Mitek Systems, Inc. (NASDAQ:MITK) Q4 2022 Earnings Call Transcript

Mitek Systems, Inc. (NASDAQ:MITK) Q4 2022 Earnings Call Transcript June 29, 2023

Mitek Systems, Inc. reports earnings inline with expectations. Reported EPS is $0.2 EPS, expectations were $0.2.

Operator: Good afternoon, and welcome to the Mitek Systems Fiscal 2022 Fourth Quarter and Full Year Earnings Conference Call. All participants will be in listen-only mode. [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 Fourth Quarter and Full Year Fiscal 2022 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 Fourth Quarter and Full Year Fiscal 2022 financial results. 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 as 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, June 29, 2023 and the Company undertakes no obligation to update or revise 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 will 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. I’m very excited to finally report our full-year fiscal 2022 results. The listing of BDO has enhanced our financial controls and governance and while it temporarily impacted the filing of periodic fiscal reports, we are now a stronger business. Fiscal 2022 was another record year for Mitek, record revenue, record earnings, and strong cash flow from operations. Product innovation also continued during that time. We launched Mitek’s integrated identity platform MiVIP, ID Live [indiscernible] and enhanced check intelligence within the Check Fraud Defender product. We were also awarded patents recognizing our commitment to Biometrics Excellence.

This ongoing momentum reinforces our optimism about our long-term prospects and our ability to further penetrate our large target addressable markets. Quickly looking at the numbers for fiscal 2022. We reported record revenue of $143.9 million, representing growth of 20% year-over-year. We also generated record Non-GAAP net income of $40 million or $0.87 per diluted share, up 17% year-over-year, as well as strong cash flow from operations of $26 million. We accomplished a lot in fiscal 2022 beyond just our record revenue and earnings performance. We provided exceptional customer value through our world-leading banks, fintechs, and marketplaces as they are interested to move more of their businesses online in a secured and trusted way. Mitek continues to distinguish itself as a critical component in the fight against fraud, and during the year, we expanded the breadth of our product offerings and the markets we serve.

With that now, let me touch on our two lines of business and their performance during the fiscal year. Our deposits line of business continues to grow in fiscal 2022 with revenue growth of 14% year-over-year. Mobile check deposit is used by over 7,500 financial institutions and continues to gain traction to consumers due to its convenience and ease of use. Adoption of our Check Fraud Defender product also increased as losses associated with Check Fraud started to skyrocket. Check Fraud Defender helps things identify and defend against these fraudulent activities, significantly reducing fraud losses and our most recent innovation Check Liveness enhances the detection of forgeries and synthetic checks. We added several new Check Fraud Defender customers during fiscal 2022 and we believe it will be a growth driver for our deposits business for years to come.

Photo by Jonas Leupe on Unsplash

Before we move on to our identity business, I’d like to provide a quick update on USAA’s litigation situations. While Mitek is not according 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. Along with our efforts, there have been some positive developments in the matters related to USAA as the US Patent Trial and Appeal Board, or PTAB has in the last six months 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 USAA patents in the coming months as they continue their review of additional USAA acts, including one additional USAA patents related to auto capture.

We also intend to continue to vigorously prosecute our case as Mitek intended to all of its core technology, and we believe our products do not infringe on any USAA patents. Switching to identity. I’d like to take this opportunity to highlight the tremendous market opportunity that lies within this sector. As the world becomes increasingly interconnected and digital, the need for robust identity verification solutions has never been more crucial. Financial crimes are becoming more sophisticated posing significant risks to individuals and organizations alike. The rapid rise of digital transformation has created a demand for seamless and secure online experiences. Mitek is at the forefront of addressing these challenges by providing AI and biometrics identity verification solution that not only mitigate risks but also enables smooth and trustworthy interactions throughout the customer lifecycle.

With the acquisition of HooYu in 2022 and the subsequent full integration of those platform technologies with our leading biometrics and existing computer vision solutions. We are strategically positioned to capture a substantial share of this expanding market and create significant value for our shareholders. In 2022, we launched Mitek’s Verified Identity Platform, MiVIP, positioned as our leading growth product. This fully integrated identity platform leverages our IP into biometrics, capture computer vision and data intelligence and present it to the customer in a low code implementation model. Already adopted by leading banks, MiVIP has expanded our addressable market and delivered improved unit economics. Shortly following the close of fiscal 2022, we launched MiPass, the industry’s first multi-modal biometrics solution for continuous identity authentication.

With the onslaught of machine-driven attacks, voice and face biometrics used together with built-in liveness checks becomes the strongest and most effortless things to authenticate somebody’s identity online. I couldn’t be prouder of the team’s vigilance in getting this product to market and I’m eager to see it implemented as quickly as possible from those who have already purchased it. MiPass further expands Mitek’s footprint in this category as well as our overall addressable market. During the past quarter, I had the privilege of attending our Annual European Customer Summit, where I had the opportunity to engage directly with our valued customers. It was an incredibly insightful experience. As I’ve heard firsthand about the value of our company is creating and the ongoing battle against digital identity fraud.

From large multinational banks to government-associated screening agencies, our customers use our identity verification solutions to enable effortless and seeks experiences with their new and returning consumers. Their testimonials serve as an evidence of our commitment to combating fraudulent activities and providing innovative solutions that address the evolving needs of the market. We 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. In fiscal 2022, our identity business grew 31% year-over-year. Our product achievements and customer wins in fiscal 2022 reaffirm our leadership position and I would like to thank every Mitekian worldwide for their unique contributions to our success.

Together, we will continue delivering significant value to our customers. Before closing, please note that we are planning an Investor Day event for later in the calendar year. This will be an opportunity for interested parties to attend a dedicated event to learn about our long-term strategy with specific detail on the next chapter of the deposits business and the significant growth opportunity for our identity products. Now, I will turn the call over to Fuad to discuss the financial results in more detail. Following Fuad’s remarks, we will open the call for questions. Fuad, please go ahead.

Fuad Ahmad: Thanks, Max, and thank you, everyone, for joining us today this afternoon. I will start with Q4 revenue and operating results. For Q4 of fiscal 2022, Mitek generated $38.8 million of revenue, a 17% increase year-over-year. Software and hardware revenue was $19.8 million, up 11% year-over-year. The increase in software and hardware revenue is primarily due to the growing contribution of ID R&D as ID R&D had another strong quarter and continued mobile deposit reorders. FX, we are pleased with the continued progress in the deposit business. As we’ve noted previously, ID R&D revenue is transactional in nature and is part of our identity business. However, since it’s offered on-prem, we put that revenue into the software line for accounting purposes.

Services and other revenue which includes transactional SaaS revenues, maintenance and professional services revenue was $19 million for the quarter, up 23% year-over-year. Notably, our transactional SaaS revenue increased 31% year-over-year to $13.4 million . Driving this growth in transactional SaaS value was increased Mobile verified volumes as well as the addition of HooYu SaaS revenue. For Q4 2022, deposits revenue increased 7% year-over-year to $23.6 million, driven by global deposit reorders. Identity revenue increased 34% year-over-year to $15.2 million driven by addition of the new SaaS revenue and strong contribution from ID R&D and growth in our Mobile verified product line. We delivered software and hardware gross margins of 98% for the quarter.

Gross margin on services and other revenue was 74% for the quarter and total gross margin for the quarter was 87% compared to 90% in Q4 of last year. Total GAAP operating expenses, including cost of revenue were $35.8 million compared to $29.3 million in Q4 of last year. This increase is due to investments into our identity business and additional costs associated with the acquisitions ID R&D and HooYu. Sales and marketing expenses for the quarter were $10 million compared to $8.4 million a year ago. R&D expenses were $8.3 million compared with $8.2 million last year and our G&A expenses were $8 million compared to $6.5 million a year ago. The GAAP net loss for the quarter was $300,000 or a loss of $0.01 per share. Our diluted share count was 45.3 million compared to 46.2 million a year ago.

Now turning to our non-GAAP results. Non-GAAP net income for Q4 was $9 million or $0.20 per share, a decrease of 11% year-over-year as a result of additional headcount and other expenses from the acquisition of HooYu. We believe non-GAAP net income provides a useful measure of company’s operating profitability and cash flow by excluding amortization and acquisition-related costs, stock compensation, one-time and non-recurring litigation expenses, amortization of debt discount and issuance costs, restructuring and related tax impacts of those items. Reconciliation of GAAP to non-GAAP presentation is provided in our press release issued earlier today. Now looking at results for the full year fiscal 2022. Total revenue was a record $143.9 million, an increase of 20% year-over-year on strong growth in the deposit business that grew 14% and the growth of our identity product lines that grew 31% over fiscal 2021.

Software and hardware revenue was $72.9 million, up 21% over the prior year due primarily due to growth in mobile deposit and our Check Fraud Defender product lines as well as the growth in ID R&D. As a result, our gross margin decreased 200 basis points from 96% in fiscal 2021 to 98% in fiscal 2022. Services and other revenue was $71 million for fiscal 2022, an increase of 19% over $59.7 million in fiscal 2021. This increase is due primarily to growth in transactional SaaS revenue, which increased 25% to $50.3 million. Gross margin on services and other revenue was 74% for the year compared to 80% for the comparable period in fiscal 2021. For our full year fiscal 2022 deposits revenue increased 14% to [$5.8] (ph) million, driven primarily by continued adoption of Mobile Deposit and Check Fraud Defender product lines.

Identity verification revenue increased 31% to $58.1 million driven by 25% growth in transactional revenue, SaaS revenue, and inclusion of additional SaaS revenue from acquisition of HooYu. Total GAAP operating expenses for fiscal 2022 were $132.6 million, an increase of 24% compared to total operating expenses of $106.5 million in fiscal 2021. This increase is due to additional investments made throughout the year to fuel our growth in the identity business and additional costs associated with the acquisition of ID R&D and the inclusion of additional headcount and expenses from the acquisition HooYu. GAAP net income for fiscal 2022 was $3 million or $0.07 per share compared to GAAP net income of $8 million or $0.18 per share for fiscal 2021.

Non-GAAP net income increased 16% for the year to $39.6 million or $0.87 per share compared to non-GAAP net income of $34.2 million or $0.76 per share in fiscal 2021. Again please refer to the reconciliation of GAAP to non-GAAP presentation in our press release. Fully diluted share count for fiscal 2022 was $45.8 million for both GAAP and non-GAAP EPS. Now turning to the balance sheet. We generated $10.3 million in cash flow from operations during the quarter and $26.4 million for the full year, bringing our total cash and investments to $101 million as of September 30, 2022. As noted recently, we continue to generate meaningful cash flow from operations. Our cash and investments at the end of March 31, 2023, increased by $30.5 million to $114.5 million.

Moving on to guidance. 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 $163 million to $165 million, an increase of approximately 14% year-over-year from the midpoint of the guidance range. In addition, Mitek expects its full-year fiscal 2023 non-GAAP operating margin to be in the range of 29.5% to 30.5%. In quarterly, we are pleased with our results, which included record revenue for fiscal 2022 as well as record non-GAAP net income. We look forward to continue to deliver industry-leading fraud prevention identity service to our valued global customers. With that operator, that concludes our prepared remarks. 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 is from Mike Grondahl with Northland Securities. Please go ahead.

Mike Grondahl: Hey, guys. In both Mobile Check and Mobile ID, could you talk a little bit about transaction activity and trends and pricing? Just trying to get a feel for volume and price trends in both areas.

Todd Kehrli: So for the periods that we’re talking about FY 2022 in both total deposits, as well as mobile verify — excuse me, the transaction volume has increased, right? So we continue to see increased transaction volumes from existing customers and then the addition of new customers for the identity verifications and for mobile check deposit similarly, although, as you know, Mike, that business can be a little lumpy, and when customers reorder or when those orders actually hit and you refill the tanks. I think in the case of Mobile Deposit, we know that we have continuously tried to push price and be able to push price increases we’ve been methodical about that. I think it’s no surprise. Our partners and customers pushback on equity part, but we’ve been able to do it consistently.

And that has set us continued to see that reflected in addition to the adoption of mobile banking and increased usage of Mobile Check Deposit, you’re seeing the other side of that which may be the increase in pricing.

Mike Grondahl: Got it. And then, are you breaking out the number of banks you have signed up for Check Fraud Defender or the revenue in the fourth quarter of 2022?

Todd Kehrli: No, we’re not. And you probably won’t see us do that for a while. We continuously increase the number of customers, but it’s coming off a very small base we’re watching some customers adopt and jump straight into the network and use the online offering. Some are starting with a small on-premise implementation to kind of get their arms [indiscernible]. But I think we’ll talk about it when we drop the queues as well. We continue to see just a big, big interest in that product pipelines are strong. We do testing with customers, pretty elaborate testing with customers and we’ve got a number of those underway. I think as we’ve talked before, Mike, just Check Fraud has exploded in the course of the last 18 months. So this is a very big topic for retail banks.

Mike Grondahl: Sure. Yeah, no, we’re trying to track it. So the number of banks or revenue, I guess it will keep bugigng you. Lastly, what should our expectations be for the timing on the 10-K and then December and March?

Fuad Ahmad: Yes, Mike, so I think news release our numbers now are unaudited. We will follow it up with the 10-K with the next week to 10 days. We’re talking about — we just need to — we can make sure that we get everything buttoned down, but we felt comfortable releasing the numbers today to you guys. In terms of Q that process will continue once the K is filed and we feel that in a few weeks we can be more precise on that at this point. So in weeks not months we will follow it up and the idea for us our expectation is to start becoming current on our filings soon after that in its entirety including Q3. So that’s the expectation right now. I can’t be more precise on the quarterly numbers as of today.

Max Carnecchia: But we are looking forward to getting back on a regular schedule.

Mike Grondahl: Sounds good. Sounds good. Hey, thanks, guys.

Max Carnecchia: Yeah, Mike.