Mitek Systems (MITK) Q3 2020 Earnings Call Transcript

Mitek Systems (MITK -2.16%)
Q3 2020 Earnings Call
Jul 30, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Mitek Systems third quarter fiscal 2020 financial results conference call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead.

Todd Kehrli -- IR Contact Officer, MKR Group

Thank you, operator. Good afternoon, everyone, and welcome to Mitek's third 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 third 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, July 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'll 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.

Max Carnecchia -- Chief Executive Officer

Thanks, Todd. Good afternoon, everyone, and thank you for joining us today. Before I cover the highlights of our strong Q3 performance, let me first restate our commitment to the well-being of the Mitek community during these challenging times. We continue to safely operate at full strength while working from home and applaud our global team members who remain highly effective in all aspects of our operations and are delivering on all service levels.

Mitek is steadfast in our commitment to empower trust and convenience in the digital economy, and we strive to ensure that all businesses are able to operate safely online through our simple to use secure identity verification solution. To reference a recent Forbes article, the pandemic has put trust in remote digital onboarding center stage, and it's not just banking. Government benefits, health services, online education, dating companies and gaming are just some of the sectors witnessing the demand for identity, know your customer services. COVID-19 has also accelerated the adoption of digital banking and with it, electronic check deposits.

Mitek remains the clear market leader with its remote check deposit solution, which is used by more than 7,000 financial organizations and has enabled over 4 billion electronic deposits. During this rapid shift online, Mitek is proud to provide a secure remote environment that enables digital transactions. With that, let's turn to our strong third-quarter results. We delivered record revenue of $25.4 million, representing 16% growth year over year.

We also generated non-GAAP net income of $6.8 million or $0.16 per diluted share, which is up 43% year over year and cash flow from operations of $9 million. SaaS transactional revenue grew 42% year over year, validating the positive momentum in the identity verification market, and we continue to experience growth from our highly profitable deposits product line with consumers and businesses, adoption. and utilization continuing to increase. If there was ever a time when mobile check deposit was essential, it is now.

Outside of the expected consumer usage from stimulus checks, banks continue to invest significant resources to meet the rising volume of active users in mobile and digital channels. Therefore, as anticipated, growth levels for the mobile deposit business increased this quarter. While this growth in transactions didn't immediately impact our revenue as we sell blocks of transactions in advance, this growth in usage will eventually flow through to revenue as banks expand their licensed transaction volumes faster than planned. We are proud of our mobile deposit offering and its ability to both assist people in this time of need while also providing layers of defense against fraud.

Now onto identity. The COVID pandemic has changed the way we live and work forever. Financial services and online marketplaces face shifting fraud landscapes and companies and consumers that formally transacted business primarily in person have been forced to embrace a digital first approach. The need for fast and secure remote services is magnified and regardless of where our customers were in their digital transformation journey, they are now looking to accelerate it.

Digital identity verification is an essential use case in this new economy. Using it, businesses are able to quickly and accurately verify legitimate customers online, which in turn helps them mitigate fraud and stay compliant. It is therefore not surprising that adoption of identity verification as a service increased in the quarter, with several of our customers and partners experiencing higher than normal transaction volumes. For instance, some of our bigger gig economy customers went from being a convenience to serving as a lifeline for millions of people following stay at home orders.

Mitek helped these customers meet increased demand by enabling them to onboard thousands of new applicants and safeguard their platform for convenient digital commerce. Similarly, a European customer who is a leading provider of digital identities in Europe was able to quickly rise to the increased demand in digital applications due to COVID-19 relief packages. Through their automated identity proofing process using Mobile Verify, they were able to provide secure access to critical government benefits for citizens impacted by COVID-19. These two examples highlight Mitek's ability to scale, as well as the short-term advantage we've received from some of our customers in the current environment.

Mitek's business resilience has proven, and we are proud to have partnered with our customers during these challenging times. It is still impossible to predict the longer-term impact that COVID-19 will have on our current customers and our pipeline of potential new customers. We see some customers returning to normal volumes, while other customers are still navigating the unknown as large swathes of the global economy are being affected. Near term, we continue to execute on our growth plan through channel expansion and continued product development.

Channel partners who extend our offering into adjacent segments provided positive momentum in this quarter. One example was our product launch with the Venetian Casino and Resort where Mitek Mobile Verify is incorporated into the Agilisys rguest Express Mobile product this solution enables hotel guests to check in remotely and bypass the front desk and traditional check in procedures. This innovative solution supports the customers' need to meet new social distancing requirements while also allowing guests to skip long check in lines. The Venetian reopened on June 4 and preliminary results from our go-live have been very positive.

Having this stature of a hotel as a successful first client is a critical milestone for our partnership with Agilisys as they look to be the leading provider of hospitality software to hotels, resorts, and restaurants around the world. We also signed a new partnership to address the significant opportunity in the e-notary space. In response to COVID-19, many states have issued emergency measures, allowing notaries to perform remote online notarization. At the same time, Congress is pushing to pass the New Standardizations and Secure Notarization Act, which would authorize every notary in the U.S.

to perform remote online notarization as companies turn to digital services in the wake of social distancing regulations. With Mitek Mobile Verify, e-notary users can simply submit a picture of their driver's license or other government issued ID document, along with answering a few questions to quickly determine the authenticity of the user and their identity. This will ensure that sensitive documents are only shared, signed, and notarized with verified parties. Innovation and product development are intrinsic parts of our growth plan and adoption of our Face Compare with Liveness Detection technology has been very well received in the global markets since its launch in February.

This high assurance biometric signal is an important competitive differentiator for Mitek. Another clear differentiator for Mitek is the caliber of our professional services, customer success, and support organizations. This quarter was no exception with record implementations in go live, collectively contributing to our one of a kind banking grade reputation. We are committed to helping our customers and partners as they adapt to recover faster and attempt to emerge from this crisis stronger.

We continue to invest in talent and innovation and successfully onboarded new hires across the globe through effective remote processes. In closing, we are pleased with our results, which include record revenue and significantly improved profitability. I'm proud to lead the Mitek workforce who has rallied to deliver the technology, products, and services that our customers need in value during these extraordinary times. We have the teams, the vision, the technology, and a market need of a solution that Mitek is uniquely positioned to deliver.

Together, this amounts to a significant opportunity for all our employees and shareholders. Now I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we'll open the call up for questions. Jeff, please go ahead.

Jeff Davison -- Chief Financial Officer

Thanks, Max, and thank you, everyone, for joining us this afternoon. Let's start with the Q3 revenue and operating results. For the third quarter of fiscal 2020, Mitek generated record revenue of $25.4 million, a 16% increase year over year. Software and hardware revenue was $13.2 million, an increase of 11% year over year.

Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was $12.2 million for the quarter, an increase of 22% over Q3 last year. This increase was due to growth in transactional SaaS revenue, which increased 42% year over year and 3% sequentially to $7.6 million. During the quarter, as a result of the pandemic, we saw varied impact on customer transaction volumes and revenue. We had certain customers experience large increases in traffic but than others with large decreases.

The biggest volume swings were in March and April and began to taper off in May and June. The net impact for the quarter was an increase in our transactional revenue of 3% sequentially to $7.6 million. As we enter Q4, these volume increases have fallen off. For Q3 2020, deposits revenue increased 13% year over year to $16.9 million.

Identity verification revenue increased 23% year over year to $8.5 million. We delivered strong software and hardware gross margins of 95% for the quarter. Gross margin on services and other revenue was 76% for the quarter. Total gross margin for the quarter was 86%, which was consistent with Q3 last year.

Total GAAP operating expenses, including cost of revenue, were $24 million, compared to $24.8 million in Q3 last year. This decrease is primarily due to the $3.2 million restructuring charge related to our Paris operations recorded in Q3 last year and the decline in acquisition-related costs and expenses. These decreases were partially offset by our continued investment in operations to grow our business and increase the litigation costs. Sales and marketing expenses for the quarter were $7.8 million, compared to $6.9 million a year ago.

R&D expenses were $5.1 million, compared to $4.7 million last year, and our G&A expenses were $5.9 million, compared to $5.1 million a year ago. GAAP net income for the quarter was $1.3 million or $0.03 per diluted share. Our diluted share count was 42.4 million shares, compared to 39.9 million shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non-GAAP net income.

We believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition-related costs and expenses, stock comp expense, litigation expenses and the related tax impacts of these items. Non-GAAP net income for Q3 increased to $6.8 million or $0.16 per diluted share, compared to $4.8 million or $0.12 per diluted share a year ago. Our non-GAAP adjustments include $2.5 million of stock comp expense, $1.7 million of acquisition-related costs and expenses, $1.4 million in cash tax difference and $1 million of litigation expenses for the quarter. This was all offset by the income tax effect of pre-tax adjustments of $1.2 million.

Turning to the balance sheet. We generated $9 million in cash flow from operations during the quarter, bringing our total cash investments to $52.2 million at June 30. Our accounts receivable balance of $12.9 million represents a DSO of 48 days. In closing, we are pleased with our results for the third quarter, which include record revenue and significantly improved profitability, and we look forward to continuing to deliver the valued services that Mitek provides.

Operator, that concludes our prepared remarks. Please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And we will hear our first question from Bhavanmit Suri from William Blair. Please go ahead.

Bhavanmit Suri -- William Blair and Company -- Analyst

Hey, guys. Congratulations. This is a great set of results. Nice job given the tough environment.

I mean, I want to touch first maybe on the identity verification side. You've obviously seen a nice uptick in demand, especially with some of the partnerships with the e-signature companies. You obviously touched on remote notary. You saw DocuSign acquire Live Oak.

Just update on those partnerships, how they're progressing, and maybe a little bit on the go-to-market with these partners that significantly larger, if we take DocuSign and someone like that. But how is that go-to-market playing out because you provide such a critical service around that. So some color on that would be great. And then I've got a quick follow-up.

Max Carnecchia -- Chief Executive Officer

Sure. Well, thanks for the props, Bhavan. Yeah. The channel for us, augmenting our direct selling with a channel sales has been a big improvement and a big progression for us over the course of the last 12 to 18 months.

And we've done that in a really thoughtful and very intentional way where we're not just kind of signing up any partner that raises their hand. So I think we used the example here that e-notary, Agilisys, you mentioned the e-signature guys. And a lot of that is where what we do with the identity verification or the reverification can add value to a bigger process that they're sitting on top of. And the e-signature is a great example, right? We all use e-signature all the time, but there's a segment of e-signature that requires a step-up to a higher level of authentication, up to and including now with the e-notary.

So I think you'll see that become a bigger and bigger part of our business. We're investing not wildly there, but we're investing very thoughtfully there. And what we found, when we can get a partner like an Agilysis, when we get a partner like DocuSign or Adobe, once we're integrated, they're able to act as that channel. And I think to your question about the enablement, the enablement is just a-it's a much easier lift because you're basically continuing to repeatedly deliver that same broader application, whether it's e-signature, e-notary or in the case of Agilysys, what they do for hotels and basically being the lifeblood, or the backbone of the hotels, restaurants and casinos.

Does that help?

Bhavanmit Suri -- William Blair and Company -- Analyst

Yeah. No, no. That's really helpful. Yes.

I guess -- and now this one maybe for you and Jeff there. But if I look at the e-signature workloads, let's assume we find a vaccine, hopefully, and we move past COVID, which I know we will at some point. And you think about the one-time items, right? And so e-signature for e-notary adoption, it doesn't feel like that's going to go back to paper. So that makes a lot of sense.

The idea of someone checking into the hotel, maybe now people want to check-in themselves as opposed to an app because the self -check-in has been available for a while, but it didn't see traction. And then if you think about mobile check deposit, there's absolutely this traction because no one's going into banks. But when you look at sort of the idea of a one-time item -- and churn is the wrong word, but if you think about the growth rates and the benefits you're seeing, how would we think about sort of what that might look like in a normalized environment. The go-to-market would be e-signature guys doesn't go back.

Totally get that. Are there other parts of the growth we're seeing that maybe return to a more normalized fashion? And how should we think about that? Thank you.

Max Carnecchia -- Chief Executive Officer

Yeah. So it's hard to predict, right? I mean, you used some good examples. But even with the Agilysys, with the self-check-in, self-check-in to avoid the contact is one element. But I think when we embarked on this relationship with Agilisys, it was really more around line busting, right? When you walk into Caesar's Palace and there's 400 people in front of you in the check-in and you spend two hours on your phone sitting there waiting to get to the front desk to be able to check-in.

So that was the original kind of business case for it. I think it's just been accelerated with the contactless. But to your point, some of the things we saw in the last four months, with the financial customers we have, PPP loans, we saw a ton of applications through our customers and our partners in that regard. We use this example for the government services in Europe, particularly in the U.K.

Our partner there basically is the -- it's the front door into getting unemployment benefits from the government in the U.K. And unfortunately, their volumes really spiked hard in March, April, and May. And I cross my fingers, as much as I love to have the business, I will cross my fingers that a year from now, we're not going to have that level. So I don't know, Jeff, did I miss anything in there?

Jeff Davison -- Chief Financial Officer

I think you hit it right on. I think Bhavan, you referred to some of the applications, or uses that I think will just contribute to this becoming more of a norm for people, and it will be a repeatable thing that you see. But there are definitely those cases and like we did see in the quarter where there were some spikes that, and the way that Max put it, we hopefully don't see that -- people needing government services continually. So those things will definitely retreat and come back down.

Bhavanmit Suri -- William Blair and Company -- Analyst

Yeah, yeah. And well, it's hard to quantify. I appreciate you guys giving us the transparency into the puts and takes. Thanks, guys.

And like I said, really nice job. Congrats.

Operator

And our next question will come from Mike Grondahl with Northland Securities. Please go ahead.

Mike Grondahl -- Northland Securities -- Analyst

Hey, guys. Congratulations on the quarter. First question is just could you talk a little bit about the increased demand in mobile check deposit, just kind of the level of it. I know revenues lag a little bit.

But to what magnitude did you see?

Max Carnecchia -- Chief Executive Officer

Yeah. So both anecdotally from member banks and then the actual logs we get from the direct banking relationships and then those reseller providers, the core service providers all indicated that the volume of checks going through the systems electronically and based on taking pictures from the phone went up pretty dramatically, like serious double digits. I'm going to let Jeff talk a little bit to remind everybody as to how the model works there because there'll be a latency between seeing those increased volumes and then actually seeing that matriculate into revenue for us.

Jeff Davison -- Chief Financial Officer

Yeah. Mike, as you understand, the model for the mobile deposit -- the revenue will flow through later. So the banks, the partners, they purchase big tranches of mobile deposit transactions. They use them up and then come back.

And this increased usage, there definitely was increased usage during the quarter. What we used to see is, I would describe to you in the lower teens to go through to 10%. It's well above that, closer to low 20s. So really good growth in the quarter in usage, and then that will flow through over the next multiple quarters as different banks and processors expire the lots that they've purchased already?

Max Carnecchia -- Chief Executive Officer

Sure. Sure. And Mike, just to help you out there. I mean, some of the bigger banks report those stats in their earnings calls, and we can kind of go back through their transcripts, like we saw the note last week from U.S.

Bank, where they had a 10% -- greater than 10% increase in mobile deposit checks and a 5% increase in active users of their mobile banking software and their mobile banking apps. So I mean that info is out there.

Mike Grondahl -- Northland Securities -- Analyst

I wrote about it a week or so ago, what Wells Fargo said. I was just curious from your view, what you guys saw. And Max, what's the current update on pricing power? I mean, you've got 7,000 banks. I don't think you've lost a bank customer.

And yet, now this product seems even in more demand. Do you have pricing power with it? Kind of where is that?

Max Carnecchia -- Chief Executive Officer

Yeah. I think we've reported on that pretty consistently, Mike. I mean, we've been at this now over a year. I think the team has picked that up and run with it.

We're not in any way being unfair with our customers or our partners, but we're delivering a tremendous amount of value here. We've got eyes on that. We understand exactly what that value is to the banks and to the partners. And some of the contracts are just being renegotiated so that they're more reasonable for both parties.

And you're starting to see that. Basically, our results represent increased volumes of checks being processed through mobile apps and then getting better economics in those relationships as those checks are processed, whether those checks are being processed mobilely or whether they're being checked -- we've got the software in the ATMs and in the horseshoes in the branches as well. So we're prosecuting that pricing power in each one of those channels.

Mike Grondahl -- Northland Securities -- Analyst

Got it. And then maybe just lastly, I think you said you had record implementations in mobile ID. How elevated were those?

Max Carnecchia -- Chief Executive Officer

Yeah. So we've tried to shy away from providing too many statistics about go-lives and how many customers are selling because what we know from our install base of hundreds of customers on the identity side is the biggest customer, it's very Pareto's Law, right? And the top customers generate over 50% of the revenue, and it's not a volume gain, it's really a quality gain. So coming back to your question, something like 25 additional implementations through the course of the quarter, which was up probably 25%, 30% from the next best quarter we've had where somebody has actually gone live and end up in production. But that doesn't really tell the tale.

The tale is, who is it? What are their volumes and how fast can they ramp once they're in production?

Mike Grondahl -- Northland Securities -- Analyst

Sure. Fair enough. OK. Hey, thanks, guys.

Operator

[Operator instructions] And we will take our next question from Darren Aftahi from ROTH Capital Partners. Please go ahead.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks for taking my questions, and I hope you're well. So can I just follow-up on the comment you just made, Max, though in terms of kind of quantity versus quality. How would you characterize those 25 or so additional implementations in the quarter [Inaudible]?

Max Carnecchia -- Chief Executive Officer

When you say quantify, what do you mean?

Darren Aftahi -- ROTH Capital Partners -- Analyst

Well, I mean, in terms of the quality of the customer, I mean, super strong, large, they're going to generate a ton of transactions. There's a lot of stickiness.

Max Carnecchia -- Chief Executive Officer

I get it. Yeah. So you'll remember, if we go back to the beginning of our fiscal year, one of the things we talked about in our -- I think it was our November earnings call was some of the adjustments we were making to our go-to-market activities in the identity business for this fiscal year. And a big part of that was bringing more focus.

We talked about focusing in on financial services, fintech, and marketplace as the sub-market segments we were after. We were really clear as to what countries. We were looking for customers in the U.K., Netherlands, Spain, that kind of thing. And then within that, we took an approach where we're really more around target accounts.

So our sales teams. our direct sellers don't have geographic territories. They have target account lists where we're fishing with spears, we're not fishing with nets here. So the overarching answer to your question is for the last three or four quarters, we've been very thoughtful and intentional around trying to find the largest lifetime value target accounts that are a good match for what we do.

It's not to say we won't do business with a smaller company or a start-up. It just means that our intention is really focused on the guys that we know we can solve their problem. They're going to get a tremendous amount of value from a relationship with Mitek Identity. And likewise, when they hit production, it may take a couple of quarters, but they're going to have some really good volumes.

And that's a long-winded way of giving you the context of I'm really happy with -- we've got some really big names on the financial services side and some really big names on the marketplace side and some names in fintech that we're going to wake up two or three years from now, and they'll be the leaders that kind of dominate the market. So feel really good about it.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Great. Thanks for that. So just with kind of the pull forward shift people are seeing in things like e-commerce, it sort of begs the question whether COVID is present or not, like how instrumental a branch is for a bank. And so with your position in multiple deposits, I'm just kind of curious, maybe in the last 90 days, how the kind of demeanor of banks on the ID side in working with you, and maybe pipeline changes has kind of transpired on products, whether it be mortgage, shining up DDAS, etc.?

Max Carnecchia -- Chief Executive Officer

Yeah. Well, so I guess we break this into two pieces. On the mobile check deposit, good point around branches were kind of in decline before there was a thing like COVID just demographically, and that's both domestically, and we've seen that in Europe as well. There's a JAVELIN study that came out in June of this year.

And moving to digital, the features that banks are using to move to digital, mobile check deposit was the number one thing. So ahead of Zelle, ahead of some of these electronic peer-to-peer approaches. So as much as that's a threat to us, the peer to peer is a threat to us long term, in the short term, checks are still a financial instrument that's being used, no doubt about it. And more and more are being deposited via the mobile app on your phone as opposed to the germ-infested ATM or the branch that's closed in your neighborhood for whatever reason.

So the second part of that question with identity, I think what we're going through, my assessment of what we're going through in the last three or four months is the banks, the financial institutions, the fintechs that are strong and are going to be able to survive have invested to accelerate their digital automation and transformation activities. There is, though, the other side of that ledger. There are a number of financial institutions that some have already gone kaput. Some of them already are in some pretty deep water.

And that's not within our control, but it's certainly a function of our opportunity and a function of some of our customers. If you're not going to make it just because your business isn't sound or because you didn't move to digital fast enough, that's one less opportunity for us. So that's a balanced view.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Thanks. And then just lastly, just any update on IP and what's going on in the legal side of your business? Thanks.

Jeff Davison -- Chief Financial Officer

Hi, Darren. There's really not any material update to what's going on there. We're pretty much where we were at the beginning of the quarter, waiting for the courts and the patent office. So both courts in Texas and then the patent office has several review requests sitting there.

So waiting to hear back on those, and we'll share when we know.

Operator

And with no further questions, I'd like to turn the call back to Todd Kehrli for any additional or closing remarks.

Todd Kehrli -- IR Contact Officer, MKR Group

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.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Todd Kehrli -- IR Contact Officer, MKR Group

Max Carnecchia -- Chief Executive Officer

Jeff Davison -- Chief Financial Officer

Bhavanmit Suri -- William Blair and Company -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

Darren Aftahi -- ROTH Capital Partners -- Analyst

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