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Mitek Systems' (MITK) CEO Jim DeBello on Q2 2016 Results - Earnings Call Transcript

Mitek Systems, Inc. (NASDAQ:MITK)

Q2 2016 Earnings Conference Call

Executives

Analysts

Mike Grondahl – Northland Securities

Operator

Ladies and gentlemen, thank you for standing by, and good day and welcome to the Mitek Second Quarter Fiscal Year 2016 Financial Results Conference. At this time, it’s my pleasure to turn the conference over to Mr. Todd Kehrli, MKR Group. Please go ahead sir.

Todd Kehrli

Thank you, operator. Good morning, and welcome to Mitek’s fiscal 2016 second quarter earnings conference call. With me on today’s call are Mitek’s President and CEO, Jim DeBello and CFO, Russ Clark. Before I turn the call over to Jim and Russ, I’d like to cover a few quick items. This morning, Mitek issued a press release announcing its fiscal 2016 second quarter financial results. That release is available on the company’s website at www.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 would like 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 our 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 for a more complete description of these risks. Our statements on this call are made as of today, April 28, 2016 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 for any reason.

Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today’s earnings release and 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, Jim DeBello. Jim?

Jim DeBello

Well thanks Todd, and good morning everyone. I'm happy to report our financial results for the second quarter, which included record revenue and strong profits. Our record revenue was driven by growth from our ID capture and verification platform, and our industry dominating, mobile check deposit solutions. With this market momentum, we believe we’re poised for continued growth throughout the remainder of the year. With over an estimated 80 million users in over 5,000 enterprises using our mobile capture solution for mobile check deposit, we’re leveraging this success to expand the scope of our business globally and address the multi-billion dollar identity capture and verification market.

During the quarter, we continued to make significant progress by adding several new customers across many different verticals, and significantly increasing our bookings and backlog for this new part of our business. Our new ID products will enable us to drive higher ASPs, while also increasing our mix of recurring revenue. We believe we have first mover advantage. Enterprises need our products to effectively address the shift to m-commerce that’s now being driven by millennials and other consumers in attractive market segments.

As you may recall, at the start of this fiscal year, we set a goal of signing 10 Fortune 500 companies in fiscal 2016 to use our new ID capture and verification platform. Well, we’re well on the way to achieving that goal and these are great reference accounts. At the halfway point at fiscal 2016, we’ve signed seven Fortune 500 companies and we look forward to building on the success in the second half of the fiscal year. Among the Fortune 500 companies we signed during the quarter, we added our first top-tier bank, as well as other industry leaders in tobacco and food processing. These businesses will use our products to optimize revenue from the mobile channel, while meeting regulatory requirements and eliminating friction from the user experience. By doing this, we’re helping our customers acquire more consumers, which is a real problem in the mobile channel where the enrollment process is cumbersome and ID verification is inadequate.

Our mobile fill product enables consumers to automatically capture information through their mobile phone camera to complete a new mobile enrollment process. Several banks, as well as a leading lending platform and healthcare company are already using or are in the process of implementing mobile fill and early results are terrific, demonstrating an increase in the number of enrollment forms being successfully completed. New consumer enrollment is the Holy Grail for all enterprises, and for us to be able to deliver this type of improvement for our enterprise customers in the mobile channel is significant.

The second major pain point that businesses face as they seek to meet growing customer demand in m-commerce is the inability to accurately verify the identity of mobile customers. This is particularly important in highly regulated markets that fall under the Know Your Customer and Anti-Money Laundering requirements, otherwise known as KYC and AML.

Mobile verify, our second ID product that we announced at the end of last year addresses this channel. Mobile verify enables banks and other businesses to improve their processes by verifying the authenticity of a driver’s license or passport during a mobile enrollment process. This is a digital equivalent of physically showing a driver’s license in a branch. Mobile verify instantly verifies the authenticity of an underlying identity document using our computer vision algorithms. The authenticity of that ID could be verified entirely through a mobile device eliminating the need for a new consumer to a peer in person to prove their identity. Data suggest that when a new customer prospect is asked to leave the mobile channel and physically go to a branch to complete a transaction abandonment can be as high as 90%. Today, one of the largest payment processing companies in the world is using our product for ID verification and we’re expanding with them every day. This customers using mobile verify to mitigate the risk of fraud, which data shows is rapidly growing in the mobile channel.

This quarter several financial services companies including a top prepaid card issuer will begin implementing mobile verify to combat both account creation and account takeover fraud, as well as meet their customer identification requirements. With our innovative new ID products, we believe we have a substantial opportunity ahead. This is a global issue. Regulators in the US and EU demand the use of personally identifiable information to verify identities, although much of it has been compromised by data breaches, making the use of a physical ID document even more important in a mobile and digital world. This is a large and growing market and we believe we have the right solutions to address the pain points these companies are encountering as they try to offer an easy to use mobile self-service environment, while meeting regulatory requirements.

Now let me quickly expand on our mobile deposit business, where we continue to dominate this growing market. While consumers love the convenience in ease of use, financial institutions recognize that substantially lower transaction cost associated with processing checks through the mobile channel. As such, Mitek’s mobile deposit has been broadly adopted by the top banks in the world including the top retail banks in the US and Canada, and it continues to grow among both consumers and the financial institutions that serve them. We now have over 5,000 financial institutions in the world licensing our technology. They continue to spend significant marketing dollars to drive their customers to use mobile check deposit and we here at Mitek continue to benefit from this push to the lower cost mobile channels. Both the retail and commercial side of the market remain significant growth opportunities for Mitek. Our focus and more importantly, our banking customers focus is to drive a significantly higher percentage of check deposits through this lower cost mobile channel.

It’s estimated that less than 5% of the total number of checks deposited annually are done so through the mobile channel. So we have a lot of room to grow. On the retail side of the mobile deposit, we believe the increase deposit limits set by financial institutions will be a growth driver that will generate an increased number of transactions. Today, we’re seeing increasing numbers of financial institutions proactively address this issue by creating advanced KYC engines, so they can raise deposit limits and eliminate hold times for customers when appropriate. As a result of these efforts, many financial institutions have seen their mobile deposit adoption and usage increase dramatically and become a key driver of both customer acquisition, retention and satisfaction.

On the commercial side, with our new mobile multi check capture product businesses will be able to make best deposits with a mobile device and take advantage of the advanced risk management and business intelligent features including endorsement detection that we offer. This quarter, we saw a top US bank using our technology announced a business mobile check deposit product aimed squarely at addressing the untapped commercial market. And through our channel partners, we continue to sign additional new commercial customers. We believe the commercial market represents a substantial opportunity for growth as more banks and businesses begin to focus on implement mobile check deposit in the years to come.

In conclusion, we had a great second quarter and first half of the fiscal year. We continue to expand into multi-billion dollar ID capture and verification market with our new products enabling us to drive higher ASPs, while also increasing our mix of recurring revenue through the cloud. We continue to see growth in mobile deposits, driven by increasing adoption by both the consumer and commercial markets.

We’re energized by these significant opportunities, and with our strong financial results growing balance sheet and market momentum, we believe we’re poised for continued growth throughout the remainder of the year.

And now with that, I will turn the call over to Russ to discuss the financial results in more detail.

Russ Clark

Thanks Jim. I would like to start by thanking everyone for joining us this morning. Q2 was another strong quarter for Mitek, and I'm pleased to provide some additional details on our results. Let’s start with revenue and operating results. In Q2, Mitek generated total revenue of $8.5 million, a 50% percent increase year-over-year. As Jim mentioned, we also achieved non-GAAP net income in Q2 of $2.4 million or $0.07 per diluted share, representing our eight consecutive quarter of non-GAAP net income.

Q2 software revenue of $5.6 million, included 17 mobile deposit reorders and is up 39% compared to revenue of $4 million in the year ago quarter. This growth was fueled by both mobile check deposit and mobile fill and verify. We maintained strong software gross margins at 98% for the quarter. Q2 services revenue of $3 million, increased 77% over last year's Q2 revenue of $1.7 million, due primarily to the addition of transactional SaaS revenues for our mobile verify product, as well as growth in the maintenance space. Q2 services gross margins were consistent at 80%.

In terms of product contribution to total revenue, we expect our mobile deposit and other non-ID image capture products to contribute a revenue percentage with the seven handle on it for this fiscal year. Total Q2 operating expenses were $7.9 million compared to $5.2 million in the year ago quarter.

Q2 selling and marketing expenses were $2.6 million compared to $1.4 million in the year ago quarter and R&D expenses were $1.8 million in Q2 compared to $1.4 million a year ago. Our Q2 G&A expenses were $2.3 million, compared to $1.7 million in the year ago period. The year-over-year increase in OpEx – increases in OpEx reflect the operating expenses associated with IDchecker, which we...


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