Mitek Systems Inc (MITK) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mitek Systems third quarter 2004 financial results conference call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded today, Monday, August 9, 2004. I would now like to turn the conference over to Ms. Moira Conlon with Financial Relations Board.

Good morning everyone, and thank you for joining us for Mitek Systems conference call. Today management will discuss the results for it's fiscal third quarter ended June 30, 2004. By now you should have all received a copy of the press release. If you have not pleased contact my office at (310)407-6555 and we will get a copy to you right away. With us today from management are President and CEO, Jim DeBello. Mr. DeBello will begin with a review of the quarter and then open the call up to your questions.

I would like to remind you that 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 U.S. Private Securities Litigation Reform Act, and are detailed in the company's public filings with the SEC on forms 10(K) and 10(Q). Forward-looking statements include but are not limited to statements relating to the development and pace of sales of the companies product, 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 fort 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 now like to turn the call over to Jim DeBello. Jim.

Good morning, everyone. I would like to add my thanks for joining us today for Mitek's third quarter conference call. Today, I'll briefly review our third quarter performance and outline the progress we've made towards implementing our strategy. Following my formal remarks, I will open up the call for your questions.

Now, because many of you have had some ongoing questions about Mitek's long-term viability, I wanted to begin today by reiterating something I said in last quarters conference call. We are fully commit to building Mitek fort long-term. To paraphrase Mark Twain, the report of our demise has been greatly exaggerated. A lot of people have misinterpreted our divestiture of check quest as exiting the industry. In fact, it's just the opposite.

This quarter we turned the corner on a number of initiatives aimed at putting the company back on solid footing. We successfully met our goals of recapitalizing the company with terrific partners, and streamlining our operations by shedding unproductive product lines which were a drag on our earnings and our focus. Although these activities put a lot of strain on the organization and this quarters results, we feel the most difficult part is now behind us. Our balance sheet is strong. We have rounded out our management team by the addition of a key executive, and we have several new products in the pipeline. The combination of all of this will enable us to aggressively move ahead with our strategy to be the leader in security solutions for financial institutions. Specifically combating fraud and providing Check 21 compliant recognition products.

I'm especially proud of our employees who have shown tire less commitment throughout this period. We're enthusiastic about about our strategy and our ability to execute it with our renewed resources and focus. We believe that the major systems we've taken in the recent months will allow to us provide value to our customers and ultimately return to you our shareholders.

Now revenue was impacted this quarter by a combination of factors. First, all key members of management were involved by design in the closing of two major deals which will finance our growth. Secondly, several customers questioned the financial stability of our company and deferred commitments. And thirdly, the general recovery of momentum in the business software market continues to sputter as frequently covered in the national business media.

Net sales for the quarter were slightly less than $1 million , a decline from $3 million for the year ago period. Gross margin was 62% for the quarter, slightly higher than the immediately preceding quarter, and 12 percentage points higher than the year ago period. This is primarily due to our product mix moving away from turn key solutions with a large hardware component and toward software license revenue. We will talk more about our gross margins in a moment.

Operating expenses continued to decline as a result of our strict cost control program, with costs and expenses in the third quarter of this year, excluding cost of sales, coming in at $2 million versus $2.6 million in the year ago period and $2.1 million in the second quarter of this year. We reported a net loss of $1.4 million or 13 cents per basic and diluted share for the third quarter of this year compared with a net loss of $953,000, or 9 cents per basic and diluted share for the same fiscal quarter last year. Turning to our balance sheet, we ended the third quarter with no bank borrowings in an extremely strong cash position. Our working capital was a healthy $2.4 million which reflects the health of the company.

I'd also like to discuss our other accomplishments now in greater detail. In mid-June, we announced that we secured $3 million in financing through a private placement with the Laurus master fund. Based in New York City, Laurus specializes in financing U.S. listed small and micro cap growth companies, and has successfully supported several companies as their stock performance has materially improved. You can learn more about them at www.laurusfunds.com Our financing is a three-year convertible note, with a variable 6% interest rate and a 70-cent conversion price, which at the time was 102% of our share price average for the 10 days prior to closing the deal. We also provided Laurus with 20% warrant coverage of their initial investment, which, if they exercised could provide another source of capital.

The Board of Directors and I studied several different financing alternatives and felt that Laurus provided the best terms and business approach to a partnership with us. Importantly they agreed to a no-short provision, which further protects the company and underscores their commitment to our financial success. This transaction was extremely important in that it provided us with the working capital we need to implement our business strategy. This strategy repositions the company, primarily as a provider of security solutions fort the financial industry.

Our strategy has three primary tactical components which are receiving equal priority. First, accelerate development of our products specifically, the advanced image base fraud protection solutions and Check 21 compliant recognition engines. Second, eliminate non-productive business lines to enable greater operational focus and, third, rapidly expand our sales and marketing organizations to fully leverage what we believe is the sizeable market opportunity for the company.

Now, regarding our first priority, our scientist and product development engineers are hard at work completing our first fraud protection system, a turn key application designed primarily for community banks with a bulk of check fraud growth is largest. Our product is currently being used by a customer in a live environment and is working extremely well. This is an extremely innovative product, the first of its kind that deploys a sophisticated image-based diagnostic tests to detect fraud. We expect to launch this product to the broader market very shortly.

Interestingly, the large company and community bank which is using it today has experienced two benefits: Greater ability to identify and stop fraudulent checks, and the ability to provide superior customer service. This customer was surprised to learn just how many checks are processed without any signature or endorsement. Go ahead and try it yourself. Sign your next check Mickey Mouse, and I bet you would be surprised to see it processed. Does this make you feel secure? We even recently in the Costco Connections Magazine, they had an article about the rise of check fraud at merchant locations and how small businesses should protect themselves. This is exactly the problem in America that we are addressing, and we think we have a powerful solution and tools to fight fraud.

In addition, and as part of our strategy, we are also regaining our leadership position in the recognition engines and tools industry. Although the cumulative market opportunity is a fraction of the fraud market, these products are central to our fraud product development and provide a steady revenue stream and cash-flow for many of our existing customers who build our products into theirs.

We've developed an industry leading high-speed courtesy amount and legal amount recognition engine that is currently being tested by our largest customers, called a Car/Lar engine for short, this engine incorporates our company proprietary neural network voting methedologies that improve read rates materially. Improved read rates means dramatic cost savings for the banking customers of our OEM partners. This new engine will be complemented by the first of its kinds automatic forms configuration engine which will be sold as an option. This product is designed to save a tremendous amount of time and cost typically incurred during the installation phase on-site at a bank.

Lastly, we are also planning to launch a new Check 21 compliant engine for testing the quality and usability of images that will be exchanged electronically in the new banking era. Fort first time in banking history, Check 21 allows an electronic image to be used as or to create a legal substitute check. Quality and usability of these images is paramount to a smoothly running National Banking system. Our breakthrough technology, again, leveraging our core domain expertise addresses these [inaudible] problems. Collectively, in the next 90 days, we thinking we will have the most comprehensive recognition lineup in the financial industry.

Going now to the second part of our strategy. Just after the end of the quarter during July, 2004, we announced that we had sold certain assets and granted exclusive distribution and licensing rights related to our check quest item processing and capture quest electronic document management solutions to Harlan Financial Solutions, a wholly-owned subsidiary of the John H. Harlan Company. In addition, Harlan license from Mitek, our quick strokes family of Recognition Toolkit, and the quick effects form identification toolkit for use with Check Quest and Capture Quest. Harlan has also agreed to be a reseller of Mitek's full line of image based fraud protection solutions.

Now the products associated with the Harlan transactions accounted for a substantial portion of our losses for the current and prior fiscal year. Given the consolidation in this sector that we've seen as evidenced by [Medivante] acquiring AFS, and Fidelity acquiring [BankWare], we believe that John Harlan can devote the resources necessary to help this product win in the marketplace. The total value of the deal was approximately $1.4 million in cash. Any of you may know Harlan as an industry leading check printing company, but they also have a sizeable division focused on supplying software and services to thousands of financial institutions of all sizes. They are traded on the New York Stock Exchange under the ticker JH for the John Harlan company, and you may also read more about them at their Web site www. harlan.com.

This deal is very important to Mitek for different reasons. We established a goal to secure a deal with an industry leading company to insure a seamless transition for our Community Bank customers and employees. By the way, you should note, we have retained all of our other customers for our recognition products. We also wanted a company with whom we could collaborate on future go-to-market strategies. I can't say enough about how privileged I feel to partner with Harlan on this transaction and these futures initiatives. Our banking customers were delighted with the efficiency of the transition, and we think many of them are candidates to deploy our fraud protection and Check 21solutions.

Now the benefit from this asset sale are numerous. To start, divesting these assets significantly lowers our ongoing cost structure. We expect to save approximately $500,000 a quarter in expenses, or about $2 million a year going forward. In part, due to a 40% reduction in our work force, that was completed under the transfer of the assets to Harlan. Secondly, this transaction will have material positive impact on our gross margins. Recall that each quarter our gross margins were impacted by the amount of hardware we shipped along with Check Quest. In my view, this was nonproductive revenue as the margins were often in the 10% range.

Going forward, we are a peer software company and should generate much, much higher gross margins. Thirdly, the divestiture allows to us more readily focus on our core competency in the areas of fraud protection and Check 21 compliant recognition solutions. We think these markets represent a large opportunity for us and provide us with an attractive area of growth on which to concentrate. As I've mentioned during past conference calls, the American Banker Association has reported a tremendous rise in the instances of check fraud, and anticipate new, yet still unknown, types of check fraud emerging as a result of the implementation of Check 21 which is expected on October 28th this year. We've also seen an urgency among many merchants racked with fraud losses for new innovative solutions to protect themselves.

Lastly, but perhaps most importantly, Harlan has become the first reseller of our fraud and recognition products complementing our sales strategy of utilizing indirect channel partners to leverage our resources and broaden our market reach, something which will be tremendously expensive if we sold directly to each and every customer. Given their tremendous distribution reach and existing relationships with thousands of financial institutions we believe this can give us a large potential pipeline of new customers.

Addressing now the last point of our strategy regarding our sales and marketing efforts we recently brought Emmanuel DeBoucaud on board as our Vice President of Sales to lead this effort. Emanuel came to us with more than 15 years of software sales and marketing experience, including senior level positions at Cardiff Software and Data Track. While at Cardiff, Emanuel, as Vice President of Worldwide Sales, helped increase revenues by more than 500% over an 8-year period. As we set out to enhance and rebuild our sales organization and resume a more aggressive sales and marketing approach, Emanuel's experience and leadership in rapidly building and mobilizing global sales teams will serve us well.

While it may take a few quarters to fully develop our sales effort we believe that we have the right products, engineering talents and resources, including capital, in place now to successfully serve the needs of the market. Before I turn over the call to your questions, I want to reiterate that we are extremely committed to our long-term growth plan. We will continue to appropriately invest in existing products and the development of new ones that fall within our core competency in the highly attractive fraud protection and Check 21 recognition industry market. This concludes my comments for today, and I'm ready now to take your questions.

Thank you, sir. Management, there are no questions at this time. Please continue.

I just want to leave you with a few following thoughts. We believe we have turned the corner. We are very excited about our direction in the securities solutions for financial institutions, specifically combating fraud, and also providing very, very sophisticated recognition engines fort new Check 21era. Lots of companies have gone through tough times and have emerged stronger, Boeing, Motorola, HP, the list goes on and on, through their early years. As them, we have gone through some challenging times, but I think have emerged stronger with a greater vision and more dedicated focus to providing superior and very innovative products.

So, again, I thank you for your your support. We look forward to performing at a higher level, in terms of financial results in the upcoming quarters. It's going to take us sometime to generate the sales and marketing effort that we think is critical now to implement the full strategy. Thanks, again.

Thank you, sir. Ladies and gentlemen this concludes the Mitek Systems third quarter 2004 financial results conference call. If you would like listen to a replay of today's conference call please dial (303)590-3000, or (800)405-2236 with access code 11004236, pound.