Mitek Systems (NASDAQ:MITK) Q1 2021 Earnings Call

0:00 Good day, everyone, and welcome to today's MyTek Systems first quarter fiscal 2021 financial results conference call. Today's call is being recorded. At this time, I'd like to turn things over to Mr. Todd Kehrli, MKR. Please go ahead, sir.

0:13 Thank you, operator. Good afternoon, and welcome to MyTek's first quarter fiscal 2021 earnings conference call. With me on today's call are MyTek's CEO, Max Carnecchia, and CFO, Jeff Davison. Before I turn the call over to Max and Jeff, I'd like to cover a few quick items. This afternoon, MyTech issued a press release announcing its first quarter fiscal 2021 financial results. That release is available on the company's website at mytechsystems.com. This call is being broadcast live over the internet for all interested parties, and a webcast replay 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 that are likely to influence the business going forward.

1:00 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. Four booking statements are subject to a number of risks and uncertainties which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K, for a complete description of these risks. Our statements on this call are made as of today, January 28, 2021, and the company undertakes no obligation to revise or update publicly any of the four booking statements contained herein whether as a result of new information, future events, changes in expectations, or otherwise.

1:54 Additionally, throughout this call, we'll be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. With that said, I'm going to turn the call over to MyTek's CEO, Max.

2:16 Thanks, Todd. Good afternoon, everyone. Thank you for joining us today. I hope all of you and your families are staying healthy and safe. Jumping right into it, the first quarter was a solid one all around for Mytek, with both lines of business and each geography performing well. We delivered significant new account wins and impressive existing customer expansion, all of which resulted in another record quarter. First quarter revenue was a record $26 million, representing growth of 18% year over year. We also generated record non-GAAP net income of $6.2 million, or 14 cents per diluted share, up 23% year over year, and cash flow from operations was $8.7 million.

3:05 We are energized by the ongoing momentum in the identity verification market, and the strength of our financial results demonstrates the expanding opportunity. We added significant new customers during the quarter, particularly in our target segments of financial services, gig economy and marketplaces and we continue to broaden our coverage with existing customers as they deploy our technology into new use cases and increase transactional volumes for traditional use cases. Almost all aspects of modern life now use digital channels. So the need to establish trust in the digital identities of customers, citizens, partners, and employees is rising rapidly. Identity verification has never been more relevant. Rapid advances in artificial intelligence are enabling novel forms of fraud such as synthetic media like bots and deepfakes.

3:58 An increased scale and frequency of data breaches are all adding heightened pressure on organizations to protect their customers' data and access. Perpetrators and their methods of crime continued to evolve and accelerated during 2020. So even the best anti-fraud programs need to be continually assessed and refined. Organizations no longer have the luxury to simply verify access at the point of onboarding. Instead, they need to continuously authenticate and know exactly who their customers are across all channels and throughout the customer lifecycle. Consumer demand for outstanding digital experiences is also increasing pressure on organizations. Capgemini reports in its top trends in retail banking that superior customer experience is now a must for banks as design-centric technological innovations gains widespread industry acceptance and adoption.

4:55 Customers expect the same experiences from their banking platforms that they get from their digital lifestyle applications offered by big tech players. Well-executed identity verification is primed to be the bridge between these two urgent requirements. Identity verification has moved beyond just being an enabler. It now serves as an integral element of most organizations' technology stack. And we believe the next decade of fraud prevention will be defined by an organization's approach to the lifecycle of continuous identity and access management capabilities. Our customers globally represent hundreds of the world's best known brands and banks. As we sharpen our identity capabilities and refine our relevance within these markets, our customers are discovering new essential use cases for identity verification and its vital role in enabling digital commerce.

5:50 Avian Amro Bank, one of the largest banks in the Netherlands, implemented Mobile Verify into two new workflows for their banking members this quarter. In both areas, Thank you for joining us. and also experienced greater usage of their digital services.

6:35 Additionally, in Q1, we continue to add new identity customers and grow our global pipeline of potential new identity customers and partners. This momentum is evident in both North America and Europe. MyTek's ambition is to be an indispensable partner in fighting identity fraud for the markets and geographies we target. Our approach is to provide advanced, linked and layered identity signals from initial user onboarding with documents, devices, and biometrics to authentication, reverification, and continuous identity fraud detection. Available today, MobileVerify includes the new standard in ID verification, face comparison with advanced liveness detection, as well as achieves the highest levels of assurance in fraud protection, data confidentiality, and security through our patented NFC solution.

7:28 This solution uses a three-way face comparison to validate the document image against the one contained on the NFC chip and a high resolution selfie. Our biometrics also use passive liveness detection to provide customers with additional security against all aspects of identity fraud and can be used across any of the preferred channels. Our advanced technology determines whether it is a genuine selfie, and detect synthetic media and spoof attacks such as video reproductions, face masks or photos of photos. Mytek is the only enterprise class provider in the identity category and our standards of service remain unchallenged. MobileVerify delivers against all measurements of performance, acceptance, availability, speed and our professional services are the best in class.

8:19 As such, our proven track record of success continues to grow as we expand our reach in this fast-growing market. Our relentless quest for customer success is delivered through a high-touch customer engagement and continuous product innovation. As we continue to innovate, we remain committed to exploring all avenues to achieve product superiority and expansion, whether through partnership, increased R&D innovation or acquisition. Turning to our deposits business for banks, Thank you for joining us today. which surveyed close to 2,000 American consumers.

9:22 Among consumers who used their bank's mobile deposit capabilities this year, 42% did so for the first time in 2020. 85% intend to continue depositing checks using their mobile devices in 2021. To this point, 70% of respondents claim that depositing a check was one of the most important mobile banking features in 2020. As more and more customers demand the ability to use remote check deposit, we saw several large banks significantly increase the dollar value limits on checks deposited through the mobile channel, as well as reduce the number of days required to clear that check. Both are hugely important to consumers and we believe will drive the continued adoption of mobile deposit.

10:11 During the first quarter, we successfully released Mobile Deposit 4.8 and Global Deposit 2.2. Both of which are mature, stable releases that will act as safe harbors for our customers and partners as they see rising demand for our solutions. Also, our deposits team is again working directly with the U.S. Treasury Department to ensure the smooth processing of physical checks issued by the IRS in subsequent rounds of economic impact payments approved by Congress. We are proud of our mobile deposit offering and its ability to assist people in this time of need. Now let me provide a brief update on the USAA litigation situation. As most of you know, the two USAA verdicts against Wells Fargo for patent infringement related to remote deposit systems are subject to post-trial motions that could overturn the rulings or result in new trials.

11:06 These post-trial motions are still pending. Either way, the two cases will be the subject of appeals in the U.S. Court of Appeals for the Federal Circuit. Additionally, Mytek continues to prosecute its case for declaratory relief that our products do not infringe the patents at issue in the Wells Fargo lawsuit, and there are no updates in that matter. Separately, the U.S. Patent Office has exercised their discretion and declined our request for additional review of the validity of four USAA patents. Also, the Patent Office has concluded its review of certain challenges filed by Wells Fargo and did not invalidate any USAA patents based on that review. All of these decisions are subject to rehearing before the Patent Office and appeal to the U.S. Court of Appeals for the Federal Circuit, and we intend to continue to vigorously prosecute our case as Mytek invented all of its core technology, and we believe our products do not infringe on any USAA patents.

12:03 Before I conclude, I want to thank Jeff for his many contributions to Mytek over the past three and a half years. As you are probably aware, in December, Jeff announced that he is planning to retire in 2021. Jeff has been a strong business partner for me since I joined Mytek and he is definitely going to be missed. The good news is he's agreed to remain our CFO until we find the right person for the job. A search is underway and Mytek has retained a top national recruiting firm to help us with this process. In closing, We're pleased with our strong results as we continue to strengthen our market position for 2021 and beyond. The acceleration in demand of our identity verification solutions is laying the foundation for future expansion, and our record results demonstrate how we have strengthened our market position.

12:54 The myTECH workforce should take pride in delivering the technology, products, and services that our customers need and value in these unusual times. Their demonstrated resiliency and adaptability give me great optimism that we have the right team and culture to realize my tech's full potential. Now I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we'll open up the call for questions. Jeff, please go ahead.

13:22 Thanks, Max, and thank you everyone for joining us this afternoon. Let's start with the Q1 revenue and operating results. For the first quarter of fiscal 2021, Mytek generated record Q1 revenue of $26 million, an 18% increase year-over-year. Software and hardware revenue was $12.3 million, an increase of 7% year-over-year. Services and other revenue, which includes transactional tasks revenue, maintenance, and consulting services, was $13.7 million for the quarter, an increase of 30% over Q1 last year. This increase is due to the growth in transactional FAS revenue, which increased 45% year-over-year to $8.9 million.

14:09 For Q1 2021, deposits revenue increased 7% year-over-year to $15.6 million. Identity verification revenue increased 40% year-over-year to $10.4 million. We delivered strong software and hardware gross margins of 90% for the quarter. Gross margin on services and other revenue was 79% for the quarter. Total gross margin for the quarter was 84% compared to 87% in Q1 last year. Total gap operating expenses, including cost of revenue, were $24.4 million compared to $21.8 million in Q1 last year. This increase is due to increased cost of revenue and increased expenses due to investments to grow our business.

15:01 Sales and marketing expenses for the quarter were $7.4 million compared to $6.6 million a year ago. RMB expenses were $6.2 million compared to $5.3 million last year, and RG&A expenses were $5.1 million compared to $5.3 million a year ago. Gap net income for the quarter was $2.2 million, or five cents per diluted share. Our diluted share count was 43.9 million shares compared to 41.8 million shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition-related costs and expenses, stock comp expense, litigation expenses, and the related tax impacts of these items.

15:56 Non-GAAP net income for Q1 increased to $6.2 million, or $0.14 per diluted share, compared to $5 million, or $0.12 per diluted share, a year ago. Our non-GAAP adjustments include $2.7 million of stock comp expense, $1.7 million of acquisition-related costs and expenses, $385,000 in cash tax difference, and $241,000 of litigation expenses for the quarter. This is all offset by the income tax effect of pre-tax adjustments of $1.1 million. Turning to the balance sheet, we generated $8.7 million in cash flow from operations during the quarter, bringing our total cash and investments to $72.6 million at December 31st. Our accounts receivable balance of $12.7 million represents a DSO of 50 days.

16:51 In closing, we're pleased with our results for the first quarter, which include record revenue and significantly improved profitability, and we look forward to continuing to deliver the valued services that MyTek provides. Operator, that concludes our prepared remarks. Please open the line for questions. Thank you. At this time, if you would like to ask a question, you may send it off by pressing star 1. Again, that will be star 1 for questions. We'll hear first today from Vivan Suri with William Blair.

17:21 Hey, guys. Can you hear me okay? We can. Hey, Bhavan. Hey, everyone. Great. Congrats, Jeff. Jeff, we're going to miss you, but, you know, we all understand how it works. But congratulations on the numbers.

17:38 Great set of numbers.

17:39 I would love to just touch on the ID verification side. As you think about demand and the pipeline, we'd love to get a little color around how that's playing out. especially around, as you think about the gig environment, the Airbnb customers, how you think it plays out, maybe not even over the next 12 months, but maybe over the next, you know, 36 to 60 months, three to five years. Let's think about how you guys see that business going out.

18:11 Yeah, that's a big question, Yvonne, just meaning it's far-reaching. You know, certainly the idea of being able to not just validate Identities digitally is a big deal. We've talked about this being an early stage market that's growing rapidly that is a big category where the problem hasn't fully been solved. I think what we've seen in the course of the last couple of quarters is new use cases in what we're referring to as the life cycle of an end user where they're being onboarded, which has been historically the use case we've been used the most in, Determining somebody when they're first kind of coming to your bank digitally to apply for a loan or a credit card or something.

18:58 But what we've seen in the course of the last couple of quarters is additional use cases around re-verifying that same individual after they've established a relationship with you. Could be because they've changed phones or changed address or changed name, got married, changed their name. and need to be re-authenticated, basically re-verified or re-binding to that device. And so we're seeing those use cases within both our existing customers as well as new customers. I think back to your question, for the markets we serve, the best estimates we can come up with is identity verification is growing someplace between 20% and 40%. A year and, you know, Gartner, the experts are telling us that, you know, the penetration rates at this point are, you know, 20-30% and they'll be at 75-80%, you know, over the course of the next three years.

19:52 So, I just think we're going to have a lot of action in what we do today and you're going to see us continue to complement, you know, the current signals and capabilities we have through ongoing innovation as we've demonstrated in the last 12 months. and then bringing on additional signals through partnership and ultimately perhaps even through acquisition.

20:12 Yeah, no, Max, that's a great answer, I guess, and great color. I guess if you think about it, right, there's lots of ways to approach this concept, right? You've seen Equifax's recent acquisition account. You've seen LexisNexis talk about, like, oh, we can identify a device and give you a score on the risk of a device. I guess the biggest question is, and obviously it's a part of your docusign, there's this concept of like actual, not just ID verification, but ID management. I'd love to get a little bit of color strategically about how you guys think about ID management. So not just, hey, yes, it's a passport, it's a driver's license, it's valid, they're valid, et cetera, but the concept of actually understanding that Vivan, who is in Chicago, did not buy a place in Mexico because he never has, he never has an account, How do you think about that longer-term strategy?

21:08 Yeah, so what you just outlined there is, you know, there's a lot of different approaches, a lot of different, not just providers, but, you know, concepts in how to attack this problem. You mentioned a number of folks that are either complementary or channel partners to MyTech. And ultimately, what you're trying to, you know, what you're trying to put your finger on is where does this go and how do we ultimately end up with, you know, a really definitive solution digital identity that is, you know, highly private, super secure, but can be used, you know, throughout our daily existence, whether as citizens... As well, I think, like, all the MasterCard Visa have the rails of credit, like the rails of ID, exactly.

21:49 You're absolutely right. In fact, you should ask that question as well. Yes. Yeah, yeah.

21:54 So, you know, I think the question becomes, and, you know, the way we're trying to position ourselves is, who's going to own that identity? Who's going to be the source of, you know, Put the technology aside. We say blockchain and all that, but is it going to be the banks? Is it going to be big technology? Could it conceivably be the government? And you have to think about this through multiple dimensions where we're serving our customers in dozens and dozens of countries. So the idea that the government of the United States is going to figure out digital identity and that's going to work for the folks in Germany, UK, Europe, Thank you for joining us. and, you know, adoption of technology that, you know, it's not going to happen on the timeline that you just, you know, you referred to three to five years.

23:07 I think it's a much longer timeline than that. But again, our jobs here and the strategy, you know, that we're taking is to position ourselves so that we can participate and be a meaningful value add to the segments and the geographies that we're focused on almost regardless of what direction it goes.

23:26 No, and I appreciate the color and I appreciate the candor. and the neutrality. One last one from me and I'll turn over the queue. Competition, you've seen a number of folks come out and say, okay, so we can do ID verification, like matching the ID to a passport or driver's license, everything else. And the approach, the business has risen to more than ID matching, but like ID verification, but ID management. And I'd love to have your color as to how you think the competitive environment is evolving given, you know, guys like Jumio, guys like Authentics, guys like Onvito. How do you think about the competitive environment? Who do you see and how do you win? Thank you.

24:11 Sure, sure. Again, another really big question. So I think, you know, what you touch on is this idea of, you know, identity access management, which is a much larger category that IDV, identity verification, is adjunct to. You know, Gartner's making these predictions that those two categories are starting to couple and intersect where you've got to have really accurate customer onboarding or else you're never going to be able to authenticate and re-verify. And so, you know, partnering with organizations that, you know, are expert in the IAM space, particularly, you know, beyond just their employee, you know, for employees, but also for consumers and customers, you know, that's part of our strategy. and a couple of others. have been able to go fully remote and do it successfully without any business interruption and are really rising to this circumstance.

25:30 And then we've seen some kind of historical competitors that are maybe a little longer in the tooth using some more antiquated technology that's not as scalable or is not as effective, and they're struggling through this. So I think you're starting to see a separation in this, what has been a relatively crowded field. So we're starting to separate the Maybe the winners from the losers or the weeds from the shaft, whatever the right metaphor there is. Hope that helps.

25:56 No, no, that's very helpful. Thank you, guys. Appreciate it and congrats. That growth number and ID verification was great. Appreciate it. Thank you all. Thanks, Boban. We'll hear next from Mark Chappelle with Benchmark.

26:11 Hi, good afternoon. Thank you for taking my question and a nice job on the quarter. Max, starting with you, the The company's performance has been, let's just say, quite good since the financial guidance was withdrawn earlier last year. I was wondering if you could just give us a little color on what it may take for the firm to reinstate financial guidance going forward.

26:39 Sure, Mark. Well, thanks for the kind words. We withdrew the guidance along with, I think, the overwhelming majority of Russell 2000 companies back in The reason we did that because there was just so much uncertainty, not just around COVID, but then the knock-on consequences around the uncertainty of what that was going to mean in the economy. You know, we're now 10 months, a little bit longer into it. And, you know, appreciate your kind words about our performance. I'm really proud of the team here. At the same time, you know, you can't have missed a news cycle in the last 30 days and think that, you know, Thank you for joining us. We just got to have confidence that the guidance we give you guys, we can stand behind and deliver on.

27:50 Great, thanks. And then switching gears a little bit here to your channel network, because building up your partner network has been a big initiative at the company over the last year or two. I was wondering if you had any progress to report on that front this quarter?

28:07 I've become really cautious in these calls of using customer names or channel partner names only because it is a competitive environment and we've got a lot of competitors. Since we're the only public company, we've got a lot of competitors who get the benefit of listening in on these calls. We have invested in the channel over the course of the last year, year and a half, and we've had big impact from that. The best is still to come. Those channel partners are both helping us co-sell into the segments that we have our direct relationships with. and our own direct activities around financial services, fintech and the marketplace gig economies. We've also, you mentioned where others have mentioned Adobe and DocuSign, the relationships we have there which are more horizontal in nature and cut across different industries, different geographies and really take us into places that on our own we probably wouldn't be ready for today just from an investment in direct resources or getting us to use cases that We're just an element of a larger workflow.

29:11 We've had quite good progress there, but as I said, I think the best is still to come.

29:17 Thank you. That's helpful. Jeff, bringing you into the equation here, I was wondering if you could just provide an update of where the company is with respect to sunsetting the legacy on-premise platforms.

29:33 Sure. So we, I think we started that initiative two to three years ago and said it was going to take us a while to get through it. We've done a great job getting, sunsetting the on-premise identity platforms that were all domestic and primarily in Europe. The only thing that's left that's on-premise is some of the products sold in the Spanish and Latin America territories. and that's probably two years out before those are, you know, completely gone. So you'll still see revenue in that hardware and software line for, you know, the next four to six quarters probably.

30:17 So it's just the one that's left for the most part.

30:21 Yeah. Great. Thank you. That's all for me. Thanks again. We'll move on to Mike Grondahl with Northland Capital Markets.

30:33 Hi, it's Michael on for Mike. Thanks for taking our questions and congrats on the quarter. Maybe just first off, was there anything specific to call out in the new deposit releases in the quarter or is that just more general updates there?

30:47 Mike, thanks for calling in. Can you just repeat the question you broke up there just as you were asking?

30:53 Oh, sorry. I think you just mentioned there was a couple of new releases for mobile deposit updates in the quarter. Is there anything specific there or these just general updates for the software?

31:06 Yeah, so there were some pretty, you know, we get down into the details, some pretty important additions and capability improvements for our existing customers in both those releases. So it was the Mobile Deposit 4.8 and the Global Deposit 2.2. There were some things under the hood that, you know, I think the The important message we wanted to get across is these are mature releases. These are very stable releases. These are very scalable releases, secure releases that as these volumes... At some point in the next 12 months, we're going to process our $5 billion check.

31:59 So there's a lot of checks going through these systems in the 7,500 financial institutions that are taking advantage of these solutions. And both to our partners and our customers directly, the ability to rely on these things and not have to babysit them, I think that's a really meaningful thing, and that's what we wanted to get across in the prepared remarks.

32:24 Got it. That's helpful. And then just in the legacy systems, I mean, it's pretty safe to assume that most of that from the previous questions cleaned up. So from a kind of cost perspective, operating perspective, that's largely the benefit of that.

32:42 Yeah, I don't know that it's all behind us for sure. I think Jeff did a good job of outlining where we are in that process. Every quarter, We have less of those legacy systems out there. Obviously, we're not continuing to provide or sell new ones. And so as that's in decline, as Jeff said, over the course of the next two years, the go-forward platform of mobile verify continues to grow. It continues to grow because we've got more new customers coming onto it, we've got existing customers finding new use cases, and we've got customers that just have expanding volumes. So I think it's this divergence of And again, for questions, that is Star 1 at this time. We'll move on to Alan Klee with Maxim Group. Good afternoon. I'd like to hear your thoughts on mobile deposits and how you think this

33:48 Thank you, Alan. So first, congratulations on your new gig and great to have you on the call today.

34:15 We referenced in the prepared remarks a report that was just released by an organization called Cornerstone that did a couple thousand consumer surveys regarding digital banking and specifically the use of remote check deposit from a mobile device. I believe you can get a link to it through our website. If not, we can get you a copy. But it's really interesting not only to see As consumers kind of got forced to adopt digital banking, their feelings about, gosh, how easy this is and how convenient this is and how sticky it's going to be, that report, which again is not our report, but we certainly love the information that's in there, supports the hypothesis that you just outlined.

35:05 Consumers are saying, yeah, I did this mobile deposit thing, I did this digital banking thing, and I'm going to keep doing it.

35:14 Yeah, that seems to make sense. And then the numbers on identity are very good. The outlook is very good. How do you feel about – and this business has good gross margins, but itís kind of an emerging business. But can you remind us of how you think about what this can look like when itís more at scale?

35:43 Yeah, for sure. And, you know, just to remind everybody, you know, the identity business is a fast-growing business. We're investing heavily in it because the time is now. And the balance that we're striking is being disciplined and thoughtful about those investments, you know, so that as it does scale, as all these cloud mobile businesses do, you know, it turns to break even and then very highly profitable. I'll let Jeff make some comments as to where that can go, but... We're still in that investment stage today, but every quarter and every year we're thinking about what the right discipline and what the right balance is. This is absolutely the kind of business that as it scales, there's a lot of leverage in it. I don't know, Jeff, if you want to bracket that with anything more specific.

36:35 I think the only thing I would add is, you know, on the gross margin line, that will improve over time. And, you know, the reason that improves is we're delivering this in the cloud. And, you know, as cloud businesses go, the more and more volume you put in, you get more efficiency and you can leverage the cloud. So it'll be a, you know, more profitable model at the gross margin level. Also, if you recall, we provide agent assist services when our automated systems are unable to read the documents. And as our systems get better and better and improve, less and less agent assist resources will be required, and that'll help improve gross margin as well.

37:21 Thank you so much. And then just, I apologize, but When you were going over the patent litigation, the litigation stuff, when you talked about the efforts that you were making where you went to the patent office, could you just repeat kind of what the actions were and what your next steps are with that?

37:44 Yeah, so specifically on the PTO, we had asked the PTO to crack those USA patents open and take another look at them and they refused to do that on a procedural matter. It had nothing to do with necessarily the validity of the patents and the challenge there. And that's really the sum of that part of the prepared remarks. Other than that, it's really not a lot of change since the last update.

38:13 And so what are you planning to do as a result of that?

38:21 Right now, there's not a lot for us to do. You know, both the courts and the patent office, while they're still open due to COVID, things are just, you know, what is normally a glacial kind of timeline and very, very slow progress has managed to downshift into something that's even slower.

38:43 Got it. Okay. Thank you so much. Once again, for any further questions, that is Star 1 at this time. and with that I would like to turn things back to Mr. Kehrli for any closing remarks.

39:06 Thank you operator and thank you everyone for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day. And again that concludes today's conference. Thank you all for joining us.