Mitek Systems Inc Q2 FY2022 Earnings Call

Good day, and welcome to the Mitek Systems’ Second Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli of MKR Group, please go ahead.

Thank you, operator. Good afternoon, and welcome to Mitek’s second 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 would like to cover a few quick items. This afternoon, Mitek issued a press release announcing its second quarter 2022 financial results. That release is available on the Company’s website. 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 for a complete description of these risks. Our statements on this call are made as of today, April 28, 2022, and the Company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today’s earnings release describes the differences between our non-GAAP and GAAP reporting and presents the reconciliation between the two for the periods reported in the release. With that said, I will now turn the call over to Mitek’s CEO, Max.

Thanks, Todd. Good afternoon, everyone. Thank you for joining us today, and a warm welcome to our HooYu team members who are joining for the first time as members of Mitek Nation. I’m happy to report that we again delivered strong financial results in the quarter with revenue growth of 21% year-over-year, non-GAAP net income up 49% year-over-year, and cash flow from operations of $7.4 million. Rather than review the quarter, I want to focus on the transformative acquisition we announced a little over a month ago that dramatically expands our addressable market and positions us for accelerated growth in the identity verification and identity authentication markets. On March 23rd, we announced the acquisition of HooYu, the UK’s leading KYC or know your customer technology pioneer. HooYu is an orchestration provider for identity verification and identity authentication processes. Orchestration is an elaborate way of saying that the end-to-end KYC process is optimized through a platform so that customers can easily manage users' journeys and accelerate identity decisioning when it matters most. Having a single platform that easily orchestrates and configures a KYC journey to manage identities and identify bad actors is becoming a prerequisite for businesses transacting digitally. To quote a partner from their 2022 market guide for identity proofing and affirmation, 'a good orchestration solution will reduce the cost and complexity of multiple vendor integrations while also enabling granular risk and trust assessment across a range of user events.' Bringing together Mitek’s leading document and biometric verification techniques with HooYu’s KYC and configuration services simplifies identity management and puts customers in control of digital access. Furthermore, the platform's low code, no code capabilities allow businesses of all sizes to quickly set up and manage the process without needing an army of developers. With this acquisition, Mitek is able to address a much larger slice of the digital identity market, including more use cases within existing customers and expanding to adjacent vertical markets. Mitek’s proven offerings are used by the largest banks and global organizations. These large enterprises, mainly the top tier financial institutions in the world, have the significant resources needed to solve this problem including many application developers, but with the onslaught of fraud attacks, data breaches, and compromised systems, almost all organizations need identity services to verify the identities of those they do business with. Digital identity verification and onboarding is table stakes today, and how well organizations control their front doors has far reaching impact long after onboarding. Our platform offers organizations a more complete picture of the consumer for more accurate decisioning throughout the customer journey. Furthermore, the orchestration capabilities enable Mitek customers to optimize workflow and improve efficiencies. These capabilities extend our services to a far broader market as businesses of all sizes can have the same features and functionality as the largest companies, but without having to develop it themselves. With this low code, no code offering, all financial institutions, the FinTechs, the Challenger banks, the cryptos, and pretty much anyone else who needs to know their customer will be able to quickly roll out our curated end-to-end platform with all of the best identity signals, workflow, and analytics to address current threat vectors. Our clients will be able to stand up the entire KYC process in days, not months, and to pick and choose what identity signals they want to use to verify and authenticate their customers, whether it is government document verification, face or voice biometrics, document liveness detection, geolocation information, and any other identity signals; we will be able to provide a seamless way to optimize KYC workflow and put our customers in control of the KYC process. Identity data signals are ever-evolving and which ones customers want to use are ever-changing. With our KYC platform, we will offer our clients orchestration capabilities that allow them to use whatever signals they want to use while giving them the flexibility to change which signals they use with ease. Identity has moved beyond just being an enabler of digital commerce. It now serves as an integral element of most organizations' technology stacks, and we believe the next decade of fraud prevention will be defined by an organization’s approach to the lifecycle of continuous identity and access management capabilities. Traditionally, companies have focused their energies on establishing proof of identity at the onset of a digital customer journey, such as opening a new account. However, establishing trust in a person’s digital identity is an ongoing process, especially in light of the data breaches, which increased 68% in 2021. This massive increase is putting even more pressure on getting identity right. This is not a solved problem; it is getting worse and much more complicated, but now we can offer the market a full end-to-end platform that enables them to fight back. As commerce shifts to digital, businesses have to balance the need for identification and fraud prevention with a smooth omni-channel customer experience. Once integrated and deployed, Mitek will be able to provide businesses with a full end-to-end orchestration platform to optimize and control the entire KYC process in an easy to deploy manner. This expands our offering substantially and will allow us to target significantly more customers, giving us the ability to accelerate the growth of our identity business even further. We are delighted to have the HooYu team onboard for our exciting journey and we look forward to sharing our progress with you all in the coming quarters. With that, I will turn the call over to Frank to discuss the second quarter financial results in more detail. Frank, please go ahead.

Thanks Max. And thank you, Mitek Nation, for all your significant contributions this past quarter. Bridging from Max’s remarks, the consumers are raising a digital channel as fraud attack vectors continue to accelerate and increase in complexity. The pace of these attacks has been especially difficult for small organizations that lack the internal technical resources and infrastructure to respond, which has created an urgency for orchestration-enabled solutions. While this market momentum emphasizes and magnifies the relevance of identity platforms, we anticipate some headwinds within our core identity business. As we gear up for greater growth, integrating our capabilities and harmonizing our go-to-market efforts is our number one priority. The quarters following the integration of HooYu will allow us to minimize the impact of these market dynamics and deliver a platform that is poised to capitalize on growing market opportunities. With that preamble, let’s look at Q2 revenue and operating results. Mitek generated second quarter revenue of $34.7 million, a 21% increase year-over-year. Software and hardware revenue was $19.3 million, up 48% year-over-year. The increase in software and hardware revenue is primarily due to the contribution of ID R&D, and the timing of mobile deposit reorders. Services revenue, which includes transactional SaaS revenue, maintenance, and consulting services, was $15.4 million for the quarter, down 2% year-over-year primarily due to the transition of one customer and the completion of the strategic identity verification project in Europe. As a result, our transactional SaaS revenue decreased 4% year-over-year to $10.5 million. For Q2 2022, deposit revenue increased 24% year-over-year to $21.3 million, identity revenue increased 16% year-over-year to $13.4 million. We delivered strong software and hardware gross margins of 98% for the quarter. Gross margin on services and other revenue was 81% for the quarter and total gross margin for the quarter was 90% compared to 87% for Q2 last year. Total GAAP operating expenses, including cost of revenue, were $29.9 million compared to $26.4 million in Q2 of last year, and this increase was due to the investment to grow our identity businesses and the additional costs associated with the acquisition of ID R&D and HooYu. Sales and marketing expenses for the quarter were $9.2 million, compared to $8.5 million a year ago. R&D expenses were $8.2 million compared to $6.7 last year and our G&A expenses were $6.1 million compared to $5.7 a year ago. GAAP net income for the quarter increased 88% to $1.9 million or $0.04 per diluted share. Our diluted share count was 46.1 million shares, compared to 44.6 million shares a year ago. As a reminder, our earnings releases include 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 comp expense, litigation expenses, amortization of debt discount and issuance costs, and the related tax impact of these items. Non-GAAP net income for Q2 increased 49% year-over-year to $10.8 million or 24% for diluted share or $0.04 per diluted share. Our non-GAAP adjustments include $3.4 million of acquisition-related costs and expenses, $3.3 million of stock comp expense, $2.4 million in cash tax differences, $1.7 million in amortization of debt discounts and issuance costs, and $286,000 of litigation expense for the quarter. This was all offset by the income tax effect of pre-tax adjustments of $2.2 million. Now turning to our balance sheets, we generated $7.4 million in cash from operations during the quarter. We also used $127.1 million in cash to acquire HooYu, bringing our total cash and investments to $93.4 million as of March 31. As I indicated earlier, we are making the necessary investments to integrate our technology and go-to-market teams as quickly as possible to magnify the opportunity of HooYu on our business. We are excited about the addition of HooYu, which ended their year at just under $10 million in SaaS revenue and is growing nicely higher than our own identity business and the identity market CAGR. Once integrated, the platform will help us accelerate identity revenue growth. As we stated during the acquisition conference call, HooYu is not yet profitable, and we expect the investments needed to combine our solutions and fund our go-to-market activities will affect operating margins in the short term. As a result, we believe profitability for the identity business gets pushed back two to three quarters to the second half of fiscal 2024. All in all, a great investment worth making, given the high revenue growth and expanded addressable market we believe the orchestration platform brings to Mitek. In closing, we are pleased with our second quarter results. While we are cognizant of the headwinds I mentioned earlier, as Max indicated, the big news is our transformative acquisition of HooYu. This is a crucial milestone for Mitek as we look to expand our leadership role in the digital identity market. Orchestration will be an accelerant to our business and allow us to address a significantly larger piece of the identity market.

Thank you. We will now turn to Jake Roberge of William Blair.

Hey everyone. Congrats on the great quarter. And thanks for taking my questions. So just first off, now that you have compiled a more comprehensive platform with orchestration and biometrics and document verification, I would love to hear how your initial customer and partner conversations are changing. Are customers understanding the ROI of combining these technologies on one platform or are they still primarily looking for point solution sales that they can stitch together themselves?

Yes. Jake, thanks for the question. It’s Max. The transformation that both Frank and I were referring to in our prepared remarks is something that we have been working on for five or six quarters, even pre-acquisition of ID R&D. We referenced a quote from the most recent Gartner study regarding identity, and we have seen this coming with respect to the need for organizations to have a place to coordinate and orchestrate these various signals to reduce their own efforts and all of the big investments they have to make from an application development perspective for large companies. But as you get into even large companies, those that just don’t have those application developers present a significant need. As you look at modern digital businesses that are moving very rapidly, implementing an orchestration layer is not something that they are going to be doing. Our customers and prospective customers have been discussing this need, which triggered our interest to assemble these capabilities, and orchestration has been on our shopping list that entire period.

Great. Thanks. And then I don’t think you made any comments on it, but you have announced a string of new products over the past few quarters with IDLive Doc, and Check Fraud Defender. Can you just talk about how initial customer conversations have been and tracking for those products and then maybe some color on the TAM expansion opportunities within these segments? I mean, still putting up some pretty impressive growth in mobile deposit. Just curious if you are seeing any signs of that being impacted by some of the new products you are offering.

Yes, absolutely. Apologies for not covering too many of the new things earlier. Everything seems to be falling in the shadow of the HooYu acquisition and now getting to the integration and all of the transformation we have to do to our go-to-market and our product integration, but good call out. Check Fraud Defender was something we announced about 10 months ago and we initially rolled it out in February of this year with the first set of customers for the networked hosted cloud offering. It has rolled out very well, both in terms of adoption and the learning process. As with any first generation offering, there are numerous opportunities for us to enhance its performance in a short period. The initial feedback from large financial institutions that suffer from check fraud and the operational costs associated with it has been very positive. We are seeing our pipelines grow with the top 50 banks and the top 50 financial institutions. That is a quick update on Check Fraud Defender. Regarding the deposits business, IDLive Doc was something that was announced by the ID R&D team at Money 2020 back in the fall and it went live just in the last quarter as a production system. They have already got a handful of customers using it. We are observing transaction volumes increase nicely with these partners and we have adopted it ourselves. In Q3, we are in the market with IDLive Doc in a sandbox, ensuring that it is performing well and additive to our offerings, and the initial data and results of those analyses have been very positive. So, we are excited about both of these offerings.

Great, congrats again on a great quarter and thanks for taking my questions.

Thanks, Jake.

Thanks, Jake.

And we will go next to Allen Klee of Maxim Group.

Yes, good afternoon. Congrats on the quarter. I just wanted to make sure I heard correctly; did you say that HooYu did $10 million in revenue last year? If so, can you give us some sense of how to think about the margins and the losses that they had done historically?

Yes, Allen, thanks for the question. Yes, the first part of that is correct; they generated just under $10 million in SaaS transaction revenue over the last 12 months, similar to our identity business. It was a loss-making business. They were a startup bootstrapping their way to success and building out their platform. We haven’t disclosed specific figures, as they were attempting to conserve cash and ran a solid business with a fantastic team. We recognize areas where we will need to invest more to facilitate an accelerated integration for the opportunities we see together, and this is an investment worth making; it won’t be overwhelming, but it will be substantial.

So, how do you think about a potential timeline for when you think it will be integrated and you can sell this to your bigger customers?

Yes, we are on a very aggressive path, both to our existing customers, but also the targets we have in some of these segments that have evolved to require orchestration. We would like to be able to in the next 90 days be out in the market with a demonstrable product that shows the integration of mobile verify and biometric along with the core HooYu platform offering, and then be able to turn that into pipeline sales cycles for that kind of business that historically have been 90 to 180 days. So, that gives you a sense of how we think about that.

Great. And then I just wanted to ask about your services and other revenue line, which was down. I believe you mentioned the completion of a European identity customer project. Could you explain a little? I thought most of the identity customers were more transactional than project-based.

Sure. We don’t typically do a lot of project-based business, but we did have an existing customer that uses us on a transaction basis that came to us about two years ago and requested a substantial re-verification project. That project lasted about two years and was quite successful but has now concluded, creating a tough comparison for us in the period. This will be a headwind we have to deal with over the next three quarters. Additionally, the headwinds that Frank mentioned were related to the ongoing evolution of market segments requiring orchestration, and we have been actively looking for targets and acquisition opportunities to address that need, which we now have with HooYu.

Great. Congrats, and thanks so much.

Thanks, Allen.

Thanks.

And we will go next to Mike Grondahl of Northland Securities.

Yes. Thanks, guys and good afternoon. Hey Frank, could you just repeat the mobile check and mobile ID growth in the revenue numbers year-over-year, and then what you said about transactional SaaS? You were going pretty quickly, and I don’t think I caught it all.

Yes. Happy to do that. Let me just go to my notes real quick. So, just from the beginning again, total revenue was $34.7 million, software and hardware revenue was $19.3 million, up 48%. Obviously, a big contribution from ID R&D and the timing of mobile deposits. As for deposit revenue, it was up 24% year-over-year to $21.3 million.

Up 24% to $21.3. And then mobile ID was up 16% to $13.4.

That is right, Mike. Identity revenue is up 16% to $13.4.

Okay. And what was the transaction SaaS revenue? Did I hear that is down 4%?

Yes. As Max just indicated, that was largely driven by completion of the large project-based work we did for that customer.

Got it. And flipping the mobile check for a minute. Were the reorders on the high side for you? I know it is lumpy, if you could just kind of frame that a little bit and then just any comment on pricing and mobile check.

I don’t think there is a big update, Mike, on pricing. We have been maintaining the same pricing discipline for 2.5 years and intend to continue doing that. I don’t think there is anything outsized or significant in Q2 regarding that. And as far as the timing of reorders, they are following the expected schedule, and we have previously mentioned some of the 10 year history we have had in this business observing how entities prepare for reorders has become less predictable in COVID times. However, it seems this behavior is sticking, and users are not reverting back to physical branches for check deposits.

Sure, sure. Well, 24% growth is pretty nice, that is for sure. Frank, you kind of talked about making additional investments and you used the word substantial as it related to HooYu. Is that $5 million to $10 million, kind of like a couple million dollars a quarter that we layer in? Just give us a little framework around that?

Yes. I think Mike, just briefly, as Max indicated, we knew coming into it because, as you said, they had to bootstrap their way to what they were doing. There were some areas we could shore up, and there is also an accelerant we can introduce through these investments. We are identifying those areas and how to approach them. This is part of the acquisition strategy to elevate and quicken the progress, and those costs are what we are focusing on now.

Got it. Okay, thanks a lot.

Thank you.

Thank you, Mike.

And at this time we have no further questions. I would now like to turn the call back to the representative 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.

And again, this concludes today’s call. Thank you for your participation. You may now disconnect.