Mitek Systems Inc (MITK) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 Mitek Systems Earnings Conference Call. My name is Stacy and I'll be your conference moderator for today.

(Operator Instructions) I would now like to turn the presentation over to Ms. Julie Cunningham, Vice President of Investor Relations. Please proceed.

Thank you.

Good afternoon and thanks, everyone for joining us for the Mitek Systems second-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 its second quarter fiscal 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 and the audio of this call will be available on the Investor Relation's 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 our 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 now, I'd like to turn the call over to Jim DeBello.

Well, thanks, Julie. I appreciate everyone joining us on the call today. I'm going to review our second-quarter results and discuss our three key focus areas and the industry trends that support our future growth.

After that, Russ will go over the Q2 financials and we'll answer your questions.

Beginning with our second-quarter results, we posted revenues of $1.2 million and a non-GAAP net loss of $2.2 million. While we clearly missed the mark this quarter and this is very disappointing to us, we remain focused on our many near- and longer-term opportunities and believe that our mobile imaging solutions provide unique advantages to our customers that allow them to engage their next generation of consumers whose lifestyles are built around their mobile devices.

I continue to believe that we're in the right market with the right strategy and at the right time. As evidence by the exponential growth in camera-enabled smartphones and tablets, we're at a very early stage in large, emerging markets where consumers are beginning to use the camera as an input device.

And despite the results in the last 90 days, I think it's significant and a great achievement that a company of our size has assembled the blue chip customer roster that we have. These relationships take time and tremendous resources, but they're worth it because they provide the foundation for the future growth and use of our next mobile imaging solutions.

Our revenue has fluctuated quarter to quarter in the past reflecting the lumpy nature of our business. And there's no mystery, dealing with big customers on their time tables with new consumer habits driven by a mobile lifestyle is formidable.

There were a number of moving parts during the second quarter, but the bottom line is that some significant licenses were delayed. I'm happy to say however that subsequent to the quarter end, we recently have reached an agreement subject to signing the final contract with one of those delayed deals and with one of the largest technology providers in the US where a reorder that expands our relationship for mobile deposit.

This existing partner has experienced a 38% increase in mobile deposit transactions during the last 90 days. In addition we faced our first legal challenge. While the lawsuit has required management time, we strongly believe in our IP position and we are confident that we will prevail.

Importantly, our customers have been extremely supportive and we remain undeterred in supporting their commercial launches of mobile deposit.

While we're not in the habit of providing mid-course updates and we won't in the future, I'll share with you that just last week, we hit a significant milestone of over 100 customers who are now live with mobile deposit including two major banks, the Citibank and ING who went live over the last 60 days.

In my recent discussions with partners and customers, they've expressed a strong desire to work closely and collaboratively with Mitek. And we're firmly committed to satisfying our customer needs in creating a long-term value for all Mitek stakeholders.

We are the technology enabler and partner to hundreds of financial institutions. And Mitek technology has facilitated billions of dollars in mobile deposits. We're the clear leader with a significant time-to-market advantage and a very strong patent portfolio. However, as with many nascent markets, our challenge is to move the market the forward as quickly as possible while balancing our priorities.

And towards that end, we've identified three key areas of near-term focus. First, we're focusing our R&D efforts on opportunities where our expertise is the strongest and our value proposition is the highest. That is providing mobile imaging solutions for high value financial and identity documents including checks, bills and driver's licenses.

These three areas form the basis of our revenue growth over the next 12 months and they allow consumers to easily enroll in financial services by snapping a photo of their driver's license for identity verification, fund checking accounts and prepaid cards by snapping a photo of a check for a deposit or to top up their prepaid card.

Shop for insurance quotations and better credit card rates by snapping a photo of key documents and finally pay bills via smartphones and tablets by snapping a photo of their bills.

Our second key focus area is close collaboration with our channel partners and customers. We believe that by working closely together, we can and will drive broad adoption of our mobile imaging solutions over the next couple of years.

There is no question that consumer interest and appetite for mobile deposit is high. And for financial institutions, it's becoming a critical customer acquisition and retention tool. In fact, in its most recent report, Forrester, a leading independent industry research firm, said quote -- we believe mobile RDC soon will be table stakes for direct providers and large national banks -- end quote.

They also said quote -- moreover, mobile RDC has given our eyes to other advanced features. One example is the ability to enroll in e-bills by taking a picture of a paper bill. Not something currently rolled out among the national banks, but an idea that is gaining momentum -- end quote.

Let me provide a few metrics that illustrate this point, 315 financial institutions have signed contracts to deploy Mitek's mobile deposit through our network of partners as of March 31. This compares to just 40 in the year-ago quarter.

We have signed all of the top eight retail banks and five of those have commercially launched mobile deposit including JPMorgan Chase, US Bank, PNC, Citibank and ING, all under their own brands.

Our Mobile Photo Bill Pay product is in pilot at two large financial institutions and we're working to continually refine the product and provide an outstanding consumer experience. Recognizing literally tens of thousands of unique bill format is extremely complex, but we're making good progress and expect the product to be commercial this summer.

Building on our ability to read and extract data from drivers' licenses, we're enabling powerful mobile solutions to enable shopping for better deals with a snap of a picture. In addition to mobile photo quoting for auto insurance, we're in discussions to deploy our Mobile Balance Transfer product by the end of this calendar year.

And by the way, keep your eyes peeled for the new, Progressive Insurance nationwide TV ad that features their new mobile quotation app powered by Mitek and now live.

Our third major area of focus is driving innovation in the industry. Our enterprise class software is designed to be highly scalable and flexible. Our document competencies in checks, bills and drivers' licenses really apply to many other use cases all of which are in demand today to drive our future revenue.

These are very complex documents with myriad variations from which we extract data that we continue to perfect in the mobile imaging world. Naturally, we continue to invest in filing for patents to protect our inventions and will vigorously defend our intellectual property.

Finally, I recognize that recent times have been difficult for our shareholders. However, if I could leave you with just one message, it would be that Mitek has a number of core competencies and many opportunities to leverage our strength.

The foundation of our company is our people who are excellent, our technical expertise in mobile imaging and our strong IP position. We're pleased with the continued momentum in mobile deposit commercial launches and we'll continue to focus on driving greater adoption and usage with our partners as well as capitalizing on our strong product pipeline with major banks, insurance and Fortune 500 companies.

Now, I'd like to turn the call over to Russ Clark to go over the financials in detail. Russ?

Thanks, Jim and good afternoon, everyone.

As I review the numbers, all figures quoted are on a GAAP basis unless specifically noted as a non-GAAP. We provided a full reconciliation from GAAP to non-GAAP along with the earnings release on our website.

For the second quarter of fiscal 2012, revenue total $1.2 million compared to total revenue of $2.9 million for the year-ago period. Of that total, approximately $612,000 was software and $580,000 was maintenance and professional services. As Jim discussed, the decrease in total revenues was due to fewer licenses signed during the second quarter.

Cost of revenue in Q2 was $310,000 and about evenly split between the software and maintenance and PS categories. This compares to $256,000 in the year-ago period.

Gross margin for Q2 was 74% compared to 91% in the year-ago period. The decrease in gross margin in Q2 was primarily due to the lower volumes of software sales. Total operating expenses were $3.8 million compared to $2.3 million in the year-ago period.

Now, let me break down the expenses by category. Selling and marketing expenses were $721,000 in Q2 compared to $565,000 in the year-ago period.

R&D expenses were $1.7 million in Q2 compared to $634,000 in the year-ago period. The year-over-year increase in R&D expenses reflects our continued investment in developing innovative new products and making new roads into new market segments.

G&A expenses were $1.3 million in Q2 compared to $834,000 in the year-ago period.

Our head count at the end of Q2 was 49 compared to 24 a year ago. Our hiring has been primarily focused in the R&D area.

GAAP net loss was $2.8 million or $0.11 per share in the second quarter. This compares to net income of $570,000 or $0.02 per share in the year-ago period. Non-GAAP net loss was $2.2 million or $0.09 per share compared to net income of $865,000 or $0.04 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 Q2 was $651,000 compared to $296,000 in the year-ago period. Our share count for Q2 was 25 million basic and fully diluted shares.

Turning now to the balance sheet, as of March 31, 2012, we had cash, cash equivalents and investments of $17.4 million compared to $16.3 million at September 30, 2011.

Accounts receivable is $1.5 million as of the end of Q2 versus $3 million of September 30, 2011. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you.

(Operator Instructions) Your first question comes from the line of Bhavan Suri with William Blair. Please proceed.

Thanks. Hey, guys.

Hi, Bhavan.

Hey. So I guess just to start off, could you give us just a little color on what exactly transpired because looking at the numbers it looks like there was almost no imaging revenue in the quarter at all. But we added banks. We expanded. We invented out there. There are a number of various pieces that fell into place in the quarter outside of Citi rolling out, ING over the last 60 days, things like that.

And it feels like if I'd looked at our legacy business and I look at and I take out maintenance, I've got very little imaging revenue, so just a little more detail in what's going on and what exactly has transpired.

Sure, Bhavan, let me answer that question.

Our business has been -- it's going to continue to be lumpy by nature. This is an emerging market. These are new customers who are beginning to launch these products to their consumers who then have to download and begin consuming.

And so as a result, its takes time. We can't predict exactly when deals will be signed. Our forecasts are based on detailed bottom-up approach, but that's the best we can do as timing moves from one quarter to the next or one week to the next. Delighted that one of the deals that we were working on last quarter has come close to conclusion already in this quarter. But that is truly unpredictable.

One thing that is constant though is that we believe that the market for our products is expanding and that it's going to take time.

So just to back in to that for a second, so you obviously added banks and the bulk of those I assume came through the partners. And you've discussed previously the partners would typically buy a block of licenses and then distribute these across banks. And if they add banks, they buy a little more, et cetera.

I guess what I'm trying to figure out, did that occurred all in the quarter because that's an agreement that's on going. That's not a new contract or anything.

Yes. One of those partners increased their usage of deposits transactions by 38% in the last 90 days. That's a very telling statistic as more and more users are beginning to consume mobile deposit from their banks.

These services are offered to banks in one of two ways, either through an ASP or separately when we license a technology that's installed behind the firewall. That takes longer as you know because of the integration process and typically those are larger banks who do it that way.

The smaller banks who signed up for the ASP are able to get to market more readily in a private labeled version of mobile deposit and typically integrated with their mobile banking solution. But because of that, those two motions to market, there is a timing effect. And that's all we're responding to right now is that we can provide excellent technology and we have license to these partners who have deployed themselves and then they have to sell to banks who then have to integrate and deploy to their consumers. It's a multi-step process which takes time.

And that's what we're experiencing now. Lots of customer wins, lots of new launches and consumptions just beginning to ramp up which would cost more and more reorders.

Yes. And I mean I guess I don't want to harp on this too much, but I guess, we see lots of ramps and wins and new orders and you've heard this from investors before sort of the frustration we're not seeing in the revenue line. The decline I guess is a little surprising given the other metrics. I mean it's very surprising given the other metrics.

We're disappointed with it like you are. No question and we continue to work very hard. What encourages me is that this market is expanding. You know the numbers with smartphone sales, devices like tablets that are penetrating the market. This is all the foundation for us.

We look at these new customers, both large and small as foundation for our future products because once we deploy mobile deposit, we think it opens up opportunities to shorten the sales cycle and sell our subsequent products to those very same customers.

Right, right.

Just changing the question a little bit, have you seen any pricing pressure from any of the customers as it come back and talk to you about what's going on with the potential lawsuit or any of that sort of stuff? Have you seen customers sort of say -- we are paying x -- and questioning that pricing per check ASP so to speak?

It's a good question Bhavan because I've been in the technology industry a long time and there is always pricing pressure.

But we're currently not seeing anything out of the ordinary and we are making every effort to sustain our pricing.

One way to do that obviously is to increase the value in the products that we're offering. But nonetheless, that's a constant in the technology industry; always downward pricing pressure. And we think we're doing a good job in maintaining our value and our price points in the market place.

And then Jim, as you think about that and you think about the market opportunity and the speed at which you're seeing the growth and if I've asked you to step back and say-- look at this versus 40 days ago -- do you change your mind on the rate of adoption here at all? Do you change your mind sort of the rate of which consumers are adopting technology for the customers that have deployed mobile photo -- mobile check deposit?

Bhavan, it's completely unpredictable. What we have seen in that the customers who put wood behind the ball with national advertising or even local advertising are the customers who are getting faster adoption. Consumers are downloading more quickly and using the product more frequently.

It really depends on the institution's marketing appetite and budgets and how creative they can be to engage their consumers. That's one element we can't support. We're a small company. We are an expert in the domain of mobile imaging. We do provide an excellent consumer experience, but it really is up to the banks, the insurance companies and to the brokerages to market to their customers.

Okay. I'll let folks jump on. I may come on for follow ups. Thanks, Jim.

Okay, Bhavan.

Tom McFarland, J.D.

Hi, Jim. Hi, Russ. Hi, Julie.

Hello, Tom.

Hi, Tom.

Can you hear me okay? I'm using a cell phone, I wish you could hear me okay.

Sure, we can.

All right. Great. Couple questions. One, you've telegraphed repeatedly to me and investors that there was a risk of a lumpy quarter based on the current revenue model and the lumpiness of the revenues but I'm just curious. I've always thought of that as kind of a single quarter event throughout the year so -- and we've never really asked you that. Can we look at this quarter as the one bad, lumpy quarter for 2012 or is the visibility that difficult to provide any assurances that revenue's would otherwise not return to levels that we've seen in the last few quarters.

Hey, Tom. It's Russ. As you mentioned, we are subject to lumpiness in the model. We have had some signings with larger customers as well as smaller ones though the ASP model as Jim mentioned. So, I wish I could tell you that the lumpiness is behind us but we will still be subject to lumpiness going forward. That's just the nature of the model that we're going to market with and dealing with large customers and their time schedules.

Tom, I want to simplify on that. I don't believe this is a trend. We remain confident of what we're doing and we got a lot of positive feedback from our customers, the banks, and our channel partners who were seeing demand for the product. It is going to take time and we've been consistent and you're right, and I thank you for mentioning that.

Okay. I'm just trying -- and I think other people are trying to distinguish between the lumpiness this quarter. The timing of impact that we are appreciating that there's a lag between early adoption and when you actually see the channel come back to kind to re-up on capacity. That is something I think people could get comfortable with but the other part that I think is concerning in light of USA disagreement is that the lumpiness is due to the delayed decision-making causes by new customers.

And we know based on the stats you talk to and we can all see the ads that those -- I'll use an analogy -- those that are going to be pregnant on Mitek is still moving forward with adoption and supporting, putting wood behind the ball as you speak but given the lumpiness this quarter, can you give any assurances that the current situation with USA is not delaying new contracts with new perspective being institutions on truly new customers. Any assurance there I think would be helpful?

Tom, let me address that. The customers we've have spoken to have been extremely supportive of Mitek in light of this lawsuit, which we don't think has merit but nonetheless, they've not indicated that they would delay launches due to this lawsuit. So that's the information that we have.

Okay. Did you sign any new customers since this disagreement was made public?

Tom, I don't think we can address on a call yet until we announce our results from this quarter.

Okay. Are there any restrictions in the last few months that had prohibited anyone from the management from buying stock in the selloff?

We have windows that are open and close. We've been in a closed window environment and therefore we have not purchased any stock.

Okay. Thank you, guys.

Great, Tom. Thank you.

Mike Grondahl, with Piper Jaffrey

Yes. Thanks for taking my questions, Jim. Couple here and I'll just repeat and they're all kind of short but you mentioned that there were a significant number of licenses delayed in the quarter. Can you tell us how many specifically? And two, you mentioned that there was one agreement that was delayed that you're close to signing and one large re-order that you're close to signing.

Can you give us a sense for the revenue dollars even a range or something so we can get a feel for what revenue is associated with each of those that are close to being signed? And then lastly, was there any reorder revenue in the March quarter? Thank you.

All good questions. Let me address them as I best can. You have to understand and I think you do as a small company, we are dependent on a few large orders from very large channel partners who then resell to customers, these are banks, brokerages or insurance companies or other types of institutions.

As a result, there's a level of unpredictability. I think we've covered that fairly closely. So, there were a few large deals that didn't get done during the quarter that we were working very hard on up until the very end.

I can't identify or quantify those for you and that's something we do commonly as we maintain the confidentiality of that information in those relationships. And we do hope to get those signed this quarter. I did mention the one. And that was a deal that was worked on to the very last hour of the quarter that we thought we might have a shot at closing. It didn't. The continuation of discussions occurred over the past several weeks and we reached at least an agreement in principal subject to final contract signing on that deal that was initiated last quarter.

That I think reflects the nature of our business. The fact that we are a vendor of a very unique and transformative technology but we're working with some very big partners who have processes, systems their own forecasts and timing. We can't control that. I'd love to be able to think that we can but reality is we try to work as collaboratively as possible to reach a conclusion within a 90-day period.

That didn't happen on that deal and a few other of material impact that we're still continuing to work on during this quarter. So I hope that answers your question. That really is a nature of the beast as we continue to pursue our growth business.

Okay. Let me just ask, so you can't give us a sense of the revenue associated with that deal or the reorder. If you can, that would be helpful. And then lastly, I'll just ask again, was there any reorders in the March quarter.

Let me tell you also as a matter of fact for everyone on the call, this is why we don't provide guidance. We are small by nature and a growth market that's emerging and it really is reflecting a change of consumer habits how they use their mobile conducted devices. And I hope I addressed that in my prepared remarks but that really is the fact. And so that's why we don't provide guidance because it is new and emerging very large but unpredictable.

David Scharf, JMP Securities.

Thank you. Good afternoon. Couple things. Jim, I appreciate the forecasting challenges. I'm just curious. Can you tell us when you're getting intra-quarter updates from channel partners and specifically a bank processor who's obviously implementing across a broad spectrum of end-clients, I believe they're contractually obligated to give you monthly data. Do they provide just an aggregate number of transactions for example or you actually getting more granular data at the bank level?

Does that processor tell you -- we've just used of X number of transaction so far this month, or they actually telling you across how many banks and what the concentration is.

David, we don't get monthly information. We get quarterly information. And that information we use to come out quarterly with pronouncements about the number of newly signed agreements that were conducted by our partners with their bank customers.

One of the ways Mitek envisioned to grow as a small 50-person company was the leverage, the relationships, and the breadth of coverage of these large integrators have with banks. As you know there are over 10,000 financial institutions in the US. We're currently signed through our partners with 8 out of the top 8 and 25 of the top 40, that number continues to grow. And we have 315 that we just announced today, customers who have signed agreements.

This information comes to us from our channel partners at the end of the quarter and it is as process-driven as possible with the understanding that it trickles in, okay, because they have many operations. And for them to collect their data then convey it takes some time. And that's the process that we go through for the 4 to 6 weeks that we use after the quarter to prepare our quarterly results.

So that's how we get that. In addition to that, we try to secure information about transaction usage. And in many cases, our partners are getting better with regard to how they collect that data and how it shared with us. So we are seeing a view collectively on usage of transactions and it is increasing universally, if you put everyone on a bucket and look at the month-to-month growth.

And I think I did mention earlier with regard to that one large processor in the last 90 days, they experience a 38% growth in transactions processed through their ASP so all that's encouraging. And that's how we calculate usage and that's how we calculate number of banks signed.

Got you. And I guess this is more an investor relation's focused question but there seemed to be a lot of efforts to understand how much of the revenue at a particular quarter came from reorders and it seems to be answering that question as distinct from all the issues regarding forecasting and visibility. Is there are reason we can't get a little more granularity and to the mix between first time licenses and reorders of inventory blocks?

Yes, David, it's Russ. Today, if you look at where we're at in the process and the life cycle of mobile deposits, we've announced the metrics here in terms of new signings and go lives. The go lives lag by a couple hundred here, the new signing. So again, as we say we're in the early innings here. The bulk of our revenue generated to date has been from new orders. We have had a few reorders along the way. But again, early stages, initial transactions for new banks, new ASP offerings at that level and again bulk of the revenue from initial orders.

Okay. Got you. Last question, clearly, you're trying to get your footing on engaging adoption rates and a lot of revenue seems to be front-end loaded obviously is what we're learning. I'm curious, the size of the license as you're in negotiations now with partners, is there a change in the -- call it the size at the inventory block? Are you finding that new partners are looking for initial purchases of smaller blocks for per se or is it just very, very customer-dependent?

Our pricing is based on volume. And therefore, the larger the blocks, a better price can be obtained and so many of our partners are considering larger blocks. However, you have to consider that there are large banks, regional banks, and small banks. And so, the variety of sizes of institution really dictates what sides of block they want to consume or sign up for initially.

So we're not seeing any trends necessarily other than some of our larger financial institution integrators who are having success marketing the product either separately, within their item processing group, or as a combined element of their mobile banking offering are seeing greater opportunity and therefore are considering larger blocks.

But there really isn't a trend right now, Dave. And I think this is one of the challenges that we face in communicating to you and others is that we don't have enough data points to effectively give you trending at this point. It's getting better. We're having more customers go live as we've indicated but we still need to have more experience and greater consumption. That is growing and that will grow over time. And as we get more mature in the product, we'll be able to convey better metrics.

So I appreciate your patience on that but we really are trying to do our best to communicate to you and the market the conditions of the market as we see them.

Got you. I'll get back in queue. Thank you.

Mayank Tandon, Needham & Company.

Thank you. Good evening. Just to get a sense of pricing trends. Could you give us a sense of what the pricing is going to look like on this reorder that you mentioned this quarter and also the deal that got pushed out and will likely be signed this quarter, maybe a sense of where that pricing is going to come out.

Mayank, as a matter of practice, we really don't get into the details of any one deal particularly as it relates to a bank or to our system integrations. Clearly for competitive reasons, it wouldn't be wise for us to do that. But I have always stated that historically, what we've tried to do is target a range based on all of the deals that come in and then we average them out.

Historically, that range has been in and around $0.10 a transaction, some are higher and some are lower. That will probably change as more and more volume occurs but then again we're going to be adding more value to the platform addressing different markets and so therefore, we're going to continue to sustain that range but there can be no assurances.

Okay. Fair enough. And then most of my questions had been answered but just I wanted to get a little color on competition given some of the events from late March, early April, some of your competitors have been making some noise. I just wanted to get some color from you in terms of what does the environment look like, especially since some of those events took place.

Sure. We always expect to see competition entering our market. I've been very open about that. A great market will attract competition and it's a sign of a healthy growing market. We have heard about other competitors but I truly have not seen them competitively and neither have our partners -- we have queried them -- or the customers of the major banks that we have interacted with.

So therefore, we expect competition. We haven't seen the competition. We continue to pursue our business by aggressively pursuing new opportunities with new banks and other institutions and to leverage our technology. So that's a market shared leadership role which is very critical competitively. They have a time to market advantage. We're on version 3.3 by the way of our mobile deposit platform. It's a very robust platform. If you ever deposited a check through Chase or other banks or even Schwab, you'll be using Mitek and it's a very pleasant experience. That is a difficult thing to do from a technology perspective and we've done it superbly. I'm very proud of that.

So, really our competitive advantage is time to market engaging with key customers broadly having a channel distribution that we're collaborating with. And lastly, to have strong IP. We do have strong IP. We file for our patents back in 2008. They began to be issued in 2010 and they are very broadly claimed because we invented the technology and we're first to market with the technology.

So for all those reasons, we think we have strong barriers to entry and a competitive time to market advantage that should sustain us in our growth in the future.

Okay. And one final question, you mentioned the Progressive relationship. Does that mean now that it's going to be nationwide and confined to the 15 states that I think it was as of last quarter? And then do you start to generate revenue of that relationship sometime this year?

Yes. We do think there are future opportunities to engage with Progressive on revenue opportunities. We know that their campaign is nationwide. And presumably they are launching in other states but I don't have that detail for you. The product you'll see if you go to YouTube. You can actually download and watch their Progressive commercial with their character Floe at a very comical and engaging advertisement promoting mobile quotation.

She actually gives her driver's license to the fellow there at the store. He snaps a picture of the license, snaps a picture of the vehicle identification number and processes a quotation. But the fun part is, is that of course is embarrassed about their driver's license photo and so is Floe. So it's a light-hearted nature that conveys the message very effectively on 30 seconds.

Okay. Jim, so just to be clear, it's still in your case not a revenue driver but ultimately you think that this could lead to some expanded opportunities with Progressive where you can actually start to monetize it. Is that the way to look at it?

Mayank, I think that is a fair way to look at that. Again, we are a mobile imaging company. And our imaging platform enables us to look at documents and extract data basically using the phones camera as an input device. Okay. So that in mind corporations and many Fortune 500 companies not just Progressive who happens to be very advanced, very forward-thinking in technology but many Fortune 500 companies are using the mobile device in new ways to engage their customers. And the camera as an input device in place of key stroking in each key like we traditionally have done on a keyboard using the camera to enter the data is very effective.

So we see our domain competencies in certain documents, it's very critical to that. Clearly, we have that competency in check and bills and now we've added driver's licenses and other documents in the future. So, because of that capability, there are a variety of use cases that these corporations are looking at that go well and beyond our current use case. In this case, mobile quotations is the first, we think there could be other opportunities in Progressive and we see the same in other corporations in which we're engaging, multiple uses.

Okay. Sure. Thanks a lot.

Bhavan Suri, William Blair.

Hey, guys. So just a few follow-ups here. First on Mayank's question on Progressive, my sense was that outside of the check deposits and some of these newer applications, there was a kind of per user fee plus per transaction fee setup.

Now, A, is that correct? And B, if that's the case, then why would Progressive be adding to revenue even if it's immaterial today to help smoothen out some of the lumpiness longer term?

Bhavan, this is Jim. I think you're getting a little ahead of the story in terms of what we're doing to collaborate with customers who are forward-thinking like Progressive.

Progressive has a lot of interesting ideas and they have talent internally with regard to building applications that engage their consumers. And we're part of that collaboration process offering our mobile imaging to enable that.

So the first phase of our arrangement was really to provide a way for them to deploy the technology in this emerging use case. So those models are different in terms of our business models from the traditional transaction model. And those will always emerge and be different as we approach different use cases.

So I want you to think a little more -- help us think a little more creatively with regard to how we approach the business because when we enter new markets like the insurance vertical, there are different use cases that address not only the consumer, but potentially the agent, the claims agent and other areas that we add value. And there maybe different business models that can be associated with those use cases that are different than our traditional mobile deposit model.

So there will be flexibility going on moving forward. Again, this is an emerging market. It is new for everybody, the customer, the channel, and the provider, us. So as we work through it, we're taking our best cases, working and collaborating with any customer to come up with business models that meaningful to them and meaningful to us.

So, I mean, I guess, Jim, just to put that just very clearly, so with Progressive who has licensed technology, they have licensed technology and not paying on any sort of transaction basis currently?

Bhavan, I really don't talk about the details, but how we'd like to look at these new types of arrangements are platform fees plus some level of click fee. So that's the way they like to do it and often that may require us to recognize revenue in arrears. That is a possibility particularly and although we're not doing this with Progressive if we begin to host some of these solutions.

Okay. And then turning to the reorders, maybe help us understand a little bit here. Let's assume I'm a big systems integrator and I brought -- I bought x number of transactions from you at x rate. And I've consumed 85% to 90% of them and my Mitek server tells me you've consumed 85% to 90% and I go back to Mitek for a reorder.

The contract that I have, does that simply mean I go and get the reorder done or do you renegotiate that contract each time for each reorder?

Hey, Bhavan, it's Russ.

Hey.

So in that situation, we generally have pricing grids for our channel partners that would define prices upon reorder. Again, as Jim mentioned, we do have volume pricing scale. So higher level of transactions, would get a better price perk.

Sure, sure. And so when the partner goes and resells the bank, you're not really involved in that discussion.

No. Again, our business relationships for mobile deposit, have been with the channel partners and their relationship is maybe for a specific larger bank, directly with the bank or an ASP offering directly with a series of smaller banks.

But this is one of the issues of an emerging market is that often we are more knowledgeable about our product than our channel partner is. And as a result, we do assist them often with direct bank discussions in the pre-sales and often in the post-sales arena.

In the area of smaller financial institutions that are hosted through an ASP we're less likely to touch that bank.

Yes, yes. I guess, then that brings me to why the negotiations get pushed out or the reorder discussions get pushed out if it's a grid and it's pretty straight forward? Why that ends up being a negotiation or pushed out?

They have -- they've used 90% of transactions. They realized they've got 10% lack, they come back and they reorder. To me that seems like a fairly straight forward transaction as opposed to something that's pushed out.

Before for example say I'm supporting x number of banks and I ran out of transactions, those banks that are my clients won't -- their consumers won't be able to deposit any more checks. So to me, that all negotiation piece and the push out seems -- it just doesn't seem to fit given that I've already got a pretty fine matrix.

Hey, Bhavan, I should append my comments earlier with one more term of our licensing agreements. So we have a transaction, the volume limits in the agreements, number one, but we also have term limits on the licenses as well.

So with a certain block of transactions and the term limit, the scenario that you laid out a minute ago would be true under the pricing grid when we're still mid stream under the term limit on the agreement. If, however, we're nearing the end of the initial term of the agreement, there may be some negotiations.

And I'll add a little bit more to that, Bhavan. With regard to new markets that our current technology can address, up to this point, it has been primarily focused on loading a demand deposit account which we know as a checking account.

Right.

What's emerged is the prepaid market where we think the ecosystem is different. It is more complicated. But the economics maybe better for both the partner and for Mitek potentially. And so that's part of the negotiation as well is to address these new opportunities and to define them. And that does take time.

Okay. That's helpful. Thanks for the clarification. That's it for me. Thanks, guys.

Thank you.

Thanks.

Ladies and gentlemen, this does conclude the Q&A session. There will be a replay of this conference for the next 31 days at 888-286-8010 with the access code of 29554555.

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