Mitek Systems Inc (MITK) Q3 2023 Earnings Call Transcript

Good afternoon, and welcome to Mitek's Fiscal 2023 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to Mitek's fiscal 2023 third quarter earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia; and Interim CFO, Fuad Ahmad. Before I turn the call over to Max and Fuad, I'd like to cover a few quick items. Today, Mitek issued a press release announcing its fiscal results for its third quarter and first nine months of fiscal 2023. 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 this call are made as of today, October 26, 2023, 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 Carnecchia. Max?

Thank you, everyone, for joining us today. We filed our fiscal 2023 third quarter 10-Q earlier, which means we are now up-to-date with our SEC filings. Before discussing the third quarter results, I want to recognize the exceptional efforts of our Mitek teams who collaborated with BDO to enhance our internal processes and ensure our filings are current. We appreciate all members of Mitek and our shareholders for their patience and support during this important phase of improving our operations. Now, turning to our fiscal 2023 third quarter results, it was a record revenue quarter for us, with third quarter revenue reaching $43.1 million, a 10% increase year-over-year. We also achieved non-GAAP net income of $9.5 million and cash flow from operations of $16.6 million. Our results position us well to meet our full fiscal year revenue guidance of 18% year-over-year and non-GAAP operating margins between 30% and 31%. We anticipate our Deposits revenue will grow over 20% year-over-year, while our Identity revenue is expected to increase at least 18% year-over-year. Additionally, we recorded a net revenue retention rate of over 120% over the past 12 months, which highlights the value our solutions bring to the markets we serve. Delving into our business segments, our Deposits line includes Mobile Deposit and Check Fraud Defender, both of which are seeing strong revenue growth. Our Deposits revenue rose by 13% year-over-year in Q3, with mobile check deposits hitting an impressive 925 million transactions in the first nine months of fiscal 2023. Mobile Deposit is becoming the preferred and safest method for consumers to deposit checks, and we are encouraged by ongoing interest in this service. Moreover, our Check Fraud Defender product is gaining traction as check fraud losses increase significantly. It enhances financial institutions' existing fraud prevention efforts by utilizing proprietary image analysis to alert banks about compromised accounts. One notable customer, facing three times the expected check fraud losses, found our product essential for addressing their needs. Shifting to the Identity line of business, identity verification has become essential for providing secure online customer experiences. Our Verified Identity Platform, MiVIP, combines our expertise in biometrics, image capture, and data intelligence. We have recently enhanced this platform with the introduction of MiPass, the first multimodal biometric solution for continuous identity authentication. This innovation merges voice and face recognition with advanced liveness detection to counteract fraud, thus reinforcing digital security. Despite the challenging macroenvironment, we experienced a 6% year-over-year increase in Identity revenue during the third quarter. Our focus on major market verticals and building indirect business through partnerships has been fruitful. We were recognized by industry analysts for our contributions to combating digital identity fraud and are committed to furthering our technologies for added customer value. Looking ahead, we expect some quarterly variability in our Deposits revenue and foresee a decline in the fourth quarter; however, we still anticipate over 20% year-over-year growth for the full fiscal year 2023. Our Identity business should experience organic growth in the mid-teens in Q4, with overall growth projected to meet or exceed 18% year-over-year for the full year. Our continued focus on profitability for the Identity business positions us well for the future, and we are leveraging our solid cash flow to enhance shareholder value without needing acquisitions. While we are currently in a blackout period due to preparing for our year-end financials, we routinely evaluate alternative capital deployment strategies. As for guidance, we reaffirm our fiscal 2023 expectations, aiming for approximately 18% revenue growth year-over-year and a non-GAAP operating margin between 30% and 31%. This places us on track to meet our targets, even amidst a challenging environment. I also want to inform you that Scott Carter will be stepping down from his executive role on December 1, 2023, but will continue to serve as Chairman of the Board. His role was deemed unnecessary as we are now up-to-date with our filings and have made substantial progress in refining our growth strategies. Thank you, Scott, for your contributions over the past 10 months. Now, I'll pass the call to Fuad for a more detailed discussion of the financial results, after which we will open the floor to questions.

Thank you, Max, and thank you, everyone for joining us this afternoon. I'll start with our fiscal 2023 Q3 revenue and operating results. For the third quarter of fiscal 2023, Mitek generated $43.1 million of revenue, a 10% increase year-over-year. Software and hardware revenue was $21.4 million, up 10% year-over-year. The increase in software and hardware revenue is due to the growing growth of our biometrics offerings and mobile deposit reorders. As we have noted previously, our biometric revenue is transactional in nature and is part of our Identity business. However, since it's offered on-premise, we categorize that revenue into the software line for accounting purposes. Services and other revenue, which includes transactional SaaS revenue, maintenance, and professional services revenue, was $21.6 million for the quarter, up 10% year-over-year. Our transactional SaaS revenue increased 5% year-over-year to $15.5 million. Deposits revenue for the third quarter increased 13% year-over-year to $24.8 million, driven by mobile deposit reorders. Identity revenue increased 6% year-over-year to $18.3 million, driven by increases in Identity SaaS revenue as well as growth from our biometric offering. We continued to deliver strong software and hardware gross margins at 98% for the quarter. Gross margin on services and other revenue was 76% for the quarter, and total gross margin for the quarter was 87%, up 200 basis points over last year. Total GAAP operating expenses, including cost of revenue, for the third quarter were $41.3 million compared to $38.3 million in Q3 of last year. Sales and marketing expenses for the quarter were $10.3 million, compared to $11.2 million a year ago. R&D expenses were $7.5 million compared to $8.4 million last year, and our G&A expenses were $11.6 million compared to $6.6 million a year ago. The increase in G&A expenses is mainly the result of increased one-time fees associated with our delayed filings and the addition of resources to our corporate services team to accommodate our scaling business. GAAP net loss for the quarter was $0.4 million, or a loss of $0.01 per diluted share. Our diluted share count was 46.5 million, compared to 45.2 million shares a year ago. Turning to non-GAAP results. Non-GAAP net income for Q3 of fiscal 2023 was $9.5 million, or $0.20 per diluted share, compared to a non-GAAP net income of $10.9 million, or $0.24 per share for the same period last year. We believe non-GAAP net income provides a useful measure of the company's operating profitability and cash flow by excluding amortization and acquisition-related costs, stock compensation expenses, one-time or non-recurring litigation expenses, amortization of debt discounts, issuance costs, restructuring costs, and related tax impacts of these items. A reconciliation of GAAP to non-GAAP presentation is provided in our press release issued earlier today. Turning to the balance sheet. We generated $16.6 million in cash flow from operations during the third quarter, bringing our total cash flow, cash and investments to $131 million as of June 30, 2023. Now turning to nine-month results. For fiscal 2023, we reported $134.9 million of revenue, a 28% increase year-over-year. Deposits revenue for the first nine months increased 35% year-over-year to $83.8 million, driven by solid mobile deposit reorders and signing of a large multi-year contract in the first quarter that locked in favorable pricing for us over four years. Due to unique terms of this contract, we recognized additional license revenue relating to future periods of approximately $7 million in the first quarter of fiscal 2023. Identity revenue for the first nine months increased 19% year-over-year to $51.1 million, driven by the addition of HooYu revenue and strong growth in our biometrics revenue. Moving on to guidance. As Max noted, we are reiterating our fiscal 2023 guidance. We expect revenue for the fiscal year ending September 30, 2023, to be in the range of $169 million to $171 million, an increase of approximately 18% year-over-year from the mid-point of the guidance range. In addition, we expect our full-year fiscal 2023 non-GAAP operating margin to be in the range of 30% to 31%. Finally, we are very pleased with our operating results, which included a record third quarter revenue as well as solid operating margins and a very strong cash flow. We are especially pleased with getting current on our SEC filings. We want to thank everyone who has worked tirelessly over the last several quarters to make this happen. We truly appreciate all your efforts. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question-and-answer session. Our first question will come from Jake Roberge with William Blair. You may now go ahead.

Hey, thanks for taking the questions, and nice to see you get back on file with the SEC filings. Appreciate the color on NRR. Not many software companies can talk about retention rates north of 120%, so that's pretty impressive. Understand the business is lumpy, so that's what's driving the step down in Q4. But excluding the timing of deals, how should we think about a sustainable net retention rate for both the mobile deposit and ID verification segments over the next year or two?

Thank you for the question, Jake. I appreciate it. While this isn’t a new KPI for Mitek, it is a new KPI that we're sharing. We have been encouraged to provide more insights into the performance of our various lines of business. Our performance exceeds 120%, and each line of business is over 110%. This is encouraging in many ways, and we aspire to maintain these high levels. In terms of providing guidance or expectations over 110%, I believe that is better than market standards and certainly superior to our competitors, which is what we will continue to strive for.

Great. And then, really nice to hear about the large multi-year, multi-million dollar check fraud customer that you signed and even the synergies between the ID and check business that help land that customer. Two questions on the check fraud front. First, how long will it take you to implement that technology for that large of a customer? And then, second, are there any data points or proof of concepts you can share for what percent of fraud losses you've been able to save customers that have already signed onto the platform?

Yes. Both those factors become somewhat specific to the individual institution. From a technical perspective, getting Check Fraud Defender switched on since it's cloud deployed and available in a secure environment like that, from a Mitek perspective, it's very quick. Obviously, we're dealing with banks, which have a lot of compliance departments, many regulated entities. If we look back at the customers that we've already been through on this, from the time they sign to the time they're actually processing checks in production, it can be six months, it can be nine months for some of the much larger institutions, and it can be over a year. We're going to see revenue through the period of that, with some of the implementation and just kind of assistance that we're providing for those customers. But to the second part of your question, we now do have enough data with enough financial institutions that are in production and getting the benefit to see that the product-market fit is there, the system is working, we are finding fraud, we are reducing operational expenses. Our biggest customer, I want to be careful how I say this, but our biggest customer for Check Fraud Defender today is eliminating tens of millions of dollars of hard dollar losses on an annual basis as a result of using Check Fraud Defender. And they've been able to validate that. Now that is our biggest customer so far. We can have bigger customers as we continue to grow. They're not fully deployed across all the different lines of business, but they've got a pretty significant share out there. So it's definitely not just a feather in our cap, but it's really helping with the other banks that are interested in getting their heads around how beneficial this can be.

Very helpful. And then if I could just sneak one more in. In the past, you've talked about the conversion of more checks to mobile deposits still being the largest growth driver for that segment. But as you look into next year, do you still think that's the case? Or could that shift towards Check Fraud Defender given the traction you're seeing there, or possibly even just kind of the pricing levers that you have as contracts come up for renewal in 2024?

It'll be interesting to see how long it takes for Check Fraud Defender to eclipse the growth, the impact on growth from just mobile check adoption on a mobile banking app. I don't know that I want to predict that just yet for some of the things we already talked about. It's early days for Check Fraud Defender or the implementation cycle, some of that stuff. But it's very clear that that market is real, and it's not just around defending against checks. What we're seeing now with the integration with MiVIP is that we're taking things from the dark web. We're providing Identity attributes. There is a big hypothesis currently that there's a bigger opportunity there over time to help financial institutions with other forms of reduction of payment fraud, not just the use of checks.

Very helpful. Thanks for taking my questions.

You got it, Jake.

Our next question will come from Mike Grondahl with Northland Securities. You may now go ahead.

Hey, guys, thanks, and congrats on getting your filings all caught up. I just want to make sure I understand the fourth quarter, the implied in your guidance is $36 million of revenue, and that's clearly a step down from the last three quarters. Did I hear right that's primarily because the mobile deposit reorders were kind of pulled forward, and there's some lumpiness with some new mobile ID customers? In relation to that, was there any promotional activity to callout with mobile ID?

Yes. I think just the first part of your question, I wouldn't use the term pulled forward. I would say that on whatever their normal need is, some of the larger orders for mobile deposit happened earlier in fiscal 2023 than later in fiscal 2023. But we stand behind the Deposits business; nothing's changed. I mean, when you zoom out, and this is how we ask our investors to look at it, not look at it on a month-to-month or quarter-to-quarter basis, but look at it over the full year, and the Deposits business this year is going to grow 20%. Yes. That's the way you got to look at it. As we look into next year, we're not going to necessarily provide guidance. But other than the really tough comp we're going to have in Q1 because of the FY2023 Q1 $7 million revenue that Fuad was mentioning in his remarks. We continue to see the business holding up, being a solid growth business, and we're doing everything we can with the price increases, more adoption for mobile check deposits or the Check Fraud Defender and all the great traction we're getting there. So it's a solid great business, and we look forward to it being that way for a long time.

Got it. Then mobile ID, any promotional revenue to callout in the quarter?

Yes. When you say promotional revenue, I think we've talked about this. But just for maybe folks that are dialing in new, the transaction volumes associated with Identity verifications and authentications at times are tied to promotions that, let's use a bank as an example, that a bank can be running to be able to get their competitors’ banking clients to switch. And so we did see that in the first half of our fiscal year where there were some pretty significant promotions there. If I just reflect on the first three quarters of the year, we've seen some really nice growth, particularly largely driven in some of the new product areas, so biometrics, HooYu, and now MiVIP and MiPass. So while there are some challenging elements to the environment out there, I think this is one that we expect the same way we've talked about targeting 18% year-over-year growth for identity in FY2023. When we think about next year or maybe even longer-term, if there isn't a change to the environment, that we expect that to be a mid to high-teens grower for us on an organic basis.

Got it. On capital allocation, Max, you kind of said – or I think you said, 'Hey, we're in a blackout right now. We really can't do anything incremental.' If you weren't in a blackout now, do you think you'd be more aggressive with that $131 million of cash you have, or kind of what thoughts do you have?

Sure. So we want to make clear is we are really excited about the product portfolio that we have, both for the Deposits line of business and the Identity line of business. We've got what we need to be successful in the market. We continue to weather the current situation, and then as things change and the environment improves, we will get back on track. From a capital allocation perspective that translates into, we're not out there hunting to do acquisitions. As we've talked about, I think in the last three calls, which unfortunately have happened over the course of the last 60 days, we've been very heads down making sure that not only do we get on file and get current with our SEC reporting, but also that we're refortifying our corporate services team. And Fuad talked about some of that in his prepared remarks so that we can continue to record, file, and support the operations of our business in a consistent way in our back office and our corporate services. So we're going to translate that. I've got $130 million of cash. The debt we have is a 75 basis points of interest on the debt we're getting now, something 4% to 5% interest on cash that we have. We think the stock sits back, and if we had maybe some more latitude, the Board here will consider all of the different alternatives we have to use that capital effectively and efficiently.

Got it. Hey, I'll jump back in the queue. Thanks.

Thanks, Mike.

Our next question will come from Scott Buck with H.C. Wainwright. You may now proceed.

Hi, good afternoon, guys. Thanks for taking my questions. Max, can you talk a little bit about the assumptions that get you to break-even or positive EBITDA in the Identity business by year-end 2024? Is it simply just scaling revenue another 20% or so? Or is there more to it than that?

Yes, I believe there is more to consider. First, we need to assess what we expect growth to be in the current macroeconomic climate over the next 18 to 24 months, as mentioned earlier. Additionally, it has become clear that the growth we are witnessing in the Identity segment is significantly influenced by our new products. As we proceed, Scott, our focus is on enhancing productivity across our go-to-market strategies, both direct and indirect, as we become more skilled in delivering these new products to customers, whether they are end-users or partners. This is a crucial aspect. There are areas within our business where we can improve efficiency, such as in go-to-market efforts and engineering and product development. Thus, it is a combination of growth and the productivity improvements from these activities that will elevate us to the next level.

Great. That's helpful. And then on G&A cost in the quarter, obviously, it's been elevated a bit, likely due to the extra auditing, I suppose, or the catch-up. I imagine that carries through fiscal 4Q, but maybe in 2024, we start to see that back off a little bit. Is that fair?

Yes. Maybe I'll answer that. Yes. I think that's generally accurate. I think we had a heightened cost structure or heavier cost structure in Q3, a little bit into Q4 because our K wasn't filed until the end of July. Coming into next year, I think we'll see some reduction. I think we get back to a more normalized manner. And I think I've said that in the past, but I think we expect that to happen in 2024.

Okay. Perfect. And then last one, quick one. Did you guys repurchase any shares during the fiscal third quarter?

We did not.

Okay. Perfect. Appreciate the time, guys. Thanks a lot.

You got it, Scott.

Thank you.

Our next question will be a follow-up from Mike Grondahl with Northland Securities. You may now go ahead.

Hey, guys, thanks. Just Max, you had said year-to-date mobile check deposit had 925 million transactions. Do you have a similar apples-to-apples number for the prior year just so we could see what transactions are growing?

Sure. Now, this is imperfect, but what I recall us doing in FY2022, the team celebrated eclipsing 1 billion checks transacted for the year, and it was the first time that that had happened. So you basically have, let's call it 1 billion in FY2022 and whatever that number was through the end of Q3 just to kind of give you a sense now. Obviously, that's not going to help you with price increases and the contribution of Check Fraud Defender or any of that stuff, and where those checks come from, kind of the mix of those checks, depending on which partner or which customer they come from, they're going to be priced at a different level. But just to give you kind of a swag, which is probably the best I'm going to be able to do off the top of my head.

No, that's fair. Fuad, you mentioned that G&A expenses were $11.5 million compared to $6.6 million, and you indicated there were some one-time fees and corporate expenses involved. Can you provide any information on the one-time fees so we can understand the core number better?

When we look at our reconciliation from GAAP to non-GAAP, we provide that because those were GAAP numbers. The main item in Q3 was the non-recurring audit fees, which we excluded amounting to $800,000. We also backed out approximately $400,000 in non-recurring litigation costs. You should be able to identify those exclusions for the non-GAAP figures from those line items.

Got it. And then just two more questions, one, Max, I just want to verify the multi-year, multi-million Check Fraud Defender customer. That was new, I think you said. Any thoughts on when that comes online?

Yes. I tried to give a sense as to how long; it depends on the size of the bank and their compliance and regulatory issues, the technology. You can switch it on in a day, right? It's all cloud deployed. But I think in this instance, it could take us six months to nine months to get them to a place where they're transacting in production at scale.

Got it. Is that six months to nine months from, like, now?

Probably six to nine months from a couple of months ago.

Okay.

Yes.

Fair enough. Good reminder, good reminder there.

Yes.

And then, lastly, you guys have talked a couple of times and you've pointed it out well, hey, the mid-point of the guidance is $170 million of revenue. But in Q1, you had that $7 million tied to the contract. Are we fair to sort of say, core, maybe baseline number for 2023 is like $163 million? Is that how you look at it?

We assess it based on the source of revenue. Revenue is not adjusted using non-GAAP measures. If the revenue recognition for the contract had been different, and we had spread the $7 million over the next three years, then revenue for fiscal year 2023 would have been $170 million less $7 million, totaling $163 million. You would then expect to see the $7 million, or perhaps $7 million to $7.5 million, appearing in Q1 over the next three years on the anniversary of the contract. However, that is not the method we are using for revenue recognition here.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Kehrli for any 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.