Mitek Systems Inc (MITK) 2006 Q1 法說會逐字稿

Good morning. My name is Dusty and I will be your conference operator. At this time, I'd like to welcome everyone to the “Mitek Systems Reports 17% Growth in 2006 First Quarter Revenue from Prior Year Period” conference call. [OPERATOR INSTRUCTIONS] Thank you and now I'd like to turn the call over to our host, Mary Sese. Ma'am, you may begin your conference.

Good morning and thank you for joining us on the Mitek Systems conference call. Today management will discuss the results for its fiscal first quarter, ended December 31st, 2005. By now you should have received a copy of their press release. If you have not received it, please call my office at 858-503-7810, extension 320, and we will get a copy to you right away.

With us from management today are President and CEO James DeBello and CFO Tesfaye Hailemichael. Mr. DeBello and Mr. Hailemichael will provide a review of the quarter and then open the call to your questions.

I'd 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 10KSB and 10QSB.

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 in growth and 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 now turn the call over to James DeBello. Jim?

Thanks, Mari. We're very pleased to announce continued growth and significant improvement in our balance sheet. I'd like to welcome all of you to our earnings conference call and I look forward to frequent interaction with all of you. I'm encouraged by our progress and hope that you are, too.

As I mentioned during our last earnings conference call, we've repositioned Mitek for growth and have devoted our energy to building and delivering a software technology that shows tremendous promise in a number of different industries. I believe that we have an exciting story to tell as we've concentrated on a strategy that leverages our expertise in recognition software into a recognized leader in image analytics used by industry to fight identity theft by detecting forged signatures and counterfeit documents. Although we still face some market challenges, as any business does at this stage, we feel that we have the talent, technology and strategy to deliver additional shareholder value.

I'd like now to introduce Tesfaye, Mitek's Chief Financial Officer. He'll discuss our results from the first fiscal quarter, after which I'll address our accomplishments and strategy for 2006. Tesfaye?

Thank you, Jim. Good morning, everyone.

During this quarter we significantly improved our balance sheet and financial performance. Importantly, we materially reduced our debt to the Laurus Fund. We appreciate their continued support, particularly in our time of need, but it is our intent to eliminate the remaining debt.

We also strengthened our working capital and added to stockholders' equity. As a result, we are well positioned for future growth.

I would like to review the numbers for the first quarter of our fiscal 2006. Revenue for the first quarter of fiscal 2006 was $1.5 million compared with $1.3 million in the same period last year. Operating loss for the first quarter of fiscal 2006 was $118,000 compared with an operating loss of $801,000 in the same period last year. Our revenue grew by 17% over the first quarter of fiscal 2005 and our operating loss decreased by 79% compared to the same period last year.

Net loss for the first quarter of fiscal 2006 was $472,000 or $0.03 per basic and diluted share compared with a loss of $918,000 or $0.08 per basic and diluted share in the first quarter of fiscal 2005.

Most of the net loss is attributed to $288,000 of beneficially-- beneficial conversion or warrant discount from Laurus' loan, which is non-cash warrant discounts given to Laurus over the life of the loan and is a GAAP-required entry.

We have made significant progress in controlling operating expenses and improving efficiency. Last quarter we reduced our expenses by 20% compared to the same period last year. We'll continue to control our expenses. Cash used in operating activities was $592,000 for the first quarter of fiscal 2006 compared with $1.3 million for the same period last year.

We had $1.8 million cash on the balance sheet as of December 31st, 2005. Our long-term debt has decreased to $659,000 as of December 31st, 2005, compared to $2.1 million in the same period of fiscal 2005. We anticipate reducing our debt by principal payments and conversion of debt to equity.

We continue to manage our resources wisely and explore ways to increase shareholder value.

In summary, total revenue is up 17%, software gross profit was 95% in the first quarter of fiscal 2006 compared to 90% in the first quarter of fiscal 2005. Overall margin was down to 73% in the first quarter of fiscal 2006 from 86% in the first quarter of fiscal 2005. This is due to an increase in our professional services.

Total operating expenses was down from $2.1 million to $1.7 million. Debt was reduced from $2.1 million as of December 31st, 2004, to $659,000 as of December 31st, 2005.

Increased stockholders' equity to $1.4 million as of December 31st, 2005, from a deficit of $1.3 million as of December 31st, 2004, which is an improvement of $2.7 million over last year.

Now I will turn this back to Jim.

Thanks, Tesfaye. Again, I'm very pleased with the strengthening of our balance sheet, particularly as it relates to stockholders' equity and the reduction of debt.

And just to amplify a little bit, Tesfaye mentioned that we did have a loss of $168,000 for the quarter and, frankly, a lot of that was related to our physical move. We physically moved facilities and there were one-time expenses associated with that and without that we would have been much, much closer to a pure break-even quarter above the line.

The Laurus expense is something that Tesfaye mentioned is a GAAP requirement. It's a non-cash expense and as we continue to work down the debt faster than we anticipated, of course, we take the amortization of the beneficial conversion at a faster pace, as well, and that's what represented by the $288,000.

Now I'd like to take a few minutes to address our continued progress to increase shareholder value. First and foremost, I want to emphasize this. We're focused on steady, intermediate and long-term growth. Our focus is definitely not quarter-to-quarter. We're not going to force numbers to make quarters and we're looking to grow the company to get to the forefront as the leading provider of image analytics to the financial services market and other industries. And I'll talk about that in a few minutes.

Now many of you have been with Mitek for a long time as investors and I really do appreciate your confidence and patience with us as we have transformed this company. I hope that you're pleased, like we are, with the renewed market interest that we've recently attracted and their eye for long-term growth. We're methodically becoming a force in the technology that we're developing and perfecting and we believe we're well positioned for future growth.

Recently we completed developing a proprietary method to analyze the characteristics of a signature, compress it within a secure code and embed it within an integrated circuit, magnetic stripe or bar code. Now this capability to encode, encrypt, decode and validate signatures is unique in its ability to catch forgeries without relying on information stored in a database and that takes away the whole issue of communication links and latency. So, again, a self-authenticating method for validating signatures.

This technology was created based on specs that we jointly developed with the John H. Harland Company and it will be initially deployed in Harland's Validified check product, which was announced last quarter.

Last month, the first wave of Harland's large sales force was trained to sell Validify and they're marching. The initial reception from the market has been positive.

Now Validify and our other fraud-protection solutions address a big problem. According to the ABA, the American Bankers Association, 72% of all banks in America suffered from check fraud, with annual losses topping nearly $1 billion. This is a problem that is not going away.

Although Americans are writing less checks, they still write over 35 billion checks a year. Most banks today are simply unprotected against forgeries and counterfeits and lack any automated system.

This is a particularly acute problem, especially in an era of rapidly growing consumer concern over personal data theft and elder financial abuse perpetrated in the form of check fraud. There's probably not one of us out there who hasn't seen a Citibank commercial about identity theft. It's there; it's growing. The sophistication of computer equipment, software, communication systems is making the problem even worse.

So, like any new and innovative product, I expect the adoption rate for our technical solutions addressing this problem to be selective at first, then escalate over future quarters. And I believe the adoption of Validify checks could be significant over time, although, of course, it's difficult to predict the rate of adoption.

Currently Harland has a 40% market share of the consumer checks in the U.S. and they generate just about $600 million in revenue from this particular division. Their nationwide sales force, in the hundreds, sells checks directly to 6000 financial institutions so I believe there could be a sizable royalty stream as a result of their efforts, beginning sometime later this year.

Now as a footnote to those of you who may not be aware of our Harland relationship, they're a strategic partner and investor in Mitek and I think you can categorize them as a gorilla in the check-printing business. Mitek will receive recurring royalties based on Harland's sales of Validified printed checks.

I should also mention that Mitek retains the exclusive rights to license the validation software to vendors of ATM machines, point-of-sale systems, kiosks, scanners and other Check 21 compliant devices used to process check payments. And, in addition, we can also sell this technology to other industries and this is where I think the key to our strategy is.

As we develop the partnership with Harland and exploit that as they begin to market just now, our goal is to make image analytics a standard fraud-deterrent option. We know the approval cycle is long and that commitment to new technologies are typically slow. So, therefore, in order to scale the business our strategy is to collaborate with leading industry partners with large sales force and established customer relationships.

That's why we developed our first strategic partnership with Harland. This is the type of collaboration or go-to-market model that we seek with other industry-leading companies in which our image analytics can provide a substantial product differentiation.

We're not limiting ourselves to marketing our image analytics to banks. We believe that detecting signature forgeries and counterfeits is valuable to several other industries such as the healthcare and pharmaceutical industries as with government agencies where our technology could benefit compliance and protect against fraud.

For example, our validation technology could be applied to source identification documents such as driver's licenses or passports. Currently, some states are mandating the inclusion of two dimensional bar codes on driver's licenses, for which we believe our technology is ideally suited.

We're also in the early discussions with leading drug companies. Several years ago, Congress passed a law to protect the public against misbranding, counterfeit and diversion of prescription drug samples. It requires written receipts for all samples, validated by a physician's signature. Now there are millions of signatures collected annually for the exchange of drug samples and failure to comply can result in large FDA-mandated penalties. Our value proposition is to significantly improve compliance and reduce the risk of penalty by providing 100% screening and lower cost of compliance using our innovations in signature validation.

So to summarize, I believe we've made tremendous progress towards our long-term goal. Financially we're stable and our balance sheet is stronger. Specifically, we're working very hard to create a platform for steady growth over the long term. We believe we're addressing large market opportunities for our image analytics in several different industries, but most importantly I think with every company we have an excellent and motivated team and we're passionate about our plan.

So at this time, I'd like to open it up for questions. Operator?

And at this time, if you would like to ask a question, all lines are open at this time, sir.

Okay.

Hey, Jim. It's George Sutton.

Hello, George.

A quick question on-- you put in this government agencies comment in your press release. I wondered if you could give us a little bit more of a specific example of what government agency opportunities might be?

I will, George, and I did this specifically to elaborate on our second leg of our strategy.

As you know, the first piece was to develop and market through large partners, specifically Harland in financial services, a very unique validation process for signatures.

Again, this is something that doesn't require access to a database. The check itself has information encoded on it which can be decoded when there's a live signature attached to that check. So it's a wonderful way to detect forgeries at the point of presentment.

And the beauty of that is, once it gets rolling, is that not only does this address issues of forgery in the back office, but as it gets pushed out to the teller and then to the ATM and, finally and most importantly, to the retail locations, that's where you want to catch the fraud. And our system is uniquely capable of doing that.

So that's the first leg of the stool. The second part is to penetrate additional markets. We've developed the technology. Now we want to capitalize on that investment by, obviously, selecting large partners who address other markets. And there's issues of signature forgery, compliance and enforcement in a lot of different industries.

So specifically to your question, I'd addressed a couple things. In going to the government market, there have been examples recently of significant fines that have been levied, first by the Housing and Urban Development, HUD, against ABN Amro as reported just last month, a $40 million fine, for non-compliance, forgeries, that were not using the official underwriters for mortgage within ABN Amro.

As the case was, as you know, the market was overheated. Lots of underwriters-- sorry, banks were writing mortgages that had to go through HUD with the official underwriting of the one or two selected officials within the organization of the bank. This was being bypassed, HUD wasn't pleased and they levied a fine. So we're in discussions with that group to try to determine if our technology can be applied to solving that problem.

Secondly, with the Prescription Drug Marketing Act that was passed by Congress, again requiring signatures to validate the exchange of drug samples. These are narcotic samples that are regulated. And, again, the signatures themselves are not being validated efficiently. We think we can automate that.

And thirdly, what we see among departments of motor vehicles around the country an increasing need to identify the true holder of that driver's license. And if you noticed on your driver's license and others there are bar codes. The bar codes today are single dimension. We are seeing now a greater growth in demand for RFPs for 2D bar codes that could incorporate the signature characteristics that we have and developed the software for.

So there are three examples right there, George, that address what I see as big opportunities in the government area and, beyond that, in pharmaceutical and healthcare.

Then secondly, can you talk about the size of the banks that might have interest in the Validify program? I understand large banks would be a longer sales cycle, but just curious. Are you seeing interest from the very large banks, from the very small banks? Just curious who, exactly, it would be targeted to.

We are in weekly conversations and dialogue with our partner at Harland. Harland is the designated marketing group for Validify. It is their product, which uses our technology exclusively. And, therefore, we're relying on their large sales force and their existing customer relationships.

They currently sell to very large banks and other banks ranging from regional all the way to community banks. They are approaching a slice of all of those banks across the spectrum for the initial rollout and launch of the product. They began these conversations just this month. They went through initial training just last month.

So they're really at early stage, but so far the results are very positive. They have secured meetings with top executives at banks across the spectrum and I expect that we will see a handful -- and only a handful, which is the plan -- to begin pilots of the product very shortly and then, as results roll in, we would see a greater rollout to the consumer base, at which time royalties would be triggered to Mitek.

So with all that being considered and in a very methodical and logical process, we expect to see a royalty stream to Mitek beginning late this year, but we do see positive results so far in terms of indications from banks to whom this product is being marketed.

Okay. And then lastly, for me, what prevents you from a NASDAQ listing at this point?

Right now, when-- we were delisted from NASDAQ two years ago due to capital requirement restrictions. We fell below the $2.5 million requirement at that point. And so at that point, regrettably, we were taken off the national listing and were placed on OTC.

Our effort is to get back on NASDAQ. There's no question that's what we want to do. There are certain requirements that NASDAQ has and those requirements are regarding stock price. They also require market value of the company and so it will take us some time to achieve that, but we know what those requirements are and we will continue to work towards achieving those requirements.

But for the foreseeable future, we anticipate being listed as we are, over the counter.

Okay. Thanks, Jim.

May I answer any other questions? The lines are open and so if anyone has a question, I'd be delighted to answer anything about our strategy and our future.

Yes, I've got a question.

Yes. May I ask who's calling, please?

Yes. My name is Glen Davis. I'm with Paulson Investment up in Portland, Oregon.

Hi, Glen.

Say, I'm new to the story, so bear with me, but can we-- can we try to quantify what the potential market is? I know it's tough to do and maybe you don't want to do it, but try to quantify what the Harland market is for your Validify product?

I'll do the best I can and, Glen, you're right. It is a tough question to answer and I believe that, again, we are the technology providers.

First of all, I'm glad that you're a new investor in Mitek. We appreciate that. Again, we really think we have a very interesting story as a technology provider of image analytics.

We're a small company. We have hundreds of man-years of scientific experience and expertise in the area of imaging and the use of pattern recognition in neural networks to really understand what those numbers are and to identify potential fraudulent or counterfeit items.

Now that being said, our belief is, our best bet to scaling and to recurring revenue growth is through partnership with large partners who dominate a sector or an industry and that's why we partnered with Harland as our first partner and that's why we've created this Validify product that you've questioned.

There are about 8000 and change number of commercial banks in the United States. In addition to that, there are about 10,000 and change of credit unions in the United States, savings and loans.

So the market, roughly, is around 20,000 institutions. Harland markets their checks -- and they've been doing this for 80 years -- through a sales force numbering around 400 people to these banks. This is their largest division. As I mentioned earlier, about $600 million in revenue is generated annually through the printed products division of the John H. Harland Company.

There are in a competitive situation with other players and they have selected this technology to take advantage of a couple really interesting points, the first of which is, they have a sophisticated software group who are differentiating their product offering through the addition of value-added technologies like ours.

Secondly and maybe more functionally they're-- the, among all of their competitors, have digital printing presses, not offset by digital printing presses, which we think and they think gives them a competitive advantage in being able to customize books of checks for their customers more rapidly and with less cost and, therefore, they can actually embed or print on each check a customized code which includes the characteristics of an individual's signature.

So when you, Glen, receive your check box from the Harland Company, bought through your bank, you'll actually have a bar code in the upper left hand corner that represents the characteristics of your signature and some account information. It's really very, very innovative and they think it's as innovative as the micro line was 40 years ago.

So, again, it's a big market. Although it is declining at about 2% annually, there's still 35 billion checks out there being written.

So to summarize the statistics, $600 million in revenue created annually by Harland selling checks. Number two, they've got digital printing presses. They can roll this out fairly rapidly. Number three, they've got 6000 customers that are currently buying checks from them and they've got a large sales force.

So that's as much as I can give you in terms of data that helps you, at least, quantify the scope of the market. It's very difficult at this early stage -- I don't have a crystal ball -- to be able to predict the speed of adoption and that's, of course, what we're all concerned about and working very hard towards coordinating and accelerating.

But we're very optimistic. And, again, this has been through a series of tests, live tests with large banks and smaller, community banks and the feedback from the initial tests that were conducted last year has been very, very positive. Harland went ahead and put a big push behind it in November to launch Validify.

We've also partnered and are discussing with additional manufacturers of scanning equipment, people who actually sell equipment to retailers, big ones, as well as ATM vendors who have an interest in exploring deploying this validation software on their devices. So, again, we think this is very exciting, very innovative. The market, we believe, is large, but it's to be seen how quickly we can take advantage of the opportunity.

Okay and two follow-up question.

Sure.

I suppose you're not going to tell us what your royalty arrangement is with Harland. And number two, what are the international possibilities? Is Harland in the international market or do you have a potential international partner?

I can't answer the first one. It is proprietary and we just don't discuss that.

However, on the second one, I can answer that. Harland does sell their products around the world in selected countries. We've already received interest as far away as Asia and Singapore and also in Canada, so we believe that this will have a global impact over some period of time.

I think it's best and I think Harland feels it's best, let's get it done right, let's do it here domestically, but let's also work with our international partners as those targets of opportunity become available.

Thank you.

Yes. Appreciate the questions. May I answer anything else from anybody?

Okay, Dusty, I appreciate you moderating the call. And, again, I welcome our shareholders to call me individually if they wish, or Tesfaye, and I do appreciate your continued interest in support of Mitek. Thank you, everyone. Goodbye.

Thank you, sir. And this concludes today's conference call. You may now disconnect at this time.

Thanks, Dusty.

Thank you.