Good day and welcome to the Mitek First Quarter Fiscal 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Todd Kehrli, with the MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Mitek's fiscal 2018 first quarter earnings conference call. With me on today's call are Mitek's Chairman and CEO, Jim DeBello, and CFO Jeff Davison. Before I turn the call over to Jim and Jeff, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its first quarter fiscal 2018 financial results. That release is available on the company's Web site at miteksystems.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's Web site. I’d like to remind everyone that on today's call, management will discuss certain factors that are 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. 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 more complete description of these risks. Our statements on this call are made as of today, January 25, 2018, 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 will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K 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’ll now turn the call over to Mitek's CEO, Jim DeBello.

Well, thanks, Todd and good afternoon, everyone. Thanks for joining us. I am happy to report today that Mitek grew revenue 31% year-over-year, a record for our first quarter. The growth was driven by continued momentum from both our digital identity solutions and our industry-leading mobile deposit. Additionally, our non-GAAP net income increased 4% year-over-year to a $1 million or $0.03 per diluted share, representing our 16th consecutive quarter of profitability. We made significant progress in our identity verification business this quarter, driving year-over-year growth of 29% number of ID customers, a 117% in SaaS transactions, and 116% growth in our SaaS revenue. And the strength of our growing and profitable mobile deposit business continues to be a solid springboard that positions us to capture further growth in the multi-billion dollar global digital identity verification market. Some of our notable new customer acquisitions for our identify solutions during the first quarter included one of the world's largest investment management companies who will be using our technology for new account enrollment. We also signed one of the world's largest airlines for mobile check-in for international flights and we added one of the largest global rental car companies who plans on using our identify verification to facilitate a self-service check-in. We see the travel vertical as a huge opportunity for our solutions as it represents a significant recurring transaction opportunity. In addition to growth from new customers, we had several renewals for our identify platform, including a renewed agreement with a top five bank in the U.S. Mitek is redefining how consumers around the globe verify their identity in a digital world. We live in an era of rapid digital transformation, the advent of 5G networks and connected devices, even cars, will accelerate this. Meanwhile, government IDs remain the universally accepted identity…

Thanks, Jim, and thank you everyone for joining us this afternoon. Let's start with Q1 revenue and operating results. For the first quarter of fiscal 2018, Mitek generated revenue of $12.1 million, a 31% increase year-over-year. Software and hardware revenue of $7.2 million was up 20% year-over-year. We maintained strong blended software and hardware gross margins at 90% for the quarter. With the acquisition of ICAR, we now have a small hardware component to our revenue and as such we have cost of goods sold for the hardware which carries a lower margin than our software revenue, plus the change to our blended gross margins. Services revenue which includes SaaS, maintenance and consulting, was $4.9 million for the quarter, an increase of 50% over last year's Q1 revenue of $3.3 million. This increase in services revenue is due primarily to growth in transactional SaaS revenues from our mobile identity products which increased 116% year-over-year to $2.6 million. Services gross margin were consistent at 82% for the quarter. Total operating expenses including cost of revenue were $14.4 million, compared to $9.9 million in Q1 last year. The year-over-year increase in operating expense reflects our continued investments to grow our identity business, as well as the addition of the operating cost associated with the acquisition of ICAR. Sales and marketing expenses for the quarter were $4.8 million compared to $3.8 million a year ago. R&D expenses were $3.3 million compared to $2.5 million last year and our G&A expenses were $3.5 million compared to $2.2 million 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 companies operating results by excluding acquisition related costs and expenses, stock comp expense and litigation costs related to…

[Operator Instructions] And we will take our first question from Bhavan Suri with William Blair.

I wanted to just first touch on the core mobile deposit business. Obviously a little more volatility in that then I guess we might have been thinking, seasonality and tough comps. But as you think about that business, Jim, how should we think about sort of the sustainable growth here. I mean you sort of suggested this has been good [healthy growth] [ph] given early penetration rates and continue growth in mobile, the options are in the 15% to 20% range. So as you think about three to five years, do we still think that’s a sustainable growth rate for that business.

We do Bhavan. We have consistently reported to the Street in our travels, a 10% to 20% growth factor for mobile deposit for the foreseeable future. The product continues to grow as it gains adoption and frequency of use. Bank of America, Wells and Chase recently reported separately their growth in their mobile banking business driven largely by mobile check deposits. I think other people have written about that and it's public information from those reports. So we remain confident in the product. We still run across people who don’t know it even exists. Which is remarkable to us. But the reports we get from the field from people who do know it exists, are very positive and delightful experience. Saves people time from waiting in line, as you know, at the bank. And from the bank's perspective, it reduces their cost footprint as they can reduce branches and teller costs. So it's a win-win and it will continue to grow.

Yes, it's helpful, Jim. And I do know, believe me. And then turning to sales and marketing spend, you have sort of given us the year now but if I think about two to three years and you think about the opportunity, really dramatically on the mobile side, ID verification side. How do you think we are balancing sort of the operating margin expansion and the growth opportunity there, given it's a fairly Greenfield market. Just some sense of, maybe not guidance but how you guys are thinking about the sales and marketing line over two to three years.

I think Jeff reflected in his comments that we anticipate over 70% growth on the ID business in the upcoming quarter and beyond we don’t expect that to abate. So we consider this an opportunity to accelerate. We are investing in sales professionals to call on major enterprise accounts. But in addition to that and where we will get some leverage ultimately is working with channel distribution partners. As I mentioned in my remarks, we are working with Experian as our premier partner and who is the largest partner globally, but also other very interesting partners like IdentityMind and VASCO, who is just coming on line. And we think that channel of partnership will grow. So we are actively working with channel partners new and prospective to sell our products. And it think, Bhavan, we do have a history of success doing that. As you know that’s exclusively how we sell our mobile deposit product. So we understand that channel well, how to manage that and also how to manage direct sales and we are winning. And I like that. So we have had a lot of very interesting logos, as I mentioned. Both for global airline, the car rental agency, the large investment group. Those are all direct deals. But we will gain additional leverage from using the channel in the future.

Got it. Got it. That’s helpful. I guess the channel was largely, thinking about the financial services focus, and it feels like airline and all rest of it is a shift. Are you thinking sort of expanding the verticals, we have discussed them before. It feels like the verticals seem to be broadening. I would love to get a sense of sort of how you guys are thinking about that. Thank you.

There is two areas really we have to think about. One is geographic coverage and secondly our beachhead verticals. So specifically on [GOs] [ph]. We are focused on North America, Europe and the U.K., primarily. And as you know, through ICAR we have expanded into Latin America. That’s a handful and we are really focused on that. But within those geographies, we are focused primarily on financial services and in that I would consider payments, lending and credit providers, especially digital lenders. And then beyond financial services, what I would consider distinct vertical markets, travel, which would include airlines and car rental companies. Shared economy players as you would know, those would be individuals or companies that provide rental homes or rooms, and other services, even rental cars on temporary basis. And then beyond that we look at other industries such as telco. And so we like those a lot. Now, to broaden beyond that, I think we will be opportunistic. We do get a lot of incoming calls and enquiries from a variety of players. One of which I have mentioned in the past, is a major player in the healthcare market. Well naturally, we will pursue that opportunity and discover what the use case is and how we can effect that more in a more broadly revealed way. So our goal is to keep focus on those [GOs] [ph] and those verticals, what we call beachheads. And then as opportunities arise, explore other vertical markets and move adjacently.

We will take our next question from Joel Fishbein with BTIG.

I wanted to follow up on [indiscernible] on ICAR. I know it's early on but would love to understand a little bit about how that’s going so far and how you see that really growing your opportunity expand here.

Well, I like ICAR a lot because they bring a couple of things on the table. First, let's just focus on their IP. They are proficient in certain authenticity checks that they have deployed in their product that complement Mobile Verify, and we are in the process of integrating all of that today. Secondly, they bring to us deep knowledge in their labs and combined with our Mitek labs we do believe we have one of the strongest, if not the strongest, research team in the industry. And lastly and importantly they do broaden our geographical reach into Latin America. So those are the three reasons we looked at them, to acquire them. They are terrific people. The cultural fit is very strong. That is a major gate for our decisions to make sure that once we buy a company we can integrate well, and we have. So they will factor into our geographic expansion plans and our technical roadmap immediately, and they have. And they have performed well. In fact even better than we anticipated. So we like them and they will continue to grow.

For our next question we will go to Mike Grondahl with Northland Securities.

First question is just, the three new ID verify wins that you talked, the large investment manager, the large airline and the global rental car company. Could you talk a little bit about what the RFP process was like and kind of who you are winning against.

Well, I will, Mike. Clearly, this is an established category getting established as more and more companies are discovering that many of their consumers are coming into their systems via their mobile devices. And the problem as I identified is lack of clarity of who that individual is and the veracity of that application. So in the case of the airline, the use case is specifically for international check-in. Meaning we capture an image of the passport and we are able to extract information and verify that. Facilitate that process. There are benefits to the airline with regard to interacting with consumers on their mobile app. It's more immediate, it's more intimate. There is opportunities for cross-selling other services. So it's a win-win for both the consumer from convenience and friction, reducing that friction, and from the airline. We were in competition. We did beat the competition. In that particular case we have eliminated the incumbent. And so we felt very good about that which is a testimonial I think to the veracity of our platform and the ability that it provides. With the other wins, we find that we have a competitive set. We believe in our cloud model and our coverage globally that we compete very well and we are able to win these accounts against competition. So competitively we feel that our AI machine learning platform is the finest in the globe. It's continuing to get better and we get better by seeing more documents. So time to market, being in market early is really to our strategic advantage on a technical side as well as account win side.

And Jim, either or any of those three live yet, if they are not do you expect them to be live soon.

So Mike the answer is, they are not yet. Those are new wins and typically we have companies that are this size. They go through several processes internally to align with their release schedules on their particular apps. So we expect to be live at the latter part of this fiscal year, is what our expectation is with all three of these accounts. And that’s consistent generally with our experience with other major accounts. So, again, the beauty of working directly is that we control the sales cycle, the conversation, we are able to convey the benefits of the technology more crisply. The negative is dealing with large accounts, that they have their own agenda and timeline and resources and we have to conform to that.

Yes. Those are nice wins though. Nice use cases too. You mentioned on mobile deposit that a top five bank renewed in the U.S. Any changes in the terms?

There are none. Actually, that wasn’t a mobile deposit. That was an ID.

That was ID. Okay. I got that wrong there. Okay. And then on the ID side, guys, Jim, if you remember several years ago you put forth a few numbers that said, hey, if you walk into a bank and use the teller it's going to cost the bank a couple of bucks. At an ATM the deposit costs the bank a buck. If they do it with mobile deposits, it's ten cents roughly. Have you guys thought through or came up with the math on what that savings is for a customer who is using mobile ID for check-in or account opening. I think we know it well on the bank side and the banks are clearly embracing it. How does it stack up on the account opening side or kind of the check-in side?

We look at it a little bit differently, Mike. We look at the cost of customer acquisition, publish reports in the banking industry, speak to anywhere from $200 to $300, renew customer acquisition. Meaning that’s the total amount of funds it costs to acquire a new customer. So adding our cost is de minimis in light of what that overall cost is. So we think there is tremendous return on the investment of deploying Mobile Verify in to that cycle. Because the risk without doing that is that you lose customers. They abandon the mobile enrollment process. Very difficult to type in your name and personal information with your thumb on a screen, on a Smartphone. And often you get interrupted. So we call that abandonment and what the enterprise speaks to is funnel metrics. They spend a lot of marketing dollars to get people in the funnel as prospects but then is a 20% attrition rate often. When people get fed up with the process where it's cumbersome or it has a lot of friction. So we help solve that friction and furthermore, once they have completed their application, we can help them verify that identify more quickly, more accurately and relive the individual from having to present credentials in the branch or in the location. So there is a lot of benefits. One, completing a form. Two, validating an ID and preventing the individual from having to walk in and physically display that. So we like that and we think it's a fraction of the cost of the overall acquisition.

Mike, I will just add on to that a little bit. The different customers have a different use case. Some are focused on, like you mentioned, the cost reduction on that capture. But others may have a use case where they are actually looking for higher touch with their customers and the more they can get them into their mobile lab, then they have an opportunity for up sell, or cross sell. So in the case of, say in airlines, for example, they may want to get you to come in and check-in on the mobile apps so they can sell you an upgraded seat or may be a meal. So it's a revenue opportunity for them as well.

Good point. And then lastly, for both of you or either one of you, what was the biggest surprise in the quarter on the Mobile Verify side. Anything really stick out?

I think we are really pleased with how Mobile Verify did for Q1. We had good traction with our bookings and really pleased with the customers that we signed. We signed some great names. We shared three of them with you and there are more beyond that. So I guess that’s where I would end up.

We were probably surprised also that we were able to higher the quality of sales people that we have brought in. It is early. We conducted global sales meeting just recently and obviously it will take those individuals sometime to get up to speed to be productive. But they are hitting the ground running. They are experienced executives that sell and so we think we will be paying some dividends on that in terms of higher revenues as a result of the investment that we made this quarter.

[Operator Instructions] We will take our next question from Mark Schappel with Benchmark.

So just one question for me tonight here. Jim, software revenue grew about 20% in the quarter in that line item which is typically mobile deposit. It is probably one of the lower growth rates we have seen in five or six quarters here. Was there something in the mobile deposit business this quarter that caused the growth rate to fall off.

This is Jeff. So we provided guidance at the end of the year for Q1 because we expected it to come down a little bit. And that really is very similar to what we are looking at in Q2. The first half of this year, timing of reorder transactions is just giving us a little lighter growth rate on the mobile deposit business. But as we said in our prepared remarks, the transactions we are seeing go through the systems are 20%. Those are great. And we are expecting to see that growth rate really tick up in Q3 and Q4. And I just would follow on with that that we are reiterating the guidance for the full year as well.

We will go next to Darren Aftahi with ROTH Capital Partners.

This is [Dillon] [ph] on for Darren. I wanted to talk a little bit about sort of the vertical expansion opportunities. You have had some good customer wins there. And I wanted to know maybe if you were seeing some higher demand in certain verticals and maybe that’s the healthcare with the biometric release you put out a couple of days ago. But just sort of curious if there is some opportunities that are a little bit bigger than others and just what you are seeing there demand wise.

Nice to have you on the call today. I understand Darren is travelling on business. We do see tremendous opportunity in a cross-section of verticals. We are trying to be disciplined to focus on a few key ones where we constantly get inbound, sales leads that are from other industries. And we will pursue some of those based on size and geography. But to give you an idea, we think lending, digital lending particularly is of unique value. Imagine this, you are a digital lender, your customers are coming in through a mobile device or remotely and you need to validate them quickly and then approve terms. And you do need KYC, know your customer compliance. You need an identity verification and we provide that. So we have got even a step further as we have learned more about this sector, is that we have added access through our platform to bank information indicating whether or not there is an active bank account or not. Simply that is a clue for a lender to understand the capacity of the customer to repay them. And that’s an important critical factor. So therefore we begin to learn more about these verticals and package them more specifically for the specific use case. So I think what I am indicating to you not only is there depth in some of these verticals and lending being, I think at the top of the list. As I mentioned earlier, travel on its heels with some major wins this last quarter. But we are also learning as an early stage market, where this can be applied, how to package it for repeat business. So what you see in this emerging market is a broad array of very capable, very significant logos, specifically targeted into certain verticals. But as we mature and as this industry grows, we are going to see greater depth within those verticals as we understand more clearly the sales processes, how we package the solution and how we conduct the integration and time to market should get shorter. So I like this because, a, we are winning. We are growing 31% on a combined basis. We have a very targeted approach today but as we get more and more information, we can go deeper in each of those verticals. Long answer to your short question but I think it portends great growth in the future.

Yes. Thank you, that’s helpful. And then one other, I know in the past you have mentioned with some of your deposit customers them switching to minimums versus pay as you go. And I was just wondering if there is any update or trends you are seeing there.

Well, it's a little bit different. On deposit, the model is fixed. You buy in blocks of transactions, you consume those blocks, or as we say, burn them down. And then you reorder. So it's a constant reordering process through our distribution partners who provide these transactions to banks for deposits. So park that to the side, what we had talked about earlier in the identity market is a little different nuance on that transaction model. We still sell transactions but in that case in this emerging market, again reflecting my earlier comment, we sell on a page you go basis. So I am a customer, I am using Mobile Verify, I am consuming every month, I pay up at the end of a quarter. Now, ultimately, once people get comfortable, these customers, with their transaction consumption rate, once they understand the dynamics of the mobile identity market in their own experience, they are going to want to convert to a more consistent, I would call SaaS model, where there are minimums over a period of time. It could be a year or two or three. Right now we are pay go in most of our cases with some minimums. But we ultimately want to migrate to a more traditional SaaS model. Would you concur, Jeff?

Yes. We are still seeing a fair number of pay go customers. Some of them with minimums. And when we do put minimums in, they tend to be on the conservative side as Jim said, because the customers are still figuring out how it's going to work in their application.

This concludes today's question-and-answer session. At this time I will turn the conference back to management for any closing remarks.

Thank you, operator, and thank you for joining us today. Mitek's management will be presenting at the 30th Annual ROTH Conference in March as well as the Craig-Hallum FinTech Innovators Conference in Boston. If you are planning on attending either of these conferences please stop by and say hi. We hope to see you there. This concludes our call. Have a great day.

This does conclude today's conference. Thank you for your participation. You may now disconnect.