Mitek Systems, Inc. (NASDAQ:MITK) Q2 2023 Earnings Call Transcript

Mitek Systems, Inc. (NASDAQ:MITK) Q2 2023 Earnings Call Transcript September 14, 2023

Operator: Good day, and welcome to the Mitek Fiscal 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Todd Kehrli: Thank you, operator. Good afternoon, and welcome to Mitek’s fiscal 2023 second quarter and first six months 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. This afternoon, Mitek issued a press release announcing its fiscal 2023 financial results for its second quarter and first six months. This 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, September 14, 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.

Max Carnecchia: Thanks, Todd. Good afternoon, everyone. Thank you for joining us today. We’re very excited to be talking with you today, having just released our fiscal 2023 second quarter and first six months results. We expect to file our 10-Q for the second quarter soon and anticipate filing our 10-Q for the third quarter before the expiration of our NASDAQ extension deadline of October 13. With that filing, we will be current with our SEC filings. Before I review the second quarter results, I want to take this opportunity to recognize and thank the Mitek nation for their tremendous efforts, which has resulted in an exceptionally strong quarter. You have shown resilience despite the disruptions and distractions presented through the rigorous audit process.

Thank you for your commitment to building a stronger Mitek. Now let me talk about fiscal 2023 second quarter results. We recorded record second quarter revenue of $45.3 million, representing growth of 35% year-over-year. We delivered GAAP net income of $4.4 million for the second quarter and non-GAAP net income of $13.1 million. Also, we delivered cash flow from operations of $6.3 million during the quarter. These stellar Q2 results, coupled with our record first quarter results, reflect some of our major accomplishments in the first six months of fiscal 2023, including being first to market with a multimodal biometric solution to elevate the fight against growing fraud. Beyond just our record revenue and earnings performance in the first six months of the fiscal year, we have distinguished ourselves as a critical solution in the fight against fraud.

So let’s dive a bit deeper into our two lines of business, starting with Deposits. The two major products, Mobile Deposit and Check Fraud Defender, continue to yield strong revenue growth with deposits revenue increasing 35% year-over-year. Mobile Deposit continues to gain traction with consumers due to its convenience and ease of use, and the adoption of our Check Fraud Defender product showed positive momentum as bank losses associated with check fraud continued to sky rocket. Check Fraud Defender is a secure, cloud-based consortium that strengthens the financial institution’s existing fraud prevention. Check Fraud Defender uses proprietary image analysis to extract data from stolen checks, account screens and identification documents sold in criminal channels to provide alerts of potentially compromised accounts.

As it is a consortium-based, relevant data is shared with all participating banks, making it a powerful offering. We believe Check Fraud Defender will continue to grow its growth trajectory and be a growth driver for our Deposits business for years to come. Before we move on to our Identity business, I’d like to provide a quick update on the USAA litigation situation. While Mitek is not a party to any of the USAA lawsuits, we continue to pursue our declaratory judgment action against USAA to prove that our products do not infringe the four auto capture patents at issue in the USAA lawsuits as we look to provide support to our banking clients. Our declaratory judgment action is currently on appeal to the U.S. Court of Appeals for the Federal Circuit after the District Court found it did not possess jurisdiction to adjudicate our claims.

Oral arguments on our appeal are expected late this year or early next year. Along with our efforts, there have been some positive developments in the matters related to USAA as the U.S. Patent Trial and Appeal Board, the PTAB has invalidated five of the USAA patents that they have been relying on to sue various financial institutions, two of which are related to auto capture. We expect the PTAB to invalidate more of USAA’s patents in the coming months as they continue their review of additional USAA patents, including one additional USAA patent related to auto capture. We also intend to continuously — to continue to vigorously prosecute our case, as Mitek invented all of its core technology, and we believe our products do not infringe on any USAA patents.

Turning our focus now to the Identity line of business. We are pleased to report a robust 35% year-over-year growth in Identity revenue, which is a remarkable achievement considering the challenging macroeconomic conditions we face. This outstanding performance underscores the increasing importance of identity verification in today’s digital landscape. In the era of ongoing digital transformation, organizations are constantly striving to deliver seamless and secure online experiences for their customers. Identity verification has emerged as a crucial component of every customer interaction and journey. It plays a pivotal role in ensuring regulatory compliance, detecting and preventing attempted impersonation fraud and enhancing the success rate of customers onboarding with minimal friction.

We have positioned ourselves strategically to meet the growing demands of our customers, whether it’s at the point of initial customer onboarding or during the reverification and authentication process for returning customers. MiVIP, our leading identity verification and authentication solution, leverages the power of AI with multimodal biometrics to provide our customers — consumers with the utmost convenience and highest levels of security to meet the growing demands of the digital savvy consumer. Mitek’s Verified Identity Platform, MiVIP, is a fully integrated identity platform that leverages our IP in biometrics, capture, computer vision and data intelligence and present it to the customer via a low-code implementation platform. In the first half of fiscal 2023, we added MiPass to its capabilities.

MiPass is the industry’s first multimodal biometric solution for continuous identity authentication. MiPass combines voice, and face recognition using sophisticated live (ph) detection technology to defend against digital and deep fake attacks in real time. With the onslaught of machine-driven fraud attacks, voice and face biometrics used together with built-in likeness checks are becoming the strongest and most effortless means to authenticate someone’s identity online. Combining the two biometrics is a significant security improvement beyond the face recognition only system many use today. Authenticating digital identities with MiPass also reduces the risk associated with on-device stored biometrics, which can easily be compromised, shared between people or overwritten with a simple passcode.

MiPass is delivered for Mitek (ph) developer-friendly SDK, which makes it easy to embed into a variety of customer use cases such as simple account information updates, password resets, device rebinding and high-risk financial transactions. Experts estimate that more than 80% of hacking breaches involve the use of stolen passwords or credentials, fraud that can cost a large company millions of dollars a year. By moving to a more secure password-less approach to digital account authentication, companies can both increase customer loyalty and reduce their own risk for identity theft and account takeover attacks. Staying with account takeover, the high list — and highlighting our tremendous work in biometrics, Gartner predicts that in 2023, 20% of successful account takeover attacks will leverage seat base.

Mitek’s latest innovation, IDLive Face Plus, addresses the growing security threat posed to the institutions and consumers by deep fakes and digital injection attacks. IDLive Face Plus has detection of digital injection attacks where fraudsters use hardware and software hacks to substitute a biometric capture with a fake digital image. It is the first known product to help ensure proper selfie capture on both desktop and mobile devices with a frictionless approach that eliminates user abandonment caused by complicated security checks. As deep fakes have become more realistic and easier to produce, injection attacks are an increasingly common method used to spoof biometrics. The innovative approach to combating deep fakes utilized by IDLive Face Plus will help our customers stay ahead of this increasing problem.

Also in the first half of the fiscal year, a patent was awarded to Mitek’s ID R&D subsidiary for their novel approach to securing virtual assistant and chatbot sessions on a mobile device. The method involves the collection of multiple biometrics throughout the chat session without added comps or tasks for the user. It provides a unique method to enable an intelligent chatbot to continuously confirm a person’s identity, and that they are, in fact, a live human being while maintaining a natural user experience. The timing of the patent award coincides with the launch and rise of the popularity of Chat GPT, a chatbot prototype that demonstrates dramatic advancements in conversational intelligence. The technology opens the door to a variety of new applications where interactive human-to-machine collaboration is productive.

From a large multinational bank to government agencies, our customers and partners use our identity verification solutions to enable effortless and safe experiences for new and returning consumers. To quote our customer, Virgin Money, who are a proud digital-first bank with a clear ambition to disrupt the status quote, it is of paramount importance that Virgin Money platform and the digital experiences the bank’s customers encounter are world-class. We want our smart digital tools to put our customers in control. And with Mitek, the journey helps our customers to successfully pass KYC where traditional name address checks have failed. We at Mitek are proud of the positive impact we are making and we remain dedicated to advancing our technologies and delivering even greater value to our customers in the fight against digital identity fraud.

During the first half of the year, our marketing efforts are concentrated on building momentum. We bolstered our digital presence and increased brand visibility through a series of global events, resulting in thousands of meaningful customer engagements. Our sales and marketing teams are not simply product sellers. They are dedicated to cultivating relationships and crafting tailored solutions. We firmly believe that this approach sets Mitek apart and is a vital element of our future ready strategy. As we continue to innovate and adapt to the evolving digital landscape, our Identity line of business remains a cornerstone of our success. We are committed to delivering solutions that exceed our customers’ expectations in an increasingly interconnected and security conscious world.

Looking ahead, I want to acknowledge the difficult macroeconomic environment and its impact on new enterprise spending. While we have delivered significant growth in the first half of our fiscal year, due to the timing of large deals, we do not expect the same type of growth to continue in the second half of our fiscal year. We, along with many other enterprise software companies are seeing customers in our pipeline extend sales cycles and delay new purchases in an effort to control expenses in this challenging environment. While this posture continues, we will experience slower growth than we have, but we remain well positioned to capitalize on new business — on our new business pipeline and the significant market opportunity ahead of us once conditions begin to improve.

Having said all of that, we are reiterating our annual guidance, which calls for revenue growth of 18% year-over-year at the midpoint and for the non-GAAP operating margin in the range of 30% to 31% for the full fiscal year. Now I’ll turn the call over to Fuad to discuss the financial results in more detail. Following Fuad’s remarks, we’ll open the call to questions. Fuad, please go ahead.

Fuad Ahmad: Thanks, Max, and thank you, everyone for joining us this afternoon. I’ll start with our Q2 of fiscal 2023 revenue and operating results. For the second quarter of fiscal ’23, Mitek generated $45.3 million of revenue, a 35% increase year-over-year. Software and hardware revenue was $25.3 million, up 39% year-over-year. The increase in software and hardware revenue is primarily due to the growing contribution of ID R&D and continuing mobile deposit reorders. As we have previously noted, ID R&D is transactional in nature and is part of our Identity business. However, since it is offered on-premise, we put that revenue into software line for accounting purposes. Services and other revenue, which includes transactional SaaS revenue, maintenance and professional services was $20.1 million for the quarter, up 31% year-over-year.

Moreover, our transactional SaaS revenue increased 33% year-over-year to $13.9 million, driving this growth in the transactional SaaS strategy was increased Mobile Verify volume as well as the addition of HooYu revenue. Deposits revenue for the second quarter increased 35% year-over-year to $28.8 million, driven by mobile deposit reorders. Identity revenue also increased 35% year-over-year to $16.6 million, driven by the addition of HooYu SaaS revenue and strong contribution from ID R&D and Mobile Verify products. We delivered software and hardware gross margin up 99% for the quarter. Gross margin on services and other revenue was 72%, and total gross margin for the quarter was 87%, consistent with gross margins in the last year of the second quarter.

Total GAAP operating expenses, including concept revenues were $37.4 million compared to $30.8 million in Q2 of last year. This increase is due to the investments to grow our Identity business and additional costs associated with the acquisition of HooYu, as well as higher G&A expenses related to enhancing our back office systems and teams. Sales and marketing expenses for the quarter were $9.6 million compared to $9.2 million a year ago. R&D expenses were $7.5 million compared to $7.1 million last year, and our G&A expenses were $10.1 million compared to $6.1 million a year ago. The increase in G&A expenses was primarily a result of increased onetime fees associated with our delayed filings, additional resources to our corporate services team to accommodate a rapidly scaling business and certain onetime restructuring and executive separation expenses.

GAAP net income for the quarter was $4.4 million or income of $0.10 per diluted share. Our diluted share count was 45.6 million compared to 46.1 million a year ago. Turning to non-GAAP results. Non-GAAP net income for Q2 of fiscal ’23 was $13.1 million or $0.29 per diluted share compared to a non-GAAP net income of $9.7 million or $0.21 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 expense, onetime or non-recurring litigation expenses, amortization of debt discounts and issuance costs, restructuring costs and the related tax impact of those items. A reconciliation of GAAP to non-GAAP presentation is provided in our press release issued earlier today.

Now turning to the balance sheet. We generated $6.3 million in cash flow from operations during the second quarter, bringing our total cash and investments to $114.5 million as of March 31, 2023. For the first six months of fiscal 2023, which includes the record first quarter results we reported earlier this month, we report $91 million of revenue, a 38% increase year-over-year. Deposits revenue for the first six months increased 47% year-over-year to $59 million, driven by solid mobile deposit reorders and signing of a large multiyear contract in the first quarter has locked in favorable pricing for us over four years. Due to the unique terms of this contract, we recognized additional license revenue related to the future periods of approximately $7 million in the first quarter.

Identity revenue for the first six months increased 24% year-over-year to $32 million, driven by addition of HooYu revenue and strong contribution from ID R&D and Mobile Verify products. Moving on to guidance. As Max noted, we are reiterating the fiscal 2023 guidance we provided earlier this month. 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 midpoint of the guidance range. In addition, we expect full year fiscal 2023 non-GAAP operating margin to be in the range of 30% to 31%. In closing, we are pleased with the second quarter results, which included a record second quarter revenue, as well as solid operating margins.

Operator that concludes our prepared remarks. Please open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jake Roberge with William Blair. Please go ahead.

Jacob Roberge: Hey. Thanks for taking the questions and congrats on the results. I know the check business is lumpy and you expect growth to decelerate through the year just given the timing of deals, but growth in that segment has been very durable. If you had to stack rank growth drivers, what could be the highest contributors between the conversion of more checks to mobile deposit, Check Fraud Defender layering deeper into the model or are price increases starting to be more meaningful? Just would love to kind of really understand what’s driving growth in that segment this year?

Max Carnecchia: Sure, Jake. I would stack ranks from highest impact to lowest impact, mobile check deposit adoption, so the online banking apps on your phone and use of that for depositing checks instead of going down the branch, number one. Number two, Check Fraud Defender, and number three, price increases, in that order. I think over time, Check Fraud Defender, as it becomes a more significant part of our business certainly has an opportunity to move up that lead table.

Jacob Roberge: Okay. Helpful. And then given these results for the quarter ended March, could you talk more about when you started to really feel the impact from the macro on those transactional volumes? Did you actually see any headwinds in Q2 or did that become a lot more pronounced in Q3 and Q4? And then from your comments, it seems like ID verification may be getting more impacted than Mobile Deposit, but would love to kind of hear the puts and takes that you’re seeing in each business as it relates to the macro.

Max Carnecchia: Yeah. I think we’ve probably seen it going all the way back to — you may not see it in the numbers, but the revenue numbers, but we’ve seen it probably going all the way back to November, December of last year, just the nature of how revenue gets formed meets those businesses being so different, there’s kind of a lag in the way some of the contracts come up for deposits. So it’s not as pronounced there. But I think those are contextualization I would give you for both lines of business.

Jacob Roberge: Great. Sounds good. Thanks for taking my questions.

Operator: Our next question comes from Mike Grondahl with Northland Securities. Please go ahead.

Michael Grondahl: Hey, guys. Thanks. Mobile ID and Mobile Deposits both grew 35%. Is there really anything to call out for either of those high growth rates, sort of what drove it or anything one-time?

Max Carnecchia: Yeah. I wouldn’t say there’s anything onetime. It seems like Q2 FY ’23 was the quarter of 35, right? 35% growth in both lines of business and then overall for the company. In the mobile identity business, I would tell you on the Mobile Verify business, the Identity business, we definitely had greater impact in the revenue from long-time existing customers that had increased volumes and increased usage. I think that was a contributor there for sure. We have some — the banks that had some real big successful marketing campaigns for acquiring new customers. And then in Mobile Deposit, we had — I wouldn’t call it an outlier, we had a couple of big contracts. But every quarter, we typically have a — the team has just done a wonderful job of smoothing out as best as possible the big contracts that come in that way.

Michael Grondahl: Got it. And then going back to the March quarter, you had that contract extension with a large reseller and they got a four-year price lock. Can you talk about the price increase that you got there? And are there other large retailers where you think you could get a similar price increase?

Max Carnecchia: Yeah. I’d remind you, Mike, we’ve been on the — I want to call it just — it’s principled approach to pricing, right? If we kind of go back to four years ago when we — when the team undertook this endeavor, we primarily sell the Mobile Deposit solution through a channel of resellers. And the historical nature of those relationships was very inconsistent, and it was kind of hard to see a true line as to how pricing works. And as we’ve adjusted pricing and those contracts have come up, we’ve done it on a much more principled approach, and that’s allowed us, in many instances to increase pricing. What you saw in the Q1 number and Fuad reiterated today in the prepared remarks, this kind of outside contract that we ended up with that we’re very proud to have, it was the reengineering of a long-standing contract that had probably been not one of our best.

And so I’m not going to go into any of the specifics other than to say we got them to what we think the general market for our product and our resellers is. And that’s good for the market, and we think it’s good for the partner, and certainly, it’s good for Mitek and our shareholders.

Michael Grondahl: Got it. Are there other large retailers, you got to play catch up on?

Max Carnecchia: We’re four years into this. There may be one or two left, but I don’t think you’d — I wouldn’t model in anything like as extreme as what we saw in the Q1 results.

Michael Grondahl: Got it. And lastly, Max, now that you’re almost caught up with your filing, what two things are you going to be most focused on?

Max Carnecchia: I’m going to Disney World. Just kidding around there, Mike. Yes, certainly, we’re coming up on the end of our fiscal year. So not only do we want to get current, but we want to finish our FY ‘23 strong. So focused on that, focused on getting our annual operating plan in place. And then we’re going to be focused on kicking off, right, getting everybody armed, aimed and excited about the opportunity that’s before us and the adjustments and the improvements that we have to make for FY ‘24.