Mitek Systems Inc (MITK) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mitek Systems, Inc. third 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 third quarter ended June 30, 2007. By now you should have received a copy of the press release. (Operator instructions)

With us today is President and CEO James DeBello and Tesfaye Hailemichael, Chief Financial Officer. Mr. DeBello 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-ASB and 10-QSB.

Forward-looking statements include, but are not limited to, statements relating to the development and the pace of sales of the company's products, expected trends, and growth in the company's available cash flow and liquidity; anticipating penetration in new and existing markets for the company's products and the size of such markets; anticipating 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 DeBello. Jim?

Thank you, and good morning ladies and gentlemen. I hope that you have all seen our fiscal third quarter financial report released this morning before the market opened.

We had a good third quarter showing progress implementing our strategy. First and foremost, we reported positive earnings of $0.01 per share. I think we did an exceptional job managing our expenses while maintaining a strong investment in our research and development, which of course is important for our future growth. We also expanded our reach into global markets with new business in Europe and Asia.

I'm also pleased to announce that we've settled all remaining merger related fees and obligations entirely, no further obligations remain; and have maintained a cash balance of $1.9 million at the end of the quarter. Incidentally, our cash balance for the end of the same quarter last year was $1.9 million as well. Our balance sheet remains healthy and our operating cash flows are strong. This allows us to pursue the growth of our business.

Our third quarter revenue grew approximately 12% over the prior quarter, attributable to growth in the core business of our recognition tool kits sold to OEM partners and system integrators. However, our third quarter revenue is about 14% lower than the same period last year, primarily due to the reduction of engineering fees paid by the John Harland Company as we had neared completion of the product development portion of our contract with them. The next phase of our contract is royalty bearing, the amount of which is dependent on the success of their marketing programs, but more on that in a few moments.

Earlier this year we announced Mitek NETX, a comprehensive internet strategy that allows our developers to deploy our recognition technologies in a variety of Web environments. NETX addresses an important market trend started by Check 21, namely the remote capture of check images and processing of payments over the Web. I believe our timely implementation will put us in a technology leading position, vis-a-vis our competition. We're on track to launch our first recognition product under this initiative later this week and we'll be exhibiting it at the Association for Work Process Improvement conference next week in Boston, called TAWPI.

Our goal continues to be to monetize our technology across multiple industries. Today our technology is being primarily integrated by our partners into payments solutions for the financial services industry. Most recently, however, we've begun to see our new signature technology deployed through partners into government organizations and the life sciences industry.

The newly formed Harland Clarke Company is the largest check printing company in the world, with nearly 70% market share. Although the combination of our partner, the John H. Harland Company, and Clarke American did slow down marketing efforts of Harland Clarke's Validified checks that utilize our signature technology, we continue to work diligently with Harland Clarke and to weight greater clarity in their combined marketing plans, the success of which, we hope, will generate a stream of royalty payments through the terms of our long standing contract with them.

I believe that Harland Clarke's Validified product, which protects businesses and consumers against losses from check fraud and identity theft, is strategic to their stated mission of providing products that help banks and credit unions acquire and retain customers. The slowdown in Harland Clarke's marketing efforts caused by the merger has in no way, however, encumbered our enthusiasm for our advanced signature technology, which is the same underlying technology used in other markets. People see the tremendous value of authenticating identities by verifying signatures quickly and accurately and we have developed a very unique solution for that.

Our partner OPT2VOTE is one of the leading suppliers of election services in the United Kingdom. Since we last spoke they have successfully deployed our SignProtect technology in elections held throughout the U.K. to verify nearly 1 million absentee ballots. In addition, our partner StayinFront has recently launched its signature compliance product and has begun to market it to leading pharmaceutical companies.

We've now deployed our patented signature forgery detection technology into three markets, financial services, life sciences, and government. In summary, with our renewed sales efforts, combined with Mitek NETX, we are working towards improving our top line performance, profitability, and shareholder value. Our balance sheet remains long term debt free and our cash position is stable, allowing us to pursue our growth strategy.

I'd like to thank you for your continued confidence in our long term growth prospects and success, and at this point Tesfaye and I are available to answer any questions. Operator?

(Operator instructions) Your first question comes from George Sutton.

Hi, Jim.

Good morning, George.

In the past, fairly recent past, you had hired a new head of sales and you were quite enthusiastic about some of the areas that he was going to be focused in his team. Could you just give us a little bit better sense -- or any update there in terms of how that's been going?

Yes. His name is Dave Youngerman, and together with other sales executives on our team we're very pleased with the progress they've made. Dave has immediately given us some marquis with existing customers and new prospects, and as a result we've deepened our pipeline. And as you know, George, it takes about six months in terms of a sales cycle, so we're three months into that but we are seeing some results that have been expedited.

In addition that, Dave comes from the industry of banking and is extremely knowledgeable about payments systems, and particularly the remote capture trend that we see in the market. And the Check 21 law that was passed two years ago, we're starting to see now more adoption of remote deposit capture implementation that is provided by our partners. And we, of course, enable that through our recognition toolkits and engines. And so as a result of it, we see not only an effort to provide software providers updated recognition engines that are web enabled, and that's part of our NETX initiative, but we also see that remote device -- capture device vendors also are looking to improve performance of their actual equipment in the field and we think that's a new market that Dave is uncovering for us.

So all in all we're very pleased with the progress that the company has made, particularly coming out of the merger that was terminated earlier in the year. And I think we've done a real quick job of getting our feet underneath us and moving forward.

You had mentioned you were awaiting greater clarity from the Harland Clarke Group. Can you just give a little more specificity, if possible?

I can, and of course we've been working with Harland Clarke now for -- well, Harland Clarke specifically for six months. No, that's not true, George. I think since May is when they actually completed the merger, and of course Harland before that for two years. We have worked diligently and effectively to produce the Validify product and the underlying technology with the cooperation and partnership of Harland Clarke; they've been terrific.

They have gone through the merger process, which is disruptive to the degree that sales forces are often combined or changed, responsibilities and alignment changes, and those things take place frequently in any merger. So as result it's slowed down in terms of their outreaching to customers and reconciling where the product will reside in the organization.

The team that managers the Validify product has remained the same. The executive team is new. We have -- or, rather, are meeting with them shortly to discuss the future plans and moving forward. So we believe that it still is a strategic product for the combined entity, despite the fact that they now are a very dominant player and before, Harland was using it to actually capture market share. Well now the combined entity has nearly 70% so we believe, however, it's still strategic because customers, and those are the banks and credit unions out there, are looking for ways they can acquire customers, provide better service to those customers, and retain them.

And already we've seen through selected beta users of the product that they have effectively been able to communicate more promptly with customers about suspicious checks. And that alone has added tremendous value because rather than being a fraud detection tool necessarily, it's really evolved into more of a risk operational management tool. And so as a result, banks see value; we hope that more banks over time will see value, and we hope that that accelerates once the consolidation is finalized and reconciled all the different reporting responsibilities.

One last thing. The Department of Justice had to review this merger and they did very quickly. And so although the Harland people and the Clarke American people thought that the combination would be wrapped up some time in September, meaning this next September, it actually closed in May, so way ahead of schedule. And so it's forced the team to scramble and really sort of be thrown together and they're still working on their consolidation plan. So again, it's been a bit disruptive. Very pleased it was a successful merger. It puts us, I think, in a good position. But again, we're awaiting their marketing plans.

Lastly, you were profitable on an amazingly small amount of revenues for a public company. As you grow from here, and if you can give any sense of growth, I would assume that would come at a fairly high incremental margin?

Well we have maintained our costs, and they are tight; and we have, I thought, together with the members of this company, pulled together and have performed I think extraordinarily well. I think we've brought in expertise into the company this year, which is manifesting itself in this good performance, although it is a low revenue base, and we understand that and we're working hard to improve that. So we see opportunities with new products, new branding, the launch of NETX in fact which will happen later on this week with its new brand name. So we see that as ways to stimulate greater excitement about the Mitek technology, packaged in a way which provides new capabilities and features consistent with the market trends. That, I think, combined will help drive the top line.

So we're going to maintain a very tight cost schedule. We have a talent here and we're very pleased with their performance, and that's both in the sales and marketing side, but also in the engineering and technology side. And we think we have the guns to take it forward.

Okay, thank you.

Thanks, George.

(Operator instructions) Your next question comes from Charles Bellows.

Yes, Jim, Charlie Bellows. Just two questions. One, also on Harland Clarke, am I correct in what you said that prior to the merger the check printer Harland was really a driver in the fact that they were using the Validifier looking to Validify for a market share advantage, and now since Harland Clarke has 70% that you would look to the bank being the driver for wanting to use that? And if so, how does that affect your sales efforts?

It's a fair question, Charlie. I don't think it dissuades anybody from seeing this as a strategic advantage, despite the fact they have 70% share. What I was trying to indicate was Harland was moving in a path of adding more software capability to their core products. And they have three primary divisions, one of which was printer products, their largest division. But they also had a very sizable software division as well, so they saw as the number three player -- number two player, an ability to add to their core printed products and checks division through software.

Maybe that's what Clarke American saw as well, and that's why they acquired Harland. And you know, or if you don't, Charlie, Clarke American and Harland are wholly owned subsidiaries as Harland Clarke of the M&F Industries Group, and that's operated by a fellow named Ron Perelman. It's a large entity, and it's a holding entity of which Harland Clarke operates fundamentally as a separate business, now.

So with the combination and with their stated mission -- and you can read those for yourself if you're interested under the Harland Clarke website. Their goal is to drive customer -- to enable their customers to drive customer acquisition and also retention, and it's a big issue among bankers that they service, is how to retain those customers in an increasingly competitive world; and it's been competitive not because of just the sheer number of banks and financial institutions out there, but the fundamental dynamics of payments, meaning check processing, credit card payments, electronic payments, is all changing. And so, consumers now and businesses have a variety of choices in how they transact their payments and manage their cash. These financial institutions are driving hard to figure out ways in which they can be more successful vis-a-vis their competition out there.

So I think Harland Clarke sees the world a little differently and they see it in that light, and so what they're trying to do is add a suite of services and products that provide these competitive advantages to their customers who are the credit unions, the banks, the financial institutions out there.

What we have seen, because we have met with customers who are testing this product right now, is that they've been effective; one in particular who's been effective in using the knowledge gained from identifying suspect checks through Validify, and then notifying their customers to see if that check was actually valid or not, if it was signed by the individual or not, to confirm all this. What has resulted is that the consumer or the business, in many cases, has said, "Gee, we really appreciate your attention. We've never had a bank treat us this well, or be this knowledgeable about that transaction or any of our other transactions." And so it's a way to retain them. The customer feels more allegiance and the bank is feeling the positive effect.

So I think the motivations may be slightly different is what I meant to indicate through the discussion earlier, but I think strategically it has as much value to the combined Harland Clarke with 70% share, as it did to Harland with 40% share prior to that.

Okay. As far as your NETX, is there any link to the Validify, or is there not? Is there any advantage of being able to wrap and have the Validify in there?

The NETX is an initiative, a platform initiative, and let me describe that a little more fully, and then I'll answer your question directly.

We've seen in the marketplace a trend, and we've seen this in information technology earlier, in computing, of distribution of computing. Before, there were mainframes that were running most businesses or many computers and now PCs in distributed Web environments. We see that happening in the payments world, which we service primarily with our products. And we see the ability to equip our partners who create solutions for those customers to want to distribute their solutions in a Web environment; and that means that they can either provide a hosted solution to their customers or their customers can distribute it over the Web within their own intranet environment.

So to enable that, we feel that it's very critical that we equip our engines with a superlative Web capability, and this is the NETX initiative. Across our entire product line of recognition engines, one thing competitively that we think is a unique advantage of Mitek is that we have the broadest range of recognition engines in the market. We wanted to take it to the next level for Web enablement, and we wanted to simplify implementation of all of those different engines into a single and uniform implementation platform called application programmer interface, or API.

So this initiative really has been to consolidate the operation of the variety of engines into a unified platform and to Web-enable it; and that it to match and align our technology where the trends of the market is going. Included in that lineup is signature technology, and the core signature technology that we've created for Harland, we also market separately to other markets under the brand SignProtect; and that will be integrated into the NETX platform and provided in a uniform API. So again, it's a very comprehensive initiative.

Now, that is separate from Validify, which is the Harland Clarke product exclusively. And so again, Harland Clarke to us represents a very significant partner, but we sell all of our products through partners in different markets, and they embed our technology and resell it as a solution, a total application to their customers.

Jim, one last question then. About a year and a half ago, year ago, there was a lot of talk on the pharma market. What's going on in pharma, and where are your initiatives, or have they stalled?

They haven't stalled. We've discovered that things don't move as quickly as we want them to move. We have, through our partner, StayinFront, seen now the final product they called Signature Compliance. They have launched it at their customer event. I attended that event and discussed the benefits of signature protection for the Prescription Drug Distribution Act, called PDMA, and they are in active discussions with two primary leading pharmaceutical companies that we hope come to fruition shortly.

In addition to that, there is another party, a large integrator, also, who has signed a development agreement to evaluate and to build a prototype of the signature technology into their application for use in the life sciences market as well. So we've seen movement, and we've seen progress, and we have participated in active dialogue with potential end-user customers that look promising. So I haven't said -- I don't want to imply that it's stalled, but it is moving at its own natural pace.

In addition to that, we have the ability through our recognition algorithms to observe and analyze pictures and objects as well; and so we're not limited to characters or numerics; and in the past, we've characterized our company -- and I'm talking about years past -- as a superlative provider of recognition technologies for character recognition, and we do that extraordinarily well. But in addition to that, the core algorithms have stretched and are flexible to be applied to pictures and objects. And so we also think that the medical market is moving into the stream of digital imaging, of course. They're using it a lot in diagnosis and pathology and a variety of other areas. So we are exploring these areas and have had discussions with substantial companies in these areas.

Now, these are at a very early stage, and these are highly speculative at this time. But as a matter of course for the company, we continue to look for other markets that are sizable that we can apply our technology to. So the bulk of our energy still is dedicated to the payments industry, but there's an ancillary (inaudible), probably on the order of 20% roughly, that really focuses on new market development and exploratory application of our technology.

Thank you.

My pleasure.

(operator instructions) Your next question comes from George Sutton.

Actually, Charlie stole my question on the pharma market, so I had tried to withdraw. But let's hypothetically say that some of these deals did come to fruition; can you give us any sense of size?

George, I really can't, because I think the way we operate is to sell our products to partners who in turn integrate and sell to the end user, the corporation or the consumer. Because of that, we're one step removed; so the advantage is to Mitek is that it reduces the requirement on a expenses and large sales force that would turn a profitable company into one that isn't profitable. And secondly, the negative part of that is that we don't have the visibility as great on the ultimate customer and their buying cycle.

So as a result of that, it's very difficult to predict our revenue from these deals. I would say it would be interesting for us, because many of these deals are proposed as a click charge or a pay per item-type volume agreement. For us, that's a revenue stream that could build over time consistently. One of the challenges I've faced and we have here at Mitek tried to address is more predictability in our revenue stream, and obviously the growth of that.

So we have regrouped after a bit of a lull through the merger process that we went through, and have done, I thought, a reasonable job rebuilding and moving forward. But as far as being on a predictable path, it's very difficult for me to make any assessment right now in terms of the size of these deals, the speed in which they'll close, and the impact on our top line trickle down to our bottom line.

So we're still in that period, sort of the in-between period, where we're showing good solid performance; we have a good solid cash position; the balance sheet is very clean; we're still working very, very hard to drive the top line. These new deals could help us -- I think it could be material, but it's very difficult to predict the scope of them right now and the timing.

Okay. Thanks for the perspective.

At this time there are no further questions. Are there any further comments?

I want to thank everyone for joining us today, and I appreciate your support, and I'd be happy to answer any follow-up questions that anyone has who would like to call me directly.

And with that, we'd like to close the meeting. Thank you.

Thank you for participating in today's conference call. You may now disconnect.