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Mitek Systems (NASDAQ:MITK)
Q4 2020 Earnings Call
Nov 05, 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 fourth-quarter and fiscal 2020 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli, MKR Group.

Please go ahead, sir.

Todd Kehrli -- Investor Relations Contact

Thank you, operator and good afternoon and welcome to Mitek's fourth quarter and full-year 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 fourth quarter and full-year 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 or 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 5, 2020, and the company undertakes no obligation to revise or publicly update any 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. I hope all of you and your families are staying healthy and safe. We had an incredible fourth quarter, topping off another record year for Mitek.

Most significantly, we surpassed $100 million in total revenue. This makes fiscal year 2020, our third consecutive year with record revenues in each and every quarter. In fiscal 2020, we also generated record profitability. This solid financial performance continues to be driven by both our deposits and identities lines of business.

For fiscal 2020, we generated record revenue of $101.3 million, representing growth of 20% year over year. We also generated record non-GAAP net income of $28.6 million or $0.67 per diluted share, up 66% year over year and cash flow from operations of $24.1 million. Reflecting on fiscal 2020 performance, I would like to take a moment to acknowledge the tireless efforts of our global teams who remain committed to our customer success and to delivering on service levels, despite the impact of this global pandemic. In times of adversity values matter and I couldn't be prouder of how my technicians' contributions have ensured business resilience and customer success.

With COVID-19 hitting right in the middle of our fiscal year, we were challenged along with everyone else to adapt quickly to this altered environment. We were able to make the transition seamlessly and we continue to operate at full strength while working from home safely. Considering business performance, the COVID pandemic continues to expand the adoption of new technologies and accelerate digital transformation. Notably for Mitek is the rising usage of digital banking and with it mobile check deposit.

Furthermore, digital identity verification technology has emerged as an intrinsic enabler for people to access essential online services when they need the most. Digital identity verification provides a valuable source for overcoming many of the barriers associated with this digital and remote access. When implemented as part of the onboarding process, digital identity proofing provides a speed and accuracy that more manual methods cannot. For banks, COVID-19 has been a catalyst for digitization as widespread lockdowns meant in-person bank branches are no longer an option for their customers.

Therefore, as anticipated our deposits businesses' transaction levels continued to increase this quarter. In September, we released Mobile Deposit 4.8 which delivers more analysis and more insight with the same superior performance of earlier releases. We are proud of our mobile deposit offering and its ability to assist people in their time of need. Now turning to the identity business.

As stated earlier, digital identity verification is an essential use case in this new economy. By implementing our solution, enterprises can quickly and accurately verify legitimate customers online which helps them secure their platform, mitigate fraud and stay compliant. Therefore, it is not surprising that adoption of identity verification as a service increased in the quarter. And several of our existing customers yielded increases in their transaction volumes, large banks and gig enterprises favor our linked and layered approach to identity verification which is uniquely customizable to protect against attack vectors, depending on the customer's assurance requirements.

Throughout fiscal 2020, we continued to sharpen our identity capabilities to ensure relevance with those vertical industries and markets requiring these higher assurance levels. The results of this increased focus can be seen in our SaaS transactional revenue which increased 36% year over year for our full-year fiscal 2020. Along with this increased revenue has come new industry analyst recognition. In 2020, Gartner recognized Mitek across four different reports, for our advanced mobile capture workflow in the 2020 hype cycle for imaging and print services, for document-centric identity proofing in their 2020 hype cycle for cloud security.

For document-centric identity proofing in their 2020 hype cycle for identity and access management technologies and most recently, Mitek was recognized among document-centric identity proofing representative vendors for it's Mitek Mobile Verify solution in Gartner's Market Guide for ID Proofing and Affirmation. This report – in this report, Gartner forecast that by 2022, 80% of organizations will be using document-centric identity proofing as part of their onboarding workflows and increase from approximately 30% today. During fiscal 2020, we continued our fast pace of product innovation. We enhanced our biometric offering with advanced liveness detection which provides a fully automated spoof-proof precise selfie match in less than one second.

Customers prefer our face compare capabilities due to its impartiality to biometric bias with facial recognition and now essential feature in this global economy. We also enhanced our proprietary barcode analysis to our automated document proofing capabilities. This feature leverages machine learning in big data resulting in faster, more accurate verification and a smooth additive layer of defense to fraud. Most recently, we further advanced the speed and accuracy of our identity verification workflow with the introduction of a single point near-field communication solution for authenticating NFC chip-enabled ID documents or e-documents via a mobile device.

Our proprietary NFC enabled solution is centered around simplicity for users and speed and accuracy for the enterprises who use it. NFC increases the speed and accuracy of verification by authenticating users through biographical and biometric information stored in the NFC chip available in e-documents, such as an e-passport. Our intuitive capture technique swiftly locates the NFC chip and securely extracts the data for rapid authentication. All consumers have to do is scan their NFC enabled ID document and take a selfie to check liveness and face comparison.

Mitek technology takes care of the rest. This technology dramatically reduces abandonment rates and improves conversion rates for customers while supporting regulatory compliance requirements. The solution is a critical next step in reducing the risk of synthetic identity fraud which is the fastest growing type of financial fraud today according to McKinsey & Company. As we continue to innovate, we remain committed to exploring all alternatives to achieve product superiority, whether through partnership, acquisition or increased R&D innovation.

Looking ahead to fiscal 2021, we are recommitting to our focus on execution and our dedication to enabling trust and convenience in this digital economy. I believe we have incredible opportunities in front of us, and we will navigate the pandemic in the most effective way possible to deliver against our customer's priorities and long-term growth. I'm also pleased to announce that we have added a new member to our board of directors, Kim Stevenson. Kim is a technology innovator, who has transformed processes at some of the industry's leading companies including Lenovo, Intel, and IBM.

She is currently a senior vice president and general manager at NetApp, a publicly traded cloud data services provider. Kim's experience in cloud software is a tremendous addition in the helping guide Mitek. We're excited to welcome her to our board of directors. Before I conclude, I want to touch on the USAA situation.

As most of you know, the two USAA verdicts against Wells Fargo for patent infringement related to remote deposit systems are subject to post-trial motion that could overturn the rulings or result in new trials. Either way, the two cases will be subject to appeal in the U.S. court of appeals for the federal circuit. Also the U.S.

patent office is currently reviewing the validity of several of the patents that issue in the Wells Fargo cases. A final resolution of these issues may still be over a year away. Additionally, Mitek continues to vigorously prosecute its case for declaratory relief that our products do not infringe the patents at issue in the Wells Fargo lawsuit. That case remains pending in the Eastern District of Texas.

We also filed six petitions with the U.S. patent office, challenging the validity of the four patents at issue in the first Wells Fargo lawsuit and the two at issue in the second Wells Fargo lawsuit. We expect preliminary decisions on whether those challenges will be instituted in the coming months. Lastly, USAA continued its unprecedented attack on its fellow financial institutions by filing a patent infringement lawsuit against PNC Bank, alleging infringement on two patent related to remote banking and mobile deposit.

The patents related to the overall process flow of remote deposit and mobile deposit and do not focus on specific techniques utilized during the process. PNC through a third-party partner, utilized a certain Mitek software solutions as part of its mobile deposit service. The complaint does not mention any Mitek products or specific Mitek technologies and Mitek is not a party to the lawsuit. In Mitek's knowledge, USAA is the only user of its technology and USAA does not make markets sell, license or offer any software technology than the banking industry which it is now attacking.

All while USAA continues to utilize Mitek proprietary check processing software in its own operations and continues to rely on digital payments platforms and a vast network of ATM's created and maintained by the vary banks USAA now seeks to profit from through their litigation efforts. Mitek on the other hand, directly and through our partners provides our proprietary and award-winning mobile deposit and check processing solutions to more than 7,000 U.S. financial institutions. Now more than ever as we deal with the uncertainty of the COVID-19 pandemic, people rely on Mitek's technology for the safety and convenience it provides, while USAA attempts to profit from an ecosystem that it neither participates in nor contributes to.

Mitek has continued to innovate on behalf of our customers and consumers. During the past year, Mitek filed six new patent applications, three of these claim innovations related to the ID document authentication and three claim innovation in the capture and processing of mobile images. We were awarded 10 new patents during the last year. Mitek currently has 20 active patent applications and holds 67 issued patents, 36 of the patents are primarily related to mobile check deposits, 17 are primarily related to our ID verification and 14 related to specific techniques for digital extraction of data which applies to all of our product lines.

While the record is clear that Mitek invented mobile deposit, our success as a result, not just of our own innovations, but of the trust and partnership we have built with financial institutions over the past 13 years, since we first introduced the world to mobile check deposit. We look forward to our continued industry partnership and to improving the convenience and security of the digital world. In closing, we are pleased with our results including record financial performance for both the full year and the fourth quarter, crossing the $100 million revenue threshold, it's a significant accomplishment and an important milestone. I'm proud of the Mitek workforce who have rallied without question to deliver the technology, products and services that our customers need and value during these unusual times.

I'll now turn the call over to Jeff to discuss the financial results in more detail and following Jeff's remarks, we'll open the call up to 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 Q4 revenue and operating results. For the fourth quarter of fiscal 2020 Mitek generated record revenue of $30.6 million, a 22% increase year over year. Software and hardware revenue was $18 million an increase of 25% year over year.

Services and other revenue which includes transactional SaaS revenue maintenance and consulting services was $12.7 million for the quarter an increase of 19% over Q4 last year. This increase is due to growth in transactional fast revenue which increased 28% year over year to $8.1 million for the quarter for the quarter. Our Q4 2020 deposits revenue increased 25% to $21.5 million and identity verification revenue increased 17% to $9.1 million. We delivered strong software and hardware gross margins of 94% for the quarter.

Gross margin on services and other revenue was 80% for the quarter equal to Q4 last year. Total gross margin for the quarter was 88% up from 87% in Q4 last year. Total GAAP operating expenses including cost of revenue were $24.6 million compared to $20.5 million in Q4 last year. The increase is due to our investments and operations to grow our business and increase litigation expenses partially offset by lower acquisition related costs and expenses.

In our year-end financial statements, we have reclassified our product management expenses from sales and marketing expense to research and development expenses. This reclassification has made for all periods presented to conform to the current year presentation for comparison purposes. Sales and marketing expenses for the quarter were $7.3 million compared to $5.9 million a year ago. R&D expenses were $6.1 million, compared to $5.1 million last year.

And our G&A expenses were $5.9 million compared to $4.1 million a year ago. GAAP net income for the quarter was $5 million or $0.12 per share, compared to net income of $3.3 million or $0.08 per share a year ago. Our diluted share count for the quarter was 43.1 million shares compared to 41.6 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 the acquisition related costs and expenses, stock-comp expense, litigation expenses and the related tax impacts of these items. Non-GAAP net income for Q4 increased 31% to $11.4 million or $0.26 per diluted share, compared to $8.7 million or 0.21 per diluted share a year ago. Our non-GAAP adjustments include $2.4 million of stock-comp expense, $1.7 million of acquisition related cost and expenses, a $1.2 million of litigation expenses for the quarter. Now, looking at results for the fiscal 2020 full year.

Revenue totaled $101.3 million an increase of 20% year over year. Software and hardware revenue of $54.2 million was up 16% over the prior year, due primarily to the growth in mobile deposit offset by lower software revenue from our legacy on premise ID products. We maintained strong software and hardware gross margins of 94% for the year. Services and other revenue was $47.2 million for fiscal 2020 an increase of 25% over $37.7 million in 2019.

This increase is due primarily to growth in transactional SaaS revenues which increased 36% to $29.1 million. SaaS transactional volumes increased 35% year over year. Services and other gross margin was 79% for the year up from 77% for 2019. For our fiscal year 2020, deposits revenue increased 19% to $67.7 million driven primarily by increased consumer adoption of mobile deposit.

Identity verification revenue increased 22% to $33.6 million driven by 36% growth in our transactional revenue which was partially offset by the decline in revenues for our legacy on-premise solutions that are being discontinued. Keep in mind the transactional revenue was aided by COVID-19 related tailwinds, spurring the transition to mobile commerce earlier this year, Total GAAP operating costs and expenses for 2020 were $92.4 million, an increase of 4% compared to total operating expenses of $89.2 million in 2019. This increase is due to the additional investments made throughout the year to fuel our growth in the identity business and additional litigation expenses in 2020. GAAP net income for 2020 was $7.8 million or $0.18 per diluted share compared to a GAAP net loss of $724,000, a loss of $0.02 per share for fiscal 2019.

Non-GAAP net income increased 66% for the year to $28.6 million or $0.67 per diluted share compared to non-GAAP net income of $17.3 million or $0.42 per diluted share for fiscal 2019. Our diluted share count for 2020 was $42.5 million for both GAAP and non-GAAP EPS. Stock compensation expense was consistent at $9.6 million for fiscal 2020, as compared to fiscal 2019. As of September 30, 2020, our headcount was 399 compared to 284 a year ago.

Turning to the balance sheet, we generated $6.7 million in cash flow from operations during the quarter and $24.1 million for the full year, bringing our total cash and investments to $62 million at September 30. Our accounts receivable balance of $15.4 million represents a DSO of 43 days. In closing, we are pleased with our results which included record revenue and non-GAAP net income for both the quarter and our full fiscal year 2020. We are also proud that Mitek has surpassed $100 hundred in annual revenue driven by continued strong growth in both our deposits and identity verification product offerings.

Operator, that concludes our prepared remarks. If you could please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Bhavan Suri with William Blair. Please go ahead.

Bhavan Suri -- William Blair and Company -- Analyst

Thank you guys. Thank you and congrats. Really nice end to the year there. I guess I wanted to touch a little bit first on the identity verification side.

I'm not just – you're seeing this business start to get enough traction and COVID has been a pretty big driver of that, right. So starting from mobile check deposit, but for mobile identity verification, the need to go in and show something for all sorts of things, loans, mortgages, things like that. I'd love to understand sort of as you think about providing some color, we'd love to get some color. How much of that growth do you think has been driven by COVID? And then more importantly the durability and the sustainability of the growth in that business, because it is a nascent market, so it feels like that could accelerate at least sustain.

So I'd love to hear how you're thinking about that for the next three to five years in terms of all the drivers behind it.

Max Carnecchia -- Chief Executive Officer

Yeah, it's a great question and thanks for the kind words Bhavan. Yes, I think the starting point there certainly is that entity, not only is a relatively early stage category, I think it's a category that will continue to morph, right, as we've made this analogy to cybersecurity as bad actors kind of find their way through different attack vectors, those get closed and then they go find other attack vectors. I think we'll continue to see that with identity fraud and identity verification. We certainly got the help, it was a mixed bag in the sense that we got the help of COVID that really pushed some really heavy transaction volumes in what would have been our Q3.

We also had customers that were hurt by COVID and their volumes went way down, but the puts and the takes, I think at least in Q3 resulted in a net positive for us in that period. And I wouldn't say we're back to kind of what we were at before, there is still tremendous amount of uncertainty, whether it's political uncertainty, economic uncertainty, biological uncertainty. But I do – it's hard to have great visibility over the course of the next, let's call it six to nine months, but the longer term, where you started with your question about what's going to happen in the next two, three, four years. I'm bullish about that, I'm really optimistic about what that's going to mean for Mitek and I think we're positioned really well both with our current offering, but then as I look into our strategy and our roadmap and the things we'll be doing, not just with documents, but we've talked today about NFC and Liveness and face biometric and still feel really good about where we're going to take this.

And just because it's market driven, it's customer driven and we've got these great customers that are providing all the insights as to what's working, what's not working and then the ongoing changes of attack vector from the bad actors.

Bhavan Suri -- William Blair and Company -- Analyst

Yeah. No, no, it's really helpful. I think just to continue down that vein and I'll jump back in queue after this question, and maybe get to the mobile check deposit stuff later. But it's going to be a big market, it's a big market table, but we all realize that this coupled with sort of this idea of identity management, this futuristic thing that you and I are talking about is going to be a pretty big market.

And it feels like there is you guys and there is another scale player out there, that's very focused on KYC and other things and then some smaller players too. How do you view a competitive nature in this market? Are you guys fixed in certain areas and other guys fixed in financial services and KYC type stuff? Are you seeing that develop or do you think it's just kind of right now so early that it's hard to do that? And how is the competitive environment?

Max Carnecchia -- Chief Executive Officer

Yeah. I think it's –- any category period end, any market period ends that's big and fast growing and is yet to be solved is a magnet for competition. While it's early days, I don't think we're in the first 10th or – we're about a quarter of the way through here, even some of the stuff you heard from Gartner, the Gartner report that we quoted here. And my experience having spent the better part of two decades in Silicon Valley and watched a lot of categories kind of go through their life cycle.

56 companies get formed and venture or private equity, and then there is a shakeout, right, there is a fight for relevance and a fight for domination and three or four come out the other side as real dominant players and that's our intention. And I think that's well under way. I think last year, if you look over the last 18 months, there is been some consolidation and I think you'll continue to see that, the folks who can invest and can't really deliver effective solutions are going to fall by the wayside and folks like Mitek that are improving go from strength to strength.

Bhavan Suri -- William Blair and Company -- Analyst

Great. That was very helpful. Thanks, guys. Congrats again.

Max Carnecchia -- Chief Executive Officer

You got it. Thanks, Bhavan.

Operator

[Operator instructions] And next we will go to Mike Grondahl with Northland Securities. Please go ahead.

Mike Grondahl -- Northland Securities Inc. -- Analyst

Hey, thanks guys and congratulations on $100 million. That's pretty impressive. Mobile deposit, could you talk a little bit about what you're seeing there? Bank branches, some are still closed, people don't like to drive up tellers as much. It really seems like the last six months has been ideal for mobile deposit.

And are you seeing that across your network? It looks like there was an acceleration in the back half of the year for mobile check revenues. Be nice to get some insight and kind of I know you don't disclose reorders, but kind of if that's starting to pull through or not?

Max Carnecchia -- Chief Executive Officer

Yeah. I'll make a couple of comments and then see if Jeff wants to add. I mean, we definitely believe, we're hearing from our customers and our partners that behavior of consumers – banking consumers has changed. They're afraid to touch ATMs.

And as you point out that there were instances of many branches being closed. And so the adoption of being able to not just deposit checks using your mobile device, but using your mobile device as the branch, I'm sure if you went into any of the earnings calls of the big four banks, you'd hear that mobile adoption is increasing at a faster pace. And I think we're enjoying the benefit of that. Now I think that's also then got to be balanced with the economic slowdown that's been experienced in the course of the last six or seven months, not just in the United States, but worldwide comes with less checks being written.

We'll set aside the federal checks that were issued, but on an ongoing basis, the retail checks, just less of them just because there's less economic activity. So, Jeff, I don't know if you want to add anything to that.

Jeff Davison -- Chief Financial Officer

Sure. Hi, Mike. Mobile deposit activity has been pretty positive during COVID. And as I shared last quarter on the call, we saw – we look at the usage of the checks that the banks report and the processes report.

And we saw an increase in that last quarter from what previously was kind of trending downwards to the lower teens, actually pick up and be more of a 20% growth last quarter. We saw a repeat of that this quarter, it's still strong usage. And so despite the pressure on the total check volume declining, we're seeing really nice growth in mobile deposit usage. So consumer adoption is definitely increased during this COVID time.

And when you try to translate it to our revenue, you think about our revenue and how it works, and we sell the large blocks upfront and they wind them down. We may have seen a little bit of that in the quarter. It's kind of hard for me to drill into it and actually assign this increase here is definitely due to COVID because the processors they buy in this large box. But the usage figures are really good which bodes well for mobile deposit revenue in the future for us as the reorders come back in.

Mike Grondahl -- Northland Securities Inc. -- Analyst

Got it. And have you been able to get a little bit of price there too?

Max Carnecchia -- Chief Executive Officer

Mike, that we've been campaigning on the idea that we've got pricing power and that we haven't gotten fair value from our partners or our customers, the better part of 18 months. I don't think that COVID, we're not opportunistic and we're not pirates and we're not trying to use COVID as an excuse to that. This is just the ongoing – the ongoing efforts to get fair value for a really important and really valuable service, whether it's at the branch, whether it's in the ATM or whether it's on a mobile device. We just have by far the best, not just the best tech, the best experience and the best results for the financial institutions.

And whether from the acquisitions or some behaviors within this business over years gone by, we're just writing some wrongs that were in contracts and it was probably a long time coming for us to make the right adjustments in those contracts.

Mike Grondahl -- Northland Securities Inc. -- Analyst

Got it. Good. Good to hear on both fronts there. Thanks, guys.

Max Carnecchia -- Chief Executive Officer

You got it, Mike. Thanks.

Operator

[Operator instructions] And gentlemen, it appears that we have no additional questions at this time.

Max Carnecchia -- Chief Executive Officer

OK. 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: 33 minutes

Call participants:

Todd Kehrli -- Investor Relations Contact

Max Carnecchia -- Chief Executive Officer

Jeff Davison -- Chief Financial Officer

Bhavan Suri -- William Blair and Company -- Analyst

Mike Grondahl -- Northland Securities Inc. -- Analyst

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