Mitek Systems, Inc. (NASDAQ:MITK) Q3 2023 Earnings Call Transcript

Mitek Systems, Inc. (NASDAQ:MITK) Q3 2023 Earnings Call Transcript October 26, 2023

Mitek Systems, Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.18.

Operator: Good afternoon, and welcome to the Mitek’s Fiscal 2023 Third 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 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?

Max Carnecchia: Thanks, Todd, and good afternoon, everyone. Thank you for joining us today. We’re very excited to be talking with you today, having filed our fiscal 2023 third quarter 10-Q earlier today. With this filing, we are now current with our SEC filings. Before delving into the fiscal 2023 third quarter results, it’s important to acknowledge the remarkable efforts and collaboration of our Mitek teams who have worked closely with BDO to upgrade our internal processes and bring our filings current. We extend our sincere appreciation to all members of Mitek nation and our valued shareholders for their patience and support throughout this crucial process that was aimed at improving our business operations and instilling additional rigor.

Now, let me talk about fiscal 2023 third quarter results. It was another record revenue quarter for Mitek. We recorded third quarter revenue of $43.1 million, representing 10% growth year-over-year. We also delivered non-GAAP net income of $9.5 million and cash flow from operations of $16.6 million during the quarter. Our third quarter results put us on track to meet our full fiscal year revenue guidance of 18% growth year-over-year and 30% to 31% non-GAAP operating margins for the full fiscal year. We expect our Deposits revenue to grow over 20% year-over-year for the full fiscal year, while our Identity revenue is on track to grow at least 18% year-over-year. Also, over the trailing 12 months ended June 30, 2023, Mitek’s net revenue retention NRR rate was over 120%, which underscores the value our solutions deliver in the growing markets we serve.

So let’s dive a bit deeper into our two lines of business, starting with Deposits. The two major products in the Deposits line of business are Mobile Deposit and Check Fraud Defender, both of which continue to yield strong revenue growth. Our Deposits revenue increased 13% year-over-year in Q3 with mobile check deposit reaching an incredible 925 million transactions during the first nine months of fiscal 2023. Mobile Deposit continues to gain traction as financial institutions encourage their users to adopt it as the preferred and safest way to deposit checks. It’s convenient and easy to use, and consumers receive an immediate electronic confirmation after making a mobile check deposit. This month, BankRate, a financial services company that provides consumers with information and tools to help them make informed financial decisions, did a feature on the seven tips for using mobile check deposit.

We are delighted to see the interest in mobile deposit continue to grow. Additionally, our Check Fraud Defender product continues to show positive momentum as bank losses associated with check fraud skyrocket. Check Fraud Defender is a secure, cloud-based consortium that strengthens a financial institutions existing fraud prevention by using 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. This relevant data is shared with participating banks, making it a powerful offering. One example of the rise of check fraud is a new Check Fraud Defender customer who was experiencing 3x the anticipated check fraud losses per year compared to the estimates by the American Bankers Association with their check fraud growing 220% in 2022.

As this customer looked for a solution to address the significantly growing problem, a key requirement was the need for it to also have a case management solution. Check Fraud Defender is integrated with Mitek’s MiVIP to provide this functionality and deliver other feature rich elements, and was a significant contributing factor to winning this multi-year multi-million dollar Check Fraud Defender opportunity. Now turning our focus to the Identity line of business. 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 digital journey. It plays a pivotal role in the success rate of customer onboarding, as well as detecting and preventing attempted impersonation fraud and enabling organizations to meet the rapidly changing regulatory environment.

Mitek has strategically positioned itself to meet these growing demands and prides itself on the comprehensive state of its solution, which adds value to countless digital use cases, including new customer onboarding, reverification and authentication for returning customers, and high risk payments and credential resets, just to name a few. Mitek’s Verified Identity Platform, MiVIP is a fully integrated identity platform that leverages our intellectual property in biometrics, image capture, computer vision and data intelligence, and presents it to the customer via a low code implementation platform. In addition, 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 liveness 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 liveness 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 systems many use today. Authenticating digital identities with MiPass also reduces the risks associated with on-device stored biometrics, which can easily be compromised, shared between people, or overwritten with a simple passcode. Experts estimate that more than 80% of hacking breaches involve use of stolen passwords or credentials fraud that can cost large companies millions of dollars a year.

By moving to a more secure passwordless approach to digital account authentication, companies can both increase customer loyalty and reduce the risk of identity theft and account takeover attacks. In Gartner’s most recent market guide for user authentication, it states that user authentication is a cornerstone of digital identity and identity first security, citing that leaders should seek toolsets to minimize account takeover risks and optimize employee and customer user experience as a part of a cohesive cybersecurity strategy that reflects human-centric design. I’m happy to say that our identity technology, including ID Face, which is the world’s first single image passive facial liveness detection capability, was highlighted in this Gartner report.

IDLive Face is the only single image solution independently tested to be both ISO 3107-3 compliant and unbiased. It provides facial liveness detection to confirm that a biometric selfie includes the face of a real live person and not that of a machine generated image. Today, IDLive Face is used to process millions of monthly transactions for customers worldwide. Another of our biometric products highlighted in the Gartner report was IDVoice Verified, which is used to perform biometric speaker verification to detect and prevent online fraud enabled by speech synthesis, voice clones and recorded replay. IDVoice Verified fights biometric spoofing with advanced voice liveness detection, confirming the voice presented for identification purposes is that of a live present person.

For large multi-national banks to global marketplaces, our customers use our identity verification solutions to enable effortless and safe experiences for new and returning consumers. During the third quarter, we increased our Identity revenue 6% year-over-year. Despite the difficult macro environment and in addition to our direct sales efforts that are focused on selling our solution to key market verticals such as financial services, insurance, telco, healthcare and marketplaces, we have made solid progress in building our indirect business through global partnerships with Experian, DocuSign, Clear and most recently, Equifax. Our market leading offerings are not only attracting new customers and partners, but are also garnering additional industry analyst recognition and product validation.

A couple of months ago, Mitek was acknowledged by both Javelin and Liminal leading analysts covering the Identity category. We at Mitek are proud of the positive impact we are making in the fight against digital identity fraud, and we remain dedicated to advancing our technologies and delivering even greater value to our customers. Looking ahead for the Deposits business, the timing of reorders can vary from quarter-to-quarter, and we saw a significant portion of our reorders occur in the first nine months of fiscal 2023. As a result, we expect deposited revenue to be down in the fourth quarter of fiscal 2023. Having said that, we ask our investors to look at the Deposits business on a full-year basis. And as I said earlier, for the full fiscal year 2023, we expect our Deposits business to grow in excess of 20% year-over-year.

Moving on to Identity, as we have said in the past, we expect to see our Identity business continue to grow even in a difficult macroeconomic environment. However, the growth rates will vary depending on the timing of identity transactions. In the first half of fiscal 2023, we had several customers initiate new customer campaigns, which drove significant volumes of Identity transactions for Mitek. These volumes are going to vary depending on our customers actions and may cause our Identity revenue to fluctuate quarter-to-quarter. Having said that, we expect to see mid-teens organic revenue growth in Identity in Q4. We encourage our investors to look at our Identity growth — revenue growth on a full-year basis. As I stated before, we expect our Identity business to grow at least 18% year-over-year for the full fiscal year 2023, and we remain well-positioned to increase this growth rate and capitalize on our new business pipeline and the significant market opportunity ahead once conditions improve.

We also continue to drive towards profitability for our Identity business, which we expect to occur by the end of fiscal 2024. During the quarter, we continued to generate solid cash flow and strengthen our balance sheet, and with our market leading product portfolio in place, we do not need to do additional acquisitions to further penetrate the significant market opportunities we address. Instead, we are focused on using our cash flow to drive shareholder value in other ways, and we routinely assess all capital allocation alternatives including opportunistic share repurchase programs. At this time, we are in a blackout period as we prepare our year-end financials for our recently completed fiscal year and are thus limited in the actions we can take until we are outside of our blackout period.

Moving on to guidance. We are reiterating our full-year fiscal 2023 guidance, which calls for revenue growth of approximately 18% year-over-year at the mid-point of the range and for a non-GAAP operating margin in a range of 30% to 31% for the full fiscal year. This puts us very close to being a Rule of 50s company, even in this difficult macro environment. Before I turn the call over to Fuad, I also wanted to announce that Scott Carter will be stepping down from his executive role effective December 1, 2023, but will remain as our Chairman of the Board. As you may recall, we brought Scott on as the Executive Chair back in January of 2023 to provide additional day-to-day support to the senior management team as we worked on refining our organic growth plan and to provide additional oversight assistance as we focused on getting our SEC filings current.

In connection with his resignation in the executive role, Scott wanted it to be noted that the role was no longer necessary based on the company’s being current on all its required filings, as well as the substantial progress made around the refinement of the company’s organic growth strategy. We want to thank Scott for his help over the last 12 — 10 months. Thank you, Scott for all the hard work. And with that, 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 up for questions. Fuad, please go ahead.

Fuad Ahmad: 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 put 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 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 company’s operating profitability and cash flow by excluding amortization and acquisition-related cost, stock comp expenses, one-time or non-recurring litigation expenses, amortization of debt discount and issuance cost, restructuring cost, and related tax impact 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 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.

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Q&A Session

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

Jake Roberge: 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?

Max Carnecchia: Sure thing, Jake. Well, thanks. Appreciate the question. This is a new — well, it’s not a new KPI to Mitek, but it’s a new KPI as far as key performance indicator that we’re sharing and been encouraged to try to provide some more insights into the performance of the different lines of business that we have. It’s greater than 120% and it’s over 110% for each one of the lines of business. So it’s good in a lot of different ways. I think we certainly aspire to keep it high like that. As far as trying to provide some sort of guidance or expectation over 110%, I think that’s considered better than market, certainly superior to our competitors and that’s what we’ll continue to strive for.

Jake Roberge: 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 customers. 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.

Max Carnecchia: Yes. Its — I guess both those become somewhat specific to the individual institution. From a technical perspective, getting Check Fraud Defender switched on since its cloud deployed and available in a secure environment like that. From a Mitek perspective, it’s very, very quick. Obviously, we’re dealing with banks with a lot of compliance departments, a lot the regulated entities. And so 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, it can be over a year. We’re going to see revenue through the period of that, some of the implementation and just kind of assistance that we’re providing for those customers.

But I guess to the second part of your question, we now do have enough data with enough financial institutions that are in production are 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 as we continue to go. They’re not fully deployed across all the different lines of business, but they’ve got a pretty significant share out there.

And so it’s definitely not just a feather in our cap, but it’s really helping with the other banks that are interested, getting their heads around how beneficial this can be.