Mitek Systems Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 15, 2024

There are 8 speakers on the call.

Operator

Hello and welcome to Mitek's Fiscal 20 24 First Quarter Earnings Conference Call. All participants will be in listen only mode. As a reminder, this conference is being recorded. I would now like to hand the call to Todd Kehrli of MKR Investor Relations. Todd, please go ahead.

Speaker 1

Thank you, operator. Good afternoon and welcome to Mitek's fiscal 2024 Q1 earnings conference call. With me on today's call are Mitek's CEO, Max Carnequier and CFO, Dave Weil. 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 2024 Q1 as well as preliminary results for its fiscal Q2 ended March 31, 2024.

Speaker 1

That release is available on the company's website at mytexascapes.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

Our 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, April 15, 2024, and the company undertakes no obligation to revise or update publicly any of the 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 Carnecchia. Thanks,

Speaker 2

Todd. Welcome, everyone, to our fiscal year 'twenty four Q1 earnings conference call. As always, we appreciate that you joined us today and thank you for your continued support and trust in Mitek. Today, I'll make some brief comments about Mitek's results and update you on the business priorities. I'll then turn the call over to Dave Lyle, our CFO, to review the Q1 financial results and provide our outlook.

Speaker 2

As previously discussed, in the Q1 of last year, we had a large one time multi year mobile deposit reorder that pulled forward 3 years of revenue into that quarter, creating a very difficult year over year comparison. It's important to note that this quarter's results are not representative of a business trend, in fact, to the contrary. With our fiscal 2024 guidance, we expect our deposits product revenue to grow 10% to 12% year over year on a normalized basis and our identity product revenue to grow 10% to 12% year over year on an organic basis. We anticipate that much of this growth will occur in the second half of the fiscal year with the growth continuing in fiscal 2025. Our conviction in Mitek's significant market opportunity continues to grow as we leverage our collective AI powered data solutions to answer an accelerating fraud management needs in markets and geographies we serve.

Speaker 2

Evidence of this can be seen in 3 factors. Number 1, the accelerated need for identity verification as fraud and cybercrimes grow in sophistication and continue to plague banks and enterprises of all sizes. Number 2, the rapidly growing misuse of deep face and voice cloning poses a significant threat

Speaker 3

to personal and

Speaker 2

financial security. As a result, our award winning biometric authentication technology is seeing rapidly increasing demand. And number 3, the momentum we are seeing with Check Fraud Defender product offering is exceeding our expectations and highlights the rise in fraud across the board as a critical problem to solve. These factors reinforce our purpose and strengthen our market opportunity. As a reminder, our purpose is to empower regulated businesses to say yes to more good customers, more deposits and more transactions with increased intelligence and customer safety.

Speaker 2

We focus on regulated businesses because the consequences are highest to those businesses and our core competency best suits those needs. Our mission informs our business decisions and over the past decade we've steadfastly developed solutions to fulfill this objective. With that said, let me briefly take you through our product evolution so you can better understand why we win. First, we leveraged computer vision to develop the advanced image processing capabilities that underpin all our solutions today. Let's call that Mitek 1.0, which began in 2,008 and remains the undisputed leader in mobile capture and deposit technology with over 90 patents and 99 of the top 100 banks in the U.

Speaker 2

S. Using our solution. In Mitek 2.0, we began about 7 to 8 years ago, we applied machine learning and AI to automate identity verification, mainly by providing document verification. Anticipating the need for more advanced identity attributes, we then integrated the unparalleled technology and biometrics from IDR and D acquisition in 2021 to prove wideness and support identity authentication. Then we added our low code orchestration platform from HUYA acquisition in 2022, yielding a solution today ready to tackle omni channel identity fraud across the organization.

Speaker 2

Today, harnessing the latest advancements in Gen AI coupled with the expansive capabilities of our orchestration platform, Mitek 3.0 is poised to be the leading authority in identity verification, authentication and fraud management. By demonstrating our industry leadership, we are winning new channels within the banks and helping drive new benefits and efficiency gains for our banking customers, most recently by reducing check fraud. Banks are getting crushed by check fraud, which has reached an all time high and rivals credit card fraud in the United States. In 2023, financial institutions reported unprecedented financial losses due to soaring check fraud. 1 institution reported $135,000,000 in losses, while total losses in the Americas were over $20,000,000,000 according to NASDAQ's Global Financial Prime Report.

Speaker 2

We launched Check Fraud Defender 2 years ago to help banks address this growing problem. Our solution offers banks a secure cloud hosted consortium that strengthens their existing fraud prevention and helps them significantly reduce financial losses. 1 of our CFP customers reported saving over $16,000,000 in less than 6 months derived from both reductions in fraud check losses and reductions in operational expenses of dealing with this exploding problem. This significant cost savings benefit is driving substantial pipeline growth for this new product offering. At the end of fiscal 2023, we had a handful of CFP customers and we exited the March ending quarter with over 20.

Speaker 2

By the end of fiscal 2024, which ends in September, we're targeting to have over 50 CFD customers contracted to participate in the consortium. Even with this rapid customer adoption, we're just scratching the surface as we target our nearly 8,000 Mitek Banking customers. Starting to contribute to this pipeline are our channel partners. The channel has been a trusted blueprint for selling mobile deposit and we're thrilled with the initial momentum we're seeing with the channel and Check Fraud Defender. As I noted on our last call, CFD represents a noteworthy growth opportunity for VITAC.

Speaker 2

We estimate CFD has the potential to contribute $200,000,000 in annual revenue within the next 5 to 7 years. CFT is also leading the way into adjacent opportunities for Mitek to help banks with new AI driven fraud and identity management. By leveraging our unique access to rare and privileged customer data and transactional intelligence, we can deliver additional differentiated value to our customers and drive increased shareholder value. Regarding the Identity line of business, we continue to execute our strategic priorities. While it is early and we have more to do, we are starting to see improved growth and increased market share for our identity orchestration platform, which we believe will drive higher returns over time.

Speaker 2

Market tailwinds continue to fuel the identity opportunity. In 2023, fraud scams and bank fraud schemes totaled 4.85 $1,000,000,000 in losses globally, according to the Global Financial Crime Report from NASDAQ. Also in 2023, consumers reported losses exceeding $10,000,000,000 to fraud, a 14% increase from the previous year. Digital identity verification is no longer a back office concern, but a front line in the fight against fraud. There has never been a greater need for banks and technology providers to innovate together.

Speaker 2

NatWest is a great example of one such partnership and why our customers select MyTech Verified Identity Platform, My VIP, to take these challenges take on these challenges. Like all major banks, NatWest faces rising threats from broad rings and impersonation, but also the need to instill customer consumer confidence in their fraud defenses. Leveraging MyVip, NatWest can configure different identity verification services to suit different customer and business needs, as well as adjust for changing risk environments. As mandatory liveness detection becomes increasingly critical in digital identity processing, NatWest has enjoyed leveraging the platform to apply new biometric signals against growing use cases. As the Wall Street Journal reported this month, deepfakes are coming for the financial sector.

Speaker 2

Companies using photos or audios to verify customers' identities are preparing for bad actors gaming the system with generative AI. The surge in deepfake related fraud underscores the need for vigilance and robust detection mechanisms. Facial Liveness Detection Technology stands at the forefront of combating these challenges, offering a sophisticated way to distinguish genuine human presence from fraudulent and deepfake attempts. ID. Live Face Plus is designed to detect injection attacks and prevent deepfake fraud in a passive way, thus dramatically improving the overall customer experience.

Speaker 2

Most of today's facial liveness technologies are active, requiring users to blink, turn their heads or move their phones back and forth. These systems are frustrating to the customer and can be tricked by fraudsters using computer generated images, masks or videos. Mitek's award winning IDR and D teams have worked relentlessly to ensure our customers don't have to sacrifice usability for security. Iulifefacepluscombinesgroundbreakingpresentationattack detection with a unique approach to injection attack detection to prevent deepfake and other fraudulent digital content. Instead of just focusing on the content of digitalface like the image, it helps shut down the channel used to deliver it such as a virtual camera.

Speaker 2

Customers and partners who have made the switch from active to passive facial likeness report a significant reduction in abandonment, lower false rejections of real users and highly accurate presentation attack protection. Our IDR and D team's ongoing innovation continues to be at the center of our identity verification solutions and their rapid integration of GenAI solutions continues to yield outstanding products. Leveraging the significant opportunities within burgeoning sectors, influenced by AI and identity and fraud trends, Mitek is strategically positioned to expand its revenue and profitability. Mitek remains at the technological forefront providing advanced machine learning and AI solutions, enabling businesses to effectively counter fraud while improving trust and convenience in digital transactions through our leading orchestration platform. Lastly, I'm thrilled that with the filing of our 10 Q today, we are now current and back on track to file our quarterly and annual filings in the normal fashion.

Speaker 2

This has been a long and difficult process. With significantly improved financial controls and reporting in place, we are confident in our ability to maintain our filings going forward. I will now turn the call over to Dave to discuss financial results in more detail. Following Dave's remarks, we will open the call for questions. Dave, please go ahead.

Speaker 4

Thanks, Max. I'll begin by taking you through the fiscal Q1 2024 financial results and then comment on our outlook. Looking first at fiscal Q1 revenue, top line revenue for the fiscal quarter declined 19% year over year to $36,900,000 due primarily to a large multiyear mobile check deposit reorder with 1 customer where Mitek recognized additional license revenue in fiscal Q1 2023 relating to future years of approximately $7,000,000 and which deducted approximately $2,700,000 from fiscal Q1 2024. Adjusting for that entry, top line revenue would have grown by 3% year over year. Software and hardware revenue declined 39 percent to $16,000,000 in fiscal Q1 2024, primarily

Speaker 5

due to

Speaker 4

the multi year contract just discussed. Services and other revenue grew 8% to $20,900,000 in fiscal Q1 twenty twenty 4. This increase was primarily due to strong growth in SaaS revenue as well as increased maintenance revenue associated with deposits product software sales. Shifting to revenue for our 2 major product categories, deposits and identity, let's start with deposits. Deposits revenue declined 30% year over year in fiscal Q1 2024 to 21,100,000 dollars for reasons just described.

Speaker 4

Adjusting for that multiyear contract, deposits revenue would have grown about 4% year over year. The quarter's revenue was also impacted by timing of reorders. Please note that 67% of deposits revenue was in Mitek Software and Hardware revenue and 33% was in services and other revenue. Identity revenue for the 1st fiscal quarter grew 3% year over year to $15,800,000 driven by our SaaS products revenue. Growth from our newer identity authentication products including MyVIP, MyPass and IDR and D biometrics, which grew faster than the market, was somewhat offset by the sunsetting of our legacy I CAR hardware and software products as well as some pressure from commoditization in the document verification market.

Speaker 4

Approximately 12% of identity revenue was in Mitek software and hardware revenue and 88% was in services and other revenue for the 1st fiscal quarter of fiscal year 2020. Moving on to gross margin. The total gross margin for fiscal Q1 2020 24 was 85%, down from 89% in fiscal Q1 2023 due to a product mix shift, which included less revenue in fiscal Q1 2024 from a strong gross margin and deposits product. We continue to deliver strong software and hardware gross margins of close to 100% for fiscal Q1 2024, while on services and other revenue, our gross margin was 74%. GAAP operating expense for fiscal Q1 twenty twenty four was $38,300,000 compared to $32,300,000 a year ago.

Speaker 4

Non GAAP operating expense for fiscal Q1 2024 was $25,800,000 compared to $22,200,000 last year and favorable when compared to the prior quarter fiscal Q4 2023. The year over year increase in non GAAP operating expense 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 expense was $12,500,000 of non recurring items, of which $7,300,000 were non cash accounting items and $5,200,000 were cash items. The noncash items were comprised of amortization of purchased intangibles and stock based compensation expense. Cash items were comprised of non recurring fees from delayed filings, legal and other expenses.

Speaker 4

Please see our earnings release for a more detailed reconciliation. Our non GAAP operating income was $5,600,000 in fiscal Q1 2024 or a 15% non GAAP operating margin. Exclude from non GAAP operating income was $12,500,000 and expenses as described above and a detail in our GAAP to non GAAP reconciliation included in today's earnings release. GAAP net loss for fiscal Q1 2024 was $5,800,000 or a loss of $0.13 per basic share versus net income of 4,700,000 dollars or $0.10 per diluted share in the prior fiscal year. Non GAAP net income for fiscal Q1 2024 was 6,300,000 dollars or $0.14 per diluted share versus $14,300,000 or $0.31 per diluted share in the prior fiscal year.

Speaker 4

Our diluted share count for the year was $46,300,000 compared to 45.6 shares a year ago. Turning to our balance sheet. Our cash and investments declined sequentially $11,000,000 from $134,900,000 in fiscal Q4 'twenty three to $123,900,000 at the end of fiscal Q1 twenty twenty four, primarily because fiscal Q1, we paid out $7,800,000 in cash for 2023 taxes and also paid $4,600,000 for the cash portion of the final earn out for the IVR and D acquisition. Moving on to guidance. We are reiterating our fiscal year 2024 revenue guidance range of $180,000,000 to 185,000,000 dollars Looking more closely at fiscal Q2, we are providing a preliminary revenue range of $46,000,000 to $47,000,000 almost $9,000,000 sequentially higher than fiscal Q1 2024 at the midpoint of the range, driven by a return to a more typical quarter from our deposits product revenue.

Speaker 4

From a quarterly trending perspective, we continue to expect top line revenue to grow year over year and sequentially in Q3 and with Q4 expected to be in the range of Q3 revenue. Quarter to quarter changes due to deal timing may influence these expectations. We continue to expect our identity business to reach standalone profitability on a fully burdened basis in the 4th fiscal quarter. With regard 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 full year fiscal 2024 non GAAP operating margin guidance range of 30% to 31%.

Speaker 4

Before I conclude, I would like to touch on where we are with our SEC filings. With our 10 ks filing done in March and the filing of our 10 Q today, we are now current on our filings and are already working diligently on the fiscal Q2 10 Q for the period ended March 31, 2024, and are targeting to file in a timely manner. Operator, if I can please open the line for questions.

Operator

Certainly. Thank you. We will now begin the question and answer session. Today's first question comes from Jacob Rehberg with William Blair. Please go ahead.

Speaker 5

Hey, thanks for taking the questions. Appreciate the color on the one time contract that was pulled forward last year. But even excluding that, the full year guide assumes a fairly large back half ramp. So could you just walk us through the building blocks that give you confidence in that guide, whether it be the new products like Check Fraud Defender ramping more meaningfully, easier comps just given the large contracts and end of life products, would just be helpful to unpack what's exactly driving that strong half ramp in the guide?

Speaker 2

Hey, Jake. Thanks for calling. I'll let Dave give you the building blocks. I think the top half comment I would make is we've tried to as we've shared with you guys before, we've tried to kind of provide some guidance around the idea that you need to look at these businesses not on a month to month, week to week basis. You got to look over a longer span of time, and I think that's definitely what's going to come into play here.

Speaker 2

But I'll let the building blocks come from Dave.

Speaker 4

Yes. I think you were characterizing it correctly. We have our kind of heritage business and mobile deposit as well as kind of document verification, those kinds of products. And we've got these new products that Max has talked about the last couple of earnings calls on the deposit side, the Check Broad Defender product, which we think is very promising. And it's kind of just now starting to pick up momentum.

Speaker 4

And so we think that will drive growth in the second half of the fiscal this fiscal year. And then also on the kind of ID R and D biometrics as well as the MyVIP platform, including MyPass, are all opportunities for growth in the second half, all of which are kind of ramping at the same time.

Speaker 5

Okay. Very helpful. And then, yes, great to hear that you had over 20 customers using Check Fraud Defender, exiting that March quarter. Could you just give us a little more detail on those deals and maybe walk through how long those sales cycles took? What those customers were using before Check Fraud Defender?

Speaker 5

And then if you could just give us any insight into just how large annual contract value could be for some of those bigger deals that you've landed thus far? That would just be helpful in understanding kind of the opportunity with check fraud.

Speaker 2

Sure. There's a lot to unpack in there. So if I miss anything, you just remind me which elements I missed with the question, Jake. So as a reminder for folks, we co created Check Fraud Defender in conjunction with 1 of the top 5 banks in the United States, obviously using the intellectual property and know how and kind of all of our frameworks around computer vision and machine learning and how to visually inspect the check and use over 20 different elements to pull that check apart and determine whether it's fraudulent or not. And so we've been at that.

Speaker 2

As I said, we introduced the product about 2 years ago. And as you'd imagine with any kind of consortium, sales cycle there was well over 12 months. And if you kind of laid down the 20 contracted customers we have today, you're almost watching the sales cycles fall into half lives, right? So to give you a sense if I had to kind of paint a picture of those 20 participating consortium members, we focus very heavily on the top 100 banks, right? So we've got a healthy dose of the top 100 banks.

Speaker 2

But we also about 4 or 5 months ago announced a relationship with Abrigo. And Abrigo back in February introduced their kind of their first product based on CSD And in the quarter had success in this quarter, the March ending quarter had success closing some smaller financial institutions. So now we've got some really big guys and we're focused on that in a very direct way with our direct sellers. And now we're starting to light up that channel that has been so successful for mobile deposit starting with the relationship I just mentioned, but to be followed very, very quickly by some of the other traditional channel partners we've had, the core service core banking service providers. So that hopefully gives you a flavor for it.

Speaker 2

It's hard to give you an average. If you think about top 100 banks, those contracts are multi 100 of 1,000 of dollars a year to low 1,000,000 of dollars a year. And then some of these ones that we're now seeing in the longer tail through the Abrigo relationship, they're under $100,000 a year. But there's so many of them. There's just such a big opportunity there with the 8,000 financial institutions that I already know and really enjoy our relationship with Mitek.

Speaker 5

Okay. Very, very, very helpful there. And then if I could just sneak one more in. Now that you're current on the filings, have the 10 Q published, working on the 2Q filing, just curious if you could just give us any updated thoughts around Converse, just how you're thinking about capital allocation, whether MAX being at the helm for a few years now or Dave now that you're taking a new look at the business, just curious how you 2 are thinking about those plans moving forward?

Speaker 2

Yes. I don't think we have anything new to announce today. I will remind you that almost on a monthly basis, certainly no less than quarterly, we're reviewing our capital allocation approach with our Board, with our senior team and with our outside advisers. Let us get that let us get the Q2 on file and let us get current and see if we've got more to talk about in the next call.

Speaker 5

Sounds great. Thanks for taking the questions.

Speaker 2

You got Jake.

Operator

Thank you. The next question comes from Mike Grondahl with Northland Securities. Please go ahead.

Speaker 6

Hey, thanks guys. A couple of follow-up questions on Check Fraud Defender. The first one is, you guys said that was exceeding your internal expectations. Just curious what that relates to? Is that revenue, number of banks?

Speaker 6

Maybe if you can cover that. And then secondly, as you're expanding that reseller channel past Abrigo, is that going to include like the Fiservs, Jack Henry, FISs of the world? Like how extensive will your retail part your reseller partners be? And when do you expect that to start?

Speaker 2

Yes. Some great questions in there, Mike. So obviously, we're very bullish about check fraud offender, both in the near term, but also on the more intermediate term. For the other callers or listeners here, just to state the top half point of this, check fraud has become a Board level issue for every financial institution in the United States. If you're in a Board meeting in a bank in the United States, it doesn't matter whether you're a small community bank or whether you're Jamie Dimon at JPMC, this is coming up in that meeting.

Speaker 2

I mean that's the level of losses and the kind of disruption and damage to customer relationships that's going on with this activity. So back to your question, I put the spotlight on Brego because they started to have success and they've turned the sales cycles very, very quickly, which we're quite impressed with. But you pointed to some of the longer term much larger institutions that service core service providers to the banks and that have for the better part of 15 years been very trusted partners both to the banks and to MICA. And I don't want to use any of the names, but we're very close to getting those folks signed up and getting them online with Check Fraud Defender. The start of your question was around our internal expectations.

Speaker 2

And I think if you had sat down with me and asked at the beginning of the year, on if we do this the right

Speaker 1

way, we'll have 15. And we're over if

Speaker 2

we do this the right way, we'll have 15, and we're over 20. So that's the reason that I feel like we're ahead of expectations is largely around that.

Speaker 3

Got it. And then just

Speaker 6

one question on mobile check deposit. I think you talked about for the year 2024 sort of like 10% to 12 percent normalized growth. Roughly, is that half of that coming from price and half of that coming from transactions?

Operator

How do

Speaker 6

we just get a feel for the mix there?

Speaker 2

Yes. I'll let Dave see if he wants to take a swing in how we break the mix up. But when we said the normalized, again, it's trying to do the math, backing out the additional 3 years of the contract, the very large contract we took in Q1 of fiscal year 2023 and then laying in 1 third of that into Q1 of 20 24. I think we laid that math out either in the press release anyway, in the press release, yes. As far as that 10% to 12%, it's part of it is price increases and part of it is

Speaker 4

broken that further than that publicly, but those are the 2 variables that are at play.

Speaker 2

And we probably shouldn't do that today. No.

Speaker 3

Okay. Hey, thanks guys.

Speaker 2

You bet, Mike.

Operator

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

Speaker 7

Yes, hi. Just some of the add backs you have for coming up with your adjusted numbers. I had questions, if you could kind of go into what was happening there and if you're expecting any large ones in the Q1 in the March quarter. You had a $2,200,000 litigation cost in the December quarter or legal costs and what is enterprise risk portfolio positioning and other related costs? Thank you.

Speaker 4

Yes. Thanks. It's a good question. In fiscal quarter 1, taking out the we'll address the legal questions in a second, but in this quarter 1, we used 3rd party experts to evaluate our product portfolio positioning, competitive landscape, enterprise risk as well as some other related analyses. And that's really a one time kind of study cost.

Speaker 4

So you won't see that come back in fiscal quarter 2. And then on the legal side, yes, we had a $2,000,000 higher legal expense. And if you look back into the details of fiscal quarter 1, we used we will keep use quite a few third party legal experts to do a variety of important activities. Some of those activities include getting our SEC filings current, navigating the NASDAQ's, the potential de listing activities that happen with NASDAQ. There are some ongoing mitigation that we show in the Q and that continues and there were some outside legal expert help there.

Speaker 4

And then lastly, litigation. So it was a combination of events, not necessarily one thing that was specific.

Operator

The next question is from Chad Bennett with Craig Hallum. Please go ahead.

Speaker 3

Great. Thanks for taking my questions. So just maybe shifting over to the ID verification business and the 10% to 12% growth expectations there. Is there a way to think about that side of the business from a transaction growth kind of same store sales standpoint versus a cross sell, upsell of my VIP, mypass, IDR and D type offerings and kind of how you think about that? And just generally, from a transaction growth rate standpoint, are we seeing just year over year volume or transaction growth in that business this year?

Speaker 3

And do you see that strengthening throughout the year? And then maybe last one tied to all of it is, Max, you mentioned in the press release, I think product market fit for MyVIP, MyPass and IDR and D. How do you kind of define that or what are examples of that? Thanks.

Speaker 2

Sure. Lots of pack there, Chad. I'll do my best. Maybe to start with a little bit of a bigger picture here. The market the identity market has changed pretty significantly in the last 2 or 3 years with all that's happened with interest rates and the slowing of maybe some of the new competitor formation and them trying to get funding.

Speaker 2

And we've definitely seen some pressure on some of our high flying competitors from last 3 or 4 years, which I think both in the intermediate term and long term is going to benefit Mitek. And the reason I start there is today our model is very much a land and expand model. We're targeted on these regulated industries, the top companies within those regulated industries primarily in North America and in Europe. The majority of the identity business is done through our direct selling activities. So about 80% of the revenues come from our direct selling activities and about 20% from our valued partners that get us into geographies, use cases and certain industries that we don't necessarily focus on.

Speaker 2

But if I had to look back on the last 18 months, I'd tell you that probably 75% of the growth that we've enjoyed in Identity has been from the expand part of land and expand. We've reported this before, but new logo acquisition has become a very, very hard fought battlefront, both because of the desperation of some of the competitors that I started with explaining, but also just because of the uncertainty, the geopolitical landscape and the global economic uncertainty. And so we've really been able to enjoy the relationships that we have with these big institutions where we might start in the retail bank in one geography with an onboarding journey. And then 2 to 3 years later, we woke up and through our activities and working with that customer, the success that they're having, we'll find ourselves in 5 or 6 different use cases, some of which are onboarding, some are in new geographies, but many are identity authentication. So those are those step up transactions or reverifications of identity in the real world.

Speaker 2

So when I come back to your question and then I'll talk about product market fit, when I come back to your question, we have seen transaction volumes grow and in some geographies and some areas grow quite nicely. We've also been able to do a good job of cross selling. So some of the new capabilities that we have back into again that expand within the previously landed logo. But we've also as Dave alluded to in some of the heritage areas of data of identity attributes, we've seen some per unit pricing pressure. So when it all washes out, I think you get the complexion of where we are today.

Speaker 2

From a product market fit perspective, right, I mean these are some basic value proposition things, right? Do you have all the key features that are needed, right? Does the audience really care? And do you have a business model that is enticing? And if all of that resonates then you've established product market fit in a given segment.

Speaker 2

And our segments are based on industries, they're based on geographies and they're based on use cases.

Speaker 1

So that's what I'm referring to.

Speaker 3

Got it. And no, that's great color. And then just in terms of the ability to get and maybe timing more importantly to get to what I think you guys have talked about on the identity part of the business it's kind of an industry or market growth rate of kind of high teens. Is that a potential Q4 event or fiscal year 2025 event? Is there anything company specific that needs to happen to achieve those growth rates?

Speaker 3

Or is it macro related or none of the above?

Speaker 2

No, I think it's a combination of those things. Yes, so if we talk about 14% to 16% CAGR growth over the next 5 years, those numbers come from 3rd parties like Gartner or Liminal, 3rd party analyst firms that focus on this identity category. That is a 5 year CAGR, right? So that's going to bounce around a little bit. We talked about the macroeconomic circumstance.

Speaker 2

But if we go back to some of the comments that both I made in the prepared remarks, but also Dave made in the prepared remarks, the composition of the Mitek identity portfolio today is just head and shoulders of over where it was 3 or 4 years ago between the biometrics and liveness category creation that we're doing with IDR and D then translating that into something that could be cloud consumed for customers through my VIP through mypass. Obviously, plugging that into my VIP, the end to end low code, no code orchestration layer. There's just so many things going on there that we have to offer customers that just a short three years ago we didn't have. Those are the growth drivers in the identity side of things and I think you'll see that in the second half of this year, but you'll see it going into 'twenty five as well. And that's without even I don't want to reach back, but that's without even talking about CFT again, which very much is a digital banking offering.

Speaker 2

But I've said this many times now that there's this very growing important intersection between what we do for fighting fraud for these financial institutions and what we do from an identity perspective. It's very rare for somebody to perpetrate check fraud without simultaneously perpetrating identity fraud. And the access that we're having to these customers for Check Fraud Defender, the insights of the kind of challenges that they face is helping us in both lines of business.

Speaker 3

Got it. Thanks much. Nice job. Thanks.

Operator

Thank you. The next question is from Scott Buck with H. C. Wainwright. Please go ahead.

Speaker 3

Hi, good afternoon guys. Just one for me. With the ID business moving towards breakeven in the 4th quarter, what kind of margin tailwind on a consolidated basis should we be thinking about for fiscal 2025?

Speaker 1

You can guide for 2025?

Speaker 4

Yes. Not guiding for 2025 outside of what we already did, but I wouldn't say we're going to see directionally material changes to what we've seen in the past.

Speaker 3

Okay. I appreciate that. Thanks guys.

Speaker 2

Thanks, Scott.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the call back over to Todd Kehrli for closing remarks.

Speaker 1

Thank you, operator, and thank you all for joining us 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 again and have a great rest of your day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Mitek Systems Q1 2024
00:00 / 00:00