Mitek Systems Inc (MITK) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mitek Systems, Incorporated first quarter fiscal year 2007 financial results conference call. [OPERATOR INSTRUCTIONS] During today's conference call, Mitek Systems management will discuss the results for its fiscal fourth quarter ended December 31, 2006. By now you should have received a copy of the press release. If you have not received it, please call 858-503-7810, extension 327, and we will get a copy to you right away. With us today are President and CEO James De Bello, and CFO, Tesfaye Hailemichael. Mr. James De Bello and Mr. Tesfaye 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 10-KSB and 10-QSB. Forward-looking statements can 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 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 James De Bello. Jim?

Good morning, ladies and gentlemen. I'd like to change the format of our standard earnings conference call. You've all seen our first quarter financial report released yesterday after the market closed. Rather than repeat the financial highlights as in the past, I want to get right down to a discussion about our business. Our CFO, Tesfaye Hailemichael, is on the call and he is available to answer any of the questions you may have.

Let me begin by stating unequivocally that we remain excited about our technology and its acceptance in the marketplace and plan to invest additional resources in our sales and marketing efforts. Our financial report reflects reasonable performance in light of the distraction of the now terminated Parascript transaction. Gross margins improved and while costs were steady, they include expenses of approximately $218,000, of legal and accounting fees that we incurred in connection with the discontinued transaction with Parascript. Fortunately, during this period, we remained diligent in our efforts to support our customers with very attentive service and product innovations. In fact, just yesterday we announced our second patent for our signature validation technology. Mitek today remains one of the few companies in the world with leading capabilities in image analytics and pattern recognition. I've spent a considerable amount of time meeting and speaking with our customers during the past two weeks, and I've affirmed a great deal of support for our Company.

Our goal continues to be to monetize this technology across multiple industries. Today, we've sold our patented signature validation technology into three key markets; financial services, and more recently, into life sciences and government. In addition, marketing by the John Harland Company of its Validify Checks that utilize Mitek's proprietary technology continues to move ahead, and we anticipate benefits as the program takes hold.

Now, I want to spend a few moments on the discontinued merger. Three weeks ago, our board elected to terminate the merger agreement entered into Parascript last summer. The board elected to do this after being notified by our financing partner that it was withdrawing its offer to fund the deal after its further review of the financial position of the combined companies. We concluded that there were no other financing offer -- options for the merger, and therefore, we took action as appropriate. Now, regrettably, there remain material fees to three vendors who were involved in the merger process. As disclosed in our S-4, those fees were to be paid from the proceeds of the financing of the merger. Today, we're in ernest dialogue with these partners to negotiate a reduced payment, and settle these obligations once and for all. These three creditors are outstanding service providers and financial partners, and our relationship has been cooperative. And by resolving these issues, operating cash flows will remain manageable, but tight.

Regardless, this will not prevent us from pursuing our strategic plan. Last week, we announced MITEK NET[X], the next generation of our recognition platform, with a comprehensive Internet strategy that allows our developers to deploy our recognition technologies in a variety of web environments. Now, this strategy anticipates more distributed and hosted applications development by our partners -- that's where the market's going -- and we think this will put us a leading position with these technologies vis-a-vis our competition. We believe that we have unsurpassed image analytics and pattern recognition technology, but our primary short-term challenge remains in how we monetize these multiple markets. Our revenues just reported remain flat year-over-year. To address this short-term revenue issue, we'll invest in our marketing efforts and strengthen our sales team, by hiring additional sales people who are knowledgeable about the industries we service. In addition, we remain diligent in managing our costs.

In summary, the uncertainty resulting from the proposed merger and the tremendous amount of management effort to go as far as we did with it did effect our performance. With this behind us now and renewed sales efforts, combined with MITEK NET[X], we're working to improve our top-line performance and profitability. I'd like to thank you for your continued confidence in our long-term growth prospects and success, and we'll continue to work hard to enhance long-term value for customers, employees and our shareholders.

I'd like at this point to open it up for questions that either I or Tesfaye could answer. Operator?

[OPERATOR INSTRUCTIONS] There appear to be no questions at this time. We do have a question from the line of George Sutton with Craig-Hallum.

Hi, guys.

Hi, George.

I just wanted to -- and I got on late, so I apologize if you addressed this, but first from the patent perspective, these patents that you have announced, can you just give us a sense of what some form of value might be related to these patents? Or do you view there being current infringement on these patents by other people that you could end up seeing some license revenues from? I just want to make sure I understood that value from your perspective.

George, I will address that, with regard to the patents that we have filed, and when I began as CEO, one of our goals was to establish a portfolio of patent protection for our technology,and begin to protect our intellectual property that way. So two years ago, a little over two and one half actually, we began to file for patents in a variety of areas, specifically our innovations in the signature world. And as you know, we have collaborated with Harland on a system by which they can protect their customers who buy their checks from identity theft and forgeries on their checks. That system called Validify is a method and work flow system for which they retain the rights.

The underlying technology, the signature technology that is imbedded, is a technology we created through our scientific group and the algorithms that we created there are those which are now protected by the patents. They are reflected and manifested in a new product that we are shipping and that is called Sign Protect. And Sign Protect allows our customers to deploy the signature validation technology in a variety of markets. We'll soon be announcing an arrangement with an integrator in the United Kingdom who's deploying our signature validation technology in the area of election -- election voting and polling to protect against forgeries. And we're also seeing the deployment of Sign Protect in now markets in life sciences, specifically that previously announced with Stay in Front, in the area of protecting forgeries and diversion of prescription drugs, as required by the FDA.

So the value of the licenses -- sorry, of the patents will be two-fold. One, it protects the Company from other people, obviously, penetrating these new markets that we seek in using the same type of technology. And secondly, we believe it gives us a lead in and with new customers as they wish to deploy signature validation technology. We have just begun these marketing efforts within the last six months. We're beginning to see some fruit with new accounts, and with Stay in Front, they are entering into one of of their first production customers very shortly. So we are excited about that and we think it adds value to the Company intrinsically, because now our technology is protected. And secondly, I think it reflects the innovations that we've created, particularly in the area of signature technology.

And in summary, what we do is that we are able now to encapsulate characteristics of a signature in a very small footprint, in a small sequence of numbers, to binary code, and we can compare codes against other codes to see if that signature meets a certain threshold of accuracy. This is different than other people have done or attempted to do in the past who have is simply compared image of the complete signature against another image, or a bit map, of the complete signature, which is must more costly in terms of memory and processing time. So we believe ours is more efficient and it will add value as reflected in increased revenues.

With respect to the pharmaceutical opportunity -- and you'd mentioned that you were in production with an opportunity with Stay in Front -- are there other Stay in Front-type distribution partners that you would be seeking to bring this solution to?

Yes. We participated twice now at the Prescription Drug Marketing conference at which several companies exhibit, many of whom provide the pharmaceutical industry with sales force automation or customer service management software, of which signature validation is a part. We see this being deployed on hand-held tablet computers now by major pharmaceutical companies who have thousands of sales reps covering the country. So there is -- there are more companies than one that do this. We are in dialogue with several of them, and we hope to be in a position to announce these deals very shortly.

Okay, good. And then lastly, Harland is being purchased by a company that owns Clark, another large printer. How does that affect your Harland opportunity and potential distribution of the Validify product?

It's a good question and it I think positively impacts the future opportunity. Harland traditionally has been the second largest check printer in the country, and by definition, in the world, behind a company named Deluxe. By combining with Clark American, they will instantly become the largest producer of checks in the country, and Deluxe will be number two. The deal between Harland and Clark American through this process, the merger, is being reviewed now, and they expect that they will get a positive result and complete the merger shortly. In their statement publicly that announced this deal, they did specifically reflect the advantages of fraud detection technologies deployed by Harland as an interesting area for them to differentiate their products on a combined basis.

I have spoken with the chairman of Harland who remains very enthusiastic about the opportunity ahead. They remain dedicated in their marketing efforts. We all acknowledge that the penetration rate and adoption has taken time, but it does take time in the banking world, which has established practices now for many decades, and this is an evolution of the practice into a safer environment for fraud-safe checks. So they remain optimistic, and we also do. And once it is adopted, we believe that the stream of revenues will be consistent for a long time to come. That's our desire. That is their desire. And we both remain working hard on the project. But the combination with Clark, I think, will add to the market penetration opportunity for us combined.

Okay. And then lastly, you mentioned you were looking to hire some additional sales people. Can you just give us a sense of a scale there, and how do you look at distribution going forward, direct versus indirect?

Yes. We intend to maintain our model of supporting our independent software vendors, original equipment manufacturers, and resellers. These are our partners, and we sell indirectly, through these partners, who create solutions based on embedding our software technology. That model will not change, and that primarily is accountable for 100% of our revenue -- I should say, George, about 90% of the revenue. Some additional revenue is through nonrecurring engineering benefits from collaborating with other companies.

So we will add -- we expect, doubling of the sales group, and the sales group has numbered three-plus support personnel and again, we're more efficient that way. By going through channel partners, we don't need to have a large team in the field. What we give up in margin we save in expense, and we rely on the selling processes of our partners. But we need to support those partners, and by doubling the effort there, we think we not only solidify our position in the market but we expect to grow it. And furthermore, it will give us the ability to go after new market opportunities that we see in the life sciences arena, and also what I would loosely term as government/security. And so, by virtue of having more feet on the street, so to speak, to meet with these resellers and partners and VARs and ISVs will be able to create new opportunities for the Company's growth. That is an immediate objective to be accomplished this quarter.

Super. Thanks very much, Jim. Appreciate it.

[OPERATOR INSTRUCTIONS] We have a question from the line of Mike Wallace with White Pine Capital.

Good morning, Jim.

Hi, Mike.

How are you today? As I kind of look out at the model it's nice to see that the balance sheet remains fairly strong in here. Your cash position remains pretty good, but as you go through this period of investment in and the Harland thing has taken a little longer to develop and you've got these liabilities -- payment liabilities that are out there, how do you see the financial structure of the business progressing over, say the next six to 12 months? Can you give us a picture or something that -- comfort there?

Yes, I can, Mike. And let me tell you, I would like to just comment on the balance sheet. We agree with you with regard to the balance sheet, and the stability of the Company that it reflects and our ongoing viability. Despite this transaction being terminated, we feel very confident about the future, and so when I talk about investing in the sales and marketing efforts, we really have, to some degree, neglected that in six months. And I don't mean neglected in terms of our attention to it but we haven't added to it, only because we anticipated the combination of the two companies. Clearly, that has changed, and we will add personnel in the sales and marketing effort, but they will be -- it will be net neutral in terms of head count, or close to net neutral, as we reallocate internal resources. And one of the things that we've noted is that we have a heavy investment in the G&A area, and we want to take a hard look at that, and if there's ways that we can reallocate those resources into our sales and marketing efforts -- and of course, that will require new personnel coming on -- that's one way we will accomplish this.

It should also be reflected in higher revenues, and therefore, as a percentage of our sales, I don't expect to see a massive change. So that's one of the ways that we approach that. On the obligations that we have, Mike, it's a concern that everyone has and certainly we are addressing this very earnestly, and immediately to try to resolve this once and for all. Now again, it's with three vendors, all of whom have been strong partners and cooperative with us. And regrettably, these costs do exist, and they have been in dialogue with us, and we hope to resolve them positively for the Company. So the unrecorded liabilities for the obligations will be resolved, we believe, very shortly. At such time, they'll be reflected in this quarter, as it is reported in April or May.

And you don't think it is going to cause a problem on the financial structure of the business then?

We do not.

And you've got plenty of cash there to fund this, and as you move expenses around, what do you think you should be thinking about in terms of operating expenses then, when you back out all of the different charges on -- sort of as an ongoing basis then?

Yes, and what I'll do, if I may, I'll include Tesfaye in this part of the discussion to address that. I think. Tesfaye would you --?

Sure., Mike, as you noted that Jim say that the G&A expenses obviously for outsider looks pretty heavy for a small Company like us, and [inaudible] public as well. So there are some expenses, which is still going to be there. But there are some expenses, but that we going to reallocate internally. So the -- in general, the expense will go -- we hope that the expense will go down as a percentage of revenue.

Okay. You need the revenue growth to offset it, but are we looking at sort of $1.5 million to $1.7 million per quarter then in OpEx total? Because if you move a couple hundred thousand out of G&A and you move it up into sales and marketing, and then your R&D efforts, do they continue at sort of $0.5 million a quarter level or does that -- most of that's --

Yes, all the other areas R&D would stay pretty much the same and the sales and marketing will go up and the G&A will go down. So pretty much what Jim said, it will be net neutral.

So sort -- just kind of summarize then on a going forward basis, we're looking at somewhere around $1.5 million five to $1.7 million in OpEx per quarter?

Actually, it should be less than that.

Yes, it will be less, Mike, because we wo -- I think you're reflecting a lot of those included merger related --

Yes, I'm trying to figure out what sort of the baseline number we'er looking at.

Yes.

So if you backed all of that out, these one-time charges and stuff for the quarter, would you have been sort of breakeven on an operating basis then.

If we maintain the same revenue, we will be -- yes, we will breakeven.

Okay. So it's probably closer to about $1.4 million then, on an ongoing basis. And now it is just a matter of reallocating the expenses to drive the sales line, and then all of a sudden you get the inflection point on the --

That's correct, Mike.

-- cash flow and the earnings and in the meantime, you've got $3.5 million or so in cash, or not quite that much [inaudible] number.

$2.5 million.

$2.5 million, yes, to get you by. So okay, good, it looks like we can come -- kind of come back to what the original Mitek story was -- almost a year ago, right? -- with the exception of the Garland Clark merger. But to kind of muddy the water at least in the short to medium term, but sounds like that could be an opportunity for you. Have you talked to the Clark people much, Jim, and [inaudible] with them?

Actually we did speak to them. It was a wile while back, however, and that was probably at the time they were in discussions, unbeknownst to us, with Harland and they did some exploratory discussions. Harland reserves the right exclusively to use this technology in the financial services market. That was part of our deal from the very beginning. And so it's always been our desire that Harland establishes a footprint out there, gets penetration, and then ultimately licenses the technology to other check manufacturers to make it ubiquitous. Now with the combination of Clark, you eliminate one of the major players, as it's combined, and so it almost takes care of that for itself. So my sense is -- and again, speaking directly to the chairman of Harland, and not to Clark, is that they are optimistic and continue to work hard on the project. And I met with the people in charge of the actual project -- the general manager yesterday, and so that is a consistent story with them, they just went through a sales training with their 400 sales people in the middle of January.. It was highlighted in that process, and they are out actively securing new accounts, but we are in the evaluation stage, with several at this point.

Can I go back, Mike, to a comment you made with regard to what would this quarter have looked like without these one-time expenses related to the terminated transaction? And if you take out the $218,000 from the net loss number, and also we have for the first time now begun to expense the options, which totaled about $44,000, this quarter could be looked at as an operating break-even quarter. Prior to that, in the K that we announced earlier, from 2006, if you eliminated the merger-related expenses that we did expense last year, and the fees associated with Delores debt, which is now gone -- there is no institutional debt on our balance sheet -- last year would have been profitable. It had a $6 million revenue rate. So we believe that we have aligned our costs to the best of our ability. Our challenge remains to grow the top line and that's why we are investing where we are in terms of personnel. So again, we have a lot of work to do. We're not satisfied, we're not implying that we are. But again, we have enough stability to, I think, grow the business, and we have planted a very strong opportunity with Harland, and we're looking for Harland-like opportunities in different industries who could deploy our pattern recognition technologies. And so you're right, in the sense that our story now goes back to the original Mitek story as it has been, and would have been, in combination with Parascript, but without the distraction of the integration with Parascript and other markets.

Just in terms of timing then, should we look at this first quarter of fiscal year '07, I guess, to be as sort of the base in sales of $1.4 million and from here, we should start seeing some steady improvement from there, Jim?

Well, Mike, we never give guidance because at our size, one or two deals can swing it very positively, or conversely the other way. And so for those reasons, we always are reticent to comment on that. Clearly, our goal is to take it from where it's at and grow it.

Well, let me ask it maybe this way then. There is no large deals included in the $1.4 million that you report in this quarter, correct?

That is correct.

That's just sort of ongoing license fees that you've got from these software people that are incorporating your technology and that revenue run rate has sort of been in that $1.4 million to $1.6 million now for the last four or five quarters, so that's been fairly stable. And so these other deals you're talking about, with -- in the pharma pipeline and the UK government would be stuff that would layer on top of this $1.4 million base number is, correct?

Those are new deals that would layer on top going forward. That would be our expectation and I think you correctly assessed it.

Okay. Good. Well we keep looking forward to tracking the progress and for some more announcements. And when you finally get all of this stuff settled with the three vendors and things, is that something that you'll disclose in announcement or something or do you just want to, again, sort of do it at the end of the second fiscal quarter?

I think my preference is the end of the second fiscal quarter. Tesfaye, I don't know if you --

Yes, I agree with that because we still in discussion and now we are at the end of -- the middle of February, so we'll probably report that at the end of the quarter.

Okay, great. Let's keep in touch. Appreciate your comments. I'll just get off now.

Thank you.

Thank you, Mike.

And we have a follow-up question from the line of George Sutton with Craig-Hallum.

Sorry, guys just one other question. This morning, Corillian was purchased by CheckFree and, of course, [Carriker] was purchased just a couple of months ago. We're seeing a lot of consolidation of smaller bank vendors. What is your official thought on you as a potential purchase by one of these companies?

George, this is Jim speaking. I was at the banking show called Transpay in Orlando earlier this week -- Monday and Tuesday -- at which I spoke to several of the vendors, and of course, CheckFree is consolidating their sector in the marketplace, and we see that. And then we've seen that now for the last two years, activity by MedAvant, activity by Fidelity, activity by Pfizer, all multi-billion dollar players, and even by Harland. You know Harland remains a shareholder of Mitek. So our technology, as we see this explosion of digital imaging, and the adoption of Check 21 becomes more central in the marketplace. In fact, Diebold announced and was displaying at this particular Transpay conference an image-enabled ATM, what can actually do [caralar] at the ATM, courtesy amount and legal amount recognition. So you can make multiple deposits and it automatically does the calculation. We further see a growth of distributed capture in the form of merchant capture, whereby merchants and businesses can now scan their checks at their businesses, and the digital image is then transported to the bank for processing, again enabled by Check 21.

So in summary, I believe that our technology is very important to this industry, and will also be important to other industries, also experiencing this massive growth of digital imaging. And it's reflected in our daily lives, even as consumers with our digital cameras, and storing our thousands of photos. Imagine what it's like at a hospital, storing thousands of CAT scans, et cetera, that are digitized. So I believe that we have an important component in many imaging solutions, and that Mitek's value could be reflected in some activity, sometime down in the future. But we're not focused on that. We're not seeking that. Should an opportunity become available, naturally the board would consider it on behalf of the shareholders. But again, I think that Mitek is well positioned and could avail itself of those opportunities sometime in the future, you never know.

Okay. Thanks, appreciate the thoughts.

And we have no further questions.

Well, I want to thank everyone, again, and more importantly just thanks for the patience through this ordeal or process that we went through with this transaction that was terminated. Again, we're very focused on what we're doing, we're excited about it, the team is rallied and we're moving ahead. So again, hope to give more positive news in the future. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.