Good day and welcome to the Mitek Systems Fourth Quarter and Fiscal 2019 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Mitek’s fourth quarter and full year fiscal 2019 earnings conference call. With me on today’s call are Mitek’s CEO, Max Carnecchia; and CFO, Jeff Davison. Before I turn the call over to Max and Jeff, I’d like to cover a few quick items. This afternoon, Mitek issued a press release announcing its fourth quarter and full year fiscal 2019 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 want 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 complete description of these risks. Our statements on this call are made as of today, November 7, 2019, and the company undertakes no obligation to revise or publicly update 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 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, Max.

Thanks, Todd, and good afternoon, everyone. Thank you for joining us today. It gives me great pleasure to report that our fiscal year 2019 was another outstanding year for Mitek. It was also our second consecutive fiscal year with record revenues for each quarter. Our solid revenue growth and increased profitability continues to be driven by both our deposits and identity product families. For fiscal 2019, we generated record revenue of $84.6 million, representing growth of 33% year over year. We also generated non-GAAP net income of $17.3 million or $0.42 per diluted share, up 57% year-over-year. And cash flows from operations of $14.3 million. Reflecting on 2019, we remain excited by the momentum in the identity verification market, which is very large, early stage and rapidly opening up to new use cases that service the digital world. We also experienced continued growth from our highly profitable deposits product line as it continues to further penetrate the market. Relative to the identity business, I think we can all agree that the digital identity verification market is exciting, fast-growing and mission critical. Identify verification is an essential step to establishing trust in a digital world where customer relationships are being created without ever physically meeting. To reference Gartner’s recent market study, quote, nearly every component of modern life embraces digital channels and the need to corroborate the identity of customers, users, citizens, partners and employees through remote interactions continues to grow, unquote. So while the market for identity verification is still in its early days, it represents a significant opportunity for Mitek. In fiscal 2019, our identity verification solutions gained significant traction with our transactional SaaS revenue growing 63% and our SaaS transactions growing 74% year-over-year. Mobile Verify, our industry-leading product, continues to be adopted by partners and customers of all…

Thanks, Max, and thank you everyone for joining us this afternoon. Let’s start with the Q4 revenue and operating results. For the fourth quarter of fiscal 2019, Mitek generated record revenue of $25 million, a 19% increase year-over-year. Software and hardware revenue of $14.4 million was in line with prior year results. Within the software and hardware line, we saw continued growth in deposits revenue offset by declining software revenue from our legacy on premise ID products. We delivered strong software and hardware gross margins of 92% for the quarter. Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was $10.6 million for the quarter, an increase of 57% over revenue of $6.8 million in Q4 last year. This increase is due to strong growth in transactional SaaS revenue, which increased 58% year-over-year to $6.3 million, and growth and maintenance revenue for deposits products. Gross margin on services and other revenue was 80% for the quarter, up from 73% in Q4 last year. Combined gross margin for the quarter was 87%, which is in line with last year. Total GAAP operating expenses including cost of revenue were $20.5 million compared to $22.4 million in Q4 last year. This decrease in total expenses is primarily due to a one-time benefit of $1 million related to an insurance settlement received in the quarter, executive transition costs recognized in 2018, which did not recur this year, lower acquisition-related costs and lower stock-based compensation in 2019. These decreases were partially offset by increased cost related to investments and operations to grow our business. Sales and marketing expenses for the quarter were $6.5 million compared to $5.8 million a year ago. R&D expenses were $4.6 million compared to $4.7 million last year. And our G&A expenses were $4.1 million compared to…

Thank you. Ladies and gentlemen, at this time, we will open the floor to questions. [Operator Instructions] And our first question comes from Bhavan Suri with William Blair.

Hey, guys. Thanks for taking my question. I guess, Max, maybe we’ll start off and I know you’re not going to comment too much on the legal stuffs. But, obviously, there was a USAA Mitek issue a few years ago and that got resolved. I think it was mutually, whatever, I forgot the exact terms. And so, now, you’ve obviously got USAA going after 200 financial institutions. I guess, I was wondering is there a question of liability to you guys, because obviously on the mobile check deposit side they’re using at some form your technology? And so, I’m trying to understand what the risk of that liability coming back to you is or, if it’s not, if it’s with the financial institutions, given you guys had already resolved the issues with USAA 3 years ago. Just trying to understand what that could look like potentially.

Yeah, the matter that was resolved between USAA and Mitek, it goes back 6 or 7 years ago. And it was an intellectual property and patent issue, but it was not related to what’s on tap here today. What we mentioned in this earnings call and what was released in the 8-K today is really us taking the offensive action last week with the DJ looking for the judgment from the court. So that we can basically prove that Mitek’s MiSnap auto check image capture technology does not infringe on the USAA patents. And that’s our obligation and our strong feelings to vigorously protect our innovation, our IP and the rights of our end users. Probably it doesn’t make a lot of sense to talk beyond that. I can share with you – the folks from Wells Fargo came out today with comments about yesterday’s action. And I’ll just quote here from the note that they sent out. We believe this is an industry issue, involving numerous other banks. So I think this is again kind of the battle of giants.

Okay, okay. But just to be clear – and then I’ll turn over the question with a follow-up for Jeff – but to be clear, the patent issue that they are going after Wells Fargo for that, your activity defending around MiSnap is different than the issue we had. That was probably the stuff that what everybody will see, I can go back and look. But that’s – it’s totally different than their patent concerns they had, whenever it was, 6, 7 years ago.

Yeah, they may touch each other and be related in some way, but it is different enough that, obviously, have ended up in court.

Got it, got it, got it. And then, Jeff, I just wanted to touch your guidance. Obviously, your growth on the SaaS side and the ID verification side was really solid this year. Obviously, mobile check deposit business helped with the acquisitions. If I look at the guidance next year, and it feels like, given the size of the business now and the growth rate, if I was to take out the inorganic part, would it put some acceleration. I know you’re shedding some businesses. So maybe if you could do the puts and takes of what’s being shed, plus the inorganic pieces, just to help us understand sort of what the apples-to-apples growth rate looks like for the core businesses on the mobile side and the check deposit side, so we can surely have an understanding of what that means for next year. So obviously, FX had an impact. So just help us understand the puts and takes for next year’s guidance. Thank you.

Sure, let me see how I can piece that together to help you out. So guidance is 16% to 21% growth for next year. We shared with you last quarter on our call that we’re end-of-life-ing some of identity platforms, and that that was going to impact some of the revenue. And those were legacy systems going back several years and accumulated from multiple acquisitions. We also discontinued the product line with our French subsidiary for document readers. So those are both impacting that. And so, we turn our focus to our SaaS transactions line, which for 2019 grew 63%. It’s been a terrific number in some quarters this year, in excess of 70%. And as that number gets bigger, you’re not going to see the 70% continue. But you’re going to see real steady growth rate. So we look for that line to continue to grow very healthy, in excess of at least 40%, if not, probably 50%. But we’ll see really nice growth in that line as we continue through this. And as we get beyond shedding the revenue on these other product lines, that will just become more clear in a bigger piece of the picture. When we look to the deposits business, that’s been a really nice growing business for us between 10%, 15%, 20%, in 2018 above that I believe. We added A2iA, which was a grower, but at a much lower rate. And as we’ve discussed, we do expect that deposits over time will slow and the growth rate will be drifting down towards 10%. But as we look into next year, we expect that deposits will still be above 10%, probably not significantly – but probably above 10%. And then, just to recap on the earlier, the higher growth rate will be on the identity and the transactions volume. So hopefully, that helps you get a little sharpness on that.

Yeah. Great. No, that’s super helpful. Thank you, guys. I appreciate the color. Thanks again.

[Operator Instructions] We’ll take our next question from Mike Grondahl with Northland Capital Markets.

Yeah. Hi, thanks. This is Michael on for Mike. Maybe first just on the sort of platform rationalization and the A2iA business. It seems like where they are on revenue as far as like cost on the platforms, [both in that 7 to 1] [ph] like how that progress doing there?

Yeah, Mike, maybe just to tease this apart, so there were 2 on the deposits check side of things, so you mentioned A2iA, basically, a series of legacy products from A2iA that we no longer sell. So that’s part of the revenue dissynergies. And then, what we announced back in June around rationalizing and harmonizing the team, and making some pretty painful people cuts, particularly in our French subsidiary, those expense changes were all disclosed back then. And I’m looking at Jeff here as we talk about this. I think the overall majority of that’s already flown through P&L.

Yeah. The restructuring charges flown through and we’re seeing the benefits. Some of the benefits we saw in Q4 and we’ll continue to see.

Yeah. On the other side of the business with identity, as Jeff was mentioning in his prepared remarks, we did these acquisitions in Europe. We had some legacy on-prem systems that were organic to Mitek. And so, between some of the things we inherited through those acquisitions and some of the legacy really on-prem related things. That’s what we talked about back in July as far as things that we were going to accelerate, the end of life, we don’t sell those things, but end of life and the transitioning of those customers were available. But some in situations there was no successor product, because it was not strategic to our go-forward plan. So I think all of that was disclosed back then and we’re seeing that run through the income statement again in the form of revenue dissynergies.

Yeah. And I think on the 7 or at least 2, I think, we’ve got 2 done as of end of year.

100%, yeah.

Yeah. And we’ll see a couple of more by the end of the year. And then, as we shared last quarter, the Spanish platform is probably 2 to 3 years out before we’re done with those, before we transitioned those over.

Got it. That’s helpful. Then maybe on borrow money, you mentioned that there is sort of an expanded use case starting with Deposits, but then moving into Verify, like got that right. With your current client base is there a lot more of that opportunity going forward, you think?

Yeah. I think, we’ve got a number of examples, whether you want to call neo-banks or digital-only banks or challenger banks or FinTechs. The BlueVines, Axos, Varo, this [PC&10] [ph], we’ve got these examples both in Europe and domestically, where – they need the identity verification, because there is no branch to go in and present your documents to open an account, whether that’s for credit card, debit, checking, whatever. As they are banks, they also then need to be able to process that legacy payment method called a physical paper check. And so, sometimes, we end up starting with the identity verification and then they adopt the check technology. Other times, the check is in there first, just because it’s – they need to accept the money. So, yeah, I think, we’ve got a pretty consistent set of examples where that works. They aren’t necessarily tied together technologically, but they’re tied together through the idea that this is a new bank, and they need to be able to do both of these functions and we help them with both.

Got it. Thanks. I’ll hop back in the queue.

Thanks, Mike.

Ladies and gentlemen, this concludes today’s question-and-answer session. Now, I’ll turn it back to Todd Kehrli for closing remarks.

Thank you, operator, and thank you everyone for joining us today. We look forward to updating you again next quarter. This concludes today’s call. Have a wonderful day.

Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.