Mitek Systems Q4 2022 Earnings Call Transcript

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June 29, 2023

There are 8 speakers on the call.

Operator

Afternoon, and welcome to the Mitek Systems Fiscal 2022 4th Quarter and Full Year Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon and welcome to Mitek's 4th quarter and full year fiscal 2022 earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia and Interim CFO, Foa de Ahmad. Before I turn the call over to Max and Foa, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its Q4 and full year fiscal 2022 financial results.

Speaker 1

That release is available on the company's website at fiteksystems.com. This call is being broadcast live over the Internet for all interested These forward looking statements may include comments about the company's plans and expectations of future performance. Forward looking statements are subject to a number of risks and uncertainties, which 10 ks and 10 Q for a complete description of these risks. Our statements on this call are made as of today, June 29, Additionally, throughout this call, we'll be discussing certain non GAAP financial measures. Today's earnings release and the related current report on Form 8 ks describe the differences between our non GAAP and GAAP reporting and present the reconciliation between the 2 for the periods reported in the release.

Speaker 1

With that said, I'll now turn the call over to Mitek's CEO, Pax.

Speaker 2

Thanks, Todd. Good afternoon, everyone. Thank you for joining us today. I'm very excited to finally report our full year fiscal 2022 results. The enlisting of BDO has enhanced our financial controls and governance and while it temporarily impacted the filing of periodic fiscal reports, We are now a stronger business.

Speaker 2

Fiscal 2022 was another record year for Mitek. Record revenue, record earnings and strong cash flow from operations. Product innovation also continued during that time. We launched Mitek's integrated identity We were also awarded patents recognizing our commitment to biometric excellence. This ongoing momentum reinforces our optimism Quickly looking at the numbers for fiscal 2022, we recorded record revenue of $143,900,000 representing growth of 20% year over year.

Speaker 2

We also generated record non GAAP net income of $40,000,000 or $0.87 per diluted share, up 17% year over year as well as strong cash flow from operations of $26,000,000 We accomplished a lot in fiscal 2022 beyond just our record revenue and earnings performance. We provided exceptional customer value to our world's leading banks, fintechs and marketplaces as they move more of their businesses Online in a secure and trusted way, Mitek continues to distinguish itself as a critical component in the fight against fraud. And during the year, We expanded the breadth of our product offerings and the markets we serve. With that now, let me touch on our two lines of business and their performance during the fiscal year. Our deposits line of business continued to grow in fiscal 2022 With revenue growth of 14% year over year, Mobile Check Deposit is used by over 7,500 financial institutions and continues to gain traction with consumers due to its convenience and ease of use.

Speaker 2

Adoption of our Check Fraud Defender product also increased As losses associated with check fraud started to skyrocket, Check Fraud Defender helps banks identify and defend enhances the detection of forgeries and synthetic checks. We added several new check fraud defender customers during fiscal 2022 and we believe it will be a growth driver for our deposits business for years to come. Before we move on To our Identity business, I'd like to provide a quick update on USAA litigation situation. While Mitek is not a party to any of USAA lawsuits. We continue to pursue our declaratory judgment action against USAA to prove that our products do not infringe Along with our efforts, there have been some positive developments in the matters related to USAA as the U.

Speaker 2

S. Patent Trial and Appeal Board, the PTAB, Has in the last 6 months invalidated 5 of the USAA patents that they have been relying on to 2 various financial institutions, 2 of which are related to auto capture. We expect the PTAB to invalidate more USAA patents in the coming months as they continue their review of additional USAA patents, including one additional USAA patent related to AutoCabin. We also intend to Continue to vigorously prosecute our case as Mitek invented all of its core technology and we believe our products Switching to identity. I'd like to take this opportunity to highlight the Tremendous market opportunity that lies within this sector.

Speaker 2

As the world becomes increasingly interconnected in digital, the need for robust identity verification solutions has never been more crucial. Financial crimes are becoming more sophisticated, posing significant risks to individuals and organizations alike. Mitek is at the forefront of addressing these challenges by providing AI and biometric identity verification solutions that not only mitigate risks, but also enables smooth and trustworthy interactions throughout the customer lifecycle. With the acquisition of HUYA in 2022 and the subsequent full integration of those platform technologies with our leading biometrics Existing computer vision solutions, we are strategically positioned to capture a substantial share of this expanding market and create significant value for our shareholders. In 2022, we launched Mitek's Verified Identity Platform, My VIP, positioned as our leading growth product, this fully integrated identity platform leverages our IP into Biometrics, capture, computer vision and data intelligence and presented to the customer in a low code implementation model.

Speaker 2

Already adopted by leading banks, MyVIP has expanded our addressable market and delivered improved unit economics. Shortly following the close of fiscal 2022, we launched MyPass, the industry's first multimodal biometric solution for Continuous identity authentication. With the onslaught of machine driven attacks, voice and case biometrics used together with built in liveness Chex becomes the strongest and most effortless teams to authenticate somebody's identity online. I couldn't be prouder of the team's vigilance in getting this product to market and I'm eager to see it implemented as quickly as possible from those who have already purchased it. MyPass further expands Mitek's footprint in this category as well as our overall addressable market.

Speaker 2

During the past quarter, I had the privilege of attending our annual European customer summit, where I had the opportunity to engage directly with our valued customers. It was an incredibly insightful experience as I heard firsthand about the value of our company is creating and the ongoing battle against digital identity fraud. From large multinational banks to government associated screening agencies, Our customers use our identity verification solution to enable effortless and safe experiences for their new and returning customers. Their testimonials serve as evidence of our commitment to combating fraudulent activities and providing Advancing our technologies and delivering even greater value to our customers in the fight against digital identity fraud. In fiscal 2022, our identity business grew 31% year over year.

Speaker 2

Our product achievements and Customer wins in fiscal 2022 reaffirm our leadership position and I would like to thank every Mitekian worldwide for their unique contributions to our success. Together, we will continue delivering significant value to our customers. Before closing, please note that we are planning an Investor Day event for later in the calendar year. This will be an opportunity for interested parties and the significant growth opportunity for our identity products. Now, I'll turn the call over to Huwad to to discuss the financial results in more detail.

Speaker 2

Following Hua's remarks, we will open the call for questions. Hua, please go ahead.

Speaker 3

Thanks, Max, and thank you everyone for joining us today this afternoon. I will start with Q4 revenue and operating results. For Q4 of fiscal 2022, Micron generated $38,800,000 of revenue, a 17% increase year over year. Software and hardware revenue was $19,800,000 up 11% year over year. The increase in software and hardware revenue is primarily due to the growing contribution IDR and D as IDR and D had another strong quarter and continued mobile deposit reorders.

Speaker 3

As such, we are pleased with the continued progress in the deposit business. As we have noted previously, IDR and D revenue in nature and as part of our identity business. However, since it's offered on prem, we put that revenue into software line for accounting purposes. Services and other revenue, which includes contractual SaaS revenue, maintenance and professional services revenue was $19,000,000 for the quarter, up 22% year over year. Notably, our transactional SaaS revenue increased 31% year over year to 13,400,000 Driving this growth in transaction SaaS revenue was increased mobile verified volumes as well as the addition of the HUDS SaaS revenue.

Speaker 3

For Q4 'twenty two, deposits revenue increased 7% year over year to $22,600,000 driven by global deposit reorders. Identity revenue increased 34% year over year to $15,200,000 driven by addition to our new SaaS revenue and strong contribution from IDR and D and growth in our mobile verify product line. We delivered software and hardware gross margins up 98% for the quarter. Gross margin on service and other revenue was 74% for the quarter and total gross margin for the quarter was 87% compared to 90% Total GAAP operating expenses including cost of revenue were $35,800,000 compared to 29.3 This increase in Q3 investments to grow our identity business and additional costs associated with the acquisitions of IDR and T and Sales and marketing expenses were a quarter of $10,000,000 compared to $8,400,000 a year ago. R and D expenses were $8,300,000 compared to $8,200,000 last year and our G and A expenses were $8,000,000 compared to $6,100,000 a year GAAP net loss for the quarter was $300,000 or a loss of $0.01 per share.

Speaker 3

Our diluted share count was 45,300,000 compared to 46,200,000 a year ago. Now turning to our non GAAP results. GAAP net income for Q4 was $9,000,000 or $0.20 per share, a decrease of 11% year over year as a result of Additional headcount and other expenses from the acquisition agreed. We believe non GAAP net income provides a These will measure our company's operating profitability and cash flow by excluding amortization and acquisition related costs, Stock compensation, one time and non recurring litigation expenses, amortization of debt discount and issuance costs, restructuring and related tax impacts of those items. A reconciliation of GAAP to non GAAP presentation is provided in our press release earlier today.

Speaker 3

Now looking at results for the full year fiscal 2022. Total revenue was a record $143,900,000 an increase of 20% year over year on strong growth in the deposit business that grew 14% and the growth of our identity product lines that grew 31% over fiscal 'twenty one. Software and hardware revenue was $72,900,000 up 21% over the prior year due primarily to the growth in mobile deposits and our check fraud dependent product lines as well as the growth in ID R and D. As a result, our gross margin increased 200 basis points from 96% in fiscal 2021 to 98% in fiscal 2022. Services and other revenue was $71,000,000 for fiscal 2022, an increase of 19% over $59,700,000 in fiscal 2021.

Speaker 3

This increase is due primarily due to growth in transactional SaaS revenue, which increased 25% to 50,300,000 Gross margin on services and other revenue was 74% for the year compared to 80% for the comparable period in fiscal 2021. For our full year fiscal 2022, deposits revenue increased 14% to $85,800,000 driven primarily by Continued adoption of mobile deposits and check fraud dependent product lines. Identity verification revenue increased 31 percent to $58,100,000 driven by 25% growth in transactional revenue, SaaS revenue and inclusion of additional SaaS revenue from acquisition of Luyu. Total GAAP operating expenses For fiscal 'twenty two, we're $132,600,000 an increase of 24% compared to total operating expenses of 106 point $5,000,000 in fiscal 2021. This increase is due to additional investments made throughout the year to fuel our growth in the identity business GAAP net income for fiscal 2022 was $3,000,000 or $0.07 per share compared to GAAP net income of $8,000,000 or $0.18 per share for fiscal 2021.

Speaker 3

Non GAAP net income increased 16% for the year to $39,600,000 or $0.87 Again, please refer to the reconciliation of GAAP to non GAAP presentation in our press release. Fully diluted share count for fiscal 2022 was 45,800,000 for both GAAP and non GAAP EPS. Now turning to the balance sheet. We generated $10,300,000 in cash flow from operations during the quarter and $26,400,000 for the full year, bringing our total cash and investments to $101,000,000 as of September 30, 2022. As noted recently, we continue to generate meaningful cash flow from operations.

Speaker 3

Our cash and investments at the end of March 31, 20 increased by $13,500,000 to $114,500,000 Moving on to guidance. We are reiterating the fiscal 2023 guidance we provided earlier this month. We expect revenue for the fiscal year ending September 30, 2023 to be in the range of $162,000,000 to $165,000,000 an increase of approximately 14% year over year from the midpoint of the guidance range. In addition, Mitek expects its full year fiscal 2023 non GAAP operating margin to be in the range of 29.5 percent to 30.5%. Importantly, we are pleased with our results, which Record revenue for fiscal 2022 as well as record non GAAP net income.

Speaker 3

We look forward to continue to deliver industry leading

Operator

Our first question is from Mike Grondahl with Northland Securities. Please go ahead.

Speaker 4

Hey, guys. In both MobileCheck and Mobile ID, could you talk a little bit about Transaction activity and trends and pricing, just trying to get A feel for volume and price trends in both areas.

Speaker 2

So for the period that we're talking about here FY 2022 In both Mobile Deposit as well as Mobile Verify, Transaction volumes increased, right? So we continue to see increased transaction volumes from existing customers and then the addition of New customers for the identity verification. And for mobile check deposit or yes, for For Mobile Check Deposit similarly, although as you know, Chad, Mike, that business can be a little lumpy in when customers reorder and when those orders We did rebuild the tank. I think in the case of mobile deposit, we know that we've continuously Tried to push take price and be able to push price increases. We've been methodical about that.

Speaker 2

I don't think it's no surprise. Our partners, customers push back on that pretty hard, but we've been able to do it consistently. And that has continued. You see that Reflecting in addition to the adoption of mobile banking and increased usage of global check deposit, you're seeing the other side of that

Speaker 4

Got it. And then are you breaking out the number of banks you have Signed up for Check Fraud Defender or the revenue in the Q4 of 'twenty two?

Speaker 2

No, we're not. And you probably won't see us do that for a while. I mean, we continuously increase the number of Customers, but it's coming off a very small base. We're watching some customers adopt and jump straight into the network and It's just the online offering, some are starting with a small on premise implementation to kind of get their arms wrapped around it. But I think We'll talk about it when we drop the queues as well.

Speaker 2

We continue to see just a big, big interest in that product. Pipelines are strong. We do testing with customers, pretty elaborate tests with customers and We've got a number

Speaker 1

of those

Speaker 2

underway. I think as we've talked before, Mike, just check fraud has It's loaded in the course of the last 18 months. So this is a very big topic for retail banks.

Speaker 4

Sure. Yes. No. Hey, Ann, we're just we're trying to track it. So the number of banks or revenue, I guess, we'll keep bugging you.

Speaker 4

Lastly, what should our expectations be for the timing on the 10 ks And then December March.

Speaker 3

Yes, Mike. So I think we've released our Preliminary numbers now, not a bit. We'll follow it up with a 10 ks over the next week to 10 days. We're talking about We just need to make sure that we get everything buttoned out, but we felt comfortable releasing our numbers Today, it's to you guys. In terms of the SKU, that process will continue once the K is filed and we feel that at the Few weeks.

Speaker 3

I can't be more precise than that at this point. But it's weeks, not months and we'll follow it up. And The idea for us, our expectation is to start becoming current on our filings Should also that in its entirety including Q3. So that's the expectations right now. I can't be more precise on

Speaker 2

We are looking forward to getting back on the regular schedule.

Speaker 4

Sounds good. Sounds good. Hey, thanks guys.

Speaker 2

You got it, Mike.

Operator

The next question is from Jake Roberge with William Blair. Please go ahead.

Speaker 3

Hey, Max, could you just talk about how

Speaker 5

the MACR is impacting each of your business units more specifically? From your comments, Seems like ID verification may be impacted a little bit more than Mobile Deposit, but would love to hear kind of the puts and takes that you're seeing in each business as it relates to the macro.

Speaker 2

Yes. So I don't think in the timeline that we're talking about here, FY 'twenty two and September, any quarter, There's probably not a lot to talk about from the macro impact. A little bit on the identity, We had a very relative to our competitors in the identity space, we had a very little exposure to crypto and it was at June of 2022, July and then kind of the crypto winter that followed from there. We had a handful of crypto customers who watched them retrace pretty hard, But nothing more kind of pointing out. Since then, when we get into the Qs, definitely the law has changed.

Speaker 2

And In some regards, we just talked about check fraud defender and all the things that are happening with check fraud. I think that's been a positive on our deposits business. On the identity business, if you're an interest sensitive business like mortgage refinancing or HELOCs and things like that, We've seen this be tough on those businesses. So more to come as we drop those cues though, Jake.

Speaker 3

Okay, helpful.

Speaker 5

And then just wanted to touch on generative AI. It seems to me like there could be some secular tailwinds around AI and how that Could impact the fraud and identity universe, but would love to get your thoughts on that and then how you could plan to integrate the technology into your core platform?

Speaker 2

Sure. So much ink has been spilled on GenAI. I want to be mindful that I don't know that

Speaker 3

I have a lot

Speaker 2

to add Generally, it's clearly going to be transformative. In our own business, we see it through 2 lenses. The first is what we're being able to Using the technology, I mean, we've got a very long and robust history with machine learning and AI. So this is just built on top of A very deep base of that knowledge and experience our engineers and computer scientists have. So our ability to use that Model building, model testing and that's already underway.

Speaker 2

I mean, we see it with our biometrics teams. We're seeing it with the core identity teams around documents, Obviously, the faces of voices. So in that regard, I think there's some very interesting things for us to increase pace, velocity of development, New ideas that can be tested much more cheaply or much more quickly. That's for us internally and Things that then result in customer facing offerings. I think the bigger challenge just generally not just For banks, but for anybody out there, right, these same tools can be used as weapons and we anticipate we're already seeing The deep fakes and the kind of things that can happen with voices and faces and every other image and video, all the stuff that you're seeing every day, That can be applied towards trying to create identity fraud with banks, with other financial institutions.

Speaker 2

And so I think it just puts a bigger focus and more meaning on having the right defenses and partnering with the right organization like MiFx.

Speaker 5

Yes, yes, agreed. Very helpful on that and interesting opportunity as we move forward. And then if I could just sneak one more in. Understand you've been working a lot with your consultants and auditors, but what is your dialogue with the NASDAQ look like throughout Process and what type of feedback have they been providing you on regaining compliance just over the past few weeks since we passed over that June 12 timeline?

Speaker 2

Sure. Well, Jake, obviously, NASDAQ is the market that we sit on, the SEC is the regulator and Being current with the SEC is a requirement for the NASDAQ. So the NASDAQ has a very rigorous and structured process under which we're currently working. I think we're working in a very positive and constructive way with them. But we're late, right?

Speaker 2

And so We brought in advisors, as you mentioned. At this point, we have high confidence based on the performance of our business, The fact that we are cash flow positive, we get cash in the bank, we continue to grow. There are no allegations of misconduct here. We have high confidence that we will regain that filing status. Ultimately, the NASDAQ is the arbiter, the ultimate arbiter of that.

Speaker 2

But

Operator

The next question is from Stephanie Moore with Jefferies. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for the update. I wanted to touch on your target for your ID segment and the target to turn a profit In 2024, the second half of twenty twenty four, could you maybe talk a little bit about what you need to see for that target to be achieved? What needs to happen maybe for that to happen earlier or on the flip side, what could delay you from actually achieving this target would be helpful? Thanks.

Speaker 2

Sure. Well, thanks for the question, Stephanie. And for those who maybe are a little newer to the story, we've been working we've got a very profitable unit Deposits and we want to get our identity business to that as well. We've stated that by the end of fiscal 2024, we'd like to be able Yes, to breakeven with that business, with the identity business, looked at in isolation and we believe we're on path, but still the current intent here. The things that could make that happen sooner is the top line growth happening faster.

Speaker 2

The things that could maybe take longer is We didn't get the top line that we're currently forecasting and that we're guiding to here in the current guidance. When I kind of think about as we've laid those markers down and as we've worked to operate the business both in our budgeting and then day to day discipline of living those budgets, Probably the biggest thing is the world's changed pretty considerably in the course of the last 5 quarters relative to just uncertainty in the macroeconomic Circumstance. So I think that's probably the biggest unknown or biggest question mark.

Speaker 6

Great. No, that's really helpful and appreciate it. And I know that, the last time we spoke a couple of weeks ago, I think you touched a little bit about Maybe within the ID business, a slight shift in strategy where you're offering your customers more of a End to end platform, kind of managing their entire the lifecycle. Could you maybe talk a little bit, I'd love to Here, because I think that's a it's a really interesting point. If you could kind of speak to any cross sell opportunities you think this opens up or pricing or why this You've kind of come to terms that this is in the incremental kind of right strategy versus maybe what you were originally thinking about as you were moving into IT space and I'd love to hear kind of the opportunity there.

Speaker 6

Thanks.

Speaker 2

Sure. Thanks. Well, I think this is not some sudden Change or anything like that. I mean, we've been working towards this for the better part of 3 years. It was the underpinning of the acquisition of IDR and D from a world leading biometrics capability and liveness and then it was really the foundational associated with the HUYA acquisition and capturing a platform and Easy to manage no code, low code platform for orchestrating multiple signals not just for onboarding new customers and opening new accounts, but those In life, the life cycle use cases of persistent identity for knowing your customer and being able to do any laundering checks well after somebody signs up for a new account or a new card or something.

Speaker 2

So that's been the strategy here going For years, I think we've been able to fine tune it as we go. That's where the market is. That's where the market is going. And I think we're very fortunate to have not Captured incredible capabilities with the talent and the teams that go with that. And you'll see us continue to leverage that, continue to evolve that strategy so that it's Beyond and not just beyond identity, but identity and fraud and you're starting to see that The first signals that we're getting as a result of our deposits business and being able to intersect our deposits business with Check Fraud Defender as a broad signal with our identity business.

Speaker 6

Great. Really appreciate the time. That's all for me. Thank you.

Speaker 2

Thanks, Stephanie.

Operator

The next question is from Allen Klee with Maxim Group. Please go ahead.

Speaker 7

Good afternoon. Can you Give us some color on how you think about the relative growth rates of the deposits versus The Identity business in fiscal 2023?

Speaker 2

Sure thing, Alan. We're probably not going to break the guidance Down by line of business, but I'm happy to give you a sense of it. We've expected that and I think we're on record and it's been a while since we've talked about it, but We're on record relative to the deposits with Check Fraud Defender and many of the new things that have been introduced. And we see that business as being a high single digit, Low double digit growth business. Obviously, we just talked about fiscal year 2022 at 14% growth, so very much on the high end of that range.

Speaker 2

But I think we stand behind that. We anticipate that the traditional check business will slowly Modulate relative to its growth, it will continue to grow, just maybe it won't grow as fast as it did in 2021, 2022 and that will be offset by the Continued uptake of Check Fraud Defender. So that's on the deposit side. On the identity side, we definitely see the market For identity being a little different, not just for us, but just the market itself being a little different today than it was a year, year and a half ago. But the idea that we can deliver High teens growth in that business in FY2023.

Speaker 2

I think that's a good number, maybe a good range to have in your mind.

Speaker 7

Thank you. And when we look at operating expenses, How do you think about to the extent that you're kind of positioned That you've already spent for some future growth or do you think that this continues to kind of grow kind of in track with revenues?

Speaker 2

Yes. Without getting into very specific to maybe Boa has something to add here. But as we get bigger with scale, we should We've done a lot to integrate both the IDR and D and the HUYA Teams, products, systems, so starting to get some of the synergies and starting to see that kind of make its way through P and L. But as we continue to grow the business, we expect that we're going to be able to take more and more of the bottom line and be able to expand operating margins.

Speaker 3

And just to kind of add a little bit, I think you see that in our guidance for 2023, like our Operating non GAAP operating margin guidance is 29.5% to 35%. And on the high end, it is higher than where we ended 2022 at. And we're still obviously growing the business, Consolidating and going through consolidation of the LEO business And the synergies that will come from that, so they'll have to be included in it. But despite all of that, we're projecting slightly higher

Speaker 7

Thank you. Last question is, do you think once you've caught up on your financials That you might be able to release your Qs and Ks on the same day that you report your earnings?

Speaker 3

At this point, I would set that expectation. I think we will do that sequentially. And that's just the way the auditor process will work. They'll complete all their work for fiscal 2022 and then they'll move to 2023. So we'll do that sequentially.

Speaker 3

As I said earlier on the call, we're talking about week 10 days for the case and then weeks after that for The Qs, we'll allow the auditors to finish their work and complete and then we'll release those and with the expectation that we get back to the normal cadence Yes, starting in Q3 and thereafter.

Speaker 7

Okay. Thank you very much.

Speaker 2

Thanks, Alex.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Todd Kehrli for any closing remarks.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you again next quarter. Our call has concluded and have a wonderful day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now

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