Mitek Systems, Inc. (MITK) Q4 2012 Earnings Report, Transcript and Summary

Julie Cunningham – VP of IR James Debellow – CEO Russ Clark - CFO

(Patrick) – William Blair & Company Adam Letson – Piper Jaffray Tom McCrohan – Janney Joel Achramowicz – Merriman Capital

Welcome to the Mitek Systems fourth quarter and fiscal 2012 earnings conference call. At this time, all lines are in a listen-only mode. (Operator Instructions) And now I would like to introduce Julie Cunningham, Vice President of Investor Relations.

Thank you, (Chanelle). Good afternoon and thanks, everyone, for joining us. With me on the call today is Mitek CEO, James Debellow and Russ Clark, our CFO. The agenda for today's call includes comments from Jim followed by a discussion of the financial results from Russ. Before we begin, I'd like to make some brief introductory comments. This afternoon, Mitek issued a news release announcing its fourth quarter and full fiscal 2012 financial results which is available on our website at www.miteksystems.com. Additional, this call is being broadcast live over the internet to all interest parties and the audio of this call will be available on the investor relations page of our website and archived there for 30 days. During the call, we will discuss some factors that are likely to influence our 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 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 for a more complete description of these risks. We will also discuss non-GAAP financial measures during the call. We believe that these measures are useful to evaluate the company's performance. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release on our website. And with that, I'll turn the call over to Jim Debello.

Well, thanks, Julie, and good afternoon, everyone. Today we announced our fourth quarter and fiscal year 2012 results. Total revenue for the fourth quarter of fiscal 2012 was $1.2 million compared to total revenue of $3 million in the fourth quarter of fiscal 2011. Total revenue for fiscal 2012 was $9.1 million compared to total revenue of $10.3 million in fiscal 2011. I can tell you that no one here at Mitek thinks that our year-over-year financial performance is acceptable, especially me. I believe that this revenue gap was largely timing related from both a market and product perspective. I am happy to announce, however, that earlier this month, Mitek signed its first contract directly with a top 10 bank for mobile photo bill pay. And separately, last month, Walmart announced its Blue Bird prepaid card from American Express, the ability to snap a photo of a check, to deposit funds on a prepaid card, was noted in a first paragraph in the New York Times article announcing this product and this is enabled by Mitek Mobile Imaging technology. This is one of 20 such prepaid projects in which we are involved nationally. Our technology is touching more and more consumers across all socioeconomic segments. I'd like to take a step back for a moment and discuss our historical revenue model. We're successfully becoming a multiproduct company. However, the majority of our revenues are still derived from our mobile deposit product. Our revenue model for mobile deposit has enabled us to invest in developing and patenting this technology. And as many of you know, we sell blocks of mobile deposit transactions and recognize revenue and collect cash up front. As those transactions are absorbed over time, we expect to receive reorders of more transaction blocks. However, the lumpy nature of…

Thanks, Jim, and good afternoon, everyone. As I review these numbers, all figures quoted are on a GAAP basis unless specifically noted as non-GAAP. We've provided a full reconciliation from GAAP to non-GAAP along with the earnings release which is posted on our website. I'll begin with the fourth quarter results. For the fourth quarter of fiscal 2012 revenue totaled $1.2 million compared to total revenue of $3 million for the year-ago period. Fourth quarter revenue was comprised of approximately $525,000 in software sales and $695,000 in maintenance and (PF)s. We had one reorder during Q4. Total operating expenses were $4.2 million compared to $3.3 million in the year-ago period and included $616,000 of non-cash stock compensation expense compared to $380,000 in the year-ago period. Now let me break down Q4 expenses by category. Cost of revenue in Q4 was $293,000 of which $180,000 was related to cost of maintenance and (PF)s. This compares to cost of revenue of $270,000 in the year-ago period. Gross margin for Q4 was 76% compared to 91% in the year-ago period. The year-over-year decline in gross margin was primarily due to a lower mix of license versus maintenance and (PF) revenues. Selling and marketing expenses were $808,000 compared to $779,000 in the year-ago period. R&D expenses were $1.6 million in Q4 compared to $1 million in the year-ago period. The year-over-year increase in R&D expenses reflects our continued investment in developing new products. G&A expenses were $1.5 million in Q4 compared to $1.2 million in the year-ago period. Our headcount at the end of Q4 was approximately 50 versus 32 in the year-ago period. GAAP net loss was $3 million or $0.12 per share in Q4. This compares to net loss of $219,000 or $0.01 per share in the year-ago period. Non-GAAP net loss…

(Operator Instructions) Your first question comes from the line of Bhavan Suri – William Blair & Company. (Patrick) – William Blair & Company: I guess first of all, I assumed there wasn't any remarks in your comments about any lost banks during the quarter or anything like that. I guess did you guys have any partner losses or were there any bank losses?

There were no bank losses. In fact, we had our largest quarter ever in terms of signed new banks. And if you add the prepaid part to this, it got even larger. So we're very confident that our momentum continues in signing these new customers. You know, (Patrick), that with the top 50 banks they have a very large market share, so we are focusing largely on the top 50 to engage with them and to get them to market and that will drive absorption of the prepaid blocks of transactions. But we feel very strongly that we continue with momentum. It continues to be a very important product and one of many products now offered by Mitek. (Patrick) – William Blair & Company: I guess was there any change in the competitive environment from – or even from a reseller standpoint or partner standpoint? Did you guys have any losses on the resellers or partners? I guess just what is the competitive environment like as of now three months down the line from last quarter?

We have not had any losses of any of our partners and our partners remain active and engaged with Mitek. During the course of the quarter, one of our partners announced a deal for international distribution of a competing product in a market in Canada that we have provided exclusivity to (MCR). That remains a partner who remains loyal to us in the US for distribution of our product. (Patrick) – William Blair & Company: And then I guess focusing on the on bank market or the Walmart announcement, I guess can you talk about in detail maybe a little bit more of how that pricing is going to be set up through that program?

In terms of pricing for prepaid, we're accessing and serving those markets really through our existing channel partner network. So the pricing for the 20 we announced is really fairly consistent with the pricing for our mobile deposit because we're, again, going through the same channel partners to get there.

Your next question comes from the line of Adam Letson – Piper Jaffray. Adam Letson – Piper Jaffray: The first question I have, just based on the revenue lumpiness and the acceleration of signings during the quarter, is it safe to assume that the banks you brought on are much smaller than what you brought on in the past? Or how can you talk – can you talk about the mix banks that you brought on during the quarter?

Sure, I think if you look at the number that we signed during the quarter – and getting back to Jim's comments on our focus on the top 50 – we noted 28 of the top 50 and we've been disclosing 25 in the past. So we did add a few of the top banks and a large number, 160-something, in total banks. So you can see the mix has a higher percentage towards smaller banks but, again, we're focused on larger ones from a market share perspective as well. Adam Letson – Piper Jaffray: Was the lower revenue driven by a lack of reorders or smaller upfront fees that you brought on during the quarter?

It's really a combination of both. As I mentioned, we had one reorder during the quarter. We announced that we had four reorders in our fiscal Q3, so that definitely had an impact on our revenue results for our fiscal Q4. Adam Letson – Piper Jaffray: And then if you can just give a little bit more color on the delay for the bill pay rollout and what happened there and when do you see that actually going live?

The deal was signed earlier this – sorry, in last month, in October. And the large bank partner is in the process of going through integration with launch to be determined. Commercially probably in the New Year but it's really up to the partner to decide when it's optimal timing. So we're excited about that. We have others in the pipeline. The product is more complex than even check, which is a very complex product because the efforts at Mitek with our imaging technology is to simplify the consumer experience, one snap to capture all the vital details. In the check world, check are very standard. In the bills world, bills are very different but they contain similar information, payee, payer, the amount due, things like that. So the complexity was an order of magnitude greater. We have solved that complexity and we think deliver an equal user experience to that of mobile deposit.

Your next question comes from the line of (Michael Thomas – Jaime).

So there was no guidance provided in 2013 and I'm wondering at what point in time can investors expect Mitek to provide some semblance of financial guidance?

I think as we've talked about on these calls in the past – and Jim had some commentary and I did as well – we continue to experience volatility on our top line due in large part to the revenue recognition model for mobile deposit. So in terms of getting to a point where we feel that we have more predictability on revenues in terms of timing of mobile deposit deals and with factors such as reorders and so forth, we're not at that point yet. As you mentioned, we haven't given guidance out here to date. We're going to have to continue to monitor the predictability of our top line to be in a position to have confidence with any guidance that we would issue out to the public. And again, I think as we mentioned, as we move into selling more bill pay and MIP deals, we expect a more recurring revenue model with some upfront fees and some transactional fees. So at some point, if we get a big enough composition of those other recurring deals, we would expect a high enough level of confidence in the recurring revenue to be in a position to give guidance. We're not at that point today.

Russ, what percentage of revenue today do you think is recurring?

Well, as you can see, we did about $700,000 in Q4 of maintenance and (PF) revenue, the high percentage of that is maintenance. So you've seen during the year anywhere from $500,000 to $700,000. It's grown to $700,000, so we like to see the growth in the maintenance base but that is really our recurring stream as we do business today.

That implies – that's midpoint about 20% of revenues today on average without recurring. So where do you need to see that percentage in order for you to get comfortable to provide guidance?

I think, Tom, certainly the majority of it – I've worked in other recurring revenue companies, HMC and FICO, where we had 80% recurring revenues, very predictable. You see start out the quarter with a large percentage of your number in the bank. We are working towards increasing our recurring revenue percentage. We understand externally that folks want more predictability and more visibility and we need to have that internally as well. So I think it would certainly be the majority of it. Does it need to get all the way to 80%? Maybe not but as you mentioned, 20% is just too low.

Question on usage trends, which I think you said were 25% this quarter, I think that was the same growth rate last quarter. I'm just trying to figure out how to interpret that given the quarter included – this quarter included be they launched the product, Wells Fargo, I guess, rolling out the functionality nationwide, so you've had more scale. You would expect that the trends stayed at 25%. So I’m curious how to interpret that.

Well, I think, yes, Tom, we mentioned or announced the last two quarters that our sequential transactional usage increased more than 25%, so some of the factors that you mentioned in terms of new larger banks rolling out and generating transactions certainly impact that. We are still in a mode where our lines of communication and reporting systems with our channel partners are improving. They're not perfect yet and they're not automatic, so we continue to improve those and compile more data. But again, over 25% transactional growth sequentially for the last two quarters; as you mentioned, there were a number of factors that impact that, including organic growth from banks that have been live for a few quarters. That's really the extent of the trended data we have and also new banks that come live during any given quarter.

Then the last question is just on cash flow in the amount of expense incurred related to the legal disputes. Do you call out how much this quarter was – how much expense was incurred related to the legal disputes and if you could also just talk about cash flow and what the operating cash flow was for the quarter?

We spent a little over $100,000 in legal fees related to litigation matters during the quarter. And again, those fees will fluctuate. I had mentioned around $300,000 the last quarter, so depending on timing of court cases and the court schedules, those are subject to fluctuation. They have been in the earlier stages of our case is relatively lighter to date, so we definitely keep an eye on those. So I mentioned the $1.8 million in operating cash flow uses for the year. I think if you back into the math there, that's going to put us at around $800,000 or so for usage for Q4.

Your next question comes from the line of Joel Achramowicz – Merriman Capital. Joel Achramowicz – Merriman Capital: I was wondering a follow-up, a lot of the guys had the same questions I have but can you – Russ, can you maybe give us any granular – let me ask the question this way: can you give us indication whether you feel confident you'll have a flat revenue quarter sequentially or maybe even up? Can you give us any thoughts with regard to that?

Joel, I can give you some thoughts. Again, we're still in the same mode with $700,000 in more recurring revenue exiting our fiscal 2012 so keep that in mind as we go into Q1 of our fiscal '13. But again, the other 80% of our revenue or so, I think as Tom pointed out, is going to come from these lumpy transactions. So again, as we get through fiscal '13 with new products, we expect more of a mix. But in the immediate term, that mix will continue to include blocks of mobile deposit as well as, as we get into these new product areas, a mixed model of upfront license fees and recurring transactional fees. So the good news there is that as we move into these new areas, we expect to continue to rebuild the recurring base. However, in the near term, we still have that – we're starting at $700,000 of revenue in the bank each quarter and we have to go out and hunt the rest. Joel Achramowicz – Merriman Capital: Do you have any indication or have you considered putting together any type of – any structural, numerical structure that would give you an indication of the balances and the transactional activity both through your partners, your major aggregators as well as direct banks so you can get a handle on this? I guess from our perspective, we would like to believe that somewhere down the line this thing's got to kick in again, right, because you're signing up additional banks and you're talking about transaction activity in (RDC) decreasing, so something's got to run out eventually we've got to see. So does that mean we're going to have just a huge quarter sometime? I guess maybe that's going to happen. What do you think?

Joel, I think to have that huge quarter it would take a number of large reorders lining up all at one point in time. You can look at historical revenue trends over the last several quarters and we were fairly consistent for a few quarters there up until Q2. So we're in the mode now. Again, we announced four reorders last quarter, one reorder this quarter. So in terms of transactional systems and so forth, again, we do communicate frequently with our partners and accumulate transactional data that we can get but those aren't perfect systems today. Joel Achramowicz – Merriman Capital: But your R&D investment continues to remain stable and strong. Do you feel confident to maybe give us an indication of where those monies are going, what kind of projects? Obviously we didn't hear very much about the insurance. I think Jim touched on Progressive briefly, but are we seeing any traction with the quotation product there and what about some of the other insurance products we were talking about before?

Joe we are; this is Jim. We have had success with the initial launch and it was a pilot launch really with Progressive last year and they advertised it nationally. You may have seen those ads. They have been in Mitek as recently as last week. We're interacting with them regularly on expanding that nationwide as well as adding additional use cases. They're looking at application to claims and agent use cases, which would facilitate more efficiency using snap of a camera photo of some of those paperwork that they have to process. So that's important with Progressive. It speaks to our land and expand, work with our customers very closely, large, influential customers like Progressive, support them with all of our efforts and do a great job and then extend it to other use cases within the organization and obviously derive economic benefit from that and they derive benefit to their customers and to their internal operations. Secondly, to go down the path then and to be able to engage with other property and casualty insurance companies, and we are. We have one notable one in pilot right now and that has been a very positive pilot and we expect that to grow into commercial deployment sometime in 2013. We've conducted webinars. We've been well attended with other insurance companies and our pipeline has deepened there. So it is a very exciting area, which is ancillary to banks and financial services in the insurance area. And beyond that, we are getting inquiries from other types of vertical markets. And not to name any names today, these are inquiries, they have discussions but we think we'll land some of these other big influential companies in different verticals. It could be as far ranging as healthcare, transportation or other services. Joel Achramowicz – Merriman Capital: And so you continue to remain positive about the insurance sector potential there.

We do, absolutely. Joel Achramowicz – Merriman Capital: I might just – did you book any or recognize any revenue from insurance at all in the fourth quarter, Russ?

Joel, we don't disclose revenues by product line or vertical, so I'd probably just leave it at that.

I would now like to turn the call back over to management.

We'd like to thank everyone for joining us for the call today. Your questions, we'll be happy to speak with you individually and I look forward to our next call with all of you in 90 days. Thank you so much.

Ladies and gentlemen, this concludes today's conference. To listen to the replay, please dial 1-888-286-8010 or international callers, 1-617-801-6888 and use the replay pass code 14521904. The replay will be available for 31 days. Thank you for your participation. You may now disconnect. Have a great day.