Mitek Systems (MITK) Q2 2021 Earnings Call Transcript

Mitek Systems (MITK 1.67%)
Q2 2021 Earnings Call
Apr 29, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Mitek Systems second-quarter fiscal 2021 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.

Todd Kehrli -- Investor Relations

Thank you, operator. Good afternoon, and welcome to Mitek's second-quarter fiscal 2021 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 2021 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 a webcast replay will be archived on the investor telations 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 Form 10-K and 10-Q for a complete description of these risks.

Our statements on this call are made as of today, April 29, 2021, 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. Thank you for joining us today. I hope you and your families are staying healthy and safe.

First, I want to commend Mitek team for their continued hard work. Because of your dedication and determination, Mitek delivered record second-quarter revenue with exceptional performance across both lines of business. For the second consecutive quarter, our identity verification revenue grew more than 45% year over year, highlighting our leadership in this high growth market. Our deposits business also continues to deliver solid revenue growth driven by increasing consumer adoption.

All of this resulted in a revenue of $28.8 million dollars, up 24% year over year. Also, we delivered a non-GAAP net income of $7.3 million, or $0.16 per diluted share, up 34% year over year, and cash from operations of $7.3 million. We remain energized by the rising momentum in the identity verification market with digital identity solutions rapidly emerging as the nexus to building trust and doing business online. More and more of our existing customers are expanding identity verification well beyond the initial onboarding use case.

And this quarter, we added numerous new customers outside of the financial services as we helped organizations in telecommunications, marketplaces, and technology establish an appropriate identity verification solution. Identity verification has never been more relevant. Rapid advances in artificial intelligence are enabling novel forms of fraud and increased scale and frequency of data breaches, all of which is adding heightened pressure on organizations to protect customers' data and access. As I recently wrote for the Forbes business council, being able to secure user's data has become a business imperative.

To prosper long-term, companies that rapidly transitioned to online commerce now must demonstrate to customers that they can be trusted to protect their data online. Organizations no longer have the luxury to simply verify access at the point of onboarding instead they need to continuously authenticate and know exactly who their customers are across channels and throughout the customer lifecycle. Accordingly -- according to Javelin Annual Identity Fraud Study, $56 billion was lost in combined identity fraud and identity fraud scams in the United States in 2020. Thirty-nine million American consumers were impacted with a loss per fraud incident of $1,300.

Most alarming was that more than half of the consumers victimized by identity fraud experienced total account takeover loss across multiple accounts. These numbers are staggering and validate the significant new investment being made in identity verification as an integral function to fight fraud online. The growing usage of digital channels for commerce presents the perfect opportunity for criminals to commit fraud. So we need to come together as an ecosystem and deliver stronger forms of authentication.

Javelin recommends, and I quote, "biometric and behavior analytics should be used from beginning to end across digital platforms to help continuously authenticate transactions." Well-authenticated identity verification using both passive and active biometrics is primed to solve this problem. Identity verification is rapidly becoming an integral element of most organizations' technology stack and we believe the next decade of fraud prevention will be defined by an organization's approach to the lifecycle of continuous identity and access management capabilities. Mitek is the only enterprise-class provider in the identity category and our standards of service remain unchallenged. Our approach is to provide advanced, lengthen layered identity signals from initial onboarding with documents, devices, and biometrics to authentication, reverification, and continuous identity fraud detection.

Our customers globally represent hundreds of the world's best-known brands and banks. And our proven track record of success continues to grow as we expand our reach into this fast-growing market. Mitek's ambition is to be an indispensable partner in fighting identity fraud for the markets and geographies we target, and the momentum we are experiencing is evident. Looking forward, our pipeline of potential new customers is strong.

Our existing customers are expanding their use of mobile verify across multiple use cases and our channel partnerships are gaining traction. As the industry-leading solution for identity verification, we are committed to maintaining product superiority and expanding our reach into this large and growing market. We are committed to innovation and delivering products that are simple and intuitive to use while protecting organizations from the growing threat of fraud. Turning to our deposits business.

Mobile banking usage continues to increase every quarter. This quarter, JPMorgan Chase reported a 9% increase in mobile banking users to 41.9 million customers. And Wells Fargo reported active mobile banking customers increased 8% to 27.7 million. Along with this increase in mobile banking adoption, mobile check deposit was rated the most valuable mobile banking app feature in 2020 according to a recent Forbes survey.

Similarly, 70% of consumers surveyed by Cornerstone advisors in 2020 said depositing a check was one of the most important mobile banking features, and 85% intend to continue depositing checks using their mobile devices in 2021. As a result of this increase in customer adoption, our highly profitable deposits business continues to grow during the quarter with its revenue increase -- increasing 18% year over year. Surprisingly, 42% of consumers survey use mobile deposits for the very first time in 2020, indicating the sizable opportunity for growth and continued adoption. And the 7,500 financial institutions that use our mobile check deposit solution are pushing for mainstream consumer acceptance as it represents a significant cost saving for them.

So don't be surprised when you see a TV ad featuring Samuel L. Jackson, Charles Barkley, and Magic Johnson telling you that using mobile deposit is a magical experience. It is. And we look forward to continuing the adoption of our deposit product as more and more consumers discover its ease and convenience.

In closing, our strong results show the central role that our products play in this digital economy. The acceleration in demand for identity verification solutions is ongoing. And our record revenue demonstrates how we are strengthening our market position in 2021 and beyond. Now I'll 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 Q2 revenue and operating results. For the second quarter of fiscal 2021, Mitek generated record revenue of $28.8 million, a 24% increase year over year. Software and hardware revenue was $13 million, an increase of 14% year over year.

Services and other revenue, which includes transactional SaaS revenue, maintenance, and consulting services, grew $15.8 million for the quarter, an increase of 34% over Q2 last year. This increase is due to growth in transactional SaaS revenue, which increased 50% year over year to $11 million. The transactional revenue was positively impacted in the quarter due to higher revenues from a few customers, which related to increased transaction usage. While we are very happy with the significant growth year over year, this revenue may not continue at these increased levels in the next quarter.

Also, as we look forward, I would point out that Q3 will be our first comparable quarter on a year over year basis since the pandemic began. As you may recall in Q3 last year, we saw significant increases in transaction volumes related to the pandemic, which will impact the comparable growth rates. For Q2 2020 -- for Q2 deposits revenue increased 18% year over year to $17.2 million. Identity verification revenue increased 35% year over year to $11.6 million.

We delivered strong software and hardware gross margins of 95% for the quarter. Gross margin on services and other revenue was 80% for the quarter. Total gross margin for the quarter was 87% compared to 86% in Q2 last year. Total GAAP operating expenses including cost of revenue were $26.4 million, compared to $22.1 million in Q2 last year.

This increase is due to the increased cost of revenue associated with higher revenues and increased expenses due to investments to grow our identity business. Sales and marketing expenses for the quarter were $8.5 million, compared to $6.7 million a year ago. R&D expenses were $6.7 million, compared to $5.6 million last year. And our G&A expenses were $5.7 million, compared to $5.2 million a year ago.

GAAP net income for the quarter was $1 million or $0.02 per diluted share. Our diluted share account was $44.6 million shares, compared to $42 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 customer expenses, stock comp expense, litigation expenses, amortization of debt discount and issuance costs, and the related tax impacts of these items.

Non-GAAP net income for Q2 increased to $7.3 million or $0.16 per diluted share, compared to $5.4 million, pr $0.13 per diluted share a year ago. Our non-GAAP adjustments include $3 million of stock comp expense, $1.7 million of acquisition-related costs and expenses, $1.1 million of amortization of debt discount and in-store issuance costs, $1.6 million in cash tax difference, and $275,000 of litigation expenses for the quarter. This was all offset by the income tax effective pre-tax adjustments of $1.4 million. Turning to the balance sheet, we generated $7.3 million in cash flow from operations during the quarter and completed a successful convertible debt offering adding approximately $150 million in cash to our balance sheet, bringing our total cash and investments on March 31st to $219.5 million.

Our accounts receivable balance of $14.2 million represents a DSO of 50 days. In closing, we are very pleased with our results, which include record second-quarter revenue and non-GAAP net income as well as strong cash flow from operations. We look forward to reporting our continued progress in the coming quarters as we help our customers and partners accelerate their digital transformation while at the same time mitigating fraud. Operator, that concludes our prepared remarks.

Please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And we'll take our first question Bhavan Suri with William Blair.

Jake White -- William Blair -- Analyst

Hi, everyone, this is actually Jake on for Bhavan. I'm just curious -- interested to hear how you're thinking about capital allocation, given the recent raise. How are you balancing investment sales and marketing versus the potential for inorganic M&A, just given the recent growth you're seeing in ID verification?

Max Carnecchia -- Chief Executive Officer

Hey, Jake, thanks for calling. Thanks for the question. Yeah, I think, we just tilt it up the converted cash since the beginning of February so it's still relatively fresh. And you know, we talked about the use of proceeds, at that point, primarily focused on -- primarily focused on acquisition.

I think that's, you know, No. 1 on the list, No. 2 on the list, No. 3 on the list and then you get down to No.

4 and it's -- it's probably, you know, other things within the business but the top three priorities there would be around acquisition.

Jake White -- William Blair -- Analyst

Awesome. And then, just as a follow-up. Just curious if there's any update on the CFO search and how the process is tracking.

Max Carnecchia -- Chief Executive Officer

The process continues to roll along. It's a great question and, you know, we're -- we're very fortunate to have Jeff and a safe set of hands here to help us we're going through this. I would kind of set your expectation, we're still probably a couple of months away from getting that -- get that fully resolved but stay tuned.

Jake White -- William Blair -- Analyst

Sounds great. Thanks for taking my questions.

Operator

Next, we hear from Mike Grondahl with Northland Securities.

Mike Pochucha -- Northland Securities Inc. -- Analyst

Thanks. This is Michael on for Mike. Thanks for taking the questions. Maybe just first on like sales force positioning as we move toward later half of this year.

Are there any thoughts about certain industries that use cases where it's generally expected to see a lot of strong growth? Can you just talk about that?

Max Carnecchia -- Chief Executive Officer

Mike on for Mike. Thanks for the -- thanks for the question, Mike. Yeah, you know, I think we went into this year with a really clear and it was very targeted and focused approach to our go-to-market not just domestically but internationally as well where we had, you know, focused on specific segments, financial services, fintech, marketplace accounts. And then, the top targets with -- within each one of those target accounts, named accounts, both direct and through our channel partners.

I don't think we're going to -- we're halfway through our fiscal year, I don't think you're going to see us change that. Ad I guess we start to think about next year, we may explore, investigate if there are ways to expand that and, you know, open the aperture a little bit but it's premature to -- premature to kind of be making any predictions on that.

Mike Pochucha -- Northland Securities Inc. -- Analyst

Got it. Thanks. And just on mobile deposit, it's safe to say that some of that kind of rolls for the way those contracts are structured with resellers where the benefit we saw in the last month or so is going to still kind of push forward a quarter or two?

Max Carnecchia -- Chief Executive Officer

Oh, yeah. I'll let Jeff add some comments on how that revenue model works.But, yeah, I think that what the system is and everything that's been issued by the government. I mean, that -- that's out there but we haven't necessarily seen that kind of walk its way through the resellers in the core service providers to actually show up as increased revenue for us yet. I don't know, Jeff, if you want to add to that?

Jeff Davison -- Chief Financial Officer

Yeah, I'll just add -- I think they understand the way the contracts work and that'll flush through the system as they, you know, reorder the depleted inventory. I would add though that, you know, this quarter we continued to see 20% plus increase in usage over the last year in mobile deposit, and that's just on checks being processed. So you know, it still remains very strong. Now, next quarter should be the first anniversary again of the pandemic so we'll see how that when you're lapping impacts net increase check usage next quarter but this quarter was still strong over 20%.

Mike Pochucha -- Northland Securities Inc. -- Analyst

Got it, thanks. I'll hop back in the queue.

Operator

We'll now hear from Hamzah Mazari with Jefferies.

Hamzah Mazari -- Jefferies -- Analyst

Hey, good afternoon. Thank you. Just -- just on identity on the M&A pipeline. Could you maybe size that up and -- and maybe just talk about, you know, how your offering is different from some of the bureaus that have done deals like Kount, Mastercard debit card.

Just talk about sort of the pipeline how your offering differs and is fragmentation and opportunity in this space for you?

Max Carnecchia -- Chief Executive Officer

Yeah, Hamzah. I think you start with the answer right there. You know identity is a -- it is still in early -- digital identity particularly is in early stage category. It's fast-growing, it's extremely fragmented, and for the things that we do, we find it to be very localized, meaning, you know, the way that identity is validated and then authenticated in different countries is subject to the -- subject to the local -- the local law.

So yeah, with so many companies out there having entered the space in so many different approaches,you know, I'm not going to name names -- I'm not gonna name companies, I'm probably not even going to name categories but we just think staying close to our customers and taking this market first approach where, you know, we've got some of the largest banks in the world and some of the most advanced fast-growing fintech in the world telling us what they're looking for and how they want it laid out, how they want it orchestrated, how they want those signals to work, we're going to use that as our guiding light as to who we should be talking to as far as potential targets for acquisition.

Hamzah Mazari -- Jefferies -- Analyst

Got you. And just my follow-up question. I'll turn it over. On the deposit side, do you have sort of an idea of where adoption sits today? I know you mentioned post-COVID -- there's a clearly greater adoption during COVID and maybe post-COVID too, but maybe touch on where adoption sits.

And are you seeing some of the smaller banks also increasingly use mobile deposits? I know you mentioned some of the larger names already? Thank you.

Max Carnecchia -- Chief Executive Officer

Yes. Let me take the back half of that question first. Small bank, big bank, community bank, regional bank, credit union, you know, digital bank, big bank, they all use mobile deposit. That's the 7,500 financial institutions represent, you know, the head of the snake and the long tail of the U.S.

financial industry. So everybody, you know, if you want to do mobile deposit, you're showing up with Mitek. The front of that question is a harder one to take on. You know, before the pandemic, adoption -- we were being told by the banks that on average that adoption was about, you know, for retail checks, the high teens and something like 17%, 18%, 19% of retail checks were being deposited via a mobile device.

And then there's been this -- there's a lot of information out there around how folks were kind of forced to -- to adopt because branches were closed and they don't want to go touch ATM machines. But we don't have a good handle on is, you know, on average across those 7,500 institutions, is that now mid-20s? Is it higher? Is it slightly lower? So I'm sorry not to be able to give you something, you know, more precise or with higher confidence. What we do -- what we do talk about internally when we do our strategic planning in what our customers have validated for us is there's no reason that over time the adoption of mobile check deposit should not be, you know, at least half of all retail checks. There's just no longer a good reason for that.

And I think we've shown that the adoption, you know, when forced, the adoption can happen pretty quickly. But we'll take the action as we get better information. So we're happy to share it with how the adoption trend continues to mature.

Hamzah Mazari -- Jefferies -- Analyst

Great. Thank you so much.

Operator

[Operator instructions] We'll hear from Mark Chappelle with Benchmark.

Mark Chappelle -- The Benchmark Company -- Analyst

Hi. Thank you for taking my question and nice job on a quarter. Jeff, starting with you in your prepared remarks, you noted that some of the 2Q transactional revenues likely won't repeat next quarter. I just wonder if you could clarify why this revenue is likely not to repeat? Why some of it anyways won't repeat?

Jeff Davison -- Chief Financial Officer

Sure. So in the second quarter, we had a handful of customers that just reached higher transaction levels that are more likely to be not repetitive, maybe one time in this quarter. So they may not repeat next quarter. So as my, you know, really the crux of my point there.

There's a specific transaction to specific customers.

Mark Chappelle -- The Benchmark Company -- Analyst

OK, great. Thanks. And then, Max, in the past you've noted that there may be some opportunities for price increases in mobile deposit. I was wondering if that's still an ongoing initiative at the company and whether you've had success on that front.

Max Carnecchia -- Chief Executive Officer

Yeah, that's -- thanks for bringing us back to that, Mark. You know, whether it's price increases or just general improved economics within these contracts as they come up for renewal and renegotiation, you know, we've talked about this consistently over the course of the last six or seven quarters that we've taken a firm stand on that not because we're ruthless privateers but because our customers are getting a tremendous amount of value from these products and when those contracts are stood up many, many years ago, in some cases decades ago, you know, the terms were not fair, they just were not reasonable to Mitek. And so we've continued to -- we've continued to prosecute that issue. And you know, it's slow but steady work and we reviewed the results of that in our quarterly business reviews every 90 days.

And you can see it just nicely, it's not a -- not a hockey stick, it's just a nice steady trend up into the right and we'll continue to do that.

Mark Chappelle -- The Benchmark Company -- Analyst

Great. Helpful. And then finally here, with respect to your ID business. I'm just wondering if you saw any strengths or weaknesses in a particular geography?

Max Carnecchia -- Chief Executive Officer

Last quarter we saw strength in just about every geography. It was a banger of a quarter. I know Jeff touched on some of these one-time things but, you know, when you take the really good year we had in FY '20, the strong quarter we had in Q1, and now an even stronger quarter in Q2, you know, we can feel it. It's there.

And we're seeing it across geography, across the industry. This is a problem that just about every organization needs to figure out how to take care of.

Mark Chappelle -- The Benchmark Company -- Analyst

Thanks. That's all for me.

Operator

[Operator Instructions] And that will conclude today's question-and-answer session. I would now turn the conference over to Todd Kehrli for any additional or closing remarks.

Todd Kehrli -- Investor Relations

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: 28 minutes

Call participants:

Todd Kehrli -- Investor Relations

Max Carnecchia -- Chief Executive Officer

Jeff Davison -- Chief Financial Officer

Jake White -- William Blair -- Analyst

Mike Pochucha -- Northland Securities Inc. -- Analyst

Hamzah Mazari -- Jefferies -- Analyst

Mark Chappelle -- The Benchmark Company -- Analyst

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