Mitek Systems Inc (MITK) 2014 Q3 法說會逐字稿

Good day and welcome to the Mitek S3Q 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Salkowski, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us.

Before I turn the call over to Jim DeBello and Russ Clark, I would like to cover a few quick items. This afternoon, Mitek issued a press release announcing its third quarter of fiscal 2014 financial results. That release is available on the Company's website at www.miteksystems.com.

This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the investor relations page of the Company's website.

On today's call, we will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunity, should be considered forward-looking statements. These forward-looking statements may include comments about our plans and expectations of future performance.

Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K, for a more complete description of these risks.

Our statements on this call are made as of today, July 24, 2014, and the Company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations, or otherwise, for any reason.

Additionally, throughout this call we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release.

And with that, I would like to turn the call over to Jim DeBello, President and Chief Executive Officer of Mitek.

Thanks, Peter, and good afternoon, everyone.

The ongoing popularity of our mobile imaging solutions drove third-quarter revenue to $4.7 million, which represents Mitek's strongest quarterly revenue performance. Reaching another milestone with over 2,500 banks now signed for mobile deposit, this is the fourth consecutive quarter we have recorded above $4 million in revenues with growth every quarter. Alongside this record revenue, we achieved non-GAAP profitability in the third quarter.

We are proud of this financial performance and pleased with our revenue growth, which is largely driven by a much broader customer base.

According to a March 2014 comScore data report, only 41% of banking customers with a smartphone were even aware of the ability to deposit a check remotely. At Mitek, we estimate that only around 10% of consumers have even tried mobile deposit. In many ways, we think this is terrific news because it signals there is a lot of potential in a market where Mitek is the clear leader.

As a testament to our leading mobile deposit solution, we now have 2,571 banks signed up for the product, of which 2,143 are live. It was only a year ago that we crossed over the 1,000-bank signed milestone for Mobile Deposit, signifying the continued growth of our flagship product.

In addition to the significant number of banks that have signed up to use our technology, all top 10 US retail banks and nearly all of the top 50 banks are Mitek Mobile Deposit customers.

We remain focused on bringing the industry's most innovative and user-friendly mobile imaging solutions to market. Adding to the strength of our Mobile Deposit product, 10 leading financial institutions have made Mitek MiSnap available to their Mobile Deposit users during our third quarter.

For those listening that may be unfamiliar, MiSnap is our patent-pending auto capture solution. Banks that have a deployed MiSnap include U.S. Bank, Morgan Stanley, and Tangerine, formerly ING Canada. In addition, MiSnap is available through our leading channel partners, such as Fiserv and NCR.

When making a deposit, you will recognize the MiSnap technology if you can take a picture by simply hovering your smartphone over the check. The technology orients the check in the photo frame, then automatically snaps a shot when the conditions are right. There is no fumbling with the phone, which is a common experience for pretty much anyone taking a photo on a smartphone.

The result? Mitek MiSnap produces a better check image quality, which translates into higher success rates for which we get paid. In other words, millions of consumers successfully deposit a check on their first attempt every time.

In addition to helping drive Mobile Deposit usage for which we get paid, we see MiSnap powering the technology behind many of our solutions, providing users an enjoyable and consistent experience across our entire product suite.

We believe there is room to grow deposit usage by raising consumer awareness, making the product easier to use, and by encouraging banks to adopt the industry best practices that have resulted in greater usage. While many banks have raised consumer awareness through ad spending, as I mentioned before, a recent study still found out that only 41% of banking customers knew that they could do this on their smartphone.

With all of this room for growth, we expect banks to continue to promote the product to customers.

Another industry survey found that while 90% of banks believe that the benefits of Mobile Deposit outweigh the risks and costs, over 40% of financial institutions apply a one-size-fits-all approach in setting limits for mobile deposits. We think there is also room to grow deposit usage by removing barriers on the bank side of the equation, and to address this, we're working with leading banks to institute smart deposit limits, based on how well they know their customers.

We have seen some upward movement on deposit limits, but there's a lot more work to do. In addition, we're working with banks to determine funds availability and other ways to put Mobile Deposit on par with ATM deposit.

Meanwhile, by focusing on the first-time user experience with enhancements such as MiSnap, we believe we can convert many consumers into repeat Mobile Deposit users. In many ways, we have only scratched the surface of what is becoming a sweeping consumer trend.

Moving now to our bill pay efforts, as we have stated before, our internal marketing and sales strategy has been to inform, educate, and sell directly to the largest financial institutions, all of whom are our customers. The direct strategy led to early adopters, such as U.S. Bank, First Financial, and BBVA Compass, signing up for our Bill Pay solution and an additional customer going live this quarter.

We also have several pilots underway with leading institutions for the deployment of Bill Pay.

While our sales and marketing team did a terrific job of informing the top financial institutions about Bill Pay, adoption of the solution has been slowed by the lengthy decision-making processes. These processes are out of our control and difficult, if not impossible, to accelerate.

According to AlixPartners, mobile is expected to supplant online as the number one method for paying bills within the next four years. While we agree that mobile will be the number one method for paying bills, we, and I am sure all of you that are listening on this earnings call, would like to see the transactions occur more rapidly. And as a result, we are focusing our selling efforts on channel partners to scale the business through their existing relationships.

With 16 billion paper bills mailed in the US annually and an expected 5 billion smartphones worldwide by 2016, we're optimistic that we will have a viable product in a market that is expected to grow.

This brings me to an update on Mobile Photo Account Opening, Mitek's solution to remove friction from the account opening process. Our solution allows a user to take a picture of their driver's license to fast-fill the form and then take a picture of a check to fund the account.

Our Account Opening solution featuring our driver's license technology works for a wide range of products, including credit card, auto lending, mortgage, brokerage, insurance, and even retirement accounts. Building off the Best of Show award at Finovate last September, we're in contract negotiations with several top 25 banks and a major distribution partner.

U.S. Bank, a recognized leader in innovating in the consumer mobile banking experience and a strong Mitek partner, is using Account Opening and recently announced an Account Opening partnership with a major league baseball team.

This season, U.S. Bank associates can be found walking around the major league baseball stadium, enrolling customers for a new credit card as they take a break from the action on the playing field. Launching Mitek's solution with a tablet in hand, the bank associates venture into their community, providing potential customers a fast, convenient, and fun way to enroll for a new card.

Account Opening can assist any institution looking to improve their topline performance through customer acquisition or enrolling existing customers in additional product offerings. With more and more digital traffic happening on mobile devices, financial institutions are in need of a way to facilitate registration, while complying with their know-your-customer regulations.

Mitek's Account Opening solution addresses both these needs, while solving the painful process of manually filling forms.

In addition to the very positive results from U.S. Bank's major league baseball pilot, we have seen interest in our Mobile Photo Account Opening product from several of the largest insurance companies. With its many applications and use cases, both within banks and other industries, we expect to see momentum grow and look forward to what's next with our Mobile Photo Account Opening product.

In addition to the product that we have developed internally, a few months ago we have made our mobile imaging technology available to developers, and so far we have been presented with some terrific ideas. There are several projects ongoing that leverage our imaging technology.

For example, during the quarter we signed an agreement with realtycloud, a small developer that will soon launch a product allowing customers to submit an escrow deposit check via their smartphone or tablet. While other ideas move through the development and launch phases, we are very excited about getting our technology in front of the next wave of developers.

Mitek's mobile imaging solutions are backed by a very strong IP portfolio. This quarter, we extended our mobile imaging leadership with our 20th patent, which relates to identifying and extracting content, a complex aspect of our underlying technology. In addition to the 20 currently-issued patents, we have another 22 patents pending.

As you are aware, we have patent infringement lawsuits against Top Image Systems and USAA. Both suits are ongoing and the trial date with USAA has been set for September 8. We believe very strongly in the merits of both our cases. We have spent years developing our strong IP and our IP portfolio, and we will defend it when appropriate to do so.

As I close my remarks, I want to reiterate that the fundamentals of our business are strong. Mobile banking continues to grow and Mobile Deposit is a key element of that, evidenced by the 2,500-plus banks we have signed to date. Let me tell you, there aren't a lot of products out there that have penetrated 2,500-plus banks.

To take advantage of these mobile trends, we are continuing to invest in new solutions, such as enrollment, identity, and verification, using our leading technology to leverage our installed base of customers, as well as attract new customers in other vertical markets.

Given the broader Mobile Deposit customer base, we have seen our quarterly revenue exceed $4 million and grow over the past four quarters. We remain focused on protecting the IP of our core solutions, improving the user experience, and working closely with our end users and channel partners to reduce barriers to Mobile Deposit growth, regarding our first-mover advantage, by offering our customers best-in-class technology, such as Mitek MiSnap, while developing new cutting-edge products that address consumer pain and provide a compelling ROI to our customers.

With that, I would turn the call over now to Russ Clark, our Chief Financial Officer, for a more detailed review of our quarterly results. Russ?

Thanks, Jim, and thank you to everyone joining us on today's call.

As usual, I will discuss our quarterly results on a GAAP basis, unless I specifically call out a figure as non-GAAP. Our earnings release includes a reconciliation between the two measures. We believe that excluding non-cash stock compensation and IP litigation expenses from non-GAAP earnings provides a useful measure of the Company's operating results.

During the third quarter of fiscal 2014, we saw our topline grow sequentially and year over year to a record $4.7 million, resulting in non-GAAP net income of $139,000. In addition, during the first nine months of fiscal 2014, we recorded a non-GAAP net loss of only $38,000, nearly breakeven.

The total record revenue for the third quarter of fiscal 2014 increased 20% to $4.7 million, compared to total revenue of $3.9 million for the year-ago period. Third-quarter software revenue of $3.2 million included 13 Mobile Deposit reorders and increased 18%, compared to year-earlier software revenue of $2.7 million.

Maintenance and PS revenue for the third quarter of $1.5 million increased 25% over last year's Q3 maintenance and PS revenue of $1.2 million.

Total operating expenses were $6.3 million, compared to $5.9 million in the year-ago period. The year-over-year increase was primarily driven by investments in the business, as well as higher non-cash stock compensation expense and litigation costs related to protecting our IP.

Non-cash stock compensation expense during the third quarter of fiscal 2014 was $922,000, compared to $686,000 in the year-ago period.

R&D expenses were $1.6 million in Q3, down from nearly $2 million in the year-ago period. The decrease in R&D expenses was primarily driven by lower outside contractor expenses.

G&A expenses were $2.3 million during the third fiscal quarter, compared to $2.0 million in the year-ago period. The year-over-year increase in G&A was primarily driven by IP litigation expenses, which totaled $849,000 during the fiscal third quarter, as well as non-cash stock compensation expense.

GAAP net loss was $1.6 million, or $0.05 per share, compared to a net loss of $2.1 million, or $0.08 per share, in the year-ago period.

As I mentioned, excluding non-cash stock compensation expense and IP litigation costs, Mitek reported non-GAAP net income of $139,000, or less than $0.01 per share for the quarter, and a non-GAAP net loss of $38,000 for the first nine months of the fiscal year.

This compared to a non-GAAP net loss of $654,000, or $0.02 per share, for the third quarter of fiscal 2013 and a non-GAAP net loss of $2.1 million, or $0.08 per share, for the first nine months of fiscal 2013.

Our EPS share count for fiscal Q3 was approximately 30.5 million basic and fully diluted shares.

We expect total fiscal Q4 OpEx to be between $5.0 million and $5.5 million, excluding litigation expenses. This guidance reflects our decision to focus our sales efforts for Bill Pay and Account Opening on channel partners to help scale the business, as well as our continued focused efforts to improve the Company's profitability.

Although it is difficult to accurately forecast the timing and extent of litigation activities in any given quarter, we currently expect litigation expenses to increase to more than $1 million in Q4 due to the USAA trial, which is scheduled for early September.

Regarding the ongoing patent infringement suit against Top Image Systems, the case is ongoing, with the trial date set for June 2015.

Turning to the balance sheet, as of June 30, 2014, cash, cash equivalents, and investments totaled $26.4 million, compared to $29.0 million at September 30, 2013. This represents a net cash burn averaging less than $1 million per quarter so far this year.

Our Accounts Receivable balance of $2.5 million represented a DSO of 49 days for fiscal Q3, which is a decrease of 14 days from last quarter, due to relatively stronger collections during Q3.

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

(Operator Instructions). Bhavan Suri, William Blair & Company.

I guess let's just dive in. It was a nice job on the increase in number of reorders, and we have seen that, I think, tick up now, if I have the numbers right, 4 to 9 to 13, but the revenue, the license revenue -- software revenue, I guess, hasn't moved a ton. So help me understand. Obviously, it feels like you're managing the reorder sizes to drive a little more frequency so you get visibility, but is that the right way to think of it?

And then, at some point do we see that start to inflect, both based on size or volume? The combination, obviously?

Sure. So, I think if you look at the last four quarters of consistent results over that $4 million mark, we're pleased with that. We are very carefully managing reorder cycles to achieve that consistency and that consistent growth.

The reorder mix, so it was a 13 reorder count this quarter. That's the highest that we have seen ever. So, think about that 13 as a good, strong increase in the reorders, but the mix has changed as well with the penetration that we have in the market.

So, with 13 reorders, the reorders are now driving in any given quarter a majority of the business. And as we have discussed in the past, there is a timing issue from time to time on reorders and sellthrough in the channel.

So, again, we are very pleased with the consistency, with the consistent growth over the last four quarters. The reorder count continues to increase, and we are continuing to see reorders fuel more of our growth.

Let me just augment what Russ has said. The other part of the story is continued growth in usage, and so, again, we see double-digit growth in usage.

Just today in American Banker, U.S. Bank was featured, Mobile Banker of the Year, and they talked about last year doing 2.2 million transactions and we know to date, halfway through this year, they are exceeding that.

So again, we are continuing to see growth in usage. The product deepens within the community, within each bank, and we also add new banks. So yes, we will continue to see growth in the revenues.

We remember those years back in 2012 where we had a great deal of volatility. I think Mitek has been very effective in eliminating the volatility, enjoying sequential quarterly growth that will continue the foreseeable future.

Great, that's helpful, Jim. Thanks.

And then, when you look at the strategy to start focusing back on the channel, one of the challenges that we've been through again in visibility in 2011 and 2012 was that we are not quite sure how much the channel has consumed, how the channel is selling, the block buying usage, and the focus was let's go direct with a bunch of these.

Help me understand the shift back. Obviously, I understand the channel has relationships, but then you would give up the visibility. So help me think through how you guys have thought through that and barbell that approach, so to speak.

Sure. I think as we have said all along, our strategy with Bill Pay and then Account Opening was to first go out to market with a direct sales force, call on the banks directly, market the product directly, talk to bank execs and explain to them how compelling we believe the offering was.

And we have accomplished that. We were out in the market with direct sales efforts over the last several quarters, doing just that. The other purpose there was to help establish pricing in the markets by going direct, and we have accomplished that as well.

I think at this juncture, we have had a high amount of success with our channel model with Mobile Deposit, and the size and scale of our channel partner network is difficult to contend with. So, we're going to leverage that even more for Bill Pay and Account Opening and try to fuel the same growth that we have seen in Deposit.

And again, Jim commenting and augmenting what Russ has said. I spend most of my time with customers. I am in the field a lot.

I meet with them, along with our people who are responsible for revenue, and I speak with them and I have learned a lot. And part of that is to work directly with key banks that are leaders, we can help establish price. We can help establish momentum and visibility. It creates a new category of product.

We, of course, are innovating all of the time and some of these new markets are nascent markets, and so, to scale up the business, we do need a distribution channel and we always believed very strongly in that from the very beginning, even with Mobile Deposit.

But now with the ability to go into our distributor partners and say, listen, we have closed important deals, established the need, the ROI, and the price points, it makes the conversation easier, more direct, and, I think, more fulfilling for both parties as we enable each of us to sell through a leveraged sales force.

Keep in mind, we're a small company by comparison to a Fiserv, an NCR, an FIS, some of the other partners like [Incenta] or even Cachet, all very capable companies with their own sales forces.

So, allowing us to partner with them triples, quadruples, orders of magnitude grows our ability to penetrate the market and do it quickly. These are short windows of opportunity. We see ourselves enabled by distribution partnerships. It is a key part of our strategy.

Yes, that's helpful. And so, I guess, more tactically, then, Jim, is Michael Diamond or Mike Diamond's organization shrinking or is that -- you are going to keep that where it is as you think about spreading the approach, or is he going to refocus and maybe look at some of the partnerships in the cloud or through the insurance providers or through guys like Comcast?

How should we think about the leverage of that organization now as you push more to partners, maybe rather than going as much direct or now that you have established the direct relationships?

Sure. So, we will continue to talk to the banks directly. We have a lot of senior execs here with experience in the banking sector and we talk to bank top execs all the time.

So, we have refocused our efforts towards the channel. If you look at our OpEx trend, we continue to prune back the business in certain areas that we need to to respond to the market.

So, again, we're still talking to the banks directly. We are focused on the channel and we refocus our resources internally as we see fit.

We're looking for the most operating leverage as an operating company. And you have heard for the first time the P word, profitability, in our earnings announcement and in our comments today.

We are intent, and I want to state this very openly and directly, to drive us to breakeven and beyond into profitability on a GAAP basis. And so far, we have been able to prove that on a non-GAAP basis, without litigation costs included. Those litigation costs will end and we want to be not only a growth company, but a profitable growth company.

And so, we are looking for operating leverage by putting our resources where they best serve the scalability of the business. And again, we will move resources around. We will reduce resources accordingly, if necessary, to drive business growth and we have demonstrated our ability to do that.

Okay, okay, that's actually helpful. You know what I will do, guys, I will jump back into queue, and then if there is a couple folks, all of them ask questions, and I will jump back in. But thanks for taking my questions.

(Operator Instructions). Mike Grondahl, Piper Jaffray.

How should we think about the uptake of MiSnap going forward, and do you have some goals for how many banks will be adopting that service?

I will comment on that and Russ can probably jump in as well. So we announced 10 institutions a couple weeks ago that have adopted it, including the ones I mentioned in the call, U.S. Bank and Morgan Stanley and others. We have others in the queue right now, so that number will continue to grow.

The thought behind MiSnap is twofold. The first of which, to improve the consumer experience where they don't have to touch the camera, which often results in shake, which often results in an out-of-focus image and a repeat image-taking process. So, consumers don't want to be burdened with that. This makes it easier.

So, if it is -- the theory goes, if it is easier for the consumer to take a picture, they're going to repeat the habit more regularly, driving the volume of transactions and clearly our revenues. So, there is obviously a need to improve the consumer experience, optimize that, and drive our topline.

The second piece is we are now integrating this into the development cycles of these large institutions. It does take time. They typically do one or two releases annually, scheduling them six months in advance.

So we will see a steady progression of adoption of MiSnap over the next several quarters. We expect that, just as we have seen with Mobile Deposit, but because of the release cycles of these large institutions, it will be steady and we will have penetration, we hope, to be greater than 50% in the next year or so of all these institutions.

So, again, there is a strategy behind it. The third part I think I want to add is that once banks are comfortable and deploy, and once consumers become -- are using this as a consumer habit, we think that translates very nicely into other use cases and solutions that we are offering the bank.

So if you take a picture a certain way for a deposit of a check, you can take the same type of picture with a bill or with a driver's license by simply hovering the camera. So, it is an integrated part of our overall strategy to drive usage and to make a common user experience across a broad set of solutions.

Okay, and then, any sense -- if you just look at your top 10 banks, any sense of what the transaction growth trend is there?

Yes, we haven't segmented any growth rates. I think to reiterate what Jim said earlier, we continue to see double-digit sequential growth rates for the entire population of Mobile Deposit customers that we get transactional reporting for. So we continue to see growth in that double-digit level overall.

Okay, and then maybe lastly, just with opening up the technology to the developer community and whatnot, any other unique examples coming out of that that are in the earlier stages that you guys can talk about?

Not ones that we have rights yet to talk about.

Jim, in his prepared remarks, mentioned realtycloud, which is a pretty unique app. Think about passing the earnest money deposit, meeting at Starbucks with the real estate agent, and then agent has to run that to escrow or to the bank to get it deposited. So now, agent can sit in the coffee shop and deposit that into escrow right there on the spot.

So, we think that's a very creative way to address an issue and we continue to engage with other developers in the network, and as soon as we have rights to talk about any others that we think are interesting, we will certainly share them.

Mike, Jim again. I will tell you one thing that is interesting to us is not only realtycloud -- we're very happy to be associated with them, but we are looking for new ways to apply products like Mobile Deposit to new markets.

And so, we have had an emphasis on retail banking. We have done extraordinarily well. As I mentioned, it's very, very difficult for any company to get penetration of 2,500 banks, and we have done that and I expect that number will continue to grow.

But we have to look for other uses of that technology in adjacent markets, and one of which we were continually proud of, we touted and talked about earlier, was with food distribution. There are other food distributors. There are other field service organizations. There are other people who collect checks for services rendered or other activities.

So, we are looking for new ways to use the technology in other applications that can continue to drive growth across the board.

Okay. Thank you, guys.

(Operator Instructions). Bhavan Suri, William Blair & Company.

Just one thing I want to touch on on the USAA litigation. There was this thought process of filing for summary judgment, and now it feels like there is a trial date. Help me understand or reconcile those two things a little bit.

Those two things are part of any trial schedule, so we have been all the way through discovery and depositions, and there is a summary judgment motion practice that took place over the last several weeks, and the next step in the process is trial, starting on September 8.

So Russ, and excuse me, because I am not that familiar with the whole litigation process, so doesn't summary judgment imply that the judge has the ability to dismiss the case, pending some review? So would it not go to trial if the judge felt that way?

There is, again, in the typical process motions for summary judgment that are filed. We have been through that process.

Our understanding, if you look at litigation stats, is that the percentage of times that there is a complete dismissal and no trial happens is definitely the small minority of the cases.

So to amplify, the parts are all the case could be, if the judge determined to be excluded. So the summary judgment rulings have been given by the judge. They are sealed and we're proceeding to a September 8 date.

Okay, okay. Then just as one last one from me, as you look at the business and you look at the sequential ramp in usage from the customers and you look at the bank additions and all those trends quite, quite nicely, and you look at the layering on approach you have applied to the various new products, and we look out not even next year, but maybe a couple of years out, past that, you look at the mix of the business today, the vast majority of license revenue is the reorders on the mobile check deposit.

How do you feel the MiSnap, the cloud piece, the other offerings compare -- maybe not even individually, just holistically, as a percentage of revenue versus the mobile check deposit?

I think deposit over the next couple of year horizon will continue to drive growth in the business. Again, with these transaction rates increasing in the double digits on a sequential quarterly basis, that will continue to fuel a lot of growth for the Company.

In terms of our other product areas, it is a relativity concept here. We expect and plan to be successful there, but they are starting out from a smaller base and those will help fuel growth as well, but deposit will still make up the lion's share.

Super. Thanks for taking my questions, guys. Appreciate it.

That concludes today's question-and-answer session. Mr. Salkowski, at this time, I will turn the conference back over to you for any additional or closing remarks.

Great, thank you. Before closing the earnings call, I would like to inform everyone that Mitek will be presenting on Wednesday, August 6, at the Needham Internet connect conference being held in New York City.

Thank you for joining us today for Mitek's fiscal third-quarter earnings call. We appreciate your interest in the Company and have a good day. Thank you.

That does conclude today's conference. Thank you for your participation.