Mitek Systems Inc (MITK) 2015 Q4 法說會逐字稿

Good day and welcome to the Mitek Systems fiscal 2015 fourth-quarter and year-end financial results conference call. At this time I would like to turn the conference over to Mr. Todd Kehrli of the MKR Group. Please go ahead.

Thank you, operator. Good afternoon and welcome to Mitek's fiscal 2015 fourth-quarter and year-end earnings conference call. With me on today's call are Mitek's President and CEO Jim DeBello and CFO Russ Clark. Before I turn the call over to Jim and Russ I'd like to cover a few quick items.

This afternoon Mitek issued a press release announcing its fiscal 2015 fourth-quarter and full-year 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.

I'd like to remind everyone that on today's call management 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 opportunities, 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 can 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, November 5, 2015 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 the call we will be discussing certain non-GAAP financial measures. Today's earnings release and 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.

With that I will now turn the call over to Mitek's CEO Jim DeBello. Jim?

Thanks Todd and good afternoon everyone. I'm happy to report the best quarter and in fact the best year in Mitek's history. Our outstanding results included record revenue, record net income and record earnings per share on both a GAAP and non-GAAP basis.

We had a strong fiscal 2015 and we think fiscal 2016 is going to be even better. These record results for the year were driven primarily by the continued sustained growth of our industry-leading mobile check deposit product while our record fourth-quarter results also highlight the rapidly growing revenue contribution from a pair of powerful new product offerings for mobile ID capture and verification.

We're now perfectly positioned to broaden our industry leadership by helping companies transform their businesses to leverage the rapidly growing mobile channel. Accordingly we're highly confident that fiscal 2016 will be another excellent year for Mitek. With the successful acquisition of IDchecker we're now providing the enterprise customer with unparalleled choice between a cloud or on-premise offering and increasing our recurring revenue mix.

We're addressing a huge opportunity estimated at $3.8 billion. Our deep experience in serving over 60 million consumers today strongly suggests that our dominance in mobile deposit can be replicated in the multibillion-dollar ID capture and verification markets where our successful launch of groundbreaking products already confirms our strategic direction and unique game changing capabilities.

For example, no one else can read an imperceptible code on a US driver's license to instantly verify a photo ID, a tremendous differentiator. And no one else can capture an identity document through the mobile browser. We can.

We're seeing a deepening pipeline and have the balance sheet to exploit these emerging opportunities quickly and profitably. We plan to sign 10 marquee Fortune 500 customers in the financial services, healthcare, and telecom verticals this year. Their size and scope will underscore the business value that our new mobile ID capture and verification offerings bring to organizations: safe, secure solutions that optimize the mobile channel for customer acquisition and payments.

To illustrate this demand for mobile convenience I'd like to briefly highlight the results of a recent survey conducted by Zogby Analytics entitled millennials, the next mobile disruptors which examined the mobile preferences of more than 1,000 consumers ages 18 to 34. Of those surveyed, 83% think mobile capture, meaning taking a picture instead of typing, will be part of all mobile transactions within the next five years.

In addition, 86% already make purchases and conduct transactions from their mobile phones. And 42% have made a decision on where to spend their money or switch companies based on what the organization allowed users to accomplish with a mobile device. The results clearly show that millennials are embracing adoption of a mobile self-service channel.

They expect to be able to use their mobile devices camera to deliver an easy mobile commerce experience. And the mobile camera is the key for businesses looking to engage with this important demographic.

Mitek's Mobile Deposit was the millennials' first exposure to mobile capture. The popularity of mobile deposit with its high quality, fast and easy user experience continues to dominate the market. Mobile Deposit has been broadly adopted by the top banks in the world, including all of the top 10 US retail banks and it continues to grow among both consumers and the financial institutions that serve them and we haven't lost a single customer.

With another 400 banks added this quarter we now have over 4,500 of the 8,000 banks in the country licensing our technology. Today according to industry analyst Celent over 60 million consumers are using our Mobile Deposit solution.

While consumers love the convenience and ease of use financial institutions recognize the substantially lower transaction cost associated with processing checks through the mobile channel. In fact, on a recent earnings call the chairman and CEO of Bank of America stated that mobile is 1/10 the cost relative to the processing of financial centers and more convenient for customers.

With our dominant position in mobile capture technology Mitek is well positioned to benefit from the continued adoption of mobile check deposit in retail banking among consumers. With that said, while adoption and usage of mobile check deposits continues to grow rapidly it still represents less than 5% of the approximately 19 billion checks deposited in the US each year, representing a significant opportunity for future growth in the years to come. A recent American Bankers Association study highlighted this growth opportunity within the consumer mobile deposit market by noting that while the number of Americans using mobile deposit is increasing only one in seven Americans has deposited a check using a mobile device in the past year.

Separately our commercial Mobile Deposit product for businesses is also gaining traction and represents an even bigger market opportunity. Of the 19 billion checks deposited annually two-thirds of them are commercial checks.

Just like the retail side of banks the commercial and treasury divisions servicing small- and medium-sized businesses recognize the substantially lower transaction costs associated with processing checks through the mobile channel. And they are highly motivated to drive more Mobile Deposit transactions as an alternative to branch or ATM transactions. In addition, businesses themselves are seeking to lower their costs with mobile tools that enable them to quickly process payments without a trip to the bank, a desktop scanner or the interchange fees associated with credit cards.

Earlier this week we announced Mobile Multi-Check Capture, a powerful new capability that enables businesses to make batch deposits with a mobile device, thereby reducing gimmick need for scanners and eliminating trips to the ATM or the branch. Available next month, Mobile Multi-Check Capture is aimed squarely at addressing the untapped commercial mobile deposit market and represents the most significant enhancement we've made to our Mobile Deposit product since its introduction.

While businesses are increasingly turning to mobile to process payments adoption of Mobile Deposit in the commercial banking sector is just beginning. And we believe it represents a substantial opportunity to drive further growth for Mitek this fiscal year and well beyond. And as an example one of our partners recently engaged a large food distribution company with over 1,000 delivery trucks who collect thousands of checks each week.

As we continue to build on the success of Mobile Deposit we're also leveraging our mobile capture expertise to significantly expand the scope of our business globally to include the multibillion-dollar identity verification and authentication markets. Our new mobile ID capture and verification solutions significantly increase our addressable market and ASPs and are aimed at the two major pain points that financial institutions and other B2C businesses face as they seek to meet growing customer demand for a mobile self-service channel.

The first pain point is the high level of abandonment of customers who become frustrated with the difficulties of trying to apply for a product or service through a company's mobile app or mobile optimized website. Second is fraud and the inability to accurately verify the identity of mobile customers. Our mobile ID capture and verification solutions enable businesses to clear the hurdles of new mobile customer acquisition and fraud.

To underscore our excitement about the new opportunities we have with these solutions and others we estimate that the total addressable market for these products currently stands at $3.8 billion annually and is growing. And that includes just are currently served verticals of financial services, insurance and telecom.

Let me illustrate these challenges with a real-life example from within the insurance industry. One of the top insurance companies in the world told us that they received 40,000 new policy inquiries a day through the mobile channel, yet despite spending millions of dollars a year advertising their service and building their funnel their conversion rates on these inquiries was severely impacted by the inability of their mobile channel to process these potential customers in a timely, easy and efficient manner. And this problem is not only widespread throughout the insurance industry but extends across the board to financial services, healthcare and telecom.

Our banking customers tell us that 40% of new account enrollments now come through the mobile channel compared to less than 10% just 24 months ago. But they, too, are experiencing what they call a soft decline of successful new customer acquisition due to abandonment from the mobile process due to the awkwardness of trying to fill out a form on a small touchscreen.

Photo Fill, our mobile identity capture solution, directly addresses the mobile customer acquisition pain point by allowing the mobile customer to use their camera as a keyboard, creating a great user experience. Using Photo Fill, which includes our touch free auto capture experience MiSnap, a consumer can pre-fill any form with personal data quickly by capturing an image of their driver's license, eliminating the hurdles that mobile customers currently experience while trying to type in all of this information into their mobile web browser or a business's native app.

By providing a superior user experience that's easy and efficient and reduces friction Photo Fill significantly reduces customer abandonment and improves completion rates through the mobile channel. It's a great value for our enterprise customers. In the case of one of our early Photo Fill customers in the insurance industry they've seen a significant uplift in their mobile completion rates, resulting in a substantial addition of new customers and revenue.

Our Photo Fill solution provides a significant value proposition for any business seeking to more efficiently acquire new customers through the mobile channel. This value extends just beyond banking and insurance to a variety of other industries. Photo Fill is helping businesses meet the growing customer demand for our mobile self-service channel.

Now the second major pain point that financial institutions and other B2C businesses face as they seek to meet growing customer demand for mobile self-service is the inability to accurately verify the identity of mobile customers. Our newest product, Photo Verify, addresses this challenge. Photo Verify, which we made generally available just two weeks ago, enables banks and other businesses to improve know your customer or KYC processes using mobile imaging for ID document authentication.

Photo Verify Advanced instantly finds and decodes an encrypted security feature hidden on a driver's license and imperceptible to the human eye. When Photo Verify detects the security feature the license is instantly confirmed to be 100% authentic, resulting in zero false positives. The authenticity of the ID can be verified entirely on the mobile device, eliminating the need for customers or applicants to appear in person.

If customers can't complete verification on their mobile device and are required to prove their identity in person abandonment can be as high as 90%. To broaden our mobile ID verification offering we acquired IDchecker in June of this year, expanding our mobile ID verification offering to the cloud and adding the ability to verify the authenticity of ID documents from all over the world. IDchecker's customers include global payments, financial services and information services companies.

Its flagship product formerly known as Strong ID expands our ID document verification capabilities through its ability to authenticate 3,500 different types of passports, international drivers licenses and identity cards from nearly every country in the world. Through the addition of IDchecker into our Photo Verify family of products we've already implemented our solution with one of the largest payment processing companies in the United States to provide ID verification. This Company has begun using Photo Verify to verify the identity of its customers worldwide, enabling them to transact stately, securely, and efficiently.

With Photo Verify the company is making significant improvements in customer experience as well as business processes for verifying a customer's identity. It used to take this payments company five days to verify their identity.

With the Photo Verify family of products we believed we leave the market with our groundbreaking mobile ID document verification solutions. However, our goal is to further extend our capabilities to also offer our customers a multifactor ID verification solution in combination with our ID document verification offering. Just last week we demonstrated our facial recognition capabilities at the Money 2020 Payment Conference.

Once fully developed our facial recognition offering will be able to verify a match between a person on an ID and a selfie taken by the mobile user. We're focused on completing development of our facial recognition offering in fiscal 2016 as well as providing additional multifactor ID verification capabilities through acquisition or partnership to help us further capitalize on the multibillion-dollar ID verification market.

With our innovative new products we believe we've got a substantial opportunity ahead. We're focused on targeted verticals that are seeking to improve new customer acquisition and ID verification via the mobile channel.

As I mentioned earlier, our goal this fiscal year is to sign 10 Fortune 500 customers which we can then use as reference accounts to further expand within these key verticals. This is a large and growing market and we believe we have the right solutions to address the pain points that these companies are encountering as they try and offer a mobile self-service environment.

In conclusion, we had a strong fiscal 2015 and we think fiscal 2016 is going to be even better. We'll see continued growth in Mobile Deposit driven by increasing adoption and usage by the retail banking customer as well as penetration of the even larger market for commercial Mobile Deposit.

And as we further growth Mobile Deposit we're also focused on leveraging our success in mobile capture to expand into the ID capture and verification market space this year which would more than double our addressable market and enable us to drive higher ASPs. We're energized by these significant growth opportunities and look forward to updating you on our progress in the upcoming months.

With that now I'd like to turn the call over to Russ Clark to discuss the quarter and the year in more detail.

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

As a reminder all financial figures I cite today are on a GAAP basis unless I specifically call out a number as non-GAAP. Our earnings release includes a reconciliation between these two measures.

Also as a reminder September 30 is the end of fiscal fourth quarter and fiscal year, so any references to quarters or years are on that basis. As Jim mentioned Q4 total revenue was a record $7.9 million, a 42% increase year over year. We also achieved record non-GAAP net income in Q4 of $2.8 million or $0.09 per diluted share, representing our sixth consecutive quarter of non-GAAP net income.

Q4 software revenue of $5.5 million included 13 Mobile Deposit reorders and was up 42% compared to revenue of $3.8 million in the year-ago quarter. Q4 services revenue of $2.4 million increased 42% over last year's Q4 revenue of $1.7 million and includes recurring identity verification SaaS revenue of around $600,000 generated by IDchecker which we acquired in June.

Total Q4 operating expenses were $6.9 million compared to $5.6 million in the year-ago quarter. Q4 selling and marketing expenses were $1.9 million compared to $1.2 million in the year-ago quarter. We continued to invest in direct sales and marketing personnel and programs for our identity products, including international sales personnel who joined us with the IDchecker acquisition.

Q4 R&D expenses were $1.7 million compared to $1.3 million a year ago. This increase reflects our investment in personnel to continue to build world-class ID capture and verification products including talented software engineers and computer vision scientists in our new IDchecker office in the Netherlands.

Our Q4 G&A expenses were $1.9 million, down from $2.6 million in the year-ago period due to a year-over-year decrease in IT litigation cost of around $700,000. We incurred $552,000 in costs and expenses in Q4 related to amortization of IDchecker intangible assets and acquisition-related stock compensation as well as direct acquisition and integration costs for the deal. Non-cash stock compensation expense during Q4 was $873,000 compared to $777,000 in the year-ago quarter.

GAAP net income in Q4 was $1 million, or $0.03 per diluted share compared to breakeven net income and EPS in the year-ago quarter. As I mentioned, Mitek reported non-GAAP net income of $2.8 million, or $0.09 per diluted share for the quarter compared to non-GAAP net income of $1.9 million or $0.06 per diluted share for Q4 of 2014. Our diluted share count for Q4 was 31.7 million shares.

Now looking at our results for the full year, revenue for 2015 totaled $25.4 million, an increase of 32% year over year and was comprised of $17.9 million in software licenses and $7.5 million in services which includes maintenance, SaaS and PS revenues. As Jim mentioned the year-over-year growth was fueled primarily by continued adoption of our Mobile Deposit product. This growth also drove an increase in our already strong gross margins from 89% to 90%.

Total operating expenses for 2015 were $23.5 million, a decrease of $1.1 million compared to total operating expenses of $24.6 million in 2014. The decrease is primarily due to a year-over-year reduction in IP litigation expenses of $2.3 million.

GAAP net income for 2015 was $2.5 million or $0.08 per diluted share compared to a net loss of $5.3 million or $0.17 per diluted share in 2014. This is based on EPS share count for fiscal 2015 of 31.5 million fully diluted shares.

Excluding acquisition-related costs and expenses, IP litigation expenses, stock compensation and tax benefits related to the acquisition of IDchecker, non-GAAP net income for fiscal 2015 was $8.1 million, or $0.26 per diluted share compared to non-GAAP net income of $1.9 million, or $0.06 per diluted share in the year-ago period. Stock compensation was $3.4 million for both fiscal 2015 and fiscal 2014. As of September 30, 2015 our headcount was around 80 employees.

Turning to the balance sheet, it's important to note that in addition to our strong results of operations for Q4 in fiscal 2015 we also generated $1.9 million of operating cash flows during Q4 and $6.1 million of operating cash flows during fiscal 2015 representing year-over-year increases of $2.1 million and $8.6 million respectively. At the end of Q4 cash, cash equivalents and investments totaled $26.7 million, an increase of $2 million from the end of Q3. Our accounts receivable balance of $3.9 million represented a DSO 46 days for Q4.

Now turning to our guidance for fiscal 2016, we expect annual revenue to be between $31 million and $33 million for our fiscal year ending September 30, 2016. Our guidance is based on continued growth in Mobile Deposit as well as contributions from our new ID capture and verification product offering.

We are not alone in the belief that there is a multibillion-dollar market opportunity in the mobile ID capture and verification space. And this creates a significant growth opportunity for Mitek. In order to pursue these markets we expect to increase our investments in sales and marketing to drive sales of our ID product offering.

We also expect to increase our investment in R&D as we continue to make targeted hires of talented mobile and software engineers and computer vision scientists. Having said all that, we still expect our non-GAAP profit margin for fiscal 2016 to be at least 20% for the year.

For the first quarter of fiscal 2016, although we have not typically provided quarterly guidance and do not expect to do so next quarter, it is important to remember that we have delivered consistent quarterly revenues for the past 12 quarters and just put a six handle on our quarterly revenue for the first time in Q3 of fiscal 2015, reporting $6.4 million in revenue for that quarter. The Q4 revenues of $7.9 million that we announced earlier today benefited from seasonality as well as some optimal timing from Mobile Deposit. As such, we expect revenue for Q1 of fiscal 2016 to be more consistent with our Q3 fiscal 2015 revenue as Q1 is seasonally our softest quarter with each quarter growing sequentially throughout the remainder of the year as we've seen in past years.

We expect Q1 OpEx to be between $5.75 million and $6.25 million excluding all the add-backs listed in our non-GAAP net income reconciliation table which is attached to the earnings release. As a reminder, our non-GAAP net income excludes acquisition-related costs and expenses, acquisition-related expenses for amortization of intangible assets and stock compensation, litigation costs and regular stock compensation expenses.

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

(Operator Instructions) Bhavan Suri, William Blair.

Hey guys, can you hear me okay?

Yes, we can.

Great. Hey Jim, hey everybody congrats there.

Nice job and thank you for the forward-looking guidance. Appreciate that as I'm sure all the investors do.

I guess let me just touch first on the Mobile Deposit business which clearly did really well. But we've seen some convergence there obviously between signed versus live banks and that's natural to assume that's happening but we should expect that gap to continue to close given the penetration rate and actual number of banks that have signed up. Is that the right way to think about it?

Yes, you're right we absolutely have seen that gap close of the last several years and several quarters. We're getting to the point now where we've added 400 banks the last couple of quarters and 300 to 400 for several quarters before that.

So it's sort of chasing a moving target and the number of banks in any quarter has increased as well. So we've seen the gap close but I think the most importantly we continue to sign 400 new banks of quarter.

Yes, yes. And when you look at that any update on the international expansion around Mobile Deposit? How should we think about that opportunity.

Obviously in Canada you guys already have a nice presence there. But how do we think about the broader opportunity where checks maybe not in Europe but in other parts of the world are still certainly heavily used?

This is Jim and hello and I think the answer that includes the phrase compared to what. So as we look at the international opportunity in England it's about 1 billion to 1.5 billion checks annually. You might get numbers approaching that in Brazil but fundamentally the check market is in North America including Canada.

The big opportunity really for us we believe is in the commercial side. And that's why we have invested in and launched this Mobile Multi-Check Capture features that allow small businesses to capture multiple checks as opposed to having a scanner connected to their PC and the added expense and inconvenience of doing that.

So we think the number of commercial checks dwarfs the number of international checks combined here in the US alone. So we look at the bigger opportunity. So we are working in parallel for UK opportunities through partners.

We're doing the same in Brazil. Brazil has yet to pass their laws allowing image capture and transmittal of an item, a check. So again that's going to be slow growth, an opportunity that will occur over time but low compared to what we're going to experience I think this year in the commercial side.

Got it, got it. And then maybe continuing in that vein, Jim, just on the mobile check deposit before we jump to the Photo Fill and Photo Verify.

But two quick things. One, how have ASPs for Mobile Deposit trended?

And then two, have you seen any banks raise their limit on deposits? Because that's always been a little bit of a throttler on the growth of that business too.

Hi, it's Russ. On the ASP side we continue to see consistency there. I think as customers have gotten more comfortable with volumes and order bigger blocks they've leveraged volume discount.

So as we've seen revenue continue to grow we've seen some more volume discounting. But overall the pricing schedule remains pretty well intact.

Let me add to that also, we see volumes going up, we see consumption continuing to percolate into the consumer world. In addition to banks which you mentioned earlier two other key drivers are important. It's the number of consumers who are exposed to Mobile Deposit and use it and then among those consumers the amount of usage, the frequency of use.

We think those latter two are the most important in terms of driving growth. I'm going to give you an example, and to your point on raising limits we did and have seen PNC Bank recently raised limits from what was an anemic $1,000 per customer per month or per item to much greater numbers.

In fact, one of our directors who was a PNC customer recently mentioned through a fundraiser he collected a bunch of checks and personally was able to deposit them in the amounts approaching over $10,000. So we see this trend happening amongst several banks where individuals are allowed to make bigger deposits and more frequent deposits.

Secondly, we also see certain banks getting very, very clever about how they market. We love their advertising. Don't make any mistake about it, when Serena Williams hits a tennis ball and then deposits the check we love that.

But you know what, there's other things you can do and certain banks are doing this. They are having contests. One bank in particular gives out a $1 check as a promotion to introduce the idea of mobile deposits to their consumers, allowing them to not only deposit the dollar into their account which isn't the thrust but to get them involved in a contest.

Deposit the buck, get involved in the contest, you either can win $100, $1000 or $10,000 a week. So we really like this kind of very innovative marketing and to keep this product in front of customers. So again one out of seven Americans growing and we think that usage consumption will continue to grow with innovative marketing that's happening.

Great. Then turning to Photo Fill, Photo Verify just a little bit on the pipeline there.

You touched on expanding into new verticals. Any specifics about what you're thinking of government services, commerce travel would be helpful as we think about where those markets could go?

Yes, so familiar territory for us is financial services and insurance and telco and we continue to be very active in those verticals in the past. But I think the point is that our Photo Fill and Photo Verify products are truly horizontal products. And they are not limited to opening accounts or helping process transaction in just those three verticals that they can apply to any vertical.

So with that being said we are very focused on those three initially but we're definitely out in other verticals meeting with digital marketers at those companies as well. So financial services, we have a big beachhead there and a stronghold and we want to make sure we win there.

P&C insurance we've been in for a long time and wireless especially on the telco side as well. With adding sales staff we have people calling on companies in other verticals also.

Let me add to that also. We are selling this product direct to enterprise, number one.

Number two is this product will be sold primarily in the cloud as a service, although we offer on-premise as well, another key differentiator for us. And thirdly this is both native in an app and through the browser through the mobile web. So we really have some core differentiators and value add for enterprise customers.

They can consume it how they wish. So it's interesting we are leveraging our success with Mobile Deposit. The 60 million consumers out there who use this product and these experiences are pleasant, it's a magical experience, when you deposit a check it's suddenly in your bank account without having to go to the branch.

So we're getting calls from other enterprise customers and other verticals and one that we'll be announcing shortly that learned about us through their experience with one of the top three banks just as a consumer. So having that base of business, having that experience with the mobile market is allowing us to leverage it into other verticals.

So in the course of the 10 that we announced in terms of marquee Fortune 500 companies they will not all be in the banking industry. And we're proud of that and we think as Russ said this is a product that extends beyond financial services into other important B2C, e-commerce, healthcare, telecom and beyond.

That's really helpful, Jim, actually just given some of that color is great. And then one last sort of just housekeeping question for me, can you give a quick update on your status of your 10b5 on the options, just how many are left to be exercised?

Good question. I'm happy to tell you and others that I have discontinued the 10b5-1 plan. It no longer is in effect. So I will not be selling any additional shares through the 10b5-1 for the remainder of this period.

Got you. Well, guys, thanks for taking my questions. I appreciate it.

Nice job on the quarter there and look forward to another solid quarter next quarter. Thanks.

(Operator Instructions) There are no other questions at the moment. That concludes our question-and-answer session. I'd like to turn the call back to the Company for closing remarks.

Thank you, operator and thank you everyone for joining us today. This concludes our call and we look forward to talking to you next quarter.