Mitek Systems (MITK) Q2 2022 Earnings Call Transcript

Mitek Systems (MITK 2.05%)
Q2 2022 Earnings Call
Apr 28, 2022, 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 2022 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli of MKR Group. Please go ahead, sir.

Todd Kehrli -- Investor Relations

Thank you, operator. Good afternoon, and welcome to Mitek's second quarter fiscal 2022 earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Frank Teruel. Before I turn the call over to Max and Frank, I would like to cover a few quick items.

This afternoon, Mitek issued a press release announcing its second quarter fiscal 2022 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, April 28, 2022, 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.

Max Carnecchia -- Chief Executive Officer

Thanks, Todd. Good afternoon, everyone. Thank you for joining us today, and a warm welcome to our HooYu team members who are joining for the first time as members of Mitek nation. I'm happy to report that we again delivered strong financial results in the quarter with revenue growth of 21% year over year, non-GAAP net income up 49% year over year, and cash flow from operations of $7.4 million.

Rather than review the quarter, I want to focus on the transformative acquisition we announced a little over a month ago that dramatically expands our addressable market and positions us for accelerated growth in the identity verification and identity authentication markets. On March 23rd, we announced the acquisition of HooYu, the UK's leading KYC or know your customer technology pioneer. HooYu is an orchestration provider for identity verification and identity authentication processes. Orchestration is an elaborate way of saying that the end-to-end KYC process is optimized through a platform so that customers can easily manage users' journeys and accelerate identity decisioning when it matters most.

Having a single platform that easily orchestrates and configures a KYC journey to manage identities and identify bad actors is becoming a prerequisite for businesses transacting digitally. To quote partner from their 2022 market guide for identity proofing and affirmation, a good orchestration solution will reduce the cost and complexity of multiple vendor integrations, while also enabling granular risk and trust assessment across a range of user events. Bringing together Mitek's leading document and biometric verification techniques with HooYu's KYC and configuration services simplifies identity management and puts customers in control of digital access. Furthermore, the platforms low code, no code capabilities allows businesses of all sizes to quickly set up and manage the process without needing an army of developers.

With this acquisition, Mitek is able to address a much larger slice of the digital identity market, including more use cases within existing customers and expanding to adjacent vertical markets. Mitek's proven offerings are used by the largest banks and global organizations. These large enterprises, mainly the top tier financial institutions in the world have the significant resources needed to solve this problem, including many application developers, but with the onslaught of fraud attacks, data breaches, and compromised systems, almost all organizations also need to identity -- need identity service to verify the identities of those they do business with. Digital identity verification and onboarding is table stakes today, and how well organizations control their front doors has far reaching impact long after onboarding.

Our platform offers organizations a more complete picture of the consumer for more accurate decisioning throughout the customer journey. Furthermore, the orchestration capabilities enable Mitek customers to optimize work flow and improve efficiencies. These capabilities extend our services to a far broader market as businesses of all sizes can have the same features and functionality at the largest companies, but without having to develop it themselves. With this low code, no code, offering all financial institutions, the FinTechs, the challenger banks, the cryptos, and pretty much anyone else who needs to know their customer will be able to quickly roll out our curated end-to-end platform with all of the best identity signals, workflow, and analytics to address current threat vectors.

Our clients will be able to stand up the entire KYC process in days, not months, and to pick and choose what identity signals they want to use to verify and authenticate their customers, whether it is government document verification, face or voice biometrics, document liveness, device and geolocation information, and any other identity signals, we will be able to provide a seamless way to optimize KYC workflows and put our customers in control of the KYC process. Identity data signals are ever evolving and which ones customers want to use are ever changing. With our KYC platform, we will offer our clients orchestration capabilities that allow them to use whatever signals they want to use, while giving them the flexibility to change which signals they use with ease. Identity has moved beyond just being an enabler of digital commerce.

It now serves as an integral element of most organizations, technology stacks, 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. Traditionally, companies have focused their energies on establishing proof of identity at the onset of a digital customer journey, such as opening a new account. However, establishing trust in a person's digital identity is an ongoing process, especially in light of the data breaches, which increased 68% in 2021. This massive increase is putting even more pressure on getting identity, right.

This is not a solved problem. It is getting worse and much more complicated, but now, we can offer the market a full end-to-end platform that enables them to fight back. As commerce shifts to digital, businesses have to balance the need for identification and fraud prevention with a smooth omni-channel customer experience. Once we use integrated and deployed, Mitek will be able to provide businesses with a full end-to-end orchestration platform to optimize and control the entire KYC process in an easy to deploy manner.

This expands our offering substantially and will allow us to target significantly more customers giving us the ability to accelerate the growth of our identity business even further. We are delighted to have the HooYu team onboard for our exciting journey, and we look forward to sharing our progress with you all in the coming quarters. With that, I'll turn the call over to Frank to discuss the second quarter financial results in more detail. Following Frank's remarks, we will open the call up for questions.

Frank, please go ahead.

Frank Teruel -- Chief Financial Officer

Thanks, Max and thank you Mitek nation for all your significant contributions this past quarter. Bridging for Max's remarks, the consumers raised a digital channels has meant fraud attack vectors continue to accelerate and increasing complexity. As discussed, the torrid pace of these attacks has been especially difficult for small organizations that lack the internal technical resources and infrastructure to respond and as such has created an urgency for orchestration enabled solutions. While this market momentum emphasizes and magnifies the relevance of identity platforms, we anticipate some headwinds within our core identity business.

As we gear up for greater growth, integrating our capabilities and harmonizing our go-to-market efforts is our No. 1 priority. The quarters following the integration of HooYu will allow us to minimize the impact to these market dynamics and deliver a platform that is poised to capitalize on growing market opportunities. With that preamble, let's look at Q2 revenue and operating results.

Mitek generated second quarter revenue of $34.7 million, a 21% increase year over year. Software and hardware revenue was $19.3 million, up 48% year over year. The increase in software and hardware revenue is primarily due to the contribution of ID R&D, and the timing of mobile deposit reorders. Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was $15.4 million for the quarter, down 2% year over year, primarily due to the transition of one customer and the completion of the strategic identity verification project in Europe.

As a result, our transactional SaaS revenue decreased 4% year over year to $10.5 million. For Q2 2022, deposit revenue increased 24% year over year to $21.3 million, identity revenue increased 16% year over year to $13.4 million. We delivered strong software and hardware gross margins of 98% for the quarter. Gross margin on services and other revenue was 81% for the quarter and total gross margin for the quarter was 90% compared to 87% for Q2 last year.

Total GAAP operating expenses, including cost of revenue were $29.9 million, compared to $26.4 million in Q2 of last year, and this increase was due to the investment to grow our identity businesses and the additional costs associated with the acquisition of ID R&D and HooYu. Sales and marketing expenses for the quarter were $9.2 million, compared to $8.5 million a year ago. R&D expenses were $8.2 million, compared to $6.7 last year. And our G&A expenses were $6.1 million, compared to $5.7 million a year ago.

GAAP net income for the quarter increased 88% to $1.9 million or $0.04 per diluted share. Our diluted share count was 46.1 million shares, compared to 44.6 million shares a year ago. As a reminder, our earnings releases include 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 cost and expenses, stock-comp expense, litigation expenses, amortization of debt discount and issuance costs and the related tax impact of these items.

Non-GAAP net income for Q2 increased 49% year over year to $10.8 million, or 24% per diluted share -- $0.24 per diluted share. Our non-GAAP adjustments include $3.4 million of acquisition-related cost and expenses, $3.3 million of stock comp expense, $2.4 million in cash tax differences, $1.7 million in amortization of debt discounts and issuance costs and $286,000 of litigation expense for the quarter. This was all offset by the income tax effect of pre-tax adjustments of $2.2 million. Now turning to our balance sheet.

We generated $7.4 million in cash from operations during the quarter. We also used $127.1 million in cash to acquire HooYu, bringing our total cash and investments to $93.4 million at March 31. As I indicated earlier, we are making the necessary investments to integrate our technology and go-to-market teams as quickly as possible to magnify the opportunity of HooYu on our business. We are excited about the addition of HooYu, which ended their year at just under $10 million in SaaS revenue and is growing nicely higher than our own identity business and the identity market CAGR.

Once integrated, the platform will help us accelerate identity revenue growth. As we stated during the acquisition conference call, HooYu is not yet profitable and we expect the investments required to combine our solutions and funded go-to-market activities will affect operating margins in the short term. As a result, we believe profitability for identity business gets pushed back two to three quarters to the second half of fiscal 2024. All-in-all a great investment worth making, given the high revenue growth and expanded addressable market we believe the orchestration platform brings to Mitek.

In closing, we are pleased with our second quarter results. While we are cognizant of the headwinds I mentioned earlier, and as Max indicated, the big news is our transformative acquisition of HooYu. This is a crucial milestone for Mitek as we look to expand our leadership role in the digital identity market. Orchestration will be an accelerant to our business and allow us to address a significantly larger piece of the identity market.

With this acquisition, there is no greater combination of identity tools on the market today. Operator that concludes our prepared remarks. Please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And we will go first to Jake Roberge of William Blair.

Jake Roberge -- William Blair and Company -- Analyst

Hey, everyone. Congrats on the great quarter, and thanks for taking my questions. So just first off, now that you have compiled a more comprehensive platform with orchestration and biometrics and document verification, I'd love to hear how your initial customer and partner conversations are changing. Are customers understanding ROI of combining these technologies into one platform? Are they still primarily looking for point solution sales that they can stitch together themselves?

Max Carnecchia -- Chief Executive Officer

Yeah, Jake. Thanks for the question. It's max. We -- the transformation that both Frank and I were referring to in our prepared remarks, this is something that we have been working to four, five or six quarters, even pre acquisition of ID R&D.

And so, we gave you a quote out of the most recent Gartner study when it comes to identity. And we've seen this -- we have seen this coming as far as the need for organizations to have a place to coordinate and orchestrate these various signals to reduce their own efforts and all of the big investments they have to make from an application development perspective for large companies. But as you get into even large companies that just don't have those application developers, there is a big need there. And as you kind of go down to more modern digital businesses that are moving very rapidly, writing an orchestration layer is just not something that they are going to be doing.

So I think, Jake, our customers, our prospective customers, the targets we're after the heart of your question. They see this, they have been talking about it. That's what triggered our interest going back four, five, six quarters to start to assemble these capabilities and orchestration has been on our shopping list the entire period of time.

Jake Roberge -- William Blair and Company -- Analyst

Great. Thanks. And then I don't think you made any comments on it, but you have announced a string of new products over the past few quarters with IDLive Doc in Check Fraud Defender. Can you just talk about how initial customer conversations have been tracking for those products and then maybe some color on the TAM expansion opportunities within these segments? I mean, still putting up some pretty impressive growth in mobile deposit.

Just curious if you are seeing any signs of that being impacted by some of the new products you are offering.

Max Carnecchia -- Chief Executive Officer

Yeah, absolutely. And again, apologize for not covering too many of the new things. Everything seems to be falling in the shadow of the HooYu acquisition and now getting to the integration and all of the transformation we have to do to our go-to-market and our product integration, but good call out. Check Fraud Defender was something we announced going back, I guess it was about 10 months ago and that was the announcement of our intent to build it and get it out there.

We lit that thing up. This was February of this year with the first set of customers for the networked hosted, cloud offering. It's gone really well both the use, the adoption, and the learning as with any 1.0 offering. There is just a lot of places for us to make improvements and to make it better in a very short amount of time.

So the 1.0 was kind of the MVP, the most -- the minimum viable product, most lovable product kind of offering there. But the broader interest from large financial institutions that suffer from check fraud and those hard dollar losses and the operating costs associated with them has been very positive. We are watching our pipelines grow with the top 50 banks, the top 50 financial institution. So that is a quick update on Check Fraud Defender with the deposits business.

IDLive Doc was something that was announced by the ID R&D team, I guess it was at Money 2020 back in the fall, and then went live with that. Just in the last quarter, as far as a production system, they have got a handful of customers for that already. We are watching transaction volumes go up really nicely with these partners and then we have adopted it ourselves. So we are out in the market here in Q3.

Our Q3 with IDLive Doc is in a sandbox, ensuring that it is performing well and additive for our offerings and the initial data and the initial kind of results of those experiments and the analysis have been very positive. So, excited about both of those things and a lot more that we probably didn't cover already.

Jake Roberge -- William Blair and Company -- Analyst

Great. Congrats again on a great quarter, and thanks for taking my questions.

Max Carnecchia -- Chief Executive Officer

Thanks, Jake.

Operator

And we will go next to Allen Klee of Maxim Group.

Allen Klee -- Maxim Group -- Analyst

Yes, good afternoon. Congrats on the quarter. I just wanted to make sure I heard, did you say that HooYu did $10 million in revenue last year and if so, and then can you give us some sense of how to think about the margins and the losses that they had done historically?

Max Carnecchia -- Chief Executive Officer

Yeah, Allen. Thanks for the question. Yeah, the first part of that is correct, the last 12 months a little under, I don't know how little under, $10 million in revenue, SaaS transaction revenue similar to our identity business. It is a loss -- it was a loss making business.

It was a start-up that was bootstrapping their way to the success and to building out their platform. We haven't disclosed what that is. We recognize that as a bootstrap start-up, they were trying to do everything they could to conserve cash and while they ran a very good business and they have a fantastic team, we have identified places that we know we are going to have to shore up and make some additional investments there, as well as we just want to accelerate the integration for all the reasons we have talked about this big -- the big opportunity that we have together. And that's -- I think that's an investment worth making.

So, it's not overwhelming investment, but it is substantial.

Allen Klee -- Maxim Group -- Analyst

So how do you think about a potential timeline for when you think it will be integrated and you can sell this to your bigger customers?

Max Carnecchia -- Chief Executive Officer

Yeah, so we are on a very aggressive path, both to our existing customers, but also the target that we have in some of these segments that have evolved to require orchestration that we want to target. Some of the industries we just talked about, we would like to be able in the next 90 days be out in the market with something that is demonstrateable, that shows the integration of mobile verify and biometrics along with the core HooYu platform offering, and then be able to turn that into pipeline sales cycles for that kind of business at least historically for HooYu have been 90 to 180 days, so three months to six months. So, kind of building out that pipeline and starting to knock down deals first here in the U.S. but then also into Continental Europe.

So to give you a sense of how we think about that.

Allen Klee -- Maxim Group -- Analyst

Great. And then I just wanted to -- last question, you mentioned that your services and other business -- and other was down and you also -- and I think there was a completion you said of a European identity customer project. Could you explain a little, and you also said there might be some headwinds in identity of -- I'm not sure I understand. I thought most of the identity customers were more transactional of kind of what you are alluding to for the identity segment.

Thank you.

Max Carnecchia -- Chief Executive Officer

Sure. So we don't normally do a lot of project based business, but we did have an existing customer that uses us on a transaction basis that came to us about two years ago and asked us to do a substantial reverification project. That project lasted about two years. It was quite successful, but it is now concluded.

And so, it's just created a very difficult comp for us in the period that was a substantial, we consider a headwind and we are going to have to deal with that comp over the next four -- three quarters. And then the other headwinds that Frank was alluding to was just the ongoing evolution of some of these market segments that are requiring orchestration. And that's -- we have seen that coming. We have been actioning that looking for, for targets and acquisitions to kind of fill that requirement.

And now we have it, and that kind of brings us back to the exciting transformation that we have now in combination with HooYu.

Allen Klee -- Maxim Group -- Analyst

Great. Congrats. Thank you so much.

Max Carnecchia -- Chief Executive Officer

Thanks, Allen.

Operator

[Operator instructions] And we'll go next to Mike Grondahl of Northland Securities.

Mike Grondahl -- Northland Securities -- Analyst

Yeah. Hey. Thanks, guys, and good afternoon. Frank, could you just repeat mobile check, mobile ID growth and the revenue numbers year over year and then what you said about transactional fast, you were going pretty quick there, and I don't think I caught it all.

Frank Teruel -- Chief Financial Officer

Yeah. Happy to do that. Let me just go to the notes real quick. Let's see.

So, just from the beginning again, $34.7 million for the total, software and hardware was $19.3 million, up 48%. Obviously big contribution that was ID R&D and the timing of mobile deposits and then deposit revenue was up 24% year over year to $21.3 million.

Mike Grondahl -- Northland Securities -- Analyst

Up 24% to $21.3 million. And then mobile ID was up 16% to $13.4 million --

Frank Teruel -- Chief Financial Officer

That's right. Identity revenue -- that's right, Mike. Identity revenue is 16% to $13.4 million.

Mike Grondahl -- Northland Securities -- Analyst

OK. And what was the transaction SaaS revenue? Did I hear that is down 4%?

Frank Teruel -- Chief Financial Officer

Yes. And that as Max just indicated, largely driven by the -- as we discussed the completion of that large project based work we did for that customer.

Mike Grondahl -- Northland Securities -- Analyst

Got it. And flipping the mobile check for a minute. Were the reorders on the high side for you? I know it's lumpy, if you could just kind of frame that a little bit and then just any comment on pricing and mobile check.

Max Carnecchia -- Chief Executive Officer

Yeah. I don't think there is a big update, Mike, on pricing. We have been doing what we have been doing now for two and a half years from pricing discipline perspective. We just continue to do that.

I don't think there is anything outsized or significant that we would report in Q2 with that. And then as far as just kind of how the reorder's laid in, nothing unnatural. These are the folks that were scheduled to be reordering now and they did it. And I think we have talked before some of the 10 year history we have in this business of the being able to do regression analysis and determine when some entity's going to be prepared for a reorder has been a little more uncertain in the COVID times, just because they had such big reorders in the beginning, because of the adoption, the increased adoption of depositing checks through mobile devices in the beginning of COVID.

But it seems like that behavior is sticking, folks aren't reverting to going back to the branch to deposit checks.

Mike Grondahl -- Northland Securities -- Analyst

Sure, sure. Well, 24% growth is pretty nice, that is for sure. Frank, you kind of -- you talked about you are going to be making additional investments and you use the word substantial as it related to HooYu. Is that $5 million to $10 million, kind of like a couple million dollars a quarter, that we layer in? Just give us a little framework around that.

Frank Teruel -- Chief Financial Officer

Got it. I think Mike, just briefly as Max indicated, we knew coming into it because as you said, they were kind of bootstrapped their way to what they were doing. There were some areas we could shore up, and there is also an accelerant we can pour into this in making those investments. So we are looking at that, we know where we have to invest, we are not quantifying it, but it is all designed as Max indicated to get it into a demonstrable product in market 90 days, and then starting to build pipeline 90 to 120 days.

So, we factored that in, that was part of the acquisition thesis, what we would have to do to shore it up and to accelerate and that is -- those costs are we are focusing on now what areas to shore up and how to deal with it through how we focus on it.

Mike Grondahl -- Northland Securities -- Analyst

Got it. OK. Hey, thanks a lot.

Max Carnecchia -- Chief Executive Officer

Good to talk to you, Mike.

Operator

At this time, we have no further questions. I would now like to turn the call back to representative for any additional or closing remarks.

Max Carnecchia -- Chief Executive Officer

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

Frank Teruel -- Chief Financial Officer

Jake Roberge -- William Blair and Company -- Analyst

Allen Klee -- Maxim Group -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

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