Mitek Systems Inc (MITK) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mitek Systems Inc. first-quarter 2004 financial results conference call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press star, followed by the zero. As a reminder, this conference is being recorded today Monday, February 2nd of 2004. I would now like to turn the conference over to Linda Chien, with the Financial Relations Board. Please go ahead.

Good morning and thank you for joining us at Mitek's conference call. Management will discuss the results for the fiscal first-quarter ended September 31st, 2003. By now, you should have all received a copy of the press release. If you have not received it, please call my office at 310-407-6555 and we will get a copy to you right away. With us from management today are President and CEO James DeBello and Chairman and CFO John Thornton.

Mr. DeBello will begin with a review of the quarter and then open the call to your questions.

With the exception of historical matters, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties under the Safe Harbor statement provision of the US (indiscernible) Security Litigation Reform Act and details in the public filings with the SEC on Form 10-K and 10-Q. Forward-looking statements include but are not limited to statements relating to the development and the pace of sales of the Company's products, expected trends and growth in the Company's results of operations, projections concerning the Company's available cash flow and liquidity, anticipated penetration in new and existing markets for the Company's products and the size of such markets, anticipated acceptance of the Company's products by existing and new customers, the ability of the Company to achieve or sustain any growth in sales and revenue and the increase in sales representatives and other personnel.

The Company's actual results could differ from such forward-looking statements. There can be no assurance that the Company will achieve the results set forth. With that, I would like to turn the call over to Jim DeBello -- President and CEO.

Thank you, Linda, and good morning, everyone. Thanks for participating on Mitek's first-quarter conference call. On today's call, I'll review our first-quarter performance, and then, I'll discuss our current business outlook. Following that, I would like to open up the call to your questions.

Clearly, we've experienced a difficult quarter and have reported a loss earlier this morning. However, we've narrowed our loss quarter over quarter and have taken significant action to reduce our expenses. We've remained committed to our flagship products, which include CheckQuest®, our recognition engines, and our innovative fraud solutions. We have the personnel required to execute our growth plan, which I believe will drive our return to profitability.

Importantly, our balance sheet remained stable with a positive cash balance and no debt.

Now, let me go over our financial results. Net sales for the first-quarter were $1.7 million -- a decline from $3 million for the year ago quarter and relatively unchanged from the immediately preceding quarter.

Sales were lower across all our product lines as we continued to see delayed purchasing decisions by current and prospective customers.

Gross margin was 56 percent for the first-quarter, lower than the 78 percent for the same quarter last year but higher than the 40 percent reported last quarter. Hardware sales as a percentage of our total revenues were higher year-over-year, resulting in these lower margins.

In the first-quarter, we successfully decreased our operating expenses, due to strict cost controls. Total cost and expenses, including -- excluding cost of sales, were $2 million for the first-quarter, a decline from $2.3 million for the year ago quarter and $2.3 million for the prior quarter.

We reported a net loss of $1.1 million for our 10 cents per basic and diluted share for the first-quarter. This compared with a net income of $61,000 or 1 cent per share for the same fiscal quarter last year.

Sequentially, we narrowed the net loss from $1.6 million or 15 cents per basic and diluted share for the prior quarter as we continued to work toward the return to profitability.

Turning to our balance sheet, we ended the first-quarter with no bank borrowings in cash of $1.5 million. We had working capital of $1.4 million and shareholders' equity totaled $1.6 million at December 31st, 2003.

The first-quarter was a challenging one as bookings came in below expectations. While recent news suggests market recovery in some segments of the technology sector, we've not yet seen increased demand for our recognition engines and image based solutions nor have we seen increased spending by our target-based community banks.

Last October Check 21 legislation was finally passed in Congress and signed into law by the President. This law calls for banks to substitute electronic check images per paper checks in the clearance and settlement process within the next year. We remain confident that the passage of Check 21 will be a significant catalyst to sales growth. However there exists a tremendous amount of uncertainty in the banking industry on how to comply with this law.

Many community banks, in addition to our current and prospective technology partners, are in the information gathering stage and continue to delay their purchase commitments. Regardless, we're confident that we're well positioned to take advantage of these new market opportunities which emerged from Check 21 as they relate to our products.

Once compliance regulations become clear and general standards are established, we expect a stronger demand for our core imaging technology and solutions, not only in the back office where we sell them and deploy them today but also within branch teller systems, ATMs, and ultimately point-of-sale equipment as we see imaging expanding beyond the back office into different levels of imaging at the branch, ATM, and point-of-sale. We are actively pursuing new business with large manufacturers of these systems to take advantage of this expanded market opportunity.

Last month, we sponsored educational web casts for our CheckQuest® customers on the implications of Check 21 and over 70 percent of our existing user base participated as well as a number of prospective customers. I think this high interest reflects a level of uncertainty regarding Check 21.

The entire industry is waiting for the federal government to release the details of Check 21 compliance, which is expected sometime in the spring of this year. Ultimately, we expect the Fed will increase the fees they charge each bank for processing paper checks which we think will create more demand for image based solutions like our CheckQuest® and our Check 21 compliance recognition engines as the traditional paper based clearance systems become uneconomical.

As we highlighted on last quarter's call, we are expanding our product development efforts in the rapidly growing yet underserved check fraud prevention market. These products are generating strong interest in the marketplace. While we expect sales of our check imaging solution and recognition engines to continue to generate the majority of revenues in the near-term, we believe our growing portfolio of fraud detection products and the attractive dynamics of this market segment will drive our long-term growth.

If you recall criminals in the United States attempted over $4 billion of check fraud in 2001. And that bank losses from these attempts approached $700 million. This according to the American Bankers Association.

We believe that our fraud protection tools are unique in the industry and are optimistic that this focus on the fraud protection segment will provide an additional revenue stream and expand our addressable customer base.

Our progress developing these new fraud protection products continues according to plan. During the first-quarter we were pleased to deliver the first two products in our fraud software family to major banking institutions in America.

Last October Wachovia Treasury Services announced the availability of a new service they called Payee Match that was developed using our Payee Fine products. In January we announced a strategic alliance formed during the first-quarter with SOFTPRO North America to combine our fraud prevention toolkit in their Signature Verification technology into an integrated solution.

One of the world's leading financial services corporations is currently conducting a pilot project with SOFTPRO that includes our fraud protection platform. We are encouraged that our new innovative fraud protection products will lead to increased selling opportunities to larger sized banking institutions particularly as we place increasing importance on utilizing new sales channels and strategic partnerships.

Now, despite our challenging first-quarter, we remain committed to our long-term growth plan. We continue to invest in new and existing products, we believe that our focus on the highly attractive fraud protection market -- combined with the emerging opportunities from the passage of Check 21 -- will allow us to regain sales momentum.

In conjunction with our recent steps to grow our indirect sales channels and improve operating efficiency, we are driving towards a return to profitability. Enhancing shareholder value was our top priority and we appreciate your continued support.

That concludes my presentation. John and I will be happy to take any questions now. Operator?

[Operator Instructions]

Rob Dimarzo, private investor.

Cost reduction. What exactly did you folks do to decrease some of your overhead?

Bob, we took action in January to reduce headcount. We have focused on restructuring our go to market strategies particularly for our applications and are emphasizing our indirect channels and, therefore, we felt that having a large direct sales force was not in our interest long-term. We think by leveraging the existing channel partners and expected new ones, we can actually work with customers where they already have relationships. One of the challenges for us particularly as we have entered the new application area in the CheckQuest® piece, particularly, is that it is difficult and challenging for us to establish the relationship with the banks as quickly as we want.

The business isn't scaling as quickly as we thought it could and we feel by working with an indirect channel and restructuring our cost structure we would be better off.

Going down the line do you think you will be selling more hardware unless as percentages sales than software?

No desire to do the opposite and focus more on software and less on hardware. Hardware, as a percentage of our total revenue, was a larger percent. That's why the margins have fluctuated downward, although we have made improvement this quarter over the prior quarter in that area. Ultimately I see this as a software company and are focusing a lot of our energy and attention on developing a new product line that we discussed earlier, specifically, the fraud area.

It does seem to be trending towards the hardware as being part of the sale. And I realize what software company (indiscernible) wondered if we're just going to be seeing that tandem (ph) sale all the time?

I think we will in the immediate future and for the next few quarters but, ultimately, as we diversify the product line and increase our OEM sales and recognition engines sales we will see the percentage mix in favor of software sales.

And let me emphasize we are very confident that what we're doing now with our recognition engines, particularly as they apply to Check 21, will have a direct impact on our revenue growth. We see this because now -- as opposed to simply being focused on item processing in the back office with our recognition engine or even our application software -- we believe that will be extended into other uses more closely aligned with where the customers are presenting their check.

That could be at the branch teller, that can be at the ATM or, ultimately, that could be at the point-of-sale. And manufacturers across all those categories are now in conversation with us at one stage or another, interested in knowing what we could do to enhance their product line.

You did touch on one of my questions and that has to do with the sales force. I've always been concerned and the question I've always had is what is the sales force doing when there's a lack of sales and it sounds like you're addressing that as taking a different means of marketing the product. Was most of the headcount then in the sales department?

Yes, we remain completely staffed in our engineering group as we think that's prudent. And we also are seeking additional sales expertise particularly as it relates to indirect channel and our technologies, our OEM recognition engines and toolkits. So although we made an adjustment downward we see that we will selectively add in key areas where we can generate additional revenues on the software side in particular.

Obviously the two quarters in a row with the losses disturbing. How far forward can we go till we're no longer having trouble as far as cash available lines of credit and such?

Well, we believe that we have adequate cash to run the Company. However, we are cash restrained and, therefore, we believe that we should be seeking additional sources of cash. We have several federal discussions that are ongoing. We have made no decision with regard to pursuing either path. Again we are funding ourselves with cash flow -- internally generated cash but we feel that our balance sheet is stable and secure.

Okay, thank you very much.

[Operator Instructions]. Gentlemen, we have no additional questions at this time. Please continue.

I have no further comments. I want to thank the shareholders for their support. We know these have been difficult quarters, we have narrowed the loss. We believe our balance sheet is stable but more importantly we're moving ahead per our growth plan. That growth plan remains committed to our recognition engines, toolkits, our applications -- including CheckQuest and CaptureQuest -- and, importantly, we believe that our fraud family, products which prevent and attract fraud at the point of the bank processing checks is going to be very very important. We do appreciate your patience with us. However, we are going to continue to work very hard to return to profitability as quickly as we can. Thank you very much.

Ladies and gentlemen, this concludes the Mitek Systems Inc. first-quarter 2004 financial conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000 or 1-800-405-2236 followed by access number 568 632. Once again, we thank you for your participation in this morning's conference and, at this time, you may disconnect.