Good day and welcome to the Mitek Second Quarter Fiscal 2018 Financial Results Conference Call. Today's call is being recorded. At this time, I would 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 second 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 second quarter fiscal 2018 financial results. That release is available on the company's website 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 website. 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, May 1, 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 today. I’m happy to report today that Mitek achieved record total revenue in our fiscal second quarter of $14.3 million, an increase of 25% year-over-year. This growth reflects the continued market momentum we’ve been building over the past two years for Mitek’s identity verification solutions. At the same time, we’ve achieved our 17th consecutive quarter of profitability with non-GAAP net income of $2.1 million or $0.06 per diluted share. During the quarter, our ID SaaS transactions grew 80%. Our ID SaaS revenue grew 91%. And our overall ID business grew 109%. We secured many new enterprise customers for the mobile verified while achieving our 2 billion mobile deposit, all of which I’ll talk about later in more detail. As a result of our strong financial performance halfway through this fiscal year, we’re pleased to be increasing our guidance for the full fiscal year, and Jeff will provide more detail later in the call. Today, there is a rapid erosion of trust in the digital world. Trust is no longer a nice to have, but a must to have and Mitek’s identity verification solutions are helping companies that are making trust a business priority. And here’s what’s new. The national narrative has definitely turned in our favor during the past 90 days. Facebook is now requiring ID verification and CEO Mark Zuckerberg's appearance before Congress strengthened this narrative. Uber’s CEO appeared on NBC's Today Show and supports identity verification in ongoing monitoring. Twitter and others claim to welcome regulation. Privacy and identity do matter. Just ask Apple’s CEO Tim Cook. Apple says, it’s a human right in their recent iOS update. To ensure transparency, Facebook will begin to require the admins of popular Facebook pages and advertisers buying political or…

Thanks Jim and thank you everyone for joining us this afternoon. Let’s start with the Q2 revenue and operating results. For the second quarter of fiscal 2018, Mitek generated record revenue of $14.3 million, a 25% increase year-over-year. Software and hardware revenue of $8.8 million was up 13% year-over-year. We maintained strong software and hardware gross margins at 94% for the quarter. Services revenue, which include SaaS, maintenance and consulting was $5.5 million for the quarter, an increase of 52% over last year's Q2 revenue of $3.6 million. The increase in services revenue is due primarily to growth in transactional SaaS revenues from our mobile identity products, which increased 91% to $3.3 million from $1.7 million in Q2 a year ago. Services gross margin were 78% for the quarter, compared to 81% in Q2 2017. The services gross margins were impacted by an increase in headcount and third party and hosting costs. Q2 revenue from ID products increased 109% and revenue for the payments business was flat as anticipated. The revenue overperformance for the quarter was due to strength in the ID transactions from our SaaS customers and favorable ID on premise renewals. Total operating expenses, including cost of revenue were $15.5 million, compared to $10.2 million in Q2 last year. The year-over-year increase in operating expense reflects our continued investments to grow our identity business, as well as the additional ICAR operating and acquisition related costs. Sales and marketing expenses for the quarter were $5.3 million, compared to $3.7 million a year ago. R&D expenses were $3.5 million, compared to 2.4 million last year and our G&A expenses were $3.8 million compared to $2.7 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…

Thank you, sir. [Operator Instructions] We will take our first question from Bhavan Suri with William Blair. Please go ahead. Mr. Suri, your line is open. Please check your mute button.

Hi guys, sorry. This is Arjun Bhatia in for Bhavan. Just wondering if you guys can provide an update on the sales and marketing investments that you have made in the first half of the year, growth clearly seems to be coming in strong, but can you provide any qualitative feedback on how the sales team has, it ramped in the ID market and how their success is tracking versus internal expectation?

Sure. I’ll answer that. This is Jeff. We have increased headcount in sales and marketing. I think entering the year, we were probably between 30 people to 40 people in that group and we are well over 50, I think we are actually above 60 in the sales and marketing team now. So, definitely headcount investment is there. The reason we are making the investments is we are seeing a lot of opportunity, lead flow, and building pipeline. So, we’re pleased with the results we are seeing from the investment we’re making in sales and marketing. And like you said, it is focused on headcount.

And there is two additional items I think to augment what Jeff has said. On the indirect channel sales, we are also engaging more actively now with our channel partners. I mentioned Experian and VASCO among others. And then the last thing per my comments earlier is this national narrative that has changed, which is providing impetus for more activity and more exploration and more deal as it relates to identification verification. So, I believe our timing is good and our investment is paying off.

Alright. That’s helpful. And on deposit side of things you know we’ve talked about in the past how it’s much more cost-effective to do the mobile deposit versus in-person deposits. In that light, can you talk a little bit about how you look at pricing power here going forward, is there any possibility of increasing pricing for these services in the future?

In regard to what product please?

Any deposit products.

Great. Yes. Mobile deposit has been in market now for eight years and it continues to dominate its space and again all of the growth is coming from additional consumers and frequency of use. We’ve actually have seen indications from studies independent from Mitek that check volumes are holding steady or their decline is reduced. So, we are encouraged by the opportunity and growth of our prospects ahead of us. We continue to innovate in the product. We’re on our 30th release and have added features that have helped us maintain our current ASP in market. We believe that we have outdistanced any competition. In fact, we’ve faced very little competition. So, the natural assumption is that we have pricing power. However, we work through channel partners and in an industry that has established a fair market value for their service we are working hard to sustain that. There is always going to be price pressure and the way we counter act that to sustain our ASP is to continue innovation. We’ve mentioned in the call’s past, new transactions that we are conducting with people like the American Cancer Society, the American Heart Association trying to get money into their accounts sooner from donors. And we see lots of other opportunities like this. So, we believe we are able to stabilize and sustain our price points. We did not anticipate increasing those prices, but we anticipate growth through activity of transactions and other used cases.

Got it. It’s very helpful. That’s all from me, thanks for the call guys.

Thank you.

We will take our next question from Darren Aftahi with ROTH Capital. Please go ahead.

Hi guys thanks for taking my questions, and congrats on the quarter. Just a few if I may. Your ID business was small, it has been kind of around for a little while now. So, I'm curious if you guys look at cohorts of newer customers sort of way back when and how fast those are growing after say 12-month or 18-month period? And then as a derivative of that question, I am kind of curious of your transaction make-up, how does that skew to may be the top two or three verticals? And I’ve got a follow-up.

So, on the ID business, the transactions and the customers, I will go to transactions first. We definitely have some customers that are higher on the transactions, but I wouldn't say the transaction make-up on the ID side is like a 80% and a handful of customers, it’s spread pretty well. What we do see is customers will launch and as we’ve talked before they launch with pilots or proof of concept and then it develops, and the customers who have been with us longer they obviously have the higher level of transactions going through their systems, and I think that probably has to do with our technologies embedded in their apps and their apps develop over time as the mobile experience develops over time.

And Darren to augment Jeff's comments, this market is new. You made an earlier comment that this market has been around for a while. I would challenge you on that one. This has up to this point been an exploratory market as workflows have changed and as old systems like knowledge-based authentication have been corrupted through this onslaught of data breaches. So, this problem is relatively new and companies are scrambling. Fortunately, the companies that we have signed earlier, a large payments processor here in the United States that has global operations, their transaction volumes are growing because they are now incorporating the workflow, more broadly, and there is some more familiarity among consumers to image their ID as a means to protect themselves overcoming some consumer habits from the past. So, I think this is very early stage market, and we're seeing success with our primary customers growing in their volumes on their pay-go models and now we’re evolving into a broader set of verticals as we see demand increasing broadly, perhaps due to some of this national narrative that we’ve been reading about and seeing on TV most recently. ID proofing, which if you recall a year ago, you and others would ask what are the used cases, it’s now very evident as a key element in terms of protecting the trust, rebuilding that and protecting the consumer elements that these customers companies have. So, we’re quite encouraged really, but we are seeing out there right now. We think we are in a very good competitive situation and our technology is performing well. So, all these things add I think the momentum.

Great and just following up on some of the comments you made on y our customer wins both channel and direct. So, on the large insurance provider for CE devices and the mobile operator in Europe, I guess one, what is the mix of new customers sort of indirect versus direct? And then on your large insurance win, I'm curious, how competitive of a process is that and other than kind of the usual suspects are there any other kind of verticals or players you want to think about that are kind of competing in the space? Thanks.

Let me speak to the distribution channel and its mix. We are seeing the bulk of our our new customer acquisition coming through our direct sales efforts today, but a growing percentage coming through channel partners as we enable them. A major element of our marketing investment is channel enablement. We have personnel focused on that to engage with customers like Experian and channel partners and VASCO to not only work with their sales people to educate them on our selling processes, but furthermore to assist their technical people to embed our technology and their solutions. We are an embedded element and experience featured crosscourt platform. This is their new platform, which allows their customers to utilize a variety of tools to verify identities not just data, which were as used in the past, and as I explained data alone is an adequate. So, we are a critical element of their go-to-market strategy in part of the technology has integrated into their core platform. We’ve now educated their sales force and we will do joint sales calls as we have in Europe. Experian you may now is a London-based Global Corporation. So, we are actually making tremendous progress in channel, but as with mobile deposit, the same will be for mobile verify, it takes time to get channel partners informed and executing. So, that’s why we have relied up to this point on investment and we will continue on our direct sales efforts. So, I think that speaks to the question of channel distribution and how it relates to our direct efforts. With regards to the used cases, Darren what I would encourage everyone to think about are two primary used cases. On boarding new customers, meaning as they and roll digitally being able to authenticate and identify and verify…

All right thank you.

We will take our next question from Mike Grondahl with Northland Securities. Please go ahead.

Yes, thanks guys. Jeff, could you repeat what you said about what drove the outperformance in the quarter kind of above your roughly 13.5 million guide?

Sure. The overall performance was due to strong performance on our SaaS transactions for our ID business and favorable renewables for some ID on premise customers.

Can you just define that, what does that mean to favorable renewals, sort of like the license got renewed?

Yes, yes sure. So, obviously I had visibility to renewals that are coming up and these renewals that came in were favorable to what I had forecasted that we were going to get on them. And that is a good portion of our over performance along with the SaaS transactions.

Got it. And then secondly, you guys called out that you are over 60 salespeople today from roughly 30 to 40 six months ago. How does the sales – how long does it take to get one of those salespeople kind of up and going? And then what is the quarter or the goal for them, you know at the end of year one or year two?

So, just to be clear, the numbers I gave you are sales and marketing organization. So, I don't want you to think we have any selling sales reps. They are a portion of that, but there is also support in all those orgs. You know the ramp time for sales reps is like most companies, it is 3 months to 6 months before they are actually up and running productive. And then they have to build pipeline as well. So, for us this past year, we were hiring earlier in the year. We have seen some of them get up and running and actually starting to produce already. We think they will continue to see that through the end of this year and then as we move into next year we will invest in more sales reps as we forecast 29 team to show growth. So, I think hopefully that answers your question?

Yes, it does. And in the mobile deposit side, do you still have sort of a pristine retention rate of the banks, I mean is that roughly still 100%?

Absolutely.

Got it. And then just moving to mobile ID, it was helpful to your couple more customer wins and a couple that went live, is there anything you can say may be about the range of prices that you are getting for a transaction, and I don't want to ask about any one customer, but of some of the ones you won, can you just give us a range of sort of what you are charging, if you are verifying an ID in some of these?

Mike, this is Jim. Listen, we have never disclosed our prices as we actually do our contracts. We’ve discovered [indiscernible] as these individual enterprises enter into their used cases, we are able to sustain what we have talked about generally in the past. So, our pricing policies have been supported by the market. And we don't see that as an impediment. This is actually a very critical element as you can imagine in the workflow. The cost of the customer acquisition is upwards of $200 to $300 in the bank and that is a documented figure to add another dollar or two or whatever the case may end up being is in significant amount to retain or to obtain a new customer. So, we like the pricing. It is significantly different than mobile deposit as we add a tremendous amount of value in new customer acquisition, and secondly in compliance, which carries significant penalties. So, for that reason we’ve moved up the ASB for the cooperation and if you recall Mike years ago when we began this journey on mobile deposit, our efforts have been to transform this company into a cloud-based platform for recurring and predictable revenues. And secondly to move up the value chain in terms of what we can charge for what we think is the best technology of its kind in the world. And I think we are now accomplishing that and you're starting to see traction in our SaaS transactions, in our pricing policies, and how we are engaging major enterprise customers, not just here in the U.S., but globally.

No, perfect. So, maybe just a follow-up to that. You are getting some of the pricing that you talked about a year or two ago and I guess you have said it significantly different in mobile deposit, which would, I think translate is to significantly higher?

That’s correct.

Got it. Okay. Hey, thanks a lot.

Thanks Mike.

[Operator Instructions] We will go next to Mark Schappel with Benchmark. Please go ahead.

Hi, good job on the quarter, and thank you for taking my question. Jim starting with you, the ID business was clearly another star performer or was the star performer in the quarter, but the mobile check deposit business appears to have come in better than expected as well, I was wondering what changed during the quarter that drove the better results in that business?

Well as you know Mark from covering this industry for a while now and through our go to market relationships with channel partners, we sell to a defined group of channel partners who then sell, resell the products to a broader list of banks, and that is how we were able to scale and that is how we are able to control and dominate this space. Control may be too tough a word, but certainly dominate. So, timing is always critical with regard to how we secure these deals based on consumption, transactions in the marketplace and so it was a timing issue, but honestly, we have been very open that the growth rate for deposit is 15% to 20% and mobile deposit is as predicted, still makes up the major part of our revenue, but we anticipated that would come in at a certain rate and it did exactly as we predicted there. The bump really that we experienced and reported just a minute ago is related to our ID products.

Just to make sure we're clear on that, the mobile deposit business for the quarter was flat over last year as we expected it to be. Where performance this quarter was going on ID side.

Okay thank you and then on the revenue guide, you are raising your 2018 revenue guidance, but operating margins are unchanged, implying that you are planning to make some additional investments in the business in the next couple of quarters, what were you planning to direct those investments?

Our investments are, where they have been, which is technologies or R&A and sales and marketing that’s our focus. And like I said in the prepared comments, it’s not going to be significant the next two quarters. We’ve front-end loaded a lot of it. So, it will tick-up a little bit, but not significantly the next two quarters.

Okay, thank you. And then Jim in your prepared remarks you noted an increase in government regulation as one of the drivers to the ID business, and I think in another question you touched on GDPR are you seeing GDPR, which is going into effect here shortly actually right now, are you seeing that drive your business particularly in Europe?

Yes, we see it as a very important element. It was important in our ability to secure MoneyGram as a customer that we’ve reported earlier. So, we definitely see this as a major initiative. It’s an important piece of legislation, it comes with big compliance, penalties for companies that don't conform, and the need for identity verification I think is going to benefit from that, and so will the companies. So, you bet. I think we’re entering a new era, both on this continent and in Europe with regard to this whole idea of identity and verification and trust, and we’re going to benefit from it by being in market at the right time with the right technology. These regulations and I can add to that AML is Anti-Money Laundering, of those get tougher and tougher globally for obvious reasons, and again proving an identity over and over again when there is money transactions cross border is very, very critical. So, we see that as a driver as well. So, these, as I mentioned, alphabet soup [ph] of regulations are very important to our market and to Mitek’s long-term success.

All right thank you. That’s helpful.

We will take our next question from Ilya Grozovsky with National Securities. Please go ahead.

Thanks guys. Just wanted to get the revenue mix domestic versus international.

We don’t publish that specifically, but what I would tell you is, the US piece of the majority and the International piece of between 30% and 40%, around there. And over time that would grow over the last year because we added ICAR. Their revenue is mostly outside of the U.S., so that definitely increased that number.

Great, thanks. And then also you can just talk about the gross margin trend for the second half of this year.

Gross margin should remain pretty constant, you know we enjoy a very high software and hardware margin. If the mix of revenue in one of the quarters has a little more hardware, it will obviously impact that margin line a little bit, but for a blended margin we don’t really expect much change through the end of the year.

Right. Thank you.

[Operator Instructions] We will take our next question from Mike Wallace with White Pine Capital. Please go ahead.

Hi Jim, hi Jeff, how are you?

Good Mike.

Great results this quarter. I was just wondering about, Jim if you could give us some characterization of comparing the pathway that IDs are now relative to the pathway that deposit was on, and kind of comparing and contrasting the two and then the second question is around the competitive environment and ID, and we are in competing with others, can you talk a little bit about how you are winning?

Yes Mike. Let me answer the first question. As you remember, with mobile deposit it was a very forward-thinking idea. We were the first to innovate in that area and we entered the market in 2008. We secured our first customer that went live in 2010 and that was JPMorgan Chase and then the other market banks followed and the rest as they say is history. We have 6,100 banks and 80 million consumers today, and no competition of any note. Now, fast forward to mobile verify, we have leveraged of our investment in our core machine learning and AI technology. We happen to read a document using a camera on a mobile device extremely well. Furthermore, we added our ability to use the device itself, the phone and have created an auto capture capability. And that has been magical to consumers who find it very easy to use and meanwhile we get great images that allow us to be even more accurate and how we extract the data for processing. So, the investments we made in mobile deposits is definitely being leveraged into our success with mobile verify. The difference is, we are actually penetrating the mobile verify and the identity verification market faster. In a quarter of the time, it took us with mobile deposit. We have a blue-chip enterprise base of customers that are growing in transaction value through our cloud today. In a matter of two years when we began launching mobile verify. And it took us much, much longer to do that with mobile deposits. I credit that to our learnings not only in our technology, but also our selling technique. We haven’t barked upon selling directly. We do control the conversation. We control the pricing. And we control the targets and that’s not always…

Yes, deposit is very sticky once you are in, tell us about how it works in ID?

Well I think it’s sticky too. It becomes part of that process now. Again, you wouldn’t hear Mark Zuckerberg in front of Congress talking about ID proofing a year ago. You certainly heard him three days ago. So, this is where the market is growing. This is a requirement now that the old methods of authentication or as you should say verification. First time you meet a perspective customer digitally to verify them, those old methods used to be a reliant on data that was stored or your Social Security number that was secure. Today it’s breached. That information is public. It is on the dark web. You can buy it for our buck. You can't do that with your identity card with your biometric match. And that’s what we do. So, we believe that there is a significant amount of reengineering going and workflows major companies across this continent in Europe and the world as they reengineer their processes to engage new customers. Now, they’ve got to do it in a frictionless way that doesn’t scare of their customers and not too many keystrokes, not too many other items of friction, and so by taking a single snap of an ID, we can capture information. We can provide that information to the system and we can verify the identity of the individual. These are things that couldn't be done with the data bureau. That’s why Experian has partnered with us. So, we believe it is very sticky and very critical to the ecosystem.

Last question, deposit you used or you used a lot of resellers in that channel, you are doing direct or ID, can you give us, maybe this question is for Jeff too, how does the business model margin structure play out as we now go and really grow ID without using the channel partners by going direct? In terms of margin structure?

So, with the channel partners for selling there is really no difference. So, we're not giving up like 30 percentage points or anything like that with the channel partners. It’s same price going through.

Could we get the margin less by going direct?

You know right now I don't think that we’ve seen that really start to happen. Most of this, you know with channel partners they’re adding our technology into the offerings, and so it’s making them have an offering they didn’t have before and makes them more competitive. So, I think they’re able to get business they couldn't get without us being part of a solution.

Yes, I guess I’m think of it Jeff, maybe down the road or maybe 24, 12 to 24 months as you leverage the salesforce and bring more revenue dollars across each salesperson in collecting and being able to leverage that through the model, what are your thoughts on how that develops in terms of your operating margins?

You know, if you look out two years from now and if the channel is a much bigger piece of what we're doing, I suppose there could be that chance that we're giving up a little bit of margin to be filling through the channel, but right now it’s not the case and I think as long as we’re leading the technology that they don't have, I think we’ve got a pretty good foot stand on to not lose much there in the selling process.

Okay. Thank you.

Good talking to you Mike. Thank you.

And at this time, there are no further questions. I will now turn the conference back over to the company for any closing comments.

Thank you, operator, and thank you everyone for joining us today. Mitek’s management will be presenting at the upcoming Needham Emerging Technology Conference in New York on May 15. If you happen to be attending, please stop by and say hi. We hope to see you there. This concludes our call and have a great day.

Once again, this will conclude today's conference call. We thank you for your participation and you may disconnect at this time.