Mitek Systems (NASDAQ:MITK) Q3 2020 Earnings Call

0:00 Welcome to the MyTek Systems Third Quarter Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded, and at this time I would like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead.

0:13 Thank you, Operator. Good afternoon, everyone, and welcome to MyTek's Third Quarter Fiscal 2020 Earnings Conference Call. With me on today's call are MyTek 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, Mytek issued a press release announcing its third quarter fiscal 2020 financial results. That release is available on the company's website at myteksystems.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 that are likely to influence the business going forward.

0:58 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. 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-K and 10-Q for a complete description of these risks. Our statements on this call are made as of today, July 30, 2020, 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 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.

2:05 With that said, I'm going to turn the call over to MyTech's CEO, Max.

2:10 Thanks, Todd. Good afternoon, everyone, and thank you for joining us today. Before I cover the highlights of our strong Q3 performance, Let me first restate our commitment to the well-being of the Mytek community during these challenging times. We continue to safely operate at full strength while working from home and applaud our global team members who remain highly effective in all aspects of our operations and are delivering on all service levels. Mytek is steadfast in our commitment to empower trust and convenience in the digital economy, and we strive to ensure that all businesses are able to operate safely online to our simple to use, secure identity verification solution. To reference a recent Forbes article, the pandemic has put trust in remote digital onboarding center stage, and it's not just banking. Government benefits, health services, online education, dating companies, and gaming are just some of the sectors witnessing the demand for identity know your customer services.

3:13 COVID-19 has also accelerated the adoption of digital banking and with it, electronic check deposits. Mytek remains the clear market leader with its remote check deposit solution, which is used by more than 7,000 financial organizations and has enabled over 4 billion electronic deposits. During this rapid shift online, Mytek is proud to provide a secure remote environment that enables digital transactions. With that, let's turn to our strong third quarter results. We delivered record revenue of $25.4 million, representing 16% growth year over year. We also generated non-GAAP net income of $6.8 million, or 16 cents per diluted share, which is up 43% year over year, and cash flow from operations of $9 million.

4:06 SAS transactional revenue grew 42% year over year, validating the positive momentum in the identity verification market, and we continue to experience growth from our highly profitable deposits product line with consumers and businesses adoption and utilization continuing to increase. If there was ever a time when mobile check deposit was essential, it is now. Outside of the expected consumer usage from stimulus checks, banks continue to invest significant resources to meet the rising volume of active users in mobile and digital channels. As anticipated, growth levels for the mobile deposit business increased this quarter. While this growth in transactions didn't immediately impact our revenue, as we sell blocks of transactions in advance, this growth in usage will eventually flow through to revenue as banks expend their licensed transaction volumes faster than planned.

5:06 We are proud of our mobile deposit offering and its ability to both assist people in this time of need while also providing layers of defense against fraud. Now onto identity. The COVID pandemic has changed the way we live and work forever. Financial services and online marketplaces face shifting fraud landscapes, and companies and consumers that formerly transacted business primarily in person have been forced to embrace a digital-first approach. The need for fast and secure remote services is magnified, and regardless of where our customers were in their digital transformation journey, they are now looking to accelerate it. Digital identity verification is an essential use case in this new economy. Using it, businesses are able to quickly and accurately verify legitimate customers online, which in turn helps them mitigate fraud and stay compliant.

5:58 It is therefore not surprising that adoption of identity verification as a service Thank you for joining us. A European customer who is a leading provider of digital identities in Europe is able to quickly rise to the increased demand in digital applications due to COVID-19 relief packages. Through their automated identity proofing process using mobile verify, they were able to provide secure access to critical government benefits for citizens impacted by COVID-19.

6:56 These two examples highlight my tech's ability to scale as well as the short-term advantage We are proud to have partnered with our customers during these challenging times. It is still impossible to predict the longer-term impact that COVID-19 will have on our current customers and our pipeline of potential new customers. We see some customers returning to normal volumes while other customers are still navigating the unknown as large swaths of the global economy are being affected. In your term, we continue to execute on our growth plan through channel expansion and continued product development. Channel partners who extend our offering into adjacent segments provided positive momentum in this quarter.

7:45 One example was our product launch with the Venetian Casino and Resort. MyTech Mobile Verify is incorporated into the Agilisys Our Guest Express mobile product. This solution enables hotel guests to check in remotely and bypass the front desk and traditional check-in procedures. This innovative solution supports the customer's need to meet new social distancing requirements while also allowing guests to skip long check-in lines. The Venetian reopened on June 4th and preliminary results from our go-live have been very positive. Having this stature of a hotel as a successful first client is a critical milestone for our partnership with Agilisys. as they look to be the leading provider of hospitality software to hotels, resorts, and restaurants around the world.

8:34 We also signed a new partnership to address the significant opportunity in the e-notary space. In response to COVID-19, many states have issued emergency measures allowing notaries to perform remote online notarization. At the same time, Congress is pushing to pass the new Standardizations and Secure Notarization Act. which would authorize every notary in the U.S. to perform remote online notarization as companies turn to digital services in the wake of social distancing regulations. With MyTek Mobile Verify, eNotary users can simply submit a picture of their driver's license or other government-issued ID document along with answering a few questions to quickly determine the authenticity of the user and their identity.

9:20 This will ensure that sensitive documents are only shared, signed, and notarized with verified parties. Innovation and product development are intrinsic parts of our growth plan, and adoption of our face-compare with liveness detection technology has been very well received in the global markets since its launch in February. This high-assurance biometric signal is an important competitive differentiator for MyTech. Another clear differentiator for Mytek is the caliber of our professional services, customer success, and support organizations. This quarter was no exception, with record implementations and go-lives collectively contributing to our one-of-a-kind banking-grade reputation. We are committed to helping our customers and partners as they adapt to recover faster and attempt to emerge from this crisis stronger.

10:11 We continue to invest in talent and innovation and successfully onboard onboarded new hires across the globe through effective remote processes. In closing, we are pleased with our results, which include record revenue and significantly improved profitability. I'm proud to lead the Mytek workforce, who has rallied to deliver the technology, products, and services that our customers need and value during these extraordinary times. We have the teams, the vision, the technology, and a market need of a solution that Mytek is uniquely positioned to deliver. Together, this amounts to a significant opportunity for all our employees and shareholders. Now I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we'll open the call up for questions.

10:58 Jeff, please go ahead.

11:01 Thanks, Max, and thank you, everyone, for joining us this afternoon. Let's start with the Q3 revenue and operating results. For the third quarter of fiscal 2020, MyTech generated record revenue of $25.4 million, Thank you for joining us. to 7.6 million.

11:48 During the quarter, as a result of the pandemic, we saw varied impact on customer transaction volumes and revenue. We had certain customers experience large increases in traffic but then others with large decreases. The biggest volume swings were in March and April and began to taper off in May and June. The net impact for the quarter was an increase in our transactional revenue of 3% sequentially to 7.6 million. As we enter Q4, these volume increases have fallen off. For Q3 2020, deposits revenue increased 13% year over year to $16.9 million. Identity verification revenue increased 23% year over year to $8.5 million.

12:37 We delivered strong software and hardware gross margins of 95% for the quarter. Gross margin on services and other revenue was 76% for the quarter. Total growth margin for the quarter was 86%, which was consistent with Q3 last year. Total gap operating expenses, including cost of revenue, were $24 million compared to $24.8 million in Q3 last year. This decrease is primarily due to the $3.2 million restructuring charge related to our Paris operations recorded in Q3 last year and a decline in acquisition-related costs and expenses. These decreases were partially offset by our continued investment in operations to grow our business and increased litigation costs.

13:25 Sales and marketing expenses for the quarter were $7.8 million compared to $6.9 million a year ago. R&D expenses were $5.1 million compared to $4.7 million last year, and our G&A expenses were $5.9 million compared to $5.1 million a year ago. Gap Net Income for the quarter was $1.3 million, or $0.03 per diluted share. Our diluted share count was 42.4 million shares compared to 39.9 million shares a year ago. As a reminder, our earnings release includes a reconciliation between gap and non-gap net income. We believe non-gap net income provides a useful measure of the company's operating results by excluding acquisition-related costs and expenses, stock comp expense, and the related tax impacts of these items.

14:17 Non-GAAP net income for Q3 increased to $6.8 million or $0.16 per diluted share compared to $4.8 million or $0.12 per diluted share a year ago. Our non-GAAP adjustments include $2.5 million of stock comp expense, $1.7 million of acquisition-related costs and expenses, $1.4 million in cash tax difference, and $1 million of litigation expenses for the quarter. This was all offset by the income tax effect of pre-tax adjustments of $1.2 million. Turning to the balance sheet, we generated $9 million in cash flow from operations during the quarter, bringing our total cash investments to $52.2 million at June 30th. Our accounts receivable balance of $12.9 million represents a DSO of 48 days.

15:08 In closing, we are pleased with our results for the third 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. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. And we will hear our first question from Bob Ansuri from William Blair. Please go ahead.

15:46 Hey, guys. Congratulations. This is a great, great set of results. Nice job, given the tough, tough environment. I mean, I want to touch first maybe on the identity verification side. You've obviously seen like a nice uptick in demand, especially with some of the partnerships with the e-signature companies. You obviously touched on remote notary. You know, you saw DocuSign acquire LiveOak. Just update on those partnerships, how they're progressing, and maybe a little bit on the go-to-market with these partners that, you know, significantly larger if we pick DocuSign or someone like that. But how is that go-to-market playing out for you because you provide such a critical service around that? So some color in that would be great, and then I've got a quick follow-up. Sure.

16:26 Well, thanks for the props, Bhavan. Yeah. You know, the channel for us, augmenting our direct selling with a channel sales has been a – Thank you for joining us. that they're sitting on top of. And e-signature is a great example, right?

17:11 We all use e-signature all the time, but there's a segment of e-signature that requires a step up to a higher level of authentication, up to and including now with the e-notary. So I think you'll see that become a bigger and bigger part of our business. You know, we're investing not wildly there, but we're investing very thoughtfully there. And what we found when we can get a partner like Anagilosis, when we get a partner like DocuSign or Adobe, You know, once we're integrated, you know, they're able to act as that channel. And I think to your question about the enablement, you know, the enablement is just a, you know, it's a much easier lift because you're basically continuing to repeatedly deliver that same broader application, whether it's e-signature, e-notary, or in the case of Agilisys, you know, what they do for hotels and, you know, basically being the lifeblood or the backbone of the Hotels, Restaurants, and Casinos. Does that help?

18:11 Yeah, no, no, that's really helpful, yeah. Yeah, I guess, and now this one's maybe for you and Jeff there, but, you know, if I look at the e-signature workloads, you know, let's assume we find a vaccine, hopefully, and we move past COVID, which I know we will at some point, and you think about the one-time items, right? And so e-signature for e-notary deduction, it doesn't feel like that's going to go back to paper. That makes a lot of sense. The idea of someone checking the hotel, maybe now people want to check in themselves as opposed to an app because the self-checking has been available for a while, but it's been through traction. And then if you think about mobile check deposit, there's absolutely just traction because no one's going into banks. But when you look at sort of the idea of a one-time item, and churn's the wrong word, but if you think about the growth rates and the benefits you're seeing, how would we think about sort of what that might look like in a normalized environment? The go-to-market with the signature guys doesn't go back.

19:04 Totally get that. Are there other parts of growth we're seeing that may be returned to a more normalized fashion, and how should we think about that?

19:10 Thank you. Yeah, so it's hard to predict, right? I mean, you used some good examples. But even with the agilicists with the self-check-in, you know, self-check-in to avoid the contact is one element. But I think when we embarked on this relationship with agilicists, It was really more around line busting, right? When you walk into Caesars Palace and there's 400 people in front of you in the check-in and you spend two hours on your phone sitting there waiting to get to the front desk to be able to check in. So that was the original kind of business case for it. I think it's just been accelerated with the contactless. But to your point, some of the things we saw in the last four months with the financial customers we have, PPP loans, we saw a ton of applications Thank you for joining us.

20:22 I would cross my fingers, as much as I love to have the business, I would cross my fingers that a year from now we're talking about that.

20:27 Right. Yeah, right. So, I don't know, Jeff, did I miss anything in there?

20:34 I think you hit it right on. You know, I think, Yvonne, you referred to some of the applications or uses that I think will just contribute to this becoming more of a norm for people and it'll be a repeatable thing that you see. But there are definitely those cases like we did see in the quarter where there were some spikes that, you know, in the way Max put it, we hopefully don't see that, you know, people needing government services, you know, continually. So those things will definitely, you know, retreat and come back down.

21:07 Yeah, yeah. And while it's hard to quantify, I appreciate you guys giving us the transparency into the puts and takes. Thanks, guys. And like I said, really nice job. Congrats.

21:17 Thanks, everyone. Thank you. And our next question will come from Mike Rundahl with Northland Securities. Please go ahead.

21:28 Hey, guys. Congratulations on the quarter. First question is just could you talk a little bit about the increased demand for in mobile check deposit, just kind of the level of it. I know revenue is lagged a little bit, but just, you know, to what magnitude did you see?

21:50 Yeah, so both anecdotally from, you know, member banks and then the actual logs we get from, you know, the direct banking relationships and then those reseller providers, the core service providers, all indicated that, you know, the volume of checks going through the systems I'm going to let Jeff talk a little bit to remind everybody as to how the model works there because there'll be a latency between seeing those increased volumes and then actually seeing that matriculate into revenue for us.

22:32 Yeah, Mike, as you understand, the model for the mobile deposit, the revenue will flow through later. So, you know, the banks, the partners, they purchase big tranches of mobile deposit transactions. They use them up and then come back. And, you know, this increased usage, there definitely was increased usage during the quarter. You know, what we used to see is, you know, I would describe to you in the lower, you know, teams, closer to 10%.

23:01 You know, it's well above that, you know, closer, you know, below 20s.

23:05 So really good growth in the quarter in usage. And then that'll flow through, you know, over the next, you know, multiple quarters, you know, as different banks and processors expire the lots that they've purchased already.

23:23 Sure, sure. Just to help you out there, I mean, some of the bigger banks report those stats in their earnings calls, and you can kind of go back through their transcripts. Like we saw the note last week from U.S. Bank where they had a greater than 10% increase in mobile deposit checks and a 5% increase in active users of their mobile banking software, their mobile banking apps. So, I mean, that info is out there.

23:51 Yeah, sure. I wrote about it a week or so ago with what Wells Fargo said. I was just curious from your view what you guys thought. And Max, what's the current update on pricing power? I mean, you got 7,000 banks. I don't think you've lost a bank customer. And yet now this product seems even in more demand. Do you have pricing power with it? Kind of where is that?

24:22 I think we've reported on that pretty consistently, Mike. I mean, we've been at this now over a year. I think the team has, you know, has picked that up and run with it. We're not in any way being unfair with our customers or our partners, but we're delivering a tremendous amount of value here. You know, we've got eyes on that. We understand exactly what that value is to the banks and to the partners and, you know, Some of the contracts, you know, are just being renegotiated so that they're more reasonable for both parties. And you're starting to see that, you know, basically our results represent increased volumes of checks being processed through mobile apps and then getting better economics in those relationships as those checks are processed. Whether those checks are being processed mobily or whether they're being checked, you know, we've got the software in the ATMs and in the horseshoes and the branches as well. So, you know, were prosecuting that pricing power in each one of those channels.

25:21 Got it. And then maybe just lastly, I think you said you had record implementations in mobile ID. How elevated were those?

25:35 Yeah, so we tried to shy away from Providing too many statistics about go-lives and, you know, how many customers are selling because what we know, you know, from our install base of hundreds of customers on the identity side is the biggest customer, it's very Pareto's law, right? And, you know, the top customers, you know, generate over 50% of the revenue and it's not a volume gain, it's really a quality gain. So coming back to your question, something like 25 additional customers And again, if you would like to ask a question, please signal by pressing star 1. and we will take our next question from Darren Aftahi from Roth Capital Partners.

26:44 Please go ahead.

26:46 Hey, guys. Thanks for my questions and I hope you're well. So, can I just follow up on the comment you just made, Max? So, in terms of kind of quantity versus quality, how would you characterize those 25 or so additional implementations in the quarter of 90?

27:04 When you say quantify, what do you mean?

27:07 Well, I mean, in terms of the quality of the customer, I mean, you know, super strong, large, they're going to generate a ton of transactions. There's a lot of stickiness. Oh, yeah, yeah, that's helpful. Yeah, I get it.

27:18 I get it. Yeah. So you'll remember, if we go back to the beginning of our fiscal year, one of the things we talked about in our, I think it was our November earnings call, was some of the adjustments we were making to our go-to-market activities in the identity business for this fiscal year. And a big part of that was bringing more focus. We talked about focusing in on financial services, fintech, and marketplaces, the sub-market segments we were after. We were really clear as to what countries we were looking for customers in, the U.K., Netherlands, Spain, that kind of thing. and then within that, we took an approach where we're really more around target accounts. So our sales teams, our direct sellers, don't have geographic territories. They have target account lists where we're fishing with spheres. We're not fishing with nets here.

28:09 So the overarching answer to your question is for the last three or four quarters, we've been very thoughtful and intentional around trying to find the largest lifetime value target accounts and many more. That's a long-winded way of giving the context of I'm really happy with, you know, we got some really big names on the financial services side and some really big names on the marketplace side and some names in fintech that, you know, we're going to wake up two or three years from now and, you know, they'll be the leaders that, you know, kind of dominate the market.

29:02 So feel really good about it.

29:05 Great. Thanks for that. So just with kind of the pull forward shift, you know, people are seeing in things like e-commerce, It sort of begs the question, whether COVID's present or not, like how instrumental a branch is for a bank. And so with your position in mobile deposit, like I'm just kind of curious, maybe in the last 90 days, how that kind of demeanor of, you know, banks on the ID side and working with you and maybe pipeline changes has kind of transpired on products that are being mortgaged, signing up DDAs, etc.? ?

29:44 Yeah, well, so I guess if we break this into two pieces, you know, on the mobile check deposit, you know, a good point around branches were kind of in decline before there was a thing like COVID, just demographically, and that's both domestically, and we've seen that, you know, in Europe as well. You know, there was a Javelin study that came out in June of this year. And, you know, moving to digital, the features that banks are using to move to digital mobile check deposit was the number one thing. So and many, many more. Thank you for having me.

31:03 Thank you for joining us. If you're not going to make it just because your business isn't sound or because you didn't move to digital fast enough, that's one less opportunity for us.

31:39 That's a balanced view. Lastly, just any update on IP and what's going on in the legal side of your business. Thanks.

31:53 Hey, Darren. There's really not any material update to what's going on there. We're pretty much You know, where we were at the beginning of the quarter, waiting for the courts and the patent office. So, you know, both courts in Texas and then the patent office has several review requests sitting there. So, waiting to hear back on those and we'll share what we know.

32:19 Great. Thank you. And with no further questions, I'd like to turn the call back to Todd Kehrli for any additional or closing remarks.

32:31 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 this concludes today's conference. Thank you for your participation, and you may now disconnect.