Good day and welcome to the Mitek Systems Second 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 second 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 second 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 so 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 the call today are made as of April 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. Good afternoon everyone. Thank you for joining us today. Jumping right in, as the COVID-19 pandemic continues to unfold our foremost commitment is to ensure the health and well being of our employees, their families and our worldwide community. As such, we’ve taken all necessary measures to maintain a continuity of our operation and to safely operate at full strength, while complying with government’s mandated stay at home directives. As a modern digital business, we were able to pivot to work from home within one day and all of our team members continue to be highly effective in this environment, delivering on all committed service levels. As such, Mitek is steadfast in our commitment to empower trust and convenience in a digital world. Our identity experts are working 24x7 around the globe to ensure that more businesses are enabled to transact digitally and secure their platforms through easy, fast and secure identity verification. We’ve increased human capacity to ensure more agents are available in more locations to support the increase in volumes for high assurance, identity verification. We are also partnering with financial institutions, as well as the Federal Reserve here in the U.S. to expand usage of mobile check deposits among consumers. To sum it up, our cloud-first technology provides a secure environment for both existing and new customers. And now more than ever, our enterprise class expertise, products and services are being leveraged. This was reflected in our second quarter results where we delivered record revenue of $23.2 million, representing growth of 16% year-over-year. We also generated non-GAAP net income of $5.4 million, or $0.13 per diluted share up 98% year-over-year, and cash flow from operations was $3.2 million. During the quarter, we continue to see ongoing positive momentum in the identity verification market. We expanded…

Thanks, Max, 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 2020, Mitek generated record Q2 revenue of $23.2 million, a 16% increase year-over-year. Software and hardware revenue was $11.5 million, an increase of 8% year-over-year. Services and other revenue which includes transactional SaaS revenue, maintenance and consulting services was $11.7 million for the quarter, an increase of 25% over Q2 last year. This increases due to growth in transactional SaaS revenue, which increased 38% year-over-year to $7.4 million. For Q2, deposits revenue increased 13% to $14.6 million and revenue for identity verification increased 21% to $8.6 million. We delivered strong software and hardware gross margins of 92% for the quarter. Gross margin on services and other revenue was 80% to the quarter, up from 78% in Q2 last year. Total gross margin for the quarter was 86% up from 85% last year. Total GAAP operating expenses including cost of revenue were $22.1 million, compared to $21.6 million in Q2 last year. This increase is primarily due to investments in operations to grow our business and increase litigation costs. These increases were partially offset by lower expenses in our Paris operations as a result of the restructuring announced in July 2019, and a decline in acquisition-related costs in expenses. Sales and marketing expenses for the quarter were $7.4 million compared to $6.8 million a year ago. R&D expenses were $4.8 million compared to $5.3 million last year. And our G&A expenses were $5.2 million compared to $4.8 million a year ago. GAAP net income for the quarter was 900,000, or $0.02 per diluted share. Our diluted share count was 42 million shares compared to 38.9 million shares a year ago. As a reminder, our earnings…

Thank you. [Operator Instructions] And our first question is from Mike Grondahl with Northland Securities. Please go ahead.

Could you talk a little bit about the new customer funnel for mobile ID and kind of what we've seen there in this environment?

Mike, it's Max. Thanks for the positive comments. Yes, I think we've been building that pipeline for the six quarters. I've been with the business. We've been retooling a number of things within the organization and the go-to-market is a big part of that, both our message how we position and then the sales motions. Pipelines grown really nicely and of course, the last three or four quarters as those efforts have taken root. You've made a lot of additions to the team, powerful additions to the team by way of personnel. Brought in our new sales leader at the beginning of the calendar year this year, for the identity U.S. business, really made some big strides in Europe, but half of our identity business comes from the EU. So in that regard, I feel good about the opportunity to think the unknown and one of the other things you heard in Jeff's remarks there is. Just what does this mean? What is the pandemic and the shutdown and just the slowdown in overall consumer spending and big unemployment numbers that we're seeing. What does this mean? Two of those opportunities and more importantly to the businesses that we have with those opportunities, I don't know if that provides the color you're looking for, but that's probably as smart as we are this far into it.

Got it. And in the mobile ID business, how much of that would you say is online? And what piece of it is sort of offline at a physical location? Have you broken that out before?

I'm not sure I understand the question because you pull on that a little bit.

Sure. With your mobile ID product, how much of it could be done from someone's living room versus maybe someone has to go into a physical store and use that mobile ID product?

Okay, thanks for clarifying it. Well, it could be 100% done remotely, right. From a mobile device, whether that's a phone, iPad or a computer. We do have use cases, it's an easy example, a bank, a retail bank location branch, where when you set up an account typically, you provide your documents and they take your documents and make a copy of them. We've got use cases where we do some of that, but that's a very, very small part of our business. The overwhelming majority of use cases both the current transaction volumes that we're seeing, as well as the pipeline we just talked about, over 95% of those use cases are wrapped around the idea that you're doing that remotely.

And our next question is from Bhavan Suri With William Blair. Please go ahead.

Hey guys can you hear me, okay?

Yes.

Great, thanks for taking my question and a nice job. I guess I just want to touch a little bit on the current environment. We've obviously seen, through conversations with CIOs that it's going to accelerate, especially coming out of it the idea of digital transformation, and things like that, but you're kind of at the forefront of some of this, right. So think about mobile check deposits and the idea of doing this remotely. You think about ID verification now and sort of being able to validate that remotely for all sorts of processes, whether it's stuff with DocuSign or things like that. I guess I'd love to understand sort of how those conversations are progressing. You talked a little bit about pipeline, but a little more color in terms of sort of what you think this is going to drive confirmation in your go-to-market especially with the new SUV sales?

Yes, sure. I think it's -- we're trying to straight the balance between what you're pointing out, Bhuvan which is, if you're a bank and you don't have -- if you don't have the ability to onboard new customers for a mobile device or digitally, expecting somebody to come down to a branch today is, just kind of impossible, but it's highly unlikely. I used a couple of examples and balancing that against, these big falls in GDP, high unemployment claims, just -- what's happening with the economy? What does that do to folks? How much credit card use is there going to be in short term? How much buying is there going to be remotely? So kind of back to your question, in this current environment with that use cases, that's kind of relevant example I can use is, when you think about Italy and just being kind of the centre of the storm, a month ago, and we've got customers in Italy, the banking customers in Milan and folks who have basically signed up better in the middle of implementation. And we were being urged by those customers and our partners, the implementation partners. We have to help accelerate those implementations because there was absolutely no way because of the lockdown was so severe, there was no way, is no way for Italian banking customers to go to a branch and so the ability to actually use mobile verify to validate somebody's identity, even if they're an existing customer with somebody like a buddy bank, just the ability for them to validate a transaction over a certain threshold of euros, transaction over 1,000 euros, you're going to do another revalidation using government issued identity cards. Those are the examples of the acceleration just, a simple one in, a really hot zone relative to the pandemic. Jeff, anything you'd add to that?

All I'd add is the way I view this longer term is just really reinforces the need and for us opportunity for identification services for every business that needs to transact digitally. So longer term this is, all beneficial to what Mitek is trying to do. Near term, obviously, there's going to be bumps, as you know companies whether they were in our pipeline or looking to do something, figure out the impact of the pandemic on their business and what kind of projects they're able to take forward. The great thing is everything we're delivering, well, most everything we deliver, I think, is towards helping companies get more revenue and sign up more customers. So it's important for businesses to be able to do that, so all good things in favor of identity verification.

So maybe let me ask that, a more direct question and Jeff, you know me long nice. I guess, I'm surprised you wouldn't see an acceleration in the business, given people got got stimulus checks that are -- some are being deposed directly, but there's a whole bunch of checking cut. There's more stuff being signed electronically. There's more of the sort of online transactions. And so, help me reconcile that idea and I understand people are making decisions slowly, but you're embedded in 3,000 plus bank. Those banks are seeing more check deposits, et cetera. And then obviously, you've got sort of recurring businesses growing nicely, but you pull guidance. So put those together for me, or if you just help me clarify that I'll be really helpful?

So, I'll take on the identity and then I'll let Jeff talk about the deposits a little bit the way we check model works there. I think everything you just said, Bhavan is 100% correct, but I think that's a great hypothesis and now it's just a matter of when does that hypothesis play out. Does that take 30 days? Does that take three months? Does that take nine months for us to get to that place? And we're bullish and optimistic that it will be sooner than later. But in the last 45 days, and completely they're mind boggling as to the rate of change, things took place without actual zero visibility to what was happening. On the identity side, yes, we're watching these projects accelerate some examples, I just use, we can come back and let Jeff talk about the deposits, but you're also doing that into the teeth of huge unemployment claims and the bottom falling out of the economy at least for some period of time. I think we're trying to balance being responsible with the optimism we have for the longer term wind in the sale that this ultimately helps accelerate. Jeff, why don't you talk about the deposits a little bit?

Yes, on the deposit side, we definitely expect to see an increase of volume usage due to the government's check that will be sent out or are being sent out, that definitely will flow through the network. But, Bhavan keep in mind the way that whole business works, right, all our customers purchase upfront, large blocks. And so, the usage will need to flow through that. But then, I imagine, they'll come back and be repurchasing probably we'll see some of that repurchases come sooner, so that's definitely favorable for our business. It is a one -- we hopefully, it's a one-time thing that's government issuing all these checks, but that'll be a one-time thing that really we will definitely benefit from. On the other hand, during this traveling economy, there's probably going to be a decline in checks that are written. Just due to be people having less money, but also there'll be less payroll checks due to unemployment. So, there's kind of a balance there. We expect real positive on deposit usage, but there are other factors in there as well.

Got it, that's really helpful. One last one from me, just on a -- quick update on the ruling, you've said, you're expecting a ruling on the decor judgment could say Northern California and Texas. Just love to understand, how that's going or when would we expect the update? Has a timeline for a legal stuff being extended because of COVID and kind of maybe not the milestones? So I know that, there's some questions buried in there, but sort of an update of the process with COVID extended and then sort of milestones that us and investors should be looking for through the process? Thank you.

Yes. So, the next milestone, obviously, is this CJ action, that's now going to be contended in the Eastern District. From a timing perspective, I think it's natural to have expected that, of course, the last 45 to 60 days. The wheels of justice that normally, that normally grind along, they continue to grind along. It's probably a little slower just because of, everything we've already talked about and we're all experiencing personally, but it hasn't stopped. So, the timeline remains largely the same.

And next question comes from Mark Schappel with Benchmark. Please go ahead.

Hi, thank you for taking my question. Max, starting with you, I apologize. I jumped on the call a little bit late, so you may have covered this in your earlier prepared remarks. I was wondering if you could just review what the Company is doing or what steps are taking on the cost containment front just to manage through the COVID disruptions?

Hey, Mark. Yes, you missed the best part of the call was the front end. From a cost containment perspective, I think we're being conservative. It's one of the reasons that we pulled the guidance here, just because we don't know, what to expect in the course of next month two or three. But from a spend perspective or I think we're being judicious and we've hopefully established our reputations as good stewards of the business and being disciplined in the way that we make these investments. We're not pulling anything back. We were able to, as we said, in the beginning of the call, we were able to, we are a modern digital business, everything that we run is in the cloud, all of our employees have laptops, we've been highly secured VPN environments. We've been reading customers for a long time. And literally the day that we announced work from home the next -- people put their laptops, the things they needed from their work areas, Jeff and I included, went home and the next day got up and went to work, at my kitchen table. So, I think we're going to continue to be judicious and continue to be conservative, both in the projections we make, but also how we run the business, but we're not pulling back. We continue to invest and we continue to grow both sides of this. Jeff anything you'd add to that?

I would just add that we have continued to hire and onboard people in this work from home environment.

Okay, great. Thank you. And then national ID business with respect to the sales organization in ID, has there been a shift in focus from generating new customers to maybe just getting your existing customers to buy more of your product or more of your solutions?

Yes, I wouldn't refer to that as a shifting focus. I think we actually have a dual focus at the beginning of our fiscal year, October 2019. We split the team, we basically took what had been a all purpose go to market team and separated kind of new business from expansion within the hundreds of customers that we have on the identity side. And I think that was a natural outgrowth of just continuing to get bigger and more mature and wanting to have unique focus, typically on the Tier 1 and tier 2 existing customers. And then be able to create its own unique focus around those target accounts we had in the select segments of the market for new identity that we've been after in those segments are the financial services to fintech and in the marketplace, gig economy, customers. So, it's a natural progression for us, natural evolution for us.

Okay, great and then Jeff, bringing in here. Despite your operating margins being up significantly year-over-year, our cash flow from operations was down this quarter. I was wondering, if you could run through some of the puts and takes in cash flow this quarter?

Sure. I guess the most unusual thing in the quarter for cash is we spent about $1 million in stock repurchase. But other than that, the changes affecting the cash flow from operations remember are really just accounts receivable, a little higher at the end of the quarter and we paid downs payable. So, nothing going on in there other than just some minor working capital changes, really. And then that stock buyback, which I don't know if you caught that on the call.

And our next question comes from Allen Klee with National Securities Corporation. Please go ahead.

My first question is I just wasn't sure, if I caught something right. When you talked about what the revenue growth rates were for identity verification and then for deposit imaging, I thought I heard 21% and 13%. Were those the numbers?

Yes, that's correct. Deposit was up 13% and ID is up 21%.

Okay, wonderful. Then do you have a general sense of what percentage of revenue you get from segments that are kind of what you pointed to like hospitality and travel and any other areas that are kind of the obvious ones that might get impacted?

We don't publicly break that out. I would say our exposure to travel and hospitality is, it's going to be on the lower side. We have a couple of customers that are of nice size that we don't have like numerous customers who travel and hospitality. We've spoken to you before about Airbnb being a customer of ours some as you can imagine their business. I took a pretty big slowdown during the pandemic. I'm not sure when that bounces back, but that would have probably been the biggest impact for us there.

I think, Allen, just to add on to what Jeff saying, we did that acquisition of ICAR 3 to 4 years ago. That's that hardware line you see in our income statement. And most of that hardware are actual scanners that are used by hotels and resorts in the Mediterranean, and I don't know those numbers off the top my head Jeff. They're not immaterial, but they're also not massive either.

Right, yes, there is exposure there as well. They used in hotel.

Thank you. And then if you look at your business of like how it's been doing in April compared from March. What can you tell us?

Let's call it to them, our Q2 results, and I don't think we're going to sit here and try to pontificate or provide information around what's happening in April, we'll do that our Q3 earnings.

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I actually have really no idea on that. We don't get, you know, all the reporting we get is the number of checks used or deposited, so we don't really see the payroll checks or if they’re small business or if they're large business, any of those things. I really couldn't answer that one for you.

[Operator Instructions] And our next question is from Darren Aftahi with Roth Capital Partners. Please go ahead.

Hey guys, good afternoon and thanks for taking my questions. A couple of I may on the check volume side, you may have seen -- could you anecdotally talk about anytime to some of puts and takes, but what sort of the trend line you've seen in terms of check deposited across your network, maybe in April versus March, is that trend is still increasing? Second question, is that a massive shift to everything e-commerce. And so I'm curious, as when you talk about the economy, one, where you seeing benefits among kind of e-commerce ecosystem? Is a normal logistic side, i.e. the instacart of the world or are there new opportunities like an e-commerce? The reason I ask that is, it's very hard to get a cell phone now via a carrier store or opportunities like that popping up for you. Do we usually, I think you get the number of new IP customers curious if you have that? And then more of a higher level question lastly. People may be more reticent to want to go ATM now. So I'm just kind of curious conversations you're having with the bigger financial institutions, is it more of an accelerate in conversations we need to have some of these solutions now in terms of opening up accounts and then doing everything remotely as opposed to seeing the ATM as a channel for transacting? Thanks.

Jeff, do you want to take on the check trends first?

Sure. Well, I'm going to say today is April 30th. So, we don't have a complete month yet of check reporting. So, I couldn't really comment about April, Darren. Say as, when I look at the checks that were reported in Q2, it was usage as we expected in the low teens, like we've been talking about. I really don't know how to predict how many of the government checks will be issued in check form versus direct deposit. We've -- our team has worked with the Federal Reserve to make sure that the format of the checks that they're working is going to work well with mobile deposit. So, we're really looking forward to seeing what comes from that, but I really can't forecast anything on that right now. And as of April, I have no way to tell you. Let's see what else is on check, ATMs, I don’t know that ATMs necessarily impact, unless I am thinking along the lines you are. With the impact identity, MOST of our conversations that are -- you don't want to -- we can't go to a branch now to deposit a check. Nobody wants to touch an ATM. So, the best option is mobile deposit. So, it's another thing that's in favor of encouraging people to use mobile banking, mobile deposit. We think they'll get users who haven't done it before. And so, we think that's going to contribute to just continue increased adoption by consumers of mobile deposits. So, again, favorable but being 6 weeks into the pandemic, it's really hard for us to forecast anything this early. But we do feel that, it's going be very positive for the mobile deposit business.

Yes, likewise, if I pick upon the questions that are more identity related. I think, Darren, right now, what we've seen, kind of since the middle of March, maybe even a little earlier in March is. More of the reaction to this crisis was started as a health crisis, which now it's turned into a global economic crisis. And the things that we're seeing or volumes are really going up are exactly that, right. The shopping, the shopping providers, you mentioned, mobile phones and assurance a big customer of great customer for us and making phone claims, if your phone is destroyed or not working or maybe you lose your phone, that kind of thing. We're seeing those volumes increase. WE got a European customer that basically does identity verification for the UK government for government services like unemployment filing. And so, what's another example in the financial services, all those PPP loans and we process thousands of transactions from small mom and pop shops. They didn't have merchant banking services when they were filing for PPP loans, which we're now seeing the second wave of that start to spark up based on the increased funding in that program, the SBA. Those are the kinds of examples we've seen so much, so far. And I would refer to that as a reaction stage, hopefully, optimistically, over the course of the next month or two. Hopefully, we start to get to the place where we start to see the recovery mode. And I think that's fact to your, some of the questions that we're asked by some of your colleagues and where you were alluding to for e-commerce and digitization. Who wants to go down to a bank and apply for a credit card or apply for a new account, that's a dirty placed with a lot of germs and potentially having viruses, right? And, I think where I use the example of Italian banks, but we're seeing that across the board, where the folks that had these digital automation programs are accelerating those and that's what we expect to happen. I think we should expect that to happen, broadly not just a matter of, how long that takes some and how serious folks are on that. Am I missing anything in there, Jeff?

I don't think so.

Can you give us the number of new ID customers in the quarter?

Okay, I think we track that, now with the resellers for some of the ICAR solutions that we have. I mean, those numbers are dozens and dozens of customers. I think that the devil is always in the details as to, you mentioned some of our bigger customers in your question. And that's, taking those dozens and dozens and shifting out, who's going to be the next big customer, who's going to have those really big volumes. So, I think tracking that numbers just not that valuable and unlimited is helpful.

And there are no further questions at this time. I would like to turn it back over to Mr. 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. Our call has concluded. Have a wonderful day.

This concludes today's call. Thank you for your participation. You may now disconnect.