Good day and welcome to the Mitek Systems First Quarter Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time I'd 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 first quarter fiscal 2020 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 first quarter fiscal 2020 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 January 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 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, Max.

Thanks Todd, and good afternoon everyone. Thank you for joining us today. Jumping right in, we delivered another record quarter with first quarter revenue of $22.1 million representing growth of 25% year-over-year. We also generated non-GAAP net income of $5 million or $0.12 per diluted share up 377% year-over-year and cash flow from operations of $5.2 million. We are energized by the ongoing momentum in the identity verification market as we continue to expand partnerships with our existing customers as well as grow adoption with new customers particularly in the financial services, gig economy and marketplace segments. We also continue to experience growth from our highly profitable deposits product line as its adoption and utilization continues to increase. Before I tell you about some of the key initiatives this quarter, we said we would keep you up-to-date on the patent litigation surrounding USAA but there is a lot of detail that is somewhat complex, so please pay close attention. Let me start with the first case. USAA first sued Wells Fargo for patent infringement based on four patents that all relate to an image auto capture feature on a mobile device. Before the trial, Wells Fargo requested that the U.S. Patent Office perform an additional review of all four patents. Subsequently USAA dropped two of the four patents from their lawsuit. At trial, a jury in the Eastern District of Texas found that Wells Fargo infringed at least one of the two remaining patents but did not specify which. Wells Fargo will likely appeal the decision. That process could take 18 months or more. Following the jury verdict in November, the U.S. Patent Office agreed to review three of the four patents. It is important to understand that the standard the U.S. Patent Office uses in determining to review patents…

Thanks Max, and thank you everyone for joining us this afternoon. Let's start with the Q1 revenue and operating results. For the first quarter of fiscal 2020, Mitek generated record Q1 revenue of $22.1 million a 25% increase year-over-year. Software and hardware revenue was $11.5 million, an increase of 15% year-over-year due primarily to continued growth in deposits revenue. We delivered strong software and hardware gross margins of 93% for the quarter. Services and other revenue, which includes transactional SaaS revenue maintenance and consulting services was $10.6 billion for the quarter, an increase of 37% over Q1 last year. This increase is due to growth in transactional SaaS revenue, which increased 39% year-over-year to $6.1 million and growth in maintenance revenue for deposit solutions. For Q1 2020, deposits revenue increased 23% to $14.7 million, and revenue for identity verification increased 28% to $7.4 million. Gross margin on services and other revenue was 80% for the quarter, up from 74% in Q1 last year. Combined gross margin for the quarter was 87%, up from 84% in Q1 last year. Total GAAP operating expenses including cost of revenue were $21.8 million, compared to $22.2 million in Q1 last year. This decrease in total expenses is primarily due to lower expenses in our Paris operations as a result of the restructuring announced in July of 2019, and a decline in stock-based compensation and acquisition-related costs as well as expenses related to the strategic process and executive transition, which did not recur in 2020. These decreases were largely offset by increased expenses for investments in operations to grow our business and increased litigation costs. As a reminder in June 2019, we recorded a restructuring charge of $3.2 million related to a reduction of 25 personnel in Paris. We estimated this reduction to be approximately…

[Operator Instructions] The first question will come from Mike Grondahl with Northland Securities. Please go ahead with your question.

We saw a big U.S. bank kind of do a promotion on Mobile Deposit in December and January. Do you think that had any effect driving new business or is that anything you see through to?

We see a lot of the banks not just the big banks but really many of the institutions running programs to try to drive more of that check traffic to the mobile - the mobile channel. And the obvious reasons are there's a tremendous cost savings for them, right? So there's a hard dollar expense savings, but there's then also the reputational element of becoming more modern and relevant as a digital institution. Back to your question, those things happen on an ongoing basis and there's not a direct cause and effect that would happen in-quarter or maybe even within a year just the way that consumption happens with the transactions in that side of our business.

And then any updated thoughts on pricing for mobile check deposit or any success you've had there recently?

Yes. So I want to be a little careful here how we advertise this. But I think in many of these calls we've been forthright in identifying that we believe that we have a dominant market position. We have a unique offering that provides value to our customers that they can't get elsewhere for depositing checks using a mobile device and that historically maybe we have not been standing as strong and tall behind that value as we should. Over the course of the last year, we've taken steps to start to move that our pricing power and move those prices in the northward direction. Some of those conversations have been difficult and challenging, but we haven't backed down. And so I think you'll start to - you probably already started to see some of that in our results and I don't think you'll see anything radical. It's not a doubling or a tripling of the price, but you'll definitely see us continue to want to establish fair value for what we're delivering.

Good. Yes, I would encourage you to do that for sure. I think you deserve it. Thanks guys.

The next question will come from Bhavan Suri with William Blair. Please go ahead with your question.

This is Kamil Mielczarek on for Bhavan Suri. Congrats on the solid growth in the quarter. I just wanted to ask if you're seeing any changes on the competitive front. Specifically have you seen any changes in win rates since the November Wells Fargo ruling? And are you seeing any hesitance to buy given this new January ruling as well? Thanks.

So Kamil I assume your question is down the deposit side of the business. Is that where that's coming from?

That's right.

Yes so no I don't think we've seen any change in competitive dynamic on that side of our business whatsoever. The DJ action that we spoke of earlier in the prepared remarks here and that we've talked about going all the way back to the beginning of November I think it's being it's being interpreted by the banking industry the way we intended and wanted it to be which is it's the shield and the sword. We are out there actively very actively protecting and demonstrating to our customers that we invented this technology that we own these patents and that we will defend and put our money where our mouth is when it comes to that. And I believe generally what we're hearing back from customers both those large banking core service providers as well as the banks themselves is they recognize that this is an industry-wide issue and it's not a Mitek issue. And that we're out there with the sword and the shield or the industry itself. No change in the competitive dynamic there.

And if I could just follow up, in the past you've talked about there being dozens of use cases for your products at some financial institution customers. Can you provide some color around what is the typical size of the initial contract and follow-on growth rates of these customers? Thanks.

Yes, I'll try to take that on its difficult. I don't think there's a one size fits all answer. It does depend on the institution. It depends on geographically who the regulators are. It depends on how they can actually absorb. But generally what happens is there's an implementation period. And it takes some time for them not just implement our solution but to get it within the flow of if we use a use case of a new account opening or an onboarding journey for a new customer that's a month to quarters kind of experience. And towards the tail end of that when they've got unit testing and system testing underway they're typically doing a controlled environment that may only be friends and family. It may only be their own employees where the volumes are typically very low. And then they're rolling that out whether it's into different geographies. In the United States that may be a region by region state-by-state thing. We watch those we typically watch those transaction volumes and the relating revenue start to grow in step. So it's a gradual, but building kind of experience. I don't know Jeff if you would add anything to that.

No, I think it's just a reminder that since this is still early stage it's early stage with our customers. And so the opportunities often start proof-of-concept, pilot and then grow from there. So really estimating an initial deal size they all start small.

Yes, and over time gets much, much bigger.

We’ll take next question from Mark Schappel with Benchmark. Please go ahead with your question.

Max starting off with a couple of questions on the jury award with respect to that do, those rulings have any impact on the continued use of your mobile deposit offering?

It does not. So the only parties affected so far have been Wells Fargo and USAA. Nobody else no other banks have been involved in that.

And have you seen any change in your customers' buying behavior on the ID side of your business as a result of the jury award?

Not at all, there has been no bleed over. We've spent a good amount of time with you guys with our shareholders obviously with customers and our partners make and our employees of course making sure that we're creating as much clarity as possible in a situation that's pretty complicated as you heard in the prepared remarks. But that's – the noise level on the identity side of the business has been close to 0.

And then you came in with a particularly strong quarter the granted it's Q1. Not raising your guidance was that just because it's so earlier and just trying to be conservative?

I'd say a little bit of both. It's early on in the year. It's a good strong quarter at 25%. There's still a lot for us to do over the next three quarters to get into the range we're in. So by no means are we looking at a slam dunk year for that guidance. We set a good ambitious number there and we're determined to go hit it but no point in raising it right now.

And then Jeff recently the company placed a buyback program. Any update there?

Yes. So if you actually looked at the timing of that buyback we announced it right as we were heading into a blackout from an insider trading perspective. So the Board approved that December 17 I think. And we have good insider rules that we follow and so we could actually execute it on it up-to-date so far. Obviously we'll report in our quarterly Qs any activity that occurs under the buyback.

The next question will come from Allen Klee with National Securities Corp. Please go ahead.

Just following up on the patent legal side and I'm - this is - I'm not a lawyer, but can you help me understand if you're trying to get a judgment that your patents are not infringing. Is there any issue that the court could say that you're basically asking for the same thing that's being handled in another court, so you can't get tried for like the same type of thing, I may be saying it wrong, but I think you know what I'm kind of saying?

Yes, the claritory relief action we're referring to it short handers as a DJ action is basically us asking a federal court in this case in the State of California to provide a judgment regarding rights relative to these patents without ordering any damages or actions right? So it just clears the deck and creates clarity for our customers around their rights to use and that our patents are prior art. I'm not a lawyer either and so I don't think I'm in a position to turn around and answer your question with any confidence. I'm going to hold off and not do that.

And then if I look at the identity segment, if that was more like stand-alone how do you think about what revenue quarterly revenue run rate it turns profitable and maybe at what revenue run rate you get to kind of what your target margins or operating margins for the segment, and what would those margins be?

Yes. So I'm going to let Jeff answer the specifics there, but Allen just to put a top cap on it all of what you're asking is very controllable. Today we are making very conscious and very intentional investments in the identity business, it's a cash consumer and we're making those investments because this market is very big, very fast-growing, very valuable. It's an intractable problem for customers in its very early stages. And so we want to be a leader there. We believe we're a leader already, but we want to be a leader two to three years from now when the market is really big. So I'll let Jeff talk to what our models indicate where this should go.

Talk to or not talk to us we don't really give a lot of guidance on our product line forecasting. Allen, I echo exactly what Max said right, we're making investments and at any time you can always pull that back. As we look at that product group, I look forward if you're thinking we can continue to grow, which we hope to give our rates that we're growing at over the next few years. And as you play that forward the only thing we've really shared is that we anticipate we can see that product group turn the corner to profitability somewhere out there probably around the end of 2021. And so if you go out and model those to revenue growth rate similar to what we're seeing I think you get an idea of kind of the size of the business that we would be at then. And the picture is over time you're going to see gradual improvements in the gross margin line as you're able to leverage the SaaS model, the cloud model, cost model. And then we perform agent services. We'll continue to perform agent review services. Over time though more and more transactions will be able to be handled via the auto system, so that will improve over time as well. And then the cost benefit you get below is really getting leverage out of your selling teams your go-to-market and less investment in G&A...

Scale. Leverage and scale.

The scale. Well, hopefully that helps you with the question.

Yes that's great. Thank you very much. And then maybe just finally there, when we think about the identity segment, should we be thinking of it similar to the kind of Mobile Deposit where you have this large defensible moat something that's protecting you? Or is it just that it's a very large market that's early and you have a good solution that's out there? But is there a barrier to others coming up it being becoming much more competitive?

I'll take that out of gate here. It doesn't have a barrier like we have on the mobile deposit. I mean mobile deposit it's a, the characteristics of the market are completely different right. You're first off you're dealing with checks which are declining over years. So the population of - the addressable population is declining. So that's completely different. And we work through a network of processors - we have long-term relationships with and we have patents. So there's a pretty good moat there whereas you go to the identity space that's an emerging market. There's not a lot of IP that's protected out there. There are some but not a lot of IP that's protected. And everybody is figuring it out. So that market is completely different with - I don't know that there's a moat there. It's about being the most stable company being a leader in the space being first with the features and then actually delivering to your customers and earning their repeat business which is where I think we focus our efforts and try to win. I don't know if you have more on that Max.

No, Allen who do you like in the Super Bowl this Sunday?

I'm the wrong person sorry.

All right no problem.

Okay, well thank you so much. I appreciate it.

You bet.

[Operator Instructions] The next question will come from Darren Aftahi with ROTH Capital Partners. Please go ahead with your question.

A couple if I may first on the deposit thanks for giving that in detail. Jeff I think you said the revenue is $14.7 million and that grew 23%. Is that correct?

Yes.

Would you try to indulge what unit growth was relative to that revenue growth?

You know that's - we don't share that because that's not exactly how it lines up. So the revenue growth, remember those transactions are blocks that are sold upfront. So it's really not associated with the unit used in the period. What I can tell you about what was used in the period is it's pretty consistent to what we've been seeing. It's in the teens.

On your transactional SaaS, I used this one before that want to clarify. Did you say ID was $7.4 million in revenue and that was up what was the percentage in the year-on-year?

That one was it was $7.4 million and I think it's 28%.

I just want to make sure my math is correct. On the transactional SaaS that grew 39% but on a dollar basis I think sequentially that stepped down a little bit in Q1. And I know looking back that was down maybe couple years ago a little bit. Anything seasonal in nature with any particular clients or anything you would kind of call out as to why that would step down do I feel like it's been continuously growing the last probably eight or nine quarters?

Yes so, there was a slight step down there a couple hundred thousand dollars from the last quarter. The thing to keep in mind with that is it's transactional. So it's always subject to fluctuation based on whatever is going on in the customer base. So obviously seasonality can impact that which we did in the quarter we had some customers with seasonality that was down. We actually had a couple customers through some Spanish partners. So that would be a couple Latin American I believe they're in Latin America customers that actually churn not significant but small enough that I noticed it. And then you've just got the different customers that for one reason or another they're seasonally up or seasonally down and that could be due to the volume in their business or the volume that they're directing to mobile verification. So they may be turning on different sectors or turning off different sectors which I think we've talked with you before in the past geographies and such like that. So that's basically what's going on there. Overall, we look for that number to continue to grow. We're enthused about the identity business. And everything we're doing now is in the cloud which we're thrilled with except for Spain of course. And the thing about that business is we're adding customers. They're going live. They're getting benefit from this. And then there's always going to be a little bit of this movement in the network. So I hope that explains it.

Just two quick ones for me, lastly the profit margin I think was 22.5% in the quarter. This is typically your seasonally weakest quarter I'm just historically it has been. I'm just kind of curious why you kept that 20% to 22% guidance. And if you do - in keeping that like where is the marginal OpEx going to come from kind of where you sit today?

I think for the quarter we're actually like 21%. The guidance is 20% to 22% and we've invested in the first quarter. And so as I look throughout the rest of the year it's probably going to be right around there up or down slightly each quarter through the end of the year. Probably Q4 will be the strongest. But the reductions of A2iA really did let us make some investments in the identity group. And then if you look back last year and look at those non-GAAP adjustments that we had that I don't want to call it nonsense but all the things we had to spend money on the trend the process last year in that there was quite...

Non-operating element.

So the non-operating element not having those has been very helpful too. So, I'm really happy with where the margins came out for the quarter. And I think that we'll see something similar up or down a few points each quarter the rest of the year. That will help us get to that guidance range. The thing I’ve got - and then it's not our intention to go exceed that significantly because we think we need to invest in the ID business which is where…

And then just lastly on the rationalization on the ID platforms kind of where are you relative to kind of last quarter? Are we sort of three months more or it's going to take another kind of six to nine months before it is all complete?

Yes so maybe, this is Max, just to remind everybody. So back in July, we said we were going to accelerate the rationalization of some of the legacy systems both on-prem and in the cloud that we had inherited through acquisition and some that were here natively. And so, we kicked off that acceleration from a just to disclaim here. We said the stuff from Spain and ICAR is going to take longer. So that's not incorporated in what we talked about back in July. We have subsequently accelerated and end-of-life and end-of-sale and sunset, because three or four systems since July. The overwhelming majority of revenue is now behind us from those systems. And maybe you want to quantify that if there's anything to quantify.

Yes, I think the hardware and software revenue line that you see now is probably close to plus or minus where it's going to plan until the Spanish stuff goes to the cloud which is a couple of years away. The rest of the ID business I think it's safe to say now all of the on-premise is done. And so that's in one of our cloud solutions. So, we've got a few cloud solutions for ID that's where the revenue should go. And then over time we'll be end-of-lifing one of those and getting down to - one cloud solution.

Yes, but from a revenue perspective I think - really at the tail end.

Yes, pretty much that.

Darren before I’ll let you go what do you like in the Super Bowl Sunday.

I wouldn’t know what do you like Max.

Come on man - I don’t want alienate any customers - but I think being and California.

I am so waiting on the…

We got to go with 49ers.

Yes, I sort of hoping the San Diego LA whatever city they are in charge of would make it but apparently it’s not on that card list this lifetime.

Just trying to add a little humanity to our call here.

Thanks for the question. I'll turn it back to the speakers now for closing remarks.

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.

Thank you. Ladies and gentlemen this concludes today's event. You may now disconnect your lines.