Mitek Systems Inc (MITK) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Mitek Systems earnings conference call. My name is Shanelle, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Julie Cunningham, Vice President of Investor Relations for Mitek Systems.

Good afternoon, and thank you for joining us for the Mitek Systems first quarter fiscal 2012 conference call. Joining me on the call today is James DeBello, President and CEO, and Russ Clark, Chief Financial Officer.

The agenda for today's call includes commentary from Jim, followed by a discussion of the financial results from Russ.

This afternoon Mitek issued a news release announcing the first quarter 2012 financial results, which is available on our website at www.miteksystems.com. This call is being broadcast live over the Internet to all interested parties, on Tuesday, February 7th, 2012, and the information provided will not be updated.

The audio of this call will be available on the Investor Relations page of our website and archived there for 30 days.

As a reminder, this conference call may contain forward-looking statements that are not historical facts, but rather are based on the Company's current expectations and beliefs. Mitek's results may differ materially. Please refer to Mitek's SEC filings for detailed information. In addition, non-GAAP financial measures will be used during this call. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release on our website.

And with that, I'd like to introduce James DeBello.

Thanks, Julie. And welcome to everyone on the call today. I'm going to begin with a discussion of market trends and how we see these trends affecting our business. After that, Russ will go over the two -- the Q1 financials, and we'll end by taking your questions.

Before I discuss our results, I'd like to touch on why we're excited about Mitek's market opportunity. First, we're experiencing exciting growth, reporting 151% increase in revenue this quarter over last year. Second, we have a growing product pipeline and patents to protect our proprietary technology. Third, we've built market relationships with a diversified Fortune 500 customer base that is growing. Fourth, we have retained 100% of our customers, all of whom are experiencing increasing usage among their consumers. It is many of these very same customers who have requested direct relationships with us preparing for the launch of our next products. And fifth, being first to market is allowing us to gain even deeper expertise to develop other industry-leading solutions.

The smartphone is all about convenience, and reducing keystrokes improves the consumer experience. Just as Siri on the iPhone 4S replaces the keyboard with voice commands to search the Internet, Mitek's mobile imaging technology allows you to snap a picture of any printed document or driver's license and enter information all without having to type on a small touchscreen keyboard. This reduces errors and consumer friction. And I think added convenience and simplicity is a fundamental desire of all users.

As we speak, the smartphone is transforming the way industries are marketing to the consumers. Fundamentally, Mitek's mobile imagining solutions are enabling Fortune 500 companies to engage their next generation of consumers more rapidly and cost effectively. By applying Mitek's technology, companies are discovering new ways to drive their top-line growth by attracting new customers with the convenience of our solutions, while reducing their delivery costs by using the mobile channel. This is a very powerful value proposition, and we believe we've laid the foundation for our future growth as we move from a single product company to multiple product offerings that will be available to consumers later this year.

I speak with customers regularly, and it's been personally gratifying to me to see their eyes light up as we tell our customers what's next for Mitek. Executives at some of the largest companies in the nation have said that our mobile imaging technology applied to their most strategic initiatives is among the biggest innovations they've seen in a decade. This gives us great confidence that we are uniquely positioned to capitalize on this mobile market transformation.

Our business as a result is evolving quickly. Today we're seen as the go-to experts for using the camera to solve some of the most vexing consumer issues. As a result, we're moving to a direct sales model with a Fortune 500 for our new products, and we're beginning to offer professional services to speed our customers' time to market and to leverage our best practices to improve the success of their commercial rollouts.

Looking at the overall market, we see some very interesting and encouraging trends. First, the market for our technology continues to expand very rapidly. The proliferation of smartphones is accelerating, with shipments increasing 63% in 2011, to nearly 500 million devices globally. In fact, smartphone shipments surpassed PC shipments for the first time in history, in 2011. Smartphones have gone from a high-end segment of the market to mass adoption here in North America and on a global basis. There is no stronger evidence of this than the crowds that gathered at the opening of Apple's flagship store in Beijing, just last month.

According to Juniper Research, smartphones will be the key driver in the expected growth of the web software and services market, to almost $19 billion by 2014. Juniper sees the smartphone as the central catalyst because it's always connected, it's carried with the user at most times, and it's ideally placed to capture information at its source. And that's exactly where Mitek plays.

Secondly, mobile remote deposit capture, or mobile RDC, is becoming table [steaks] for financial institutions as they compete for consumers. We have signed a total of 250 financial institutions by the end of Q1, an increase of 55% over the prior quarter. And we added another top-10 bank, for a total of eight out of the top 10 banks ranked by asset size, and 25 out of the top 40 banks in the country. We expect to sign all of the top 40 this year.

Recent studies have increasingly shown that consumers want the convenience of mobile banking, so much so that, according to Consumer Research by Alex Partners, 43% are willing to switch banks to get it.

It's great to have our current vantage point. Two years ago, I had to explain the concept of snapping a picture to deposit a check. Now the discussion is not if, it's when. Our conversations today are all about helping our customers get to market faster and, as the uses for our mobile imaging technology proliferate for payments and pre-paid cards, more banks are requesting a direct relationship with us.

Finally, we believe this desire to leverage the mobile channel with easy-to-use applications, extends well beyond mobile banking in our flagship mobile deposit product. We have a growing, diversified product pipeline that addresses the consumer marketing needs of other Fortune 500 companies, most notably, including the launch of a new app from Progressive Insurance, powered by Mitek, that was announced just last week. Progressive is among the most innovative companies in the insurance industry, and we're proud to have them as partner.

Mitek's mobile imaging solutions can be broadly applied to multiple solutions within most industries, including property and life insurance, tax preparation, and even enabling the mobile wallet by digitizing the contents of your wallet with a snap of the camera. Mobile imaging applications are enabling these Fortune 500 companies to acquire and retain customers at lower costs than ever before. For these companies, offering mobile imaging applications has become a competitive differentiator, and Mitek is the enabler.

Of course, no good market goes unnoticed, and so we do expect competitors to enter the market at some point. However, we feel confident that we've constructed a strong foundation for our long-term growth. We have created competitive barriers by differentiating ourselves through the gold-standard technology that we developed and patented over several years. We have significant time-to-market advantage, and we've built strong relationships with the industry leaders. All of these things, combined with our high customer retention, contribute to our market leading position.

Now, with that as a backdrop, let me provide a brief update on our major product initiatives. And these initiatives fall into three broad categories - mobile payments, shopping, and enrollment. Beginning with our flagship product, Mobile Deposit, of the 250 banks that have signed contracts to deploy Mobile Deposit through our network of partners, 56 have now launched our Mobile Deposit solution, up from 35 institutions just last quarter.

To put that in context for you, more than half of the commercial launches to date took place over the past two quarters. So we believe our momentum is at an inflection point and continues to accelerate.

The fact that USAA reported 150% increase year-over-year in usage of its deposit @ mobile app, is proof positive that consumers who use mobile deposit love the convenience. Usage is growing among our customers due to more promotion by banks of all sizes, and viral growth as friends tell friends.

According to Insurance Networking News, USAA said that roughly 7.7 million checks have been deposited, totaling $4.3 billion since its inception. USAA is unique, of course, because they are branchless, and the majority of their members are in the military, and, thus, have highly mobile lifestyles. So the service is a natural fit. And to see that kind of growth is tremendous.

We're also looking at new market segments like the unbanked and under banked - that is, people who choose not to use a traditional bank for a variety of reasons. Our mobile imaging solutions can be used to cash checks with the cash used to [top up] prepaid cards. A very valuable service to this underserved market, that some estimate is as large as 80 million Americans.

Our second payments product is called Mobile Photo Bill Pay. And we have lots of excitement around this area, due to the significant market potential and its ability to revolutionize how people pay their bills using their smartphone camera to simply snap a photo of the bill. Mobile Photo Bill Pay uses our imaging technology to capture the image, correct image distortions, and extract and use the data from that image. This requires more sophisticated technology. But we are uniquely capable and positioned to do this, and we're on track for launching this product midyear.

Mobile Photo Bill Pay is currently in pilots at two large financial institutions, and I'm happy to announce that we've signed our first deal for this product with a national bill pay provider to credit unions. So we're moving beyond the pilot stage.

Next, we've introduced two solutions that help consumers shop for a better financial service by using their camera. These solutions use our mobile imaging platform, which deploys our latest mobile imaging technologies to read any document. The first of these solutions is Mobile Balance Transfer, which allows consumers to shop for a better credit card rate by simply snapping a picture of their current statement. Acquiring new customers in this extremely cost-efficient way is a huge asset for credit card companies who do millions of credit card balance transfers a year. As you would expect, we're seeing a great deal of interest for this product from credit card issuers.

We're also very excited about Mobile Insurance Quotation, currently being rolled out by our partner, Progressive Insurance. This allows the consumer to shop for a better car insurance rate by snapping a photo of their driver's license, and separately, their vehicle identification number. Instantly, the consumer can receive a quotation from Progressive, and has the choice to accept it right there on their phone and initiate new coverage. If you haven't already done so, I'd invite you to check out Progressive's demo video. The link is included at the end of our insurance solutions news release, which is on our website. It's a visual demonstration of Progressive's Image Capture product.

And lastly, Mobile Enrollment is another area we're addressing, and that's the ability to enroll in new programs or use an electronic wallet. We offer our customers the ability to capture data from a photo of a driver's license or capture an image of a voided check, much like you do when you enroll in a new direct deposit benefit at your company using a canceled physical check. By using our technology, this speeds the enrollment process, and reduces opt-outs by significantly reducing the number of keystrokes and typing mistakes.

So with all of that, now I'd like to turn the call over to Russ Clark to go over the financial performance of the quarter.

Thanks, Jim. And good afternoon, everyone. As I review the numbers, all figures quoted are on a GAAP basis, unless specifically noted as non-GAAP. I will refer to non-GAAP net income and net income per diluted share, and we've provided a full reconciliation from GAAP to non-GAAP, along with the earnings release on our website.

For the first quarter of fiscal 2012, revenue totaled $3.5 million, a 151% increase over the year-ago period. Of that total, $2.9 million was software and $627,000 was maintenance and professional services. Our revenue growth was driven primarily by our Mobile Deposit product. As a reminder, we generally sell blocks of transactions or subscribers and recognize related revenue upfront, so we expect our revenues to be lumpy quarter-to-quarter depending on the timing of these sales.

Cost of revenue in Q1 was $302,000, and about evenly split between the software and maintenance professional services categories. This compares to $208,000 in the year-ago period. Gross margin for Q1, was 91%, which was up from 85% in the year-ago period. The increase in gross margin in Q1 was primarily due to the higher mix of mobile products.

Total operating expenses were $3.5 million, compared to $1.8 million in the year-ago period. Now let me break down the expenses by category. Selling and marketing expenses were $851,000 in Q1, or 24% of total revenues, compared to $399,000 in the year-ago period. R&D expenses were $1.2 million in Q1, or 34% of total revenues, compared to $589,000 in the year-ago period. G&A expenses were $1.2 million in Q1, or 33% of total revenues, compared to $623,000 in the year-ago period.

Our headcount at the end of Q1 was 43, compared to 20 a year ago. Our hiring has been primarily focused in the engineering, product management, and direct sales areas.

GAAP net income was $26,000, or breakeven on a per-share basis in the first quarter. This compares to a net loss of $801,000, or a $0.04 loss per share in the year-ago period. The net loss in the year-ago period included $438,000 of non-cash interest and amortization expense related to convertible debt, which was converted into common stock, and $234,000 of stock-based compensation expense.

Non-GAAP net income was $453,000, or $0.02 per diluted share, compared to a net loss of $129,000, or $0.01 loss per share in the year-ago period. Non-GAAP net income excludes stock-based compensation expense and non-cash interest and amortization expense related to convertible debt.

Stock-based compensation expense in Q1 was $502,000, compared to [$234,000] in the year-ago period. This year-over-year increase is due in large part to higher stock price in the current year, and resulting higher fair value of our stock options. Our share count for Q1 was 24.4 million basic and 27.8 million fully diluted shares.

Turning now to the balance sheet, as of December 31st, 2011, we had cash, cash equivalents, and investments of $17.5 million, compared to $16.3 million at September 30. Accounts receivable was fairly consistent at $3.1 million as of the end of Q1, versus $3.0 million at the end of fiscal Q4. The increase in revenues helped reduce DSO to 80 days in Q1 versus 89 days in fiscal Q4.

That concludes our prepared remarks. Operator, please open the line for questions.

(Operator Instructions) Please standby as we compile a list of questions. Bhavan Suri, William Blair.

Thanks for taking my question. Just it was a nice uptick you had in the license line. And I guess as you look at that, could you give us some sense of sort of if there were any reorders in the quarter or if it was largely sort of new banks signing up?

Sur, Bhavan. First of all, I'd like to address the size of the market. We continue to support the idea this market for Mobile Deposit alone is $100 million to $200 million market, based on the number of checks that we expect to be diverted to the mobile channel. Meaning, people that would normally go into a branch use their phone to deposit a check. And we see that number growing monthly and quarterly with our current customers who are reporting back numbers to us.

But importantly, with regard to usage, we have seen reorders from current customers, and we're also getting initial orders from new customers. We reported now we have eight out of the top 10 banks. And importantly, a new number, 24 out of the top 40 banks.

Great. And then, as you look at the direct relationships with the top 40 banks, and you sort of laid out that you're going to have all of them, hopefully, as customers by the end of the year, two questions in there. Just any progress towards that? And then, more importantly, I think, could you just sort of help us understand how that'll work with the existing channel today? So the channel sells to the same banks and they sell Mobile Deposit. And sort of how does that relationship work? And is there any sort of risk that the channel gets upset or the channel wants a part of the new platform, because it is, obviously, a higher ARPU too?

We don't think there's any risk. We sell to large partners like Fiserv, FIS, NCR, Jack Henry, [Warsaw], host of others. Really, our channel partnerships cover 95% of the banks in the United States, and there's about 10,000 financial institutions out there.

Now, within these larger groups, our channel partners, they were different divisions. And so our agreements are with specific divisions that sell remote deposit capture solutions or item processing solutions. This is distinct and different from other divisions that sell bill payment solutions. [So], in fact, we are consistent and loyal to our channel for our Mobile Deposit products, and we expect to leverage that channel into all of the banks in the US, and certainly, as I mentioned earlier, all of the top 40 by yearend.

As it relates to our other products, there is a tremendous amount of interest from channel players who want to resell our Mobile Photo Bill Pay or other types of products, but we feel now that banks are asking us for more direct relationships, and that we need to honor that and be responsive to the banks. That helps our time-to-market. That helps the bank's time-to-market. And this allows us to be more in command of our relationships and also allows us to be more innovative with customers for future products.

Great. Great. And then one other quick question there. You'd alluded to in the past about Mobile Photo Bill Pay being launched by yearend with one of your largest direct banking customers. And I guess you're launching with someone else now. I just wanted to get clarity on was something delayed there or is that just a normal sort of par for the course here?

No, we actually believe we're on schedule. We still are on schedule with our initial large bank that we expect to be live midyear. As we add new banks, though, of course, we're getting into their product integration and launch schedules which will push some of those new launches and newer customers to the latter part of the year. But we feel very positive about where we are with our second major product, Mobile Photo Bill Pay, and the reception that we've had among our customers.

Great. One quick one in for Russ before wrapping it up. Deferred grew nicely. Was there anything in deferred that was extraordinary there, Russ? Or was that just sort of maintenance that'll be recognized over the next 12 months?

Yes, nothing extraordinary in there Bhavan. It's really just timing of maintenance renewals. And you've seen that balance fluctuate around --

Right.

-- low as 900 to as high as 1.5 million over the last several quarters. So it's still in the range.

Great. Thanks for taking my questions, guys.

Tom McCrohan, Janney Capital Markets.

Start with Mobile Bill Pay and then go back to Mobile Deposit. On the Bill Pay, can you remind us, Jim, about the revenue model? It sounded like it was more recurring than how you [saw] Mobile Deposit. Wonder if there's been any change there.

There's been no change. And we think the model is beginning to get traction. Unlike Deposit, which is strictly based on number of transactions, we believe that the Mobile Photo Bill Pay model will include both a platform fee and transaction fees, based on number of the bills that are paid.

We see two use cases that are prominent among customers with whom we've contracted or in current pilots. First of which is to augment existing online bill activity by onboarding new, what we call ad-hoc bills. Those are the new car lease that you may have this year or an occasional bill that comes in from a dentist, and you want to onboard that. Instead of having to sit at your keyboard and physical keystroke each letter in, you can take a photograph, and it's onboarded for you automatically. That's a huge reduce -- reduction of friction for the consumer, it adds convenience, and we think will add and make that online Bill Pay system stickier.

The second use case is very interesting. There's only 45% of Americans who are using online bill pay in one more or another, either as a direct bill or as a consolidated bill pay through their bank. That means 55% of the US does not - many of whom are carrying smartphones today. And so our belief is that there's a whole population of non-online bill payers who carry a smartphone who want the convenience of snap and pay, and that's provided by Mitek. So we think that's an untapped opportunity for us as we grow. So having that quick charge is really going to be valuable to us in that particular category, but combined is really how we're approaching the market.

And again, this model is evolving. But we believe now that the two components will be central to all of our future licenses for all of our future products.

That's interesting, that breakdown of 45%, 55%. The 55%, [let's] call them luddites, they don't use any technology today. Why would they be inclined to, if they're not using online to pay a bill, why would they use the phone?

I think studies have shown that the complexity of actually logging on to a bank site, to actually finding the online bill pay section, to enrolling, to entering all your personal data one key at a time, is a cumbersome maneuver, and often people opt out. So I jut think it's the factor of complexity that's prevented people who are not necessarily luddites, who actually are now carrying probably the most sophisticated device in the history, being a smartphone, are actually now being nicely courted and brought into the modern age by being able to image capture as opposed to type on a keyboard or on a small touchscreen phone.

Fair enough. On Mobile Deposit, Jim, the eighth bank, top-10 bank that you signed, is it possible to tell us who that was for the quarter?

Tom, we'd love to. We haven't on purpose, only because under our NDA with the bank, they prefer to hold that ammunition for their launch. They're busily now integrating it into their systems. But we're very pleased with that. I encourage folks who are listening to the call, if they have a moment, to go to the app store, click on Wells Fargo, click on Bank of America, click on Citibank. These are banks that have currently contracted for Mobile Deposit, but haven't deployed. And look to see what their consumers are saying. In fact, in front of me now I have the app store reviews from customers for Citibank. Quote/unquote, where's the remote check deposit via iPhone? If you don't update this, I'm thinking of transferring to Chase, unquote.

So this is stuff that's being written by consumers out there, and I think it provides a level of urgency. Fortunately, Citibank is in pilot. They actually have had a soft launch, and we expect them to be active in the market very shortly, followed by Wells Fargo, BofA, and our other top customer. So we're really just at the tip of the iceberg, as we like to say around here, the first inning of major deployments, Chase being in the market the longest, followed by PNC who is live, and also US Bank. But they've only been live actually, within the last six months. So they're just getting their engines running right now.

So we think there's a lot of headroom in what we're seeing in the marketplace. Plus, with the addition of new, live launches from our customers, we're seeing more and more advertising spreading the word. And this is good for our viral growth and for the actual promotion and awareness of the product. Locally here in southern California, one of the more prominent community banks, San Diego County Credit Union, a Fizerv customer, has launched, and they're doing TV, radio, and print advertising.

So we think this is a very positive sign. We look at 2012, as a key inflection point for the adoption and consumption of these transactions.

That makes sense. And just turning gears a little bit to Progressive. Did they have any revenues that contributed to this quarter?

No. We recognized revenue from Progressive earlier. And the important part about our deal with Progressive, it really puts the stake in the ground with regard to the opportunity ahead of us in other vertical industries of magnitude. Now, keep in mind we are a tenacious innovative company. We're showing the major enterprise customers. These are large institutions with millions of consumers. They have very rigorous processes, not only for selecting their vendors, but implementing and integrating and launching their products.

So it does take time. But we're very delighted to work with Progressive. And we have others that we're currently working with that we haven't been able to announce yet, but we look forward to in the upcoming quarters.

Jim, I saw the YouTube clip that Progressive has. I guess they have a whole website on YouTube to kind of see the, kind of the use cases visually.

Yes.

Is this product launch just in certain states right now or is it in pilot mode?

It is. They did a launch in selected states. There's 15 states in which they've launched the product. They do expect and want to roll it out nationally. So often as these companies do, they'll put it out and it's like the states get experience, and then roll it out nationally with a supporting promotional campaign at some point.

That's great. And is it a per-click revenue model for you folks in terms of, as Progressive gets new customers that convert from a quote to a new sign business?

There are fees involved, Tom. We haven't disclosed the nature of the terms of this agreement. So we're going to have to respect our NDA with our customer on that one. But nonetheless, we think ultimately this could be a very lucrative deal for us and one for Progressive as they acquire new customers.

Thanks, Jim. Congratulations for all the hard work. I have two just administrative questions for Russ on the model. Russ, the share count was a little higher than I was modeling for. Is that kind of a run rate, the 27 million, that we should be using for the rest of the year?

Yes, Tom, that's right in the ballpark. I think maybe before when we had a GAAP net loss in some quarters, the diluted securities options and so forth are not included in the share count. So with flipping to net income in this quarter, it flipped another three and a half or four million dilutive securities into the count.

Okay. And in terms of just kind of modeling out the R&D and G&A line, which, obviously, is going up due to the increased headcount, can any type of help there, as far as how we should be modeling kind of R&D and G&A, going out the rest of the year?

Yes. On the R&D line, if I look at the bulk of the hiring that we've done over the last quarter, it's really been in that area, and will continue as we're trying to get these next products to market to invest in that area. So that's really going to be the heaviest concentration of additional hiring during the year.

G&A, on the other hand, we're in fairly good shape there. We'll be seeing some volatility in the G&A line just with some non-recurring charges here or there. But you shouldn't expect to see that grow that much over the course of the rest of the year.

Great. Thanks, guys.

George Sutton, Craig-Hallum.

Just a couple questions for a luddite. First, you have suggested since the beginning that Photo Bill Pay will ultimately be larger than the Deposit piece of your business. When do you think that will become obvious to the world?

Thank you, George. I did mention earlier in my first question from Bhavan, the size and scope of the Mobile Deposit market, and I listed that between $100 million and $200 million in total available market. What I'd like to do is add to that, George. And as we do, really with our investor presentations, talk about the size of the market for Mitek and our mobile imaging technology, we think far exceeds $1 billion. We think that the Mobile Photo Bill Pay could be worth up to half of that, in the $300 million to $500 million range.

We look at this market from the eyes and optics of the online bill pay experience. And this is a validated experience promoted and conducted by companies such as Fiserv, which owns CheckFree, and FIS, which owns Metavante. You know them well, George. These companies are -- these divisions for online bill pay are well in billion dollar sizes for their respective groups, CheckFree and others.

So we think the market is extraordinarily sizeable for online bill pay, but it has tapped out and not growing quite as rapidly as people again deal with the complexity of going online, entering data, and conducting their bill pay. We think the convenience of the smartphone, A, provides more ubiquity in terms of a connected device, and ease of use as a result of being enabled with our mobile imaging technology.

So that's why we think the size of this market for Mobile Photo Bill Pay approaches $0.5 billion just for Photo Bill Pay. And we look at our economic model built on both click fees, meaning number of bills you pay, plus a platform fee. So combined, that's what makes up our market opportunity going forward. It is sizeable. It is new. And it will be impactful, I think, to our overall revenue stream later this year, as we sign our first customers, and then more impactful clearly as it grows in 2013, and beyond.

Great. You mentioned that you were considering or planning to offer professional services as part of your solution, which is the first time I've heard you say that. What is the logic there? I certainly understand going direct with the sales force. I'm just curious your thoughts on the services side.

So the revenue from our professional services group is not material in terms of our overall performance. It will grow. But here's why we are doing this. We are discovering that in addition to our expertise in the area of imaging and image analytics, we have customers now who are looking to us to help them improve the user experience or use our knowledge of other customers to assist them in best practices.

And so specifically there are things that you can do on a phone device within your application that many of our newer customers are not aware of. As an example, on the iPhone, you have an accelerometer. It actually measures the movement of the phone device. And clearly, when the -- what we want to enact is the ability to take a clear picture without fuzziness. And so by using the accelerometer, you can cleverly program it when it stops, meaning the phone is still for a microsecond, the shutter on the camera will snap. It actually makes it easier to take a clear picture without blurry images. And this helps improve the recognition rates by eliminating bad images.

So these kind of tricks are important and can be added to the actual application that our customers deploy to their consumers. We have that knowledge, and they often want us to share that knowledge with them. And for a small fee, we provide that type of services to cover our cost and to add profit to the company.

Super. That's all I had. Thanks, Jim.

John Wiseman, Compass Capital.

Good quarter. I just have a question in regards to the revenue recognition. When a customer signs on for Mobile Deposit, do you guys recognize any deposit revenues up front?

The revenue recognition model for our business right now, as Jim mentioned, we access 95% of financial institutions through the channel and some of the channel partners that he mentioned. So we recognize revenue when we sign the deal and sell transactions to our channel partners. The numbers that we report for actual financial institution signings and lives are somewhere downstream, when our channel partners are able to sign deals with end user banks, as well as go live at those banks on the live statistic.

So is it -- would it be possible that you guys have recognized revenues from, say Bank of America or any of the other ones that haven't actually launched?

Yes. I mean, we, again, we recognize revenue on sales into the channel. So to the extent that we recognize revenue to channel partners that are serving Bank of America or some of the others that Jim mentioned, then, yes, we would have.

Okay. And then the other question I have is, there's a small company called DataTreasury, who I believe has gone after a bunch of banks about mobile capture. They actually went after US Bank. I was wondering how Mitek's technology, if it infringes on that technology at all, or how it compares to that technology?

We've studied the area of patents and the area of imaging for many years now. We've done a tremendous amount of work in the area of patents. We have 12 patents that have bee issued for Mitek, and several more that are in the queue. We do not believe the data treasurer patents infringe on ours, nor is our area touching on theirs. So their patent structure is for image processing in terms of banks processing images for transactions. It is different than the capture that we perform on mobile devices. They have been pursuing their activity for well over a decade. US Bank is the latest of several that have been in discussions with DataTreasury.

So, no, no conflict there. And we have studied the area extensively. We feel very strongly about our patent portfolio, how it protects our intellectual property, and how it substantiates our innovations in this whole area of mobile imaging.

Okay. And then I have a couple small questions about expenses. I notice that there was, I think roughly 500K in stock-based compensation. How many stock options have you guys granted in the past 12 months? I'm trying to get an idea of how much we can expect going forward.

Yes. I think over the past 12 months, as I commented earlier the increase in the stock price and the fair value has been a large contributor to the increase in stock comp expense. But I think if you look back just at the option outstanding number end of Q1 this year versus end of Q1 last year, it's fairly consistent.

So I guess if you want to do some more modeling on that, we'll have the Q on file here shortly with all the details of the stock roll. Yes, the number of outstanding options is fairly consistent. So you'd have some churn in there in terms of some exercise and some [granted], but it's been fairly consistent.

I may just add a few things to that as well. We're a technology innovator in a very competitive market that is a high-growth market. This whole area of mobile, particularly as it relates to mobile imaging, makes it challenging for companies like ours to attract and retain excellence. And we do that by virtue of offering competitive salaries and stock options. And so we do it in accordance with industry standards as a means of incentive and compensation on behalf of our employees.

And so all of our efforts really are to try to build the strongest team we can. And we feel that we've been successful using stock options to do just that.

Okay. And then I guess getting back to that question about the revenue recognition. I was just kind of looking at how many partners are live now versus last quarter. And it looks like you had about a 60% increase, whereas revenues jumped about 17%. Is it safe to assume that last quarter you may have had revenues for, say Bank of America or something like that, whereas, obviously they're [on watch], so you're not going to get any reloads? Is that why there's a disparity between them?

No. I think as I mentioned, revenues we expect to be lumpy, and we recognize when we sell into the channel. And there is a lag between the point of recognition when we sell in. And then the next stage in the process would be our channel partner signing up a bank. That's the signed number that we have, 250 to date. And then the next stage in the process is the go-live, where we have 56 to date.

So depending on the size of the bank, the complexity of the IT department, all things that are involved in it, implementation for a large institution, the time it takes to get through that entire cycle, even from signing to implementation can be six to 12 months.

And I'll add a little bit to that as well. The number of signed agreements and separately the number of go-lives, is a metric we use internally to indicate momentum and adoption of the technology. However, I want to underscore it is disconnected from the revenue recognition piece because we do sell to those banks via an indirect channel.

And so by virtue of that, a two-tier channel, we sell to the channel partner who then resells to the banks. And the banks then have another six months typically before they launch commercially.

So please don't make the mistake of linking the two, because they are disconnected. But the metric is very solid as it relates to the growth of the business and the momentum that it supports.

So is it -- I mean, is that standard practice to recognize those revenues up front for, say a Bank of America that hasn't actually launched? Or should that really be in deferred revenues? I'm just curious (technical difficulty) as far as the revenue recognition goes?

Yes. Our contracts for mobile deposit with limited exceptions are with the channel partners. So the terms of our arrangements with the channel partners are really irrespective of their sell-through deals with the end-user banks. So that really drives our [rev rate].

Thanks a lot.

(Operator Instructions) Philip Lamoreaux, Lamoreaux Capital Management.

This is [Ashoke] for Phil. I just had a quick question about, I've been hearing about how some of the carriers are deploying another mobile payment technology, the ISIS, and I've heard that Google is coming together with Wallet, Google Wallet. So I just wanted to see how, big picture, how this sort of technology compares to your offering.

I'd be happy to discuss that. And [it] really is indication of this tremendous transformation in the payments industry by virtue of the adoption of smartphones. So in the course of the last year, we have seen Google introduce their eWallet. We've seen Amazon stake a claim in that space, and others hovering to try to figure out the best way to implement mobile payments or electronic payments or what's called eWallet. That's all sort of the same mix.

We play in that ecosystem. If you think about what others are trying to achieve in terms of eliminating the physical wallet in your hip pocket and putting that content into your smartphone or your mobile device, what lacks is the ability to facilitate that transfer from a physical world to a digital world. Literally to take your credit card information, to take your affinity cards and gift cards and to enter that requires you to sit down and either type it in one stroke at a time, or potentially speak it in. But more likely, photograph it in by taking an image. And we capture the data and then input it and digitize it. And this is really how we play in that oncoming eWallet or mobile Wallet arena.

So really it's complementary or we're complementary to it. As it evolves, it is at its [nation] stage in the US. You'll see more Wallet activity in Europe in terms of micropayments or electronic payments through smartphones. We do see a smattering of it here in the US, but mostly experimentation. I think recently an experiment at Home Depot, for example, and selected markets. I think you've seen the Google Wallet experiment in different avenues.

So we look forward to that evolution. We think that will happen over the course of the next several years, not immediately. And people are vying in a high-stakes game to transform the payments world.

What I'm excited about is that Mitek and what we do plays a role in all of this evolution. And so as a result, all ships rise with the rising tide. We believe that we'll play a pivotal role in the adoption from a consumer perspective in terms of implementation and enrollment. And that's why I mentioned earlier in my prepared remarks about mobile enrollment as being a very exciting avenue for us, albeit at a very early stage.

Great. Thank you very much.

[Bill Risner]. Please go ahead.

Hi, Bill.

It will just be one moment. Bill, your line is open.

Yes. Anyway, I'm retired. And I was just curious. It seems like the government would be a natural as far as mobile bill paying. There's a lot of people that have to pay estimated taxes every year. And so it seems there would be a great fit with the IRS.

I think there is a great fit, maybe not necessarily with the IRS, but with organizations and corporations who prepare taxes on behalf of millions of Americans. And so we have activity in that space, the ability to read W2s. And shortly we expect to have some announcements about that.

As it relates to servicing the government market, it is a huge market, and it's growing, apparently. But as a result of that, we think it's a rich opportunity. But you have to always meter that with your ability and your resources to execute. And what we're doing here is focusing on financial documents primarily within financial institutions and insurance verticals. And that could extend to tax preparation or other types of ancillary verticals that have high value in those documents. That means more revenue for Mitek and more profit for Mitek.

Pursing government deals is lengthy, cumbersome, and often doesn't pay well. So for that reason right now, we're exclusively focused on our key verticals in which we have domain expertise and a stable of technologies to bear fruit.

I appreciate that. Thanks. It makes a lot of sense. By the way, I've been a member of USAA for over 45 years, and they are a great organization.

They are terrific. We have nothing but praise for them.

And, yes. And I'm one of these guys that I pay all my bills over the Internet, so it's all done through USAA, and they're terrific.

Well, thank you for your question.

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