Good day, ladies and gentlemen. Welcome to Mitek Systems First Quarter Fiscal 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Mitek's First Quarter Fiscal 2022 Earnings Conference Call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Frank Teruel. Before I turn the call over to Max and Frank, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its first quarter fiscal 2022 financial results. That release is available on the company's website at miteksystems.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that on today's call, management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities, should be considered forward-looking statements. These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K and 10-Q, for a complete description of these risks. Our statements on the call today are made as of today, January 27, 2022, and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations or otherwise. Additionally, throughout this call, we'll be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. With that said, I'll now turn the call over to Mitek's CEO, Max.

Thanks, Todd. It's really nice to see you in person today, and good afternoon, everyone. Thank you for joining us today. We're off to a fast start in fiscal 2022 with our first quarter delivering very strong results. Our digital identity verification revenue grew a strong 30% year-over-year as we continue to capitalize on the shift to digital and respond to our customers' needs to balance identification and fraud prevention with a smooth online customer experience. As such, we experienced record transactional volumes in identity this quarter. Whether it's verifying a loan application, authenticating travelers, using biometrics to authenticate payment, re-authenticating access of a remote workforce or verifying the identity of a new customer, the world's leading brands are using Mitek to enable trust instantly in this digital economy. The demand for digital banking also continues to yield strong growth for our deposits business, which grew 22% year-over-year. All of this resulted in record first quarter revenue of $32.5 million, which was up 25% year-over-year; non-GAAP net income of $10.2 million or $0.22 per diluted share, up 65% year-over-year; and cash flow from operations of $2.3 million. The case for digital transformation has never been more urgent, and I'm honored to lead a team of global professionals who continue to make a difference for customers and consumers as they navigate this economic and social shift. Digging into each of our businesses, let's start with identity. Our continued growth at scale underscores our growing leadership in the digital identity ecosystem and the immense value we deliver to customers seeking to transform the customer experience during verification, authentication and account opening. Access to digitally enabled services continues to increase, and this accelerating shift to digital creates an immense challenge for organizations as they strive to balance customer experience with financial risk. As the digital economy grows, so do the opportunities for fraud. And as long as criminals can cleverly exploit weaknesses in an institution's ability to distinguish a legitimate customer from an imposter, this threat will continue to increase. Digital identity verification has, therefore, moved beyond just being an enabler of digital commerce. It now serves as an integral element of most organizations' technology stack. And we believe the next decade of fraud prevention will be defined by an organization's approach to the life cycle of continuous identity and access management capabilities. Traditionally, companies have focused their energies on establishing proof of identity at the outset of a digital customer journey such as opening a new account. However, establishing trust in a person's digital identity is an ongoing process. This quarter's increase in transaction volumes from our banking and fintech customers, in particular, is evidence of this change as the digital identity authentication is successfully being adopted throughout the digital journey. Our Mobile Verify solution, powered by multimodal biometrics, is transformational for organizations as they respond to consumer demand and establish a foundation of trust with their digital customers and protect this confidence at every touch point throughout the life cycle. Our industry-leading technology is used every day across over 80 million mobile devices around the world, and it is the strongest starting point for fighting fraud. Built on patented machine learning and computer vision algorithms, our technology provides instant feedback regarding legitimacy, authentication and liveness of the applicant or their identity document. Liveness Detection has become an essential element of digital engagement, and regulators believe it is essential to fraud detection and prevention. This quarter, we continue to progress our efforts related to Liveness Detection and launched the Document Liveness product, ID Live Dock. ID Live Dock uses AI and builds on the same neural processing approach used in ID R&D's passive facial liveness detection product to spot document screen replay attacks in real time. Because of today's modern high-resolution video displays, it is very difficult for the human eye to distinguish between a photo replica of a document and the real document. When this fraud is successful, it often goes undetected until other fraud signals or a fraud event triggers an audit. ID Live Dock is uniquely designed to prevent screen replay attacks from proceeding to the next step in the identity verification process, flagging potential fraud fast and early without any involvement from humans. This new product significantly enhances fraud detection capabilities while reducing costs and latency of such analysis. And we are very excited to be the first to market with this innovation. Accordingly, a study we conducted with PYMNTS, a global leader for data news and insights for the connected economy, revealed that more than half of U.S. consumers think biometric authentication methods are faster, more convenient and more trustworthy than passwords or PINs. Yet only 10% of consumers are using them today. In addition to enabling frictionless authentication and verification, the role of biometrics has never been more relevant and in line with our quest for inclusive digital participation for all. We at Mitek pride ourselves on our innovation and commitment to negating biometric bias and are in full support of the proposed AI bill of rights. As we continue to innovate, we remain committed to exploring all avenues to achieve product superiority and expansion, whether through partnership, increased R&D innovation or acquisition. Turning now to our deposits business and our industry-leading mobile check deposit solution. The increasing use of smart devices, improved connectivity, and demand for high-end user experience are the crucial aspects that are driving digital transformation at banks and allowing banks to deliver critical services to their consumers in the form of an app. Banks are leveraging our mobile check deposit product as a catalyst for their app adoption and increased usage. In fact, Bank of America announced last year that digital deposits accounted for 85% of transactions in the quarter, fueled by almost 48 million checks deposited that same quarter. As a result, we continue to experience growth from our highly profitable deposits product line as more and more checks are being deposited digitally. This is just another example of the rapid shift we are seeing to the digital channel. And with that shift, the need for trust and security increases. We also look forward to incremental growth in our deposits business as we further penetrate this market opportunity with the ongoing rollout of our newest solution, Check Fraud Defender. In closing, I couldn't be more optimistic about the opportunities ahead, and our strong results validate my trust in the Mitek nation to strengthen our market position in 2022 and beyond. The growing demand for our market-leading offerings demonstrates the pivotal role our products play in providing trust in the digital economy, and we are well positioned to take more share. Strong growth of our innovative biometric and authentication technologies and the rise of our fraud network will incrementally add to our position as a market leader. Our globally trusted brand and the team of fraud experts remain committed to all of our customers and partners in our collective quest to fight fraud and abuse and enable trust in the digital economy. With that, I'm going to turn the call over to Frank to discuss the fiscal first quarter financial results in more detail. Following Frank's remarks, we'll open the call to questions. Frank, please go ahead.

Thanks, Max, and thank you, Mitek nation for all of your significant contributions and another record-setting quarter. Let's start with the Q1 revenue and operating results. Mitek generated first quarter revenue of $32.5 million, a 25% increase year-over-year. Software and hardware revenue was $15.4 million, up 26% year-over-year. The increase in software and hardware revenue is due primarily to the timing of our mobile deposit reorders. Service and other revenue, which includes transactional SaaS revenue, maintenance and consulting services, was $17 million for the quarter, an increase of 25% over Q1 last year. This increase is due to growth in transactional SaaS revenue, which increased 31% year-over-year to $11.6 million. For Q1 '22, deposits revenue increased 22% year-over-year to $19.1 million. Identity verification revenue increased 30% year-over-year to $13.4 million. We delivered strong software and hardware gross margins of 98% for the quarter. Gross margins on service and other revenue was 83% for the quarter, and total gross margin for the quarter was 90% compared to 84% in Q1 last year. Total GAAP operating expenses, including cost of revenue, were $27.6 million compared to $24.4 million in Q1 of last year, and this increase is due to the continued investment to grow our identity business and the additional costs associated with the ID R&D acquisition. Sales and marketing expenses for the quarter were $8.4 million compared to $7.4 million a year ago. R&D expenses were $7.6 million compared to $6.2 million last year, and our G&A expenses were $6 million compared to $5.1 million a year ago. GAAP net income for the quarter increased 44% to $3.1 million or $0.07 per diluted share. Our diluted share count was 46.2 million compared to 43.9 million shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition-related costs and expenses, stock compensation expenses, litigation expenses and the related tax impacts of these items. Non-GAAP net income for Q1 increased 65.1% year-over-year to $10.2 million or $0.22 per diluted share. Our non-GAAP adjustments include $3.1 million of stock compensation expense; $2.3 million of acquisition-related costs and expenses; $1.7 million in amortization of debt discount and issuance costs; $1.4 million in cash tax differences; and $374,000 in litigation expenses for the quarter. This was all offset by income tax pretax expenses of $1.9 million. Now turning to the balance sheet. We generated $2.3 million in cash flow from operations during the quarter, bringing our total cash and investments to $218.2 million. During the quarter, we repurchased approximately 599,000 shares for $10.1 million at an average price of $0.1695 per share. As a reminder, our Board authorized a $15 million share buyback program in June of last year, which runs through June 30, 2022. In closing, we are very pleased with our results, which include record revenue for the first quarter as well as very solid non-GAAP net income and cash flow. We look forward to continuing to deliver amazing fraud prevention services that Mitek provides for our valued global customers and driving increased shareholder value for all of our stockholders.

We'll take our first question from Bhavan Suri with William Blair.

Congrats on the great work by you and the team at Mitek. I wanted to start by discussing the Mobile Deposit business. You've mentioned in the past that you can slightly increase average selling prices. I would love to get a better understanding of the underlying growth rates in the business, as it appears to be more sustainable than many had anticipated. Additionally, I’m interested in how average selling prices are rising throughout the year and your expectations for the growth of this market. Insights into the key factors driving this market would be greatly appreciated.

Sure. Thanks, Bhavan. Good to hear from you, and thanks for the kind words. On the Mobile Deposit side, the three growth drivers in that business are obviously increased adoption of using mobile for check deposit; the price increases that you mentioned; and then bringing online additional capabilities like Check Fraud Defender, which, at this point, is still very nascent as we're just rolling the product out now. So really kind of coming back to those other two factors. While we've been consistent with the price increases and getting fair value, those increases are modest. I mean it's a couple of percent for each one of these big service providers upon when they're up for renewal and when that contract is up for renegotiation. The overwhelming majority of the growth has been just the amount of checks that are going through Mobile Deposit as opposed to ending up in branch or ATM.

That's very helpful. I’m interested in your identity verification business and the strong partnerships you have with companies like DocuSign and Adobe. I would like to know how these partnerships are developing and what your go-to-market strategy is for securing more similar partnerships, especially those integrated into key signature products. I'm not certain about the account opening aspect, but managing documents and workflows is becoming increasingly important. Can you share how the partnerships are progressing and how you plan to drive more of these types of collaborations?

Sure thing. We're very proud of the partnerships we have and the names that you mentioned. In addition to that, we've probably got another 15 major names that you'd be familiar with, the likes of Experian and other big service bureaus and credit bureaus. And that is an important part of our growth plans. Today, approximately, these are just approximate numbers, probably 20% of our revenue in the identity business is derived through channel partners. We set a goal for our organization over the course of the next 2 years to double that. And that's not by having the direct business go down. That's by having both of these businesses increase. And through the course of last fiscal year, we made an investment in fortifying the team. So we have a dedicated worldwide team establishing those alliances and partnerships of channel partners. So it's not just the names we're mentioning are global businesses, but they're based in the United States. If we went to Spain, if we went to Amsterdam, if we went to London, that team is working with names you would really know. And it is a very intentional and focused approach. We're not just waiting for people to call us. We've got a list of what we think are the probably 20 most important partners. We have created something called the perfect partner profile. And that's where that outreach is going. So more to come, but really good progress by that team so far.

Got you. Got you. I might squeeze one more in. This is sort of a high-level question. But you touched on sort of the idea of biometrics being easier and faster. And I'd love to understand where you think the signature piece gets replaced by that. So today, we sign all sorts of things and contracts, and you need to sign for identification, driver's license, all sorts of things. But the biometrics, whether it's voice or facial recognition or fingerprinting or retina, whatever, strategically, how do you guys think about sort of that taking share from signature? How do you think about that world shifting and sort of this becoming a more compelling way to identify someone? I'd love to sort of think through like what the next 5 to 10 years drives. Or signature is just going to be part of the contract, and this is a better way to access applications and data. Just how do you parse that out as you think through the long-term trajectory here? I guess slightly tangential to your business, but critical to sort of some of the things you're investing in.

Bhavan, your thought-provoking questions are always appreciated. It's intriguing to consider the role of notary services, especially when we think about how they operate in the United States versus globally. When a notary verifies a government-issued ID against a person's face during a transaction like signing mortgage documents, they often collect a fingerprint as part of the biometric process. This traditional approach is quite physical and typically involves maintaining records in books, which makes searching and matching cumbersome. The COVID pandemic has accelerated changes in this area. In the past few years, the demand for simple electronic documentation of consumer transactions has grown significantly. Nowadays, you can buy or lease a car and complete all related paperwork online without visiting a dealership, which is becoming increasingly popular. However, state laws can restrict this process, limiting the use of platforms like Adobe or DocuSign. That said, progress is being made. To answer your question, while physical and electronic signatures may still exist, they are likely to diminish over time. This shift is driven more by necessary legal changes than by advancements in technology.

We'll take our next question from Hamzah Mazari with Jefferies.

This is Mario Cortellacci filling in for Hamzah. Just first question is around your new ID Live Dock product. Maybe you can help size up what the addressable market is there and how big that could be over time. I think when you guys came out with your Check Fraud Defender, you kind of put some numbers around what the cost of fraud is in that market and maybe being able to win some business there on some of that cost savings. But could you maybe perform a similar exercise for this new product?

I think we could, Mario, but it feels like we would really be guessing. I have to say this product is borne out of experimentation by the ID R&D team through the course of last summer and leading up to last summer. When they introduced it in a beta form at Money 20/20 in the fall, the reception among folks, particularly channel partners that can embed this and just like the last caller, combine it with other things, other capabilities has been super high. So it wasn't the kind of thing where we started with a business plan and said, 'Hey, this is a tens of millions of dollars a year market that can grow at a specific rate.' This is something that really led the way with innovation, and we're kind of chasing it. We think it's material. We've already got customers that are paying us for it, and they're using it in production, a handful. So I'm not dodging your question. I don't want to just kind of off the top of my head, make something up. We just don't have good market sizing for this, but we'll keep you abreast as we continue to make progress and just a great job by the ID R&D team with this.

Great. For my follow-up on the fraud and ID side, where are you typically winning business? Are you competing with other companies, or are you attracting customers who were using inefficient in-house technology? Or are you mostly tapping into customers who didn't previously use any product? I'm trying to understand where your gains are coming from. Also, regarding the sales cycle in fraud and ID, how long does it take currently? Can you close deals in weeks, or is it generally more of a months-to-years timeframe? Any details on this would be helpful.

Yes, Mario, it's Frank. I will address the first question. Max can provide more insights into the sales cycle. It encompasses various aspects. There are companies that are new to the market and lack advanced solutions. Additionally, we are replacing competitors because we offer capabilities they do not have, or there may be new regulatory requirements compelling companies to enhance their identity verification services. This sector is quite intriguing. When considering the importance of identity and the necessity for efficient onboarding, as Max previously demonstrated to Bhavan, the speed of online consumer transactions is crucial. Companies have different risk appetites regarding the amount of money they are willing to engage without firmly establishing identity verification. This space addresses these needs: businesses lacking a solution and trying to manage it internally, those facing increased regulatory scrutiny, and firms acknowledging that fraud operates in a networked environment. As they assess the risks associated with their offerings, they require various fraud prevention capabilities, such as verifying a person's authenticity and linking that identity to a verified document or selfie. We observe all these trends in our marketplace today. Depending on the sales cycle, Max can elaborate on how urgency influences various sales processes, but certainly, all three situations apply.

Yes. And on the sales cycle, there's not a one-size-fits-all. The previous caller talked a little bit about some of our channels and partnerships, and those sales cycles can be very quick because the capabilities are embedded in a broader application. When we're in a direct selling mode, sales cycles are typically counted in quarters, and it's very quick to be able to get Mitek identity stood up. The implementation is broader than just the identity verification part for an onboarding journey. If you think about somebody opening a new account or applying for a credit card, particularly in a bank or large fintech, those are regulated entities. They have compliance and legal teams that are making sure these things are being executed properly. And so an implementation cycle end-to-end could literally be two, three, or even four quarters. So it varies. It can be super short in some cases, while in others it could be years.

I have one more question that I received from an investor recently, and I would appreciate your thoughts on it. Regarding the lawsuits related to check deposits involving some of your customers, there seems to be resistance to selling new products like Check Fraud Defender to them. This could possibly be due to concerns about potential liabilities in the future. I would like to hear your perspective on your ability to sell new and additional products to existing customers.

Yes. So that's the first time I'm hearing of that. We have had none of that in our experience, whether that's with the conventional products we bring to banks for mobile check deposit or whether it's Check Fraud Defender. As a reminder, the two lawsuits that are out there relative to this area do not involve directly Mitek in any way. We've had no customers that have reduced their usage or pushed back on us relative to the adoption of either Check Fraud Defender or mobile check deposit as a result of USAA's actions with the broader financial community about remote banking.

We'll take our next question from Mike Grondahl with Northland Securities.

If you could maybe just help a little bit, the 30% growth in mobile ID, dissect that a little. I assume that probably transactions mostly, maybe a little bit more penetration in existing accounts, maybe some new wins. I don't know. Is pricing up a little there, down a little there? Maybe just help us think through that 30% growth a little?

Yes. Mike, it's Frank. Actually, again, like Mario's question, all of the above. We're seeing it. As we mentioned in the release and in the talk track, transaction revenue, SaaS transaction revenues are up, which is encouraging. It definitely is an expansion in new logo opportunity as well. So on all those metrics that matter, all of them were operative in driving that number for this quarter.

And maybe a little bit more there, Frank. But I know you're getting positive price adjustments in mobile check. Are you getting that in ID? Or are you giving up a little bit of price?

Yes, Mike, the markets and the product lines they address are quite distinct, making any comparison unfair. In the identity sector, the pricing we receive per transaction is heavily influenced by the value associated with each use case and the type of customers involved. This can differ based on geographical location and whether the client is a gig economy business or a traditional large financial institution. Overall, our pricing trends in identity have remained consistent with what we've observed over the past year.

Got it. And maybe Check Fraud Defender, did you have any revenue in the December quarter?

Yes, we had nominal revenue. Just to remind everyone who may not have been with us over the summer, we introduced the product in June. We have been collaborating with some of our initial network members to develop that product. The revenues related to Check Fraud Defender, while minimal, are primarily from implementation support professional services. We expect to start seeing some transaction-related revenue either in the current quarter, Q2, or in Q3.

Got it. March or June, okay. And then the press release noted $218 million of cash. Have you guys been still kind of actively aggressively looking at acquisitions? Are you spending a lot of time there?

Yes.

Yes, we are actively looking for opportunities and are deeply involved in evaluating them.

We'll take our next question from Allen Klee with Maxim Group.

The IRS announced that they are going to soon require a selfie to access some of their online tools and applications. Can you disclose if that's you guys they're using?

Yes. We try to respect the confidentiality agreements we have with our customers. I want to remind you that the government has not been a focus area for us, so you can draw your own conclusion there.

Could you break out your deposit revenues by software versus service?

Yes. Allen, it's Frank. Apologies. The phone had a problem. Yes, we don't really tend to do that. It's interesting that we had good growth in that business. It was largely driven by Mobile Deposit volume as you think about it. So don't break it out in detail, but I think a 20% growth indicative of just volume increases and the timing of orders.

And for the identity business, how did the revenue breakout for like the newer stuff versus the legacy?

Yes, as I mentioned earlier, the growth in identity was driven by acquiring new clients and expanding within current accounts. It's not tied to any specific feature or new product. Overall, the identity business performed well, and our transactional SaaS revenue saw significant growth, which is a positive sign for us.

Okay. And what was your total depreciation and amortization expense for the quarter?

Yes. We run around $320,000, like that a quarter. So we're consistent with prior quarters.

We'll take our next question from Scott Buck with H.C. Wainwright.

Just a quick follow-up to Mike's question. On the M&A front, what are you prioritizing there? Should we expect bolt-on deals or transactions similar to the ID R&D deal? What are you looking at?

Yes. We're definitely looking for things that will expand our capabilities, so logical adjacent kinds of capabilities that we can see that our customers need or are going to need. So very similar to ID R&D. I'm not going to kind of review the categories just because we don't want to tip the hand too much. But it's more around having the scope of capabilities than trying to have more scale with things that we already do or any kind of consolidation.

Okay. That's helpful color. And second, I was hoping you might be able to kind of give us an update on where we are in terms of kind of path to profitability on the ID verification business? And then how you balance investment growth and...

Yes. Scott, great question. It's Frank. I mean we've been saying now, we think that towards the end of '23, fiscal '23, we're there. We still see that kind of glide path. As you can see, the identity business as a percentage of revenue is growing, which is great. We continue to drive the business towards the end of fiscal '23 as the kind of pivot point for profitability.

Great. That's really helpful, Frank. And then last one for me. Just to get there, what do you need in terms of investment in the business? Are we going to see a substantial uptick in some of the OpEx from these levels? Or should it be pretty consistent from here on out?

Yes, it’s not at all. We’ve built the plan and incorporated prudent growth in investment areas. Therefore, you won’t see an increase in operating expenses to fuel growth. We’re on a steady path, and as we approach the end of fiscal '23, it won’t impact our planned operating expenses.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to the company for any additional or closing remarks.

Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.