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Executives

Peter M. Salkowski - Analyst

James B. Debello - Chief Executive Officer, President, Secretary and Director

Russell C. Clark - Chief Financial Officer and Principal Accounting Officer

Analysts

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Patrick Cebrzynski

Elizabeth Colley - Needham & Company, LLC, Research Division

Mitek Systems (MITK) Q2 2013 Earnings Call May 7, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal Second Quarter 2013 Mitek Systems Earnings Conference Call. My name is Tahitia, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference to your host for today Mr. Peter Salkowski, Investor Relations for Mitek Systems. Please proceed.

Peter M. Salkowski

Thank you, Tahitia. Good afternoon. Thank you for joining us, everyone. Before turning the call over to Jim Debello and Russ Clark, I would like to cover a few quick items. This afternoon, the company issued a news release announcing its fiscal second quarter of 2013 financial results. That news release is available on the company's website at www.miteksystems.com. As a reminder, this call is being broadcast live over the Internet to all interested parties and the audio of this call will be archived on the Investor Relations page of the company's website.

Before we begin, I'd like to remind everyone that on the call, we 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 our 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 any of our other SEC filings for a more complete description of these risks. Our statements on this call are made as of May 7, 2013 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 for any reason.

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 presenting the reconciliation between the 2 for the period reported in the release.

And with that, I'd like to turn the call over to Jim Debello, President and Chief Executive Officer of Mitek Systems.

James B. Debello

Thanks, Peter, and good afternoon, everyone. Russ will provide details of the fiscal second quarter financials in just a few minutes, but before we do that, I'd like to discuss our accomplishments for the quarter. The Mitek team delivered strong second quarter results that demonstrate continued momentum in our business. Revenue came in at $3.2 million, an increase of over 170% from revenue of $1.2 million for the year-ago period. It was driven by our flagship Mobile Deposit product. For the fourth consecutive quarter, Mobile Deposit transaction usage increased sequentially by over 25%, contributing to an estimated $40 billion of mobile deposits since the product launched. In addition, U.S. Bank, the fifth largest retail bank in the nation, successfully launched our Mobile Photo Bill Pay Solution. During the quarter, 5 more banks signed agreements for Mobile Photo Bill Pay through our channel partner, bringing the total to 7, of which 2 are live commercially. Our 14th patent was granted in February, relating specifically to Mobile Photo Bill Pay, helping to further establish Mitek as the leader in the emerging markets for mobile imaging and document capture solutions. And following the end of our second quarter, we signed another contract with another top 5 property and casualty insurance company who will provide our proprietary mobile imaging technology to their customers.

We're all extremely excited about this progress and I'd like to take a moment now to highlight some of the industry trends that's driving our business forward. As all of you know, the smartphone and tablet industries continue to grow at a torrid pace, taking center stage in our daily lives. Texting has become old-school. Now you can snap chat with your camera, just ask your teenager. But mobile banking has evolved too, equipped with cameras that have improved the customer experience with ease-of-use and added functionality. Mobile Deposit has become a key growth driver, but not just for millennials. ComScore reported that 55% of U.S. adults now own smartphones, while the Pew Research Center reports that 25% of U.S. adults own tablets. The cameras on these mobile devices are ubiquitous, global and creating new markets for our technology. We've seen financial institutions and insurance companies use our technology to reduce consumer friction in the digital channel, and in effect, adopt the camera as a keyboard. Taking a picture of a document is easier, it reduces keystrokes and is a much better user experience.

According to Forrester Research, the number of U.S. mobile banking users is expected to double in the next 5 years, reaching 108 million people by 2017. And we've been told by many bank executives that engagement through smartphone and tablet technology is increasingly critical for financial and other institutions that are looking to grab market share by tapping into the mobile lifestyles of their next generation of consumers. Given this growing demand, I'd now like to turn your attention to our Mobile Imaging Solutions.

For the fourth consecutive quarter, the number of mobile checks deposited by our technology has grown sequentially by over 25%. According to AlixPartners Consumer Research, the use of mobile check deposit among U.S. mobile banking adopters has grown to nearly 38% in the calendar fourth quarter of 2012 from just over 27% in the second quarter of 2012. Mitek's Mobile Deposit technology is deployed by all of the top 10 retail banks in the U.S. As of the end of last quarter, more than 2/3 of the top 50 banks and 889 financial institutions have now signed agreements to deploy Mobile Deposit. Of these, 445 financial institutions have deployed Mobile Deposit commercially to their customers. Compared to the prior quarter, this is an increase of 181 signed and 127 financial institutions that went live during the quarter.

Industry analysts have labeled our invention "table stakes" for any successful mobile banking initiative. In fact, we're now starting to see Mobile Deposit deployed internationally as the first Canadian bank started to offer our solution in mid-April.

I'm also pleased that in April, Mitek received the industry's Overall Most Innovative award from Barlow Research Associates in their Annual Monarch awards. Mobile Deposit was selected based on an evaluation of its uniqueness, its dependability, ease-of-use and value. It's precisely this mix of value for both the customer and the institution that's driving Mobile Deposits continued growth.

According to AlixPartners, Mobile Deposit continues to be the #1 mobile feature sought by all smartphone and tablet owners who would switch banks for mobile banking. We believe that this shift in customer perception has made Mobile Deposit a must-have for all financial institutions and is therefore easy to understand why banks are so focused on providing the solution. But banks also benefit in other ways. Earlier this year, PNC Bank revealed that Mobile Deposits saved their organization up to $3.88 per transaction compared with a deposit made with a teller. The savings amount to millions of dollars annually for the bank. As a result of the strong return on investment illustrated by the significant savings the banks are experiencing, we believe that the adoption of Mobile Deposit will continue to increase in retail banking. But meanwhile, new and compelling use cases will emerge in other channels.

A major food service distributor recently deployed Mobile Deposit among its fleet of 750 delivery trucks. Drivers now deposit checks directly from their truck using a smartphone instead of having to stop at a bank branch along their route. This food service distributor has calculated saving an estimated $4 million since inception and reported up to a 1 day reduction in DSO receivables, resulting in faster funds availability, operating efficiencies and less risk. We believe that field service and commercial use provide expanded market opportunities for Mobile Deposit that we're just beginning to tap.

Our Mobile Deposit technology is also being deployed for a variety of other uses. For example, funds can be loaded onto a Walmart Bluebird prepaid card using Mitek's Mobile Deposit technology. For those who don't know, Bluebird is a debit and checking alternative launched last October by Walmart and American Express to serve the tens of millions of underbanked Americans.

To give an idea of how big this market opportunity is, it is estimated that Americans will load $202 billion on reloadable cards this year, which is a giant leap from the nearly $29 billion placed on these cards in 2009. We hope that Mobile Deposit plays a significant role in helping Americans access their cash with the unparalleled ease and convenience of our mobile imaging solutions.

The usage and ROI benefits experienced through retail and commercial applications makes us optimistic of the continued growth for Mobile Deposit.

I'd like now to discuss the next mobile banking application that we're very excited about, Mobile Photo Bill Pay. In January, we announced our strategic partnership with U.S. Bank for the commercial launch of Mobile Photo Bill Pay. According to their website, Quote, "One picture equals 1,000 keystrokes. This is the magic of Mobile Photo Bill Pay." U.S. Bank went live with Photo Bill Pay on March 7th and sees the solution is central to 3 initiatives. First, reducing consumer friction and manual data entry; secondly, acquiring new customers; and third, making it easier for customers to pay their bill.

The first phase of U.S. Bank's rollout focused on adding new billers to their existing bill payment system. In the first 3 weeks, the bank offered the service and with very little marketing, they experience rapid adoption of customers doing just this just this. In the coming months, U.S. Bank has indicated that they'll launch the ability to pay a bill by simply snapping a photo of the payment coupon. Banks recognize the value of their customers paying bills digitally. We believe Mobile Photo Bill Pay will be key to a bank's digital strategies as it will encourage people to become active users of Digital Bill Pay.

In January, we announced a partnership with Allied Payment Network, the first bill pay processor to license Mitek's Mobile Photo Bill Pay technology. Allied has partnered with mobile banking application developer, Malauzai, to launch Picture Pay, powered by Mitek's Mobile Photo Bill Pay Solution. First Financial Bank in Abilene, Texas was the first Community Bank to launch Picture Pay. With nearly $5 billion in assets, First Financial serves a population of roughly 120,000 people. Their CEO recently disclosed that the bank received more than 12,000 picture payments from smartphones in a 10-day period.

Another First Financial Executive commented, "We believe Mobile Photo Bill Pay is going to make our customers mobile champions for the bank. They're going to be proud to have this service and will show their friends." This optimism is well founded. A recent Bain survey revealed that those who use the mobile channel are far more likely to have products beyond just a checking account and are more likely to recommend their bank to a friend.

In this quarter, Allied launched a second Community Bank, City National of Texas and signed 2 more banks for the deployment of Mobile Photo Bill Pay already. This Mobile Photo Bill Pay activity demonstrates the value to both large and small financial institutions, of which there are over 8,000 in the U.S. alone and provides Mitek with a tremendous growth opportunity.

As we've seen with mobile deposits, we believe that additional uses will be discovered for Mobile Photo Bill Pay technology. While we developed this technology originally to pay bills with a single snap of a photo, I've talked about its application for adding new payees for allowing customers to get a better credit card deal by taking a picture of the credit card statement to initiate a balance transfer. We expect to have upcoming announcements about commercial deployments of these other use cases this year.

We continue to develop mobile imaging technology to be utilized by insurance companies. Our mobile imaging technology allows the insurance customer to snap a picture of their driver's license and vehicle ID numbers. From there, the customer can receive an almost immediate quote. In an industry that's completely and extremely competitive, this technology gives insurance companies a desirable edge that we believe will attract new customers.

As I mentioned in my opening, we now have 2 of the top 5 property and casualty insurance companies signed, including Progressive Insurance. The most recent contract, which was signed only in the past few weeks, provides our mobile quotation and mobile enrollment solution to a major auto insurance provider in the U.S. We see emerging opportunities to add more value to our mobile imaging and driver license capture technologies and are exploring adding data analytics and risk-based authentication capabilities to assist our enterprise customers to easily and safely enroll new customers in profitable services from their mobile devices.

And lastly, I've previously stated that we are investing in our patent portfolio and reiterated that intellectual property is the lifeblood of this company. In our fiscal second quarter, Mitek was issued a U.S. patent for mobile image capture and remittance processing, which includes the processes and methods we've developed to capture a bill image, improve the quality of the image, extract the required content, identify the intended recipient and pay the bill. In our fiscal second quarter, we filed 12 additional patents and now have 14 patents issued with 25 patents pending. We will continue to make these IP investments and of course update analysts and investors along the way.

Overall, we're very excited about what we've accomplished as the provider of Mobile Deposit technology. We look forward to growing our Mobile Photo Bill Pay offering, and we're working hard to leverage our technology into enrollment and identity opportunities. We believe the strength of our relationships with the financial institutions and insurance companies, along with the attractive ROI our solutions provide them and their customers will make us the leading provider of mobile imaging solutions.

And with that, I will now turn the call over to Russ to go over the financial fiscal second quarter results. Russ?

Russell C. Clark

Thanks, Jim, and hello, everyone. As I review the numbers, all figures are on a GAAP basis unless specifically described as non-GAAP. We have provided a full reconciliation from GAAP to non-GAAP with the earnings release, which is posted on our website.

And now for the fiscal second quarter results. Total revenue for the second quarter of fiscal 2013 was $3.2 million compared to total revenue of $1.2 million for the year-ago period. Second quarter revenue was comprised of approximately $2.2 million in software revenue and $1 million in maintenance and professional services revenue. We had 5 Mobile Deposit reorders during Q2.

Total operating expenses were $5.6 million compared to $4.1 million in the year-ago period. The year-over-year increase in OpEx was primarily driven by higher investments in personnel to grow the business, as well as litigation costs with the latter pushing total expenses above the $4 million to $5 million range we've been running at historically.

Noncash stock compensation expense during Q2 was $704,000 compared to $651,000 in the year-ago period.

Now let me break down Q2 expenses by category. Total cost of revenue in Q2 was $417,000 comprised of $263,000 related to maintenance and professional services and $154,000 related to software. This compares to total cost of revenue of $310,000 in the year-ago period.

Gross margin for Q2 was 87%, which compares to gross margin of 74% in the year-ago period. The increase in gross margin was driven by higher revenue in the most recent period.

Selling and marketing expenses were $1.4 million or 44% of total revenue compared to $712,000 or 60% of total revenue in the year-ago period. As we discussed previously, we have hired additional personnel to support our direct sales efforts.

R&D expenses were $1.6 million or 51% of total revenue in Q2 compared to $1.7 million or 145% of total revenue in the year-ago period. Assembling the team to continue to build innovative products continues to be an area of focus for us, and the majority of our planned hires for the remainder of the fiscal year are in R&D.

G&A expenses were $2.1 million or 67% of total revenue during the second fiscal quarter compared to $1.3 million or 109% in the year-ago period. The year-over-year increase in G&A was primarily driven by litigation expenses. Our litigation expenses were approximately $700,000 during the second quarter. We expect these expenses to increase in the third and fourth fiscal quarters given the level of activity in the USA case associated with fact discovery, which is scheduled to be completed in June and expert testimony, which is scheduled to be completed in November. The court has not yet set a trial date for this case.

GAAP net loss was $2.4 million or $0.09 per share compared to a net loss of $2.8 million or $0.11 per share in the year-ago period. Non-GAAP net loss in Q2 was $1.7 million or $0.06 per share compared to non-GAAP net loss of $2.2 million or $0.09 per share in the year-ago period. Non-GAAP net loss excludes stock compensation expense and our EPS share count for Q2 was approximately 26.5 million basic and fully diluted shares. Our headcount at the end of Q2 was just over 50. And moving forward, given our hiring plans, we expect a total OpEx run rate of $5 million to $5.5 million excluding litigation expenses.

Turning now to the balance sheet. As of March 31, 2013, cash, cash equivalents and investments totaled $15.3 million compared to $14.6 million at September 30, 2012. The increase in cash was driven by strong collections in the last 2 quarters as also evidenced by our accounts receivable balance of $794,000 at the end of fiscal Q2. Stock option exercises also contributed over $700,000 in cash year-to-date.

That concludes our prepared remarks. Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Joel Achramowicz from Merriman Capital.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Jim and Russ, any -- are you prepared at all to give us -- I mean, it's great to see the top line. Any contribution that you want to break out in terms of the Mobile Bill Pay application at this point ?

Russell C. Clark

Joel, we haven't historically broken out revenues by product line. We talked in prior quarters about signings for Bill Pay, we've updated that this quarter, but what I would say is that in terms of total revenue contribution, Mobile Deposit still accounts for a large percentage of our license revenue.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Okay, fair enough. How about, Russ, what caused major bump in maintenance and professional services revenue, just new contracts? RBC contracts?

Russell C. Clark

Absolutely. It's the -- as we continue to sign and you see those numbers increasing on the signed and live, as we continue to sign those, we get more maintenance payments in that number, that number grows.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

It's great to see. And there's some consistency there, right, going forward?

James B. Debello

Yes, I mean, when we talk about recurring revenue and consistency, it is nice to see that maintenance and professional services line grow. It is predominantly maintenance in any given quarter the professional services contribution to that has been $100,000 plus or minus. So it is the vast majority maintenance, which is recurring in nature.

James B. Debello

And Joel. This is Jim. We've invested in our professional services team, we've brought in some excellent people. This is new for Mitek and we're building our book of business. It really helps foster the use of our Mobile Imaging platform and a variety of other use cases. So again, it assists us in growing our top line.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

That's great. Jim, you had mentioned something like -- it was a little confusing to me in the patent side. Did you apply for 7 patents this year? I mean, or did you receive 7 new patents? You talked about that earlier and then at the back end of the call, you talked about having 14 issued patents and 25 applications pending? Could you just clarify that?

James B. Debello

Sure. We have 14 that have been issued, one of which most recently is the Mobile Photo Bill Pay patent, which is very, very important to us. We built that intellectual property. We protected it on behalf of the company and our shareholders, and that's related to Mobile Photo Bill Pay. In addition to that, we have filed more patents as it relates to other use cases that we've developed for our core technology and other methods that we have developed as well, and those are pending right now and working their way through the USPTO. So we believe owning a large piece of not only the proprietary technology, but protecting it is an advantage for the company and one which will sustain our long-term growth.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

That's great. Just a couple of other brief comments. Any comments on whether we might see sequential improvement in the third quarter in the top line, Russ or Jim?

Russell C. Clark

Yes, Joel, we are still in a position right now. As I've mentioned, the vast majority of our license revenues generated from Mobile Deposit. We're still in the block pricing model there, which lends itself to a little bit of the variability we've had in our top line results. So not at a stage here today in this game where I have a large enough recurring percentage to give you any guidance.

Operator

[Operator Instructions] Your next question comes from the line of Patrick Cebrzynski from William Blair & Company.

Patrick Cebrzynski

Just one quick one for you, and I think this is kind of going back in a bit of a recall here. But when you talk about the unbanked or underserved market and you talked specifically about Walmart and the Bluebird card. Can you guys go through kind of your sales process there and if it's a direct sales or using one of your partners? And then, can you kind of also explain in terms of how that will play out in the future if that's going to other, I guess, other partners will that be a direct sale or are you going to use partners for that as well?

Russell C. Clark

Sure, Patrick. So when Jim mentioned our history with mobile deposit of additional use cases coming up, that we didn't even think about when we set forth and we expect the same thing to happen for Mobile Photo Bill Pay. As we got into Mobile Deposit and we went through an indirect model primarily through our channel partners, we were initially seeing those channel partners deploy those transactions for just that Mobile Deposit, but what's occurred over time is we're seeing more use cases in the prepaid card market, including Bluebird for the Mobile Deposit technology. So it's the same front-end in terms of our technology that enables recognition of a check and extraction of the data. But on the backend, with Bluebird as an example, the funds are being loaded onto a prepaid card instead of into a DDA.

Patrick Cebrzynski

Great. And then can you remind us how many, I guess, partners you have in that underbanked or unbanked market besides Walmart?

Russell C. Clark

Well, in total, there are around 12 primary channel partners that we work with for Mobile Deposit and I'd say a large number of those probably have some type of prepaid offering.

James B. Debello

And Patrick, we've mentioned in the past 20 such prepaid initiatives, Walmart being just one of them. And to date we have 889 financial institutions now, which have signed agreements to deploy Mobile Deposit, most of which comes indirectly through our channel partners, the 12 of which Russ just mentioned.

Patrick Cebrzynski

I guess in that same realm, when you think of like a Chase who does -- I don't know the exact name of their prepaid card, but they use obviously Mobile Deposit through you guys. Are they using the same technology for their prepaid card?

James B. Debello

They are. It's called Liquid and they use what they call Quick Deposit under their brand which deploys our technology to top-up prepaid cards that they offer.

Operator

The next question comes from the line of Elizabeth Colley from Needham & Company.

Elizabeth Colley - Needham & Company, LLC, Research Division

One quick question. I'm just wondering if you could give us any additional details on the reorders? I didn't catch the number of reorders and maybe you could give us some color on changes in pricing if there were any?

Russell C. Clark

Sure. On the reorder count, there were 5 during the quarter. We've been announcing that statistic, I think this is the fourth quarter in a row. In prior quarters, I've believe we've ranged from anywhere from 1 to 4 reorders. So again, we did see a handful of reorders during the quarter primarily through our channel partners as it's a channel model. And again, it's primarily just initial block transactions that have been exhausted from the initial order point here over the last several months and folks coming back to reorder more as they move ahead with the offering.

Operator

All right. Gentlemen, we have no more questions in the queue at this time.

James B. Debello

Well, thank you very much for joining us. We appreciate your interest in Mitek Systems, and we look forward to updating you on our next earnings call. Have a good day. Take care.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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