Mitek Systems Inc (MITK) 2006 Q3 法說會逐字稿

Good morning. My name is LaTrisse, and I will be your conference operator today. At this time I would like to welcome everyone to Mitek Systems fiscal third-quarter 2006 earnings release conference call. (OPERATOR INSTRUCTIONS). Thank you. Ms. Sese, you may begin your conference.

Thank you. Good morning and thank you for joining us for Mitek Systems' conference call. Today management will discuss the results for its fiscal third quarter ended June 30, 2006. By now you should have received a copy of the 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 will open up the call to any questions.

I would like to remind you that with the exception of historical matters the matters discussed in this conference call are forward-looking statement 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-KSC and 10-QSC. Forward-looking statements will 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 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 anticipated 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 their results set forth.

With that, I would like to now turn the call over to James DeBello. Jim?

Thank you. I would like to welcome all of you to our earnings conference call and look forward to your questions later on in the call. Now I don't intend for this to be a long call, but what I hope to do is update you on our financial performance, growth prospects and impending combination with Parascript.

As I mentioned during our last earnings conference call, we have been working to reposition 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. We believe that we have an exciting story to tell as we have concentrated on a strategy that leverages our expertise in recognition software into a recognized leader in Image Analytics used by banks and remittance operations to process checks and by other industries to fight identity theft. I'm very excited about our announced combination with Parascript and encourage you to read the S-4 filing about this transaction when it is available.

I would now like to introduce Tesfaye Hailemichael, Mitek's Chief Financial Officer, who will discuss our results from the third fiscal quarter of fiscal 2006 that ended June 30. After which I will address our accomplishments and strategy for the remainder 2006. Tesfaye?

Thank you, Jim. Good morning. I would like to begin by reviewing the numbers for the third quarter of our fiscal 2006. Revenue for the third quarter of fiscal 2006 was 1.7 million with gross profit of 80% compared with 1.5 million revenue and 79% in gross profit in the same period last year. Net sales for the first nine months of fiscal 2006 were 4.7 million compared with 4.6 million in the same quarter last year. Gross margins for the first nine months of fiscal 2006 were 79% compared with 84% for the same period last year. Operating loss for the third quarter of fiscal 2006 was $53,000 compared with a profit of $502,000 in the same period last year.

The loss for the third quarter of 2006 includes approximately $300,000 in legal expenses related to the previously announced merger of operations with Parascript LLC, which in nature is recurring -- non-recurring expenses, and it is really expenses this quarter. The profit last year includes $1 million gain from this position of CheckQuest to the John H. Harland Company. Net loss for the third quarter of fiscal 2006 was $126,000 or $0.01 per basic and diluted share compared with net profit of $230,000 or $0.02 per basic and diluted share in the third quarter of fiscal 2005. Net loss for the first nine months of fiscal 2006 was 573,000 or $0.04 per basic and diluted share compared with a net loss of 1.5 million or $0.12 per basic and diluted share for the same period last year.

We had $1.9 million in cash on the balance sheet as of June 30, 2006 compared with $2 million on the same period last year. We had working capital of approximately $2 million and stockholders equity of 2.1 million at the end of the third quarter of fiscal 2006 compared with working capital of 1 million and stockholders equity of 45,000 at the end of the third quarter of fiscal 2005. Cash used in operating activities was $482,000 for the third quarter of fiscal 2006 compared with 1.6 million for the same period last year.

In summary, revenue was up by 15%. No long-term debt. We expensed $300,000 in legal costs, which was related to Parascript's merger which is a non-recurring expense. Increased stockholders equity to 2.1 million as of June 30, 2006 from stockholders equity of 45,000 as of June 30, 2005. Overall margin was up to 80% in the third quarter of 2006 from 78% in the third quarter of 2005.

Now I will turn it back to Jim.

Thanks. I would like to take the next several minutes to address our accomplishments during the third quarter and our continued progress to increase shareholder value.

Now many of you have been with Mitek for a long time as investors, and I appreciate your confidence in us as we have transformed this Company over the past two years. I hope that you are pleased like we are with our solid financial performance, increased net worth and eye for long-term growth.

We continue to make progress executing our long-term growth strategy by partnering with significant industry players. On July 14, we announced that we entered into a definitive agreement to combine operations with Parascript to create the largest Image Analytics software provider with a broad portfolio of intelligent recognition and identity validation solutions. We expect that this transaction will close before the end of this calendar year. This is a significant transaction, but unfortunately I cannot discuss the financial details until we file an S-4 registration statement with the SEC.

Suffice it to say, though, that the size of this transaction suggests that the combined Company will be larger than Mitek or Parascript alone, and that while Mitek is the smaller piece, we believe it will provide an important contribution towards the growth upside. We are currently preparing our S-4, and I really encourage you to read it because at that time you will have access to the underlying information including the financial data that we think makes this deal very very exciting.

The primary driver of the combination is to create a strong platform to pursue growth in revenues and earnings. Just a few facts about Parascript. They are a leading software developer of cursive, handwritten and machine printed intelligent recognition products. They have a strong position in commercial mail and postal agencies around the world and have a strong client base, including the United States Postal Service. In addition, they provide products similar to Mitek's to the banking and financial services market.

Like us, they sell their products through independent software vendors and system integrators. Unlike us, however, these vendors and integrators include Lockheed Martin, NCR, Siemens, Bowe Bell & Howell and Unisys. I'm very excited about this deal because I believe the two companies fit very well and can address substantial opportunities together. Although we remain extremely confident about Mitek's long-term growth prospects, we felt the larger market presence and better capitalized company resulting from this combination with Parascript met our growth objectives more directly.

Mitek and Parascript should be considered natural merger partners because we have overlapping product lines and complementary strengths. First, both companies have outstanding technical staff. The combined Company will provide technologies that are used to accurately capture information from checks, forms and mail and to provide advances in fraud detection and identity theft security.

Secondly, the Company will benefit from a combined customer base with little overlap, and in return our customers will benefit from a broader set of best of breed solutions.

Thirdly, the prospect of greater market capitalization builds confidence among prospective customers and we believe provides the opportunity to return greater value to our shareholders. We anticipate going from a bulletin board Company with relatively small revenues and market cap to a post-transaction Company that we believe will qualify to list on NASDAQ. While the combined Company's common stock will continue to be traded on the over-the-counter stock exchange, we anticipate taking action as soon as possible such that the combined Company is eligible to be listed on NASDAQ and to apply for listing as soon as practicable. We are already receiving analyst calls expressing interest in this transaction.

Lastly, we have great chemistry with a Parascript team built on mutual respect as a competitor and a supplier. Years ago Mitek was one of Parascript's largest OEM customers for their cursive handwriting recognition capability. I respect their talents both as world-class scientist and businesspeople. We share the same core values based on integrity and innovation.

During this period, we are working on an integration plan that will leverage our strengths and realize cost synergies that we intend to implement after closing. In the meantime, however, we continue to operate our business separately and are taking special care to provide our customers with uninterrupted service while assuring them that the combined Company will provide greater technical capabilities and support.

So, during this time it takes us to complete the merger with Parascript, we will also continue developing products that allow us to pursue opportunities in other markets where our identity validation technology can provide protection against the ever increasing threats of forgery and identity theft. Last quarter, if you remember, we announced the release of SignProtect, an advanced software development toolkit that allows our partners to embed our signature authentication technology into their solutions.

Now, as an update, we are currently in negotiations with a leading Company who hopes to improve compliance processes for prescription drug sampling programs by embedding SignProtect. We hope to finalize these negotiations shortly and announce this partnership soon.

As a footnote to those of you who may not be aware, Mitek is also the exclusive technology provider to the John H. Harland Company for their innovative fraud-safe check product marketed by Harland under their Validify brand. We will receive recurring royalties based on Harland's sale of Validify printed checks. Although it is difficult to predict the rate of adoption, we believe the adoption of Validify checks could be significant over time. Harland has secured their initial beta customers and has begun to deploy Validify at a few selected banks. Additional information about Harland is available by accessing their New York Stock Exchange ticker JH.

So to summarize, we believe we have made tremendous progress toward achieving our long-term goals and are working very hard to increase shareholder value. Specifically our balance sheet and financial performance continues to strengthen. Furthermore, we believe we are addressing large market opportunities for our Image Analytics in several different industries. Now, combined with Parascript, we believe we have a larger platform for growth over the long-term. Again, I encourage you to read our S-4 once it is filed.

At this time, I would like to open it up for questions. Operator?

(OPERATOR INSTRUCTIONS). George Sutton.

Jim, could you give us a sense of the sales reach direct and indirect of the combined business potentially comparing it to Mitek itself?

As I mentioned, the combined Company will be more sizable than Mitek, Mitek being the smaller portion of it. By combining with Parascript, we instantly broaden our reach into other vertical markets. Parascript is an expert not only in the financial services area but in the area of automating mail and commercial postal services. So we are very excited about that combination because one, it broadens our market reach immediately domestically, and secondly, gives us an international footprint. Parascript also has sales abroad. So we think combined it gives us, as I mentioned earlier, a platform for growth both domestically and overseas.

But you're not able to give specifics yet in terms of sales, the direct sales force, indirect partners compared with your current direct sales force?

George, I cannot now but I will in the S-4 coming out shortly.

Okay. This combination of Mitek and Parascript in the Image Analytics market looks a little bit like a rerun of what Visage has done with the biometrics market. Is that your goal here?

Well, if you're referring to Visage in terms of how they have acquired other companies, I think that is consistent with our objectives. But let me just tell you, though, we think that the two companies together provide substantial opportunities on their own merits. We're going to be focused on growing the Company based on our existing operations and what we can do with expanding them. However, there are players that we would like to have discussions with, and we think we're well positioned to do what Visage has done.

Okay, great. The last question you ran through it real quickly, but it sounds like you have a new opportunity with a drug company. Can you just retell what you told us before on that?

I will. We have been in discussions for awhile now with a variety of companies who provide services to pharmaceutical companies in the health sciences area. Specifically we provide signature authentication technology, and we have taken that which we have created for the Harland Validify product and we have created a toolkit. This toolkit can be used by other players in other industries to help authenticate identities. And in this case, there is a requirement by the FDA and the United States Congress to validate signatures when drug samples are distributed. There is a problem in America with drug diversion when these samples are delivered to doctors or diverted to other areas in the gray market. And so, as a result, signatures are literally collected by hand by each pharmaceutical rep, combined and then randomly sampled, and it's a very costly and time-consuming process and one which is not very accurate.

We believe, and with this partner that we're talking to, we can automate this to provide greater labor savings, greater accuracy and better compliance. So that is what we are working towards in a completely different industry than what we have been focused on in the financial services. Again, our go-to-market strategy has been through channel partners or independent software vendors, and in this case it will be through an ISV. So when we get that done, we will make an announcement, but it will be sometime later this quarter we hope.

(OPERATOR INSTRUCTIONS). Mike Wallace.

It looks like you have got things tracking real well there on the core Mitek business and this Parascript (multiple speakers) venture for you. You know you have got the business now profitable. It looks like it is plus or minus depending on a couple of hundred thousand on the top line. As we look at the combined companies, is that aspect of your business going to change? George mentioned Visage there, and they went on a big acquisition spree and bought a bunch of companies that have been really difficult bringing it to the bottom line there. I kind of want to get a feel for how that is going to play out here.

I think that is a fair point. Let me address that. First of all, you are right, we have turned Mitek right side up. We have been profitable consistently for the past several quarters, and had we not done this deal with Parascript and expensed the legal expenses associated with this deal, we would be profitable today in this quarter. So you're correct about the operating benefit of what we're doing here. We're pleased with that, and thanks for mentioning that.

However, as a stand-alone company, we continue to be very very positive about our long-term strategy for growth. We have a very good relationship with Harland, and we are beginning to get traction now in other industries although it takes time. With any new adoption of technology, it takes time, and that is difficult to predict. With the combination, we get a couple of benefits that are immediate to our shareholders and to the Company.

One, it broadens our market instantly. With Parascript, they are an outstanding Company. You will see this when you have a chance to look at the S-4. And again I just cannot emphasize enough when that is published, please have a chance to read through that. It will be voluminous, but it is worth it.

When is the S-4 coming?

We expect it to be coming shortly. Now that means probably in August, and that is really our focus. We're working very hard on it behind the scenes, but I cannot give you a definitive date, but shortly.

A week or two sort of thing, or is it more towards the end of August?

I would say probably the latter. But again, we're working very hard to get it done as soon as possible.

Now, as it broadens our market, it gives us access to more customers, customers that don't overlap with ours. As I mentioned earlier in the conference call, Parascript has relationships -- long-standing relationships with major independent software vendors and system integrators around the globe. This is terrific. That adds a special level of depth and predictability of recurring revenues that we don't have today.

Number two, we end up with a greater market capitalization, and that is important to customers as they make buying decisions. It is true, and over the past several years, it has been difficult at times when Mitek has presented to customers who like the technology very much that at times they have been shy about investing in it and it has slowed our growth. So the combination we think will further accelerate our growth both in the long-term and in the short-term. So I think there are real benefits that are tangible.

And lastly, as I did mention earlier as well, the combined companies give us the capability now at least to meet the requirements we think of relisting on NASDAQ. That gives us greater visibility among the market and I think also tees us up for future opportunities to combine with other companies. So to answer your question directly, we understand Visage and other companies have gone through very aggressive, very fast acquisition strategies and have had hard times at times absorbing that, integrating it and providing smooth operations.

What we see here with Parascript is different. First, with Parascript, there is a great cultural fit. We really have a high regard for their team and I think they do for us. We openly communicate on a regular basis and have been customers of Parascript for a long time. So this is not a new relationship; it is an older relationship. So we think the integration process will go very smoothly, and we have a very very diligent effort to focus on our core operations to drive the top line growth and the bottom line profitability.

However, saying that, there are other companies out there that probably make sense in terms of looking at with regard to combination for having at least a discussion to see if there are some synergies. So we will be having those discussions, and undoubtedly we will consummate deals in the future as part of our overall growth strategy. So again I want to say that we're not going to take our eye off the ball. But we think it does make sense to look for strategic acquisitions in the future.

Now did they approach you or did you approach them?

Again, that will be in the S-4. They actually disclose all of the process, and so if I can just ask you to wait until you read that, it will have the full story in there.

It will be a pretty important document, it sounds.

You know, it really is and I cannot emphasize that enough. I'm chomping at the bit here to tell you more, but I am prevented by the rules and regulations to do that, and I just want to wait until we can disclose it to all the public at the same time with all the details.

So I assume you will put out some press release or something?

Well, we will let you know as soon as the S-4 is filed, and probably it is appropriate at that point then to announce it.

Do you think you might hold a conference call?

I don't think we will hold a conference call at that point, and we have to assure ourselves that we don't have to face any quiet period restrictions. I don't know if we do or not yet.

You mentioned on Harland they have completed the beta tests and now are rolling out. Could you give us a little more color on that?

Mike, I don't mean to put the cart before the horse because that's not exactly true. They are in the beta process, and they are just gathering results now. It takes time to integrate the technology. First, it takes time to get on the bank's integration schedule. Secondly, it takes time to integrate the technology and refine that because we've discovered things as they go through the process and correct or adjust. And then they begin collecting data from live implementations. So we are on schedule, but it will take several more months of beta testing before we began seeing check rollout, which will trigger royalty payments.

All right. Is the timeline with Harland a little bit slower than you thought originally, Jim, and that is kind of why you're thinking maybe we need something else like Parascript here to accelerate the growth?

Mike, it is a fair question, but they are not related. We believe we are on track with Harland. I have been through lots of product launches in the technology business for 20 years, and it always takes more time than you think. So we are pretty much on track with what we thought because we built in some delays. Getting a customer to cooperate on your schedule is always difficult. We have to cooperate with their schedule, so that has built in a few extra months that we did not anticipate. But --

Did you need their approval for the Parascript deal?

No, we did not. Of course, we needed our board approval, which we received and Parascript's board also voted in favor of deal, but we will go through a shareholder meeting once the SEC approves the S-4.

All right. Good. Keep up the good work. It sounds like things are progressing well, and we will look forward to continuing to track you.

Thanks, Mike. I do appreciate your questions.

[Gonzalo Maquaria].

Jim, this is Gonzalo Maquaria. All of my questions were answered already by Mike's questions basically.

Okay.

I guess we will wait for the S-4.

I hate to keep you in suspense, but that would be the thing.

All my questions were related to that document, I guess.

Okay.

At this timer, there are no questions. Are there any closing remarks?

Well, I would just like to say that again we support -- we are excited about this deal with Parascript, and we appreciate your support as investors and interested parties out there listening to this call. Please do stay tuned for the S4. When we have that issued, we will notify folks through the public market and allow you to see the underlying financial information and other information which we think makes this deal very very exciting. Other than that, we continue to focus on our business as an independent business until such time that this transaction closes sometime before the end of this year. Again, thanks for listening and again for your support. Good-bye.

This concludes today's conference. You may now disconnect.