Mitek Systems Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 19, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to Mitek's Fiscal 2023 4th Quarter and Full Year Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Mitek's fiscal 2023 Q4 and year end earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia and CFO, Dave Lyle. Before I turn the call over to Max and Dave, I'd like to cover a few quick items. Today, Mitek issued a press release announcing its financial results for its fiscal 2023 Q4 and full year.

Speaker 1

That release is available on the company's website at 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 want to remind everyone that on today's call, management will discuss certain factors 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 the company's plans and expectations of future performance.

Speaker 1

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 ks and 10 Q for a complete description of these risks. Our statements on this call are made as of today, March 19, 2024, 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. 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 two for the periods reported in the release.

Speaker 1

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

Speaker 2

Thanks, Todd. Good afternoon, everyone. Thank you for joining us today. I want to extend a warm welcome to our investors, employees, customers and partners joining us today. Thank you for your continued support and trust in Mitek.

Speaker 2

I'm excited to provide insights into our fiscal 'twenty three performance, spell out our strategic direction going forward, and then hand the call over to Dave Lyle, our new CFO to provide more financial details. At Mitek, our mission is clear. We help regulated businesses say yes to more customers, more deposits, and more transactions with increased intelligence and customer safety. We achieved this by providing unique signals that seamlessly bring identity transaction intelligence together. Over the past decade, we've diligently developed solutions in pursuit of this mission.

Speaker 2

Today, leveraging our most current applications of AI and machine learning, we are proud to enable over 7,900 organizations with new levels of security and control while protecting the digital consumer from the most sophisticated fraud threats. I'm very proud of our 200 machine learning and AI engineers, data scientists, developers and CloudOps team members who are dedicated to ensuring that our award winning product offerings remain at the forefront of the industry and their vital role in developing solutions to combat evolving fraud and enhanced digital security. Thank you all my technician for your ongoing commitment to our mission and the incredible work you do. Before we discuss our financial results for fiscal 2023, I'd like to introduce Dave Lyle, our newly appointed CFO. Later in the call, Dave will provide further insights into our financial performance and outlook for fiscal 2024.

Speaker 2

Dave joined us in early January and has already made a substantial impact. With his broad experience across multiple business functions, Dave brings invaluable expertise to our team. We're thrilled to welcome him aboard. I'd also like to express my gratitude to Fuad Ahmad, who served as Mitek's Interim CFO for a little over a year. Thank you, Fuad, for your dedication and contributions during this critical period.

Speaker 2

Turning to Mitek's record performance in fiscal 2023, I'm pleased to announce that we achieved solid growth across both deposits and identity, leading to total revenue growth of 19% year over year. Additionally, we achieved non GAAP net income of $44,400,000 and generated $31,600,000 in cash flow from operations further strengthening our balance sheet. First, looking at our identity products, revenue grew 17% year over year in fiscal 2023 attributed to strategic efforts in customer acquisition and expansion within our existing customer base. Our net revenue retention rate for fiscal 2023 was approximately 117%, which underscores the value of our solutions delivered. Notable customer expansion included Lloyd's, Chase and NatWest.

Speaker 2

We won over 100 new identity customers in fiscal 2023 including major names like Nationwide, Horizon, Virgin Mobile 2 and Telefonica. Nationwide Building Society was a very strategic win and a competitive takeaway. This British cooperative financial institution is in the process of rebranding under the slogan, A Good Way to Bank, and its primary goal is to differentiate itself based on user experience and security. Mitek's mission and approach are very well matched to this rebranding and we are confident it is one of the reasons we secured the business. Nationwide is implementing our solution in multiple use cases and has taken a phased approach starting with a remediation project and expanding to device binding and onboarding.

Speaker 2

The device binding and step up authentication involves all app users as a replacement for card readers. Using our multimodal biometric solution MyPass, they have already enrolled 120,000 biometric faces and all 5,000,000 app users will be invited by April of this year. Verizon, another significant win, was also a competitive takeaway. Verizon will leverage our identity verification and face comparison tools to support its product operations and customer experience teams. Initially with their B2B business and soon moving to support the in store consumer.

Speaker 2

Access to digitally enabled services continues to explode and this accelerating shift to digital creates an immense challenge for organizations as they strive to balance customer experience with financial risk. As digital grows, so do the opportunities for fraud. And as long as criminals can cleverly exploit weaknesses and an institution's ability to distinguish a legitimate customer from an imposter, this threat will continue to grow. As such, we see customer interest, engagement and inquiries dramatically increasing. According to industry analysts, the identity market is growing between 14% 16% annually and we have the opportunity to take market share given our unique proprietary industry leading biometrics offerings and orchestration platform.

Speaker 2

Our channel partner investment has also yielded returns during the year. With Experian, our long standing partner in North America, the UK, and Europe growing their Mitek business by 17% year over year across all regions and we believe we are only just scratching the surface with them. Our most recent win with Experian is in the government healthcare in U. K. And Experian is also one of the biggest partners in the telco space, particularly in Europe.

Speaker 2

Partnerships like Experian are pivotal in our efforts to support new verticals including government, telco, healthcare, each which presents a significant growth opportunity. As such, we continue to add new channel partners most recently with the industry leaders like Equifax and NICE Actimize. By leveraging these alliances, we aim to establish a strong foothold in new geographies driving expansion and enhancing our global presence. Now let's shift our focus to the non financial milestones achieved during the fiscal year across each line of business and outline our FY 'twenty four priorities. We see a large and growing opportunity in the intersection of fraud and identity, especially in regulated environments like financial services, mobile operators, iGaming and healthcare.

Speaker 2

The role AI is playing in changing and accelerating regulation further benefits Mitek and our solutions. As a result, our growth products including our My VIP platform and the AI driven biometric solution MyPass have seen growing adoption. Today, integrated identity platforms are emerging technologies and essential tools that reshape how we secure and authenticate identities in the digital world. These platforms combine various verification methods, streamlining the process and enhancing security for our customers. The market discerns this by categorizing the orchestrators and the orchestrated.

Speaker 2

MyVIP is a leading orchestration solution in the market today through its highly differentiated offering. Beyond traditional static ID checks and physical document verification, our orchestration platform incorporates proprietary biometric analysis and liveness inspection in combination with highly personalized external data signals to ensure the legitimacy of identities, thereby preventing synthetic and computer generated frauds. In the ongoing battle against online fraud, deepfakes and injection attacks, our biometric components which are part of MyVIP play a pivotal role in enhancing security and safeguarding digital transactions. Our IDR and D biometrics revenue has grown substantially since we acquired IDR and D in May of 2021 as use case continue to expand and the need for continuous authentication becomes mainstream. Voice biometrics expedite and secure customer authentication, especially when combined with face biometrics.

Speaker 2

Face biometrics also strengthen fraud prevention during a customer's digital onboarding by verifying a user's face against the government issued ID, thus thwarting attempts to bypass screening processes using manipulated images. And other spoofs by spam bots and bad actors to create or access online accounts, thereby significantly enhancing security. Leveraging all these proprietary technologies, in fiscal 2023 we introduced our exclusive 4 point multimodal biometric solution, the only one of its kind, utilizing the combination of face biometric, face liveness, voice biometric, and voice liveness technologies. This innovative solution, MyPass, seamlessly captures and verifies these biometrics simultaneously, providing near instant authentication for digital users. Initially praised by expediting and securing customer authentication, voice biometrics are being challenged by the emergence of generative AI voice clips known as Vishing or voice deepfakes, which malicious actors exploit to infiltrate financial accounts.

Speaker 2

Our ID R and D labs were quick to respond and early this year we introduced ID. Live voice clone detection to protect against bad actors impersonating their victims to commit fraud and crime. With just 3 seconds of a person speaking, the product can deliver a score indicating the likelihood that it was created using cloning technology. It can detect clone attacks that use replay or advanced software and hardware based hacking methods. In a world of Gen AI, large language models and transformers where deep fake impersonations are proliferating so rapidly, voice clone detection plays an essential role in preserving trust between people and technology and we are proud to be at the forefront of this innovation.

Speaker 2

According to Gartner, the number of deep fake attacks worldwide in 2023 was 10 times the number detected in 2022. With our leading industry biometric solutions preventing deepfakes, we expect biometrics and liveness to be a significant revenue growth engine for Mitek for years to come. We're also very excited about how our identity product portfolio reinforces our deposits business. Our end to end orchestration platform MyVIP is now serving both deposits and identity and we're seeing our pipeline of potential new business increase as we provide a comprehensive suite of machine learning and AI based tools that can help organizations fight fraud. Now let's discuss our deposits business and where we see it going in fiscal 'twenty four and beyond.

Speaker 2

In fiscal 'twenty three, we saw our deposits in revenue increase substantially, growing 20% year over year. We recorded over 1,200,000,000 mobile check deposits in fiscal 2023. Notably, 8,000,000,000 checks were deposited in North America throughout the year. Analysts forecast the sustained demand for check deposit services over the next decade with an estimated 5,000,000,000 checks per year still being deposited 10 years from now, we plan to capitalize on the increasing adoption of mobile check deposit among consumers and small businesses, as well as to continue to implement price increases as the leading provider of this solution. Now let's talk about the momentum we are seeing with Check Fraud Defender or CFD product offering.

Speaker 2

1 of our most exciting prospects for growth over the coming years. Banks are getting crushed by check fraud which according to the recent NASDAQ report has eclipsed credit card fraud in the United States. CFD is making significant strides in combating check fraud with the potential to save banks 1,000,000,000 of dollars in losses. We believe CFD has the potential to contribute $200,000,000 in annual revenue within the next 5 to 7 years. Let me walk you through how we got there.

Speaker 2

As a recent Boston Fed article noted, one industry analyst estimates over $24,000,000,000 in check fraud losses in 2023. We believe CFD could help banks conservatively avoid around 40% of those losses based on our unique ability to visually detect fraud through machine learning. That would imply that CFD could potentially save approximately $10,000,000,000 in check fraud losses just this year. We believe a reasonably healthy bank friendly ROI to combat this size of check fraud would be in the range of 10 to 1, meaning we would believe banks would be willing to invest $1,000,000 to prevent $10,000,000 in check fraud losses. That would allow for a $1,000,000,000 annual serviceable addressable market or SAM or our check fraud defender product.

Speaker 2

With less than a handful of potential competitors today, we believe a 20% market share should be achievable, especially given our leadership position and strong reputation in check processing. That would equate to 200,000,000 dollars in annual revenue opportunity for Mitek within the next 5 to 7 years. And remember, check fraud is growing rapidly, so these estimates do not consider the growth over the coming years. Also important to note is the potential bank savings don't include additional operational efficiencies these banks will realize by using CFD and our new mind control product, our latest achievement in empowering banks to control check fraud by integrating CFD with MyVIP. Productivity gains using MyControl are significant.

Speaker 2

In the review of potentially fraudulent check, agents can reduce what would have taken them as long as 10 minutes to just 90 seconds using my control. Also, CFD drives down false positives so that banks will spend more time looking at bad checks rather than good checks. We launched CFD 2 years ago to help banks solve this growing problem. In fiscal 2023, one of our customers reported saving over $16,000,000 in less than 6 months using CFD to prevent fraudulent check losses and reduce the expense of dealing with this exploding problem. Today, CFD boasts a select group of clients including 2 of the top 10 banks in North America.

Speaker 2

Our dedicated sales team and partners are diligently pursuing the top 100 financial institutions aiming to onboard dozens more as CFD clients by the end of fiscal 2024. Despite the deliberate pace inherent in the regulated banking sector, our progress remains promising driven by the substantial cost savings our CFD solution can deliver. Encouragingly, our pipeline of potential customers continues to expand indicating a growing market interest in our offering. Contributing to the pipeline are our channel partners. The channel has been the trusted blueprint for selling mobile deposit and we are thrilled with the momentum we are starting to see in the channel with CFB.

Speaker 2

Within a few months of onboarding our new partner Abrigo, we have already closed a couple of CFD deals. CFD is just the beginning of a very large opportunity for Mitek. MyControl is the latest of many products being built on MyVIP's low code, no code platform for fast and simple implementation that we believe can drive revenue growth for us over the next several years. We are already planning follow on products to address other growing market opportunities in the retail bank payments, wire and peer to peer space, which we believe is a substantially larger opportunity than even CFD. I want to reiterate the growing the important growing intersection of fraud and identity.

Speaker 2

CFD is leading the way into adjacent opportunities for Mitek to help with new AI driven anti fraud and identity capabilities. By leveraging our unique access to rare and privileged customer data and transaction intelligence, we can deliver additional differentiated value to our customers and drive increased shareholder value. In summary, Mitek is well positioned for the continued growth in both revenue and profitability. We are capitalizing on a large growing end markets at the nexus of big secular trends in AI, identity and fraud. Mitek is delivering cutting edge machine learning and artificial intelligence tools empowering organizations to combat fraud and enhance trust and convenience across every digital interaction through our leading additional growth.

Speaker 2

I'll now turn the call over to Dave to discuss the financial results in more detail. Following Dave's remarks, we'll open the call for questions. Dave, please go ahead.

Speaker 3

Thanks, Max. I couldn't be more excited to be here at Mitek. It's a privilege to join a company that is not only a pioneer and a category creator in its space, but has also established itself as a clear market leader while demonstrating consistent revenue growth and profitability. I'm looking forward to continuing my work with the team towards growth for years to come. I'm also looking forward to getting to know our shareholders and sell side analysts.

Speaker 3

With that said, let me take you through our financial results for fiscal year 2023, which ended September 30, 2023. Looking first at revenue, it would be valuable to spend a few minutes describing how we talk about some of our revenue streams for those of you who are new to Mitek like myself. Our 10 ks filings talk about 2 revenue categories, software and hardware and services and other. On the software and hardware revenue side, we include mainly software term license revenue and to a limited extent hardware scanner boxes and on premise appliance products revenue. Our deposits products contribute the vast majority to that revenue category as the Mobile Check deposits product is primarily an on premise software license model.

Speaker 3

The only deposits product that will be primarily in the services and other revenue category is our Check Fraud Defender product. On the services and other revenue side, we include transactional SaaS revenue, maintenance and professional services revenue. Our identity products have historically contributed the vast majority to that revenue category as almost all identity products except our IDR and D biometrics and some legacy hardware products are SaaS delivered as they are cloud hosted solutions to our customers. Our Check Fraud Defender product revenue is also primarily a SaaS for fiscal year 2023. Top line revenue for the fiscal year grew 19% year over year to $172,600,000 just above the preliminary revenue number we announced on December 7 last year.

Speaker 3

Software and hardware revenue grew 21% to $88,400,000 in fiscal year 2023, primarily due to an increase in sales of mobile check deposit products. Services and other revenue grew 17% to $84,200,000 in fiscal year 2023. This increase was primarily due to strong growth in SaaS revenue from our HUYA and My VIP products as well as increased maintenance revenue associated with MobileCheck Deposit software sales. Shifting to revenue for our 2 major product categories, deposits and identity, let's start with deposits. Deposits revenue grew 20% year over year in fiscal 2020 3 to $104,100,000 This growth was driven primarily by strength in mobile check deposit reorders and additional adoption and usage across the banking system.

Speaker 3

Please note that 75% of deposits revenue was in Mitek software and hardware revenue, 25% was in services and other. Identity revenue for fiscal year 2023 grew 17% year over year to 68,400,000 dollars driven by our SaaS products revenue. Approximately 15% of identity revenue was in Mitek's software and hardware revenue and 85% was in services and other revenue for fiscal year 2023. Moving on to gross margin, the total gross margin for fiscal 2023 was 86.7%, up 50 basis points from 86.2% in fiscal 2022. We continue to deliver strong hardware and hardware gross margins of 98%, while on services and other revenue our gross margin was 74% for fiscal year 2023.

Speaker 3

Operating expense for the fiscal year 2023 was $134,000,000 compared to $112,600,000 last year. Non GAAP operating expense for fiscal 2023 was $96,400,000 compared to $80,500,000 last year. The year over year increase was primarily related to fees associated with our delayed filings, including audit, accounting and legal support and to a lesser extent, the addition of resources to our corporate services team to accommodate our scaling business. Excluded from our non GAAP operating expenses are about $29,500,000 of non cash accounting items and $8,200,000 dollars in non recurring cash items. The non cash items were comprised of $19,000,000 for amortization of purchased intangibles and $10,500,000 in stock based compensation expense.

Speaker 3

The cash items were comprised of $4,000,000 mostly associated with non recurring auditor fees and about $4,200,000 related to restructuring, executive transition and litigation expenses. Please see our earnings release for a more detailed reconciliation. Our non GAAP operating income grew 20% in fiscal 2023 to $53,200,000 or a 31% non GAAP operating margin. Excluded from non GAAP operating income was $37,700,000 in expenses as described above and are detailed in our GAAP to non GAAP reconciliation in today's earnings release. GAAP net income for fiscal year 2023 was 8 $1,000,000 or $0.17 per diluted share versus $3,700,000 or $0.08 per diluted share in the prior fiscal year.

Speaker 3

Non GAAP net income for fiscal year 2023 was $44,400,000 or $0.95 per diluted share versus $40,500,000 or $0.88 per diluted share in the prior fiscal year. Our diluted share count for the year was 40 6,500,000 compared to 45,800,000 shares a year ago. Turning to our balance sheet. Our cash and investments grew from $101,000,000 at fiscal year end 2022 to 134,900,000 at fiscal year end 2023. Dollars 31,600,000 of that $34,000,000 growth was provided by our cash flow from operations.

Speaker 3

Moving on to guidance. We are reiterating our fiscal year 2024 revenue guidance range of $180,000,000 to $185,000,000 or a 6% growth rate at the midpoint of the range and a 12% growth rate if we backed out the future year license revenue from the large one time mobile deposit deal from fiscal 2023. More specifically, material growth rates are expected this year for Check Fraud Defender as it moves from its nascent stage to accelerated growth, coupled with strong expected growth from the flagship identity platform MyVIP, MyPass and our ID R and D biometrics products. This growth is expected to be somewhat offset by revenue declines associated with our retirement of legacy iCAR products as they move towards end of life. It's also important to note that we won a large mobile check deposit customer in fiscal Q1 of 2023, which creates a difficult year over year comparison.

Speaker 3

From a quarterly trending perspective, we expect top line revenue to be lowest in fiscal Q1 ramping in Q2 and again in Q3 with Q4 expected to be in the range of Q3 revenue. Quarter to quarter changes due to deal timing may influence these expectations. From a year over year perspective, we expect most of the year over year revenue growth quarters to be in the fiscal Q3 Q4. We continue to expect our identity business to reach standalone profitability on a fully burdened basis in the 4th fiscal quarter. This will be driven by revenue growth as well as additional operating leverage in the sales, marketing and R and D functions.

Speaker 3

With regard to taxes, we to taxes, we expect to be a taxpayer in fiscal 2024 with a tax rate in the 25% plus or minus range of GAAP pre tax net income. In addition, we are reiterating our fiscal full year 2024 non GAAP operating margin guidance range of 30% to 31%. Moving to our capital allocation plans, we continue to generate solid cash flow and strengthen our balance sheet in fiscal 2023 and we expect to continue to generate cash in fiscal 2024. As Max has previously said regarding acquisitions, with our market leading product portfolio in place, we do not need to do additional acquisitions to further penetrate the significant market opportunities we have in front of us. Our team with our Board of Directors continues to assess all capital allocation alternatives routinely.

Speaker 3

As we are currently in a blackout period while we prepare our fiscal quarter 10Q filing, we are limited in the actions we can take until we are outside of our blackout period. Before I conclude, I would like to touch on where we are with our SEC filings and our expected Investor Relations activity during fiscal 2024 following those filings. With the fiscal year 2023 10 ks filing behind us just out in the past 20 minutes, our team with our auditors are already working diligently to get current on our 10 Q filing for the 1st fiscal quarter of 2024 ended December 31, 2023. The 1st fiscal quarter 10 Q filing was due February 9. Based on last year's 10 Q filing timing, we believe it should take about a month to file the fiscal first quarter 10 Q, which would put us sometime in mid April, assuming no delays arise.

Speaker 3

We would then jump into our normal cycle to deliver the 2nd fiscal quarter 10 Q in May. If we are able to achieve this timeline, we expect to increase our Investor Relations activities from there. This would include upcoming investor conferences in May June with Needham and William Blair, as well as our long awaited Analyst Day, which we are targeting to occur before our fiscal year end, which ends on September 30, 2024. We look forward to getting out and telling investors about the big opportunity we have in front of us. In closing, we are very pleased with our results, which included record revenue and record non GAAP net income for the full year of fiscal 2023.

Speaker 3

We look forward to growing again in fiscal 20 24 as we continue to deliver industry leading machine learning and AI driven tools that enable us, our customers to prevent fraud. Operator, that concludes our prepared remarks. Please open the lines for questions.

Operator

Thank you. And we will now begin the question and answer session. Our first question today will come from Chad Bennett of Craig Hallum. Please go ahead.

Speaker 2

Just a couple of things. Just it was great you kind of laying out the linearity of

Speaker 4

the year from a revenue standpoint. I guess, as much as you can say now that we're effectively almost halfway through the year, and maybe it more pertains to the identity part of the business, just in terms of the macro and demand environment and volume environment on that side of the business. Any insight, Max, into kind of what you're seeing there or your thoughts on the demand or macro environment on that part of the business right now?

Speaker 2

Yes, I don't know that I have a substantive update for you, Chad. I think things are similar to when we talked previously, at least in the recent past. With where interest rates are, we definitely see challenges on anything that's kind of loan origination or interest rate sensitive, refinancing, new mortgages, HELOCs, even credit card issuance at these rates. But I do feel like we see some stabilization across the more revenue generation areas. And I think as we've talked about in the past, when times get tough, fraud increases, right?

Speaker 2

And so we're seeing that on both sides of the business, both the identity side, but obviously with Check Fraud Defender. I could go on for hours on kind of the stats and what's being perpetrated on that side. So hopefully that's helpful.

Speaker 4

Yes. And just in

Speaker 2

terms of the

Speaker 4

penetration you're seeing with my VIP and mypass and the biometric solutions. I guess, can you give a sense of where you are in terms of penetration into your existing base with those solutions?

Speaker 2

Yes, I would say we're in the very early stages. For our international audience, I don't want to use a baseball example, but 1st 10%, 15%, I don't know, 1st inning, I used baseball anyway. For me, the Gen AI hype that's been out there over the course of the last 5 or 6 quarters, when you bring that to the fraud and identity space, it changes almost everything. What companies, regulated organizations are confronted with the changing regulations that are in place things like IDAS2 in Europe and FIDO2 which is really more protocol and framework here in the U. S, those were built and delivered and kind of conceptualized before the real rollout of transformer large language model, Gen AI.

Speaker 2

And it's a wind up to say every one of these large regulated entities whether they're banks, telcos, healthcare, they've got to figure out liveness. Who's on the other side of that device and how do I make sure not only it's who they say they are, but that it's actually a live human. And we are just so well positioned with the be first, be best approach to face and voice. I feel really good about it. It's going to take some time, right.

Speaker 2

I mean early days, it's going to take some time, but I don't know how you solve that problem otherwise. I really don't know how you do that in a Gen AI world.

Speaker 4

And just on I like the way you laid out the opportunity in Check Fraud Defender. And I mean, it certainly seems like you guys are seeing traction with that product. I guess maybe the best way to ask it is, have you rethought kind of the growth potential of the deposit side of the business, Max? I think it's certainly outgrown, I think, at least my expectations maybe yours the last couple of years. But I think we just generally thought about that business being maybe kind of high single digits, 10%.

Speaker 4

It's certainly outgrown that materially. But just is it are you thinking any differently about that side of the business and kind of the growth rate the next 3 to 5 years?

Speaker 2

No. We continue to believe the base check business, Mobile Check Deposit and the Check Intelligence business will continue to be contributing growth to Mitek from a revenue perspective and continuing to throw off impressive operating margins and profitability. We're going to do that because the adoption of mobile banking is still in the very early days, right? When you use a stat about we processed in FY 2023, 1,200,000,000 checks, that sounds amazing. And then you say, hey, 8,000,000,000 checks, were in the system.

Speaker 2

So you've only kind of scratched the surface and you've published some reports that kind of quote the Bank of America's and the wells and the JPMC. So there's a lot more to go there as you know because we're a dominant market player. We have pricing power both with the end using banks as well as with the core service channel providers that we rely on. So I think between the idea of those two things, we anticipate this continue to be a growth element of the business. And CFT, the Check Fraud Defender, just because of the explosive growth of check fraud, we think that's going to be we see it right.

Speaker 2

It's one of the fastest growing things I've ever seen right now.

Speaker 4

Got it. All right. Thanks. Great to see the K out, obviously, and look forward to more investor facing activity as we go along here. Thanks.

Speaker 2

Got it. Thanks, Chad.

Speaker 3

Thanks, Chad.

Operator

Our next question today will come from Jake Roberge of William Blair. Please go ahead.

Speaker 5

Hi, guys. This is Jacob Zerbebon for J. Gurbe Bares. And thank you for taking my questions. So obviously, Check Fraud Defender is seeing solid adoption.

Speaker 5

But just curious from a go to market perspective, are you dedicating teams to the product yet? Or is it still combined with the classic Check Deposit business and leveraging those pre existing relationships? And then I have another question. Thank you. Sure.

Speaker 2

Yes, so the first part of that question, since its inception, since we announced going back almost 2 years ago and introduced Check Fraud Defender, we have had a dedicated team of sellers, resales engineers, customer success and implementation. So it started out as a very small team. It's about almost 3 times the size of what it started out to today. But yes, it is a dedicated series of individuals that make their mortgage payment and make their car payments based on the success of helping customers fight fraud in the check area.

Speaker 4

Got it. Got it.

Speaker 5

That's good to hear. Thank you. And then just to touch on what you're seeing in the market from like a competitive perspective, given the more difficult funding environment for private ID verification providers. Are you seeing competitive benefits in the pipeline as a result of the uncertain macros, so kind of a tailwind given the macro environment? Thank you.

Speaker 2

Yes, it's a good question, Jacob. I think the answer for sure is yes. If we went back in the way back machine 2.5, 3 years ago, you couldn't open Crunchbase any week without reading about a new company that was being created to take on the identity category. You couldn't go a week without seeing additional eye popping funding rounds. And most of those new formed competitors, they spent a lot of that money on sales and marketing and they were not investing in innovation and things that were both proprietary and differentiated.

Speaker 2

And over the course of the last 2 years, we've absolutely seen that come home to roost. And so as I said when Chad asked the question, there's still uncertainty in the economy. There's still a lot of geopolitical stuff going on. But the lay of the land, the competitive lay of the land for us has shifted and we believe shifted in our favor. I mean, when you're going to look around as a a you're a mobile operator, you're a bank, you're a healthcare institution, who are you going to partner with, who are you relying on, who's going to be able to kind of come out the other side of this and not just have great product, but be able to support you and have the vendor viability.

Speaker 2

And I'll stand on the FY2310 that's vendor viability.

Speaker 5

Got it. That sounds great. Congrats on the results again. Thank you.

Speaker 2

Thanks, Jacob.

Operator

Your next question today will come from Owen Rickert of Northland Capital Markets. Please go ahead.

Speaker 3

Hi, guys. This is Owen on for Mike Grondahl. I just have two questions. So first, what are your priorities for Mobile ID in 2024?

Speaker 2

Can you be a little more specific as to what you mean by that?

Speaker 3

I guess just priorities going forward in terms of go to market, what you're doing to improve the product, etcetera?

Speaker 2

Sure. All right. Thanks, Owen, for clarifying. We're really excited about the progress that we're making with MyVIP, right. So this end to end orchestration low code, no code environment, our ability to take on these really gnarly problems for regulated organizations, I talked about what those vertical industries are.

Speaker 2

But to be able to do that not just for onboarding journeys and to get new accounts open, but what is often referred to in life journeys, right? The ability to help somebody with a password reset, you forgot your credentials instead of sitting for a half hour on a call center line and burning up a lot of time and having a terrible experience using MyVIP and now MyPass, the multimodal biometric identity authentication system, those are great opportunities for us. And as we've talked about in the past, our model is land and expand, right? You land the initial piece of business with a bank or a mobile operator. And inevitably within a year or 2, we're in 2, 3, 4 different use cases.

Speaker 2

Some of those are onboarding journeys, which are transaction driven. But now with what we're doing with MyPass and of course the IDR and D biometrics and liveness componentry, having recurring revenue associated with more of a conventional subscription model, we're really excited about how that's growing the business and not just what we're going to do for the rest of FY 'twenty four, but really the future of this business over the intermediate term. Great.

Speaker 4

Thanks for the color. And then lastly,

Speaker 3

are there any incremental updates on the sales team?

Speaker 2

Well, coming into FY 'twenty four, as we just said for Jacob, we've made some additional investments in what we're doing with Check Fraud Defender and now My Control. So putting more, if you will, logs on the fire to really kind of get that cooking. On the identity side of the business, we've been investing in really kind of upgrading the team. We're probably halfway through a pretty big transformation, right? If you go back in the Wayback Machine before we came together with Huyu and had My VIP, we were basically selling a point solution where we would be able to do identity verification using a government issued identity document and a facial liveness test.

Speaker 2

Now with my VIP, I've got an end to end enterprise solution that can be used in a lot of different places by a lot of different businesses. And the sales motion, the positioning of that, who we're targeting as far as the buyer cohort within our target accounts, all of those things have changed and we've been making changes to our team and our selling motions to exploit that. So and then with IDR and D separately very much the selling of those componentry just again bringing it's not huge investments, but going from 3 sellers to 5 sellers makes a really big difference and to have those folks located in places like Singapore or Brazil or Eastern Europe, just because that's where the action is.

Speaker 3

Great. Thanks for answering my questions.

Speaker 2

You got it, Owen.

Operator

Owen. And our next question will come from Allen Klee of Maxim. Please go ahead.

Speaker 6

Hello, good afternoon. A question on your guidance, I think you are guiding to non GAAP operating margin of 30% to 31%. I think that compares to 31% you did in fiscal 'twenty three. So my question is, if the mobile identity business is going to move from losing money to breakeven during the year, so that should improve results, what's the offset that is making margins not go up? Thank you.

Speaker 3

Yes. It's a couple of different things. Just doing a high level math first, if you take our revenue guidance and assume kind of gross margins similar to 2023 looking at 2024. And backing into operating expense, we're growing operating expense somewhere in the kind of $7,000,000 range year over year, dollars 23,000,000 to $24,000,000 Most of that is going to be investment in R and D from a cost perspective. And that's going to be a combination of products that we're investing in, particularly CFD, but also in some of the other kind of earlier stage growth products that we have.

Speaker 6

Great. Thank you. And then in terms of capital allocation, I think the last call you had, you guys said you would once you got out of a blackout, you would consider a buyback. How are you thinking about that today?

Speaker 3

Yes. I said in the prepared remarks, I talked a little bit about the capital allocation plan. The management team, Max and myself are working with our Board of Directors on a routine kind of basis to figure out what that capital allocation will look like going forward. We're looking at all alternatives, which could include a buyback, but we haven't specifically talked, I think historically more than just that on our earnings call.

Speaker 6

Great. Last question. Is it possible at some point as mobile identity grows that you might be able to break out the more metrics related to it either the basics of profitability or certain KPIs?

Speaker 2

Yes. Hey, Alan, it's Max. Dave's in the chair here about 60 days and he brings a lot of fresh thinking, a lot of new eyes and CFO at 6 other public companies before being here. I think you'll see us definitely learn some new tricks from him. So the answer is yes.

Speaker 2

Let's give him a chance to get his sea legs and kind of find his way around and start to put his fingerprints on things here and stay tuned.

Speaker 6

That's great. Thank you so much.

Speaker 2

Yes. Thanks for the call.

Speaker 3

Thank you.

Operator

Hi. We will conclude our question and answer session. I'd like to turn the conference back over to Todd Kehrli for any closing remarks.

Speaker 1

Thank you, operator. Thank you everyone for joining our call today and for your continued support. As always, if you have any follow-up questions or would like to meet with management, please feel free to reach out to me and I'll set something up. Thanks for everything and have a great day.

Operator

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

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Earnings Conference Call
Mitek Systems Q4 2023
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