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Executives

Peter M. Salkowski - Analyst

James B. DeBello - Chief Executive Officer, President and Director

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

Analysts

Bhavan Suri - William Blair & Company L.L.C., Research Division

Elizabeth Colley - Needham & Company, LLC, Research Division

Mitek Systems (MITK) Q1 2014 Earnings Call February 6, 2014 5:00 PM ET

Operator

Greetings, and welcome to the Mitek Systems First Quarter Fiscal 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Peter Salkowski, Investor Relations for Mitek Systems.

Peter M. Salkowski

Thank you, Raya. Good afternoon, thank you joining us, everyone. Before I turn the call over to Jim DeBello and Russ Clark, I'd like to cover a few quick items. This afternoon, Mitek Systems issued a press release announcing its first quarter of fiscal 2014 financial results. That the 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 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 today, February 6, 2014, 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 present the reconciliation between the 2 for the periods 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

Well, thanks, Peter, and hi, everyone. I'd just like to take a moment to recognize the men and women of Mitek, they're extremely smart, hard-working and passionate about making an impact, simplifying important daily tasks with our technology. And because of them, I'm pleased to report that Mitek delivered strong first quarter results.

Solid usage trends helped Mitek develop and deliver 35% year-over-year revenue growth to $4.5 million. We ended the December quarter with 1,780 banks signed and 1,362 banks live with Mitek's Mobile Deposit. That makes 360 newly signed and a record 557 newly live banks in the quarter.

With over 20 million users, Mobile Deposit is going mainstream on America's Main Street. In November, Mitek Solutions caught the attention of comedian and talk show host, Ellen DeGeneres, who made Mobile Deposit the focus of her opening monologue. In describing Mobile Deposit, she said, "We're now living literally in the future and people don't know how easy they have it."

She joins the growing number of people who use and love Mobile Deposit. The product continues to grow in popularity and usage, crossing the chasm, from early adopters to mass adoption. And we don't see this trend stopping.

With the arrival of the mobile only customer, Mitek is pioneering solutions that serve the customer's entire financial life cycle. You might ask, what I mean by financial life cycle, it means that Mitek's products help millions of consumers at every step in their financial lives. From opening their first account to depositing their first check, paying their bills and even shopping for a better kind of credit card, all with the ease of snapping a photo from any smartphone or tablet.

Our vision takes us well beyond financial institutions. Building on our momentum, we're focused on expanding our addressable market by equipping third-party developers to use our proprietary mobile imaging technology to create new and exciting applications that they create to address problems in other industries that could range from health care and commerce to concert tickets.

Today, I'm proud to preview the launch of Mitek's developer network, a mobile imaging platform that we host, that will open the door to new markets and compelling use cases for our technologies. This adds an entirely new dimension to our business.

Before digging into our developer network and solutions, I'd like to step back for a moment and look at some industry trends that support our view that mobile only is where we're headed. In a recent Wall Street Journal interview, technology thought leader, investor and web browser entrepreneur, Mark Andreessen, predicts there'll be 5 billion smartphones worldwide by 2016, compared to 2 billion today. In fact, he predicts that every phone will be smart. The proliferation of smartphones and tablets are changing how companies deliver their core services and how we, as consumers, consume our information. For example, banks are moving away from direct contact and migrating to self-service digital channels. The Wall Street Journal reports that in 2013, bank branch closures hit the highest level on record. Mobile banking plays an important role in this phenomenon.

At Mitek, we think 2014 will be another banner growth year for mobile banking, resulting in even a bigger dent in the number of traditional bank branches.

The latest data from ComScore indicates that over 150 million people in the U.S. own smartphones, each of which, features a camera. And that smartphones have reached nearly 64% penetration of the mobile market. With the growing penetration rates of smartphones and tablets, industry experts predict that, by 2016, there'll be 60 million Mobile Deposit users.

This brings me to an update of our Mobile Deposit business. There are over 5,000 financial institutions in the US. At the end of our first quarter, 1,780 of them have licensed Mobile Deposit, and 1,362 banks have gone live with the product. Mitek's Mobile Deposit technology is deployed by all of the top 10 retail banks and over 75% of the top 50 retail banks in the U.S.

We're observing that financial institutions are relaxing deposit limits. For example, a top 10 bank increased their limit from $1,000 to $2,500 during Mitek's fiscal first quarter. We find it interesting that during the same period, this bank's sequential transaction growth increased substantially.

As number one feature for Mobile Banking users, we're optimistic that the relaxing of deposit limits will promote usage of Mitek's Mobile Deposit resulting in continued growth. We've even seen this among written reviews on the app store in which consumers are demanding higher deposit limits on their phone. A recent use case we're quite excited about is the T-Mobile launch of Mobile Money.

Mobile Deposit is an important feature of T-Mobile's new offering, allowing check deposit services without physical locations or ATMs. For Mobile Money customers, it couldn't be simpler. They can load their prepaid card by depositing a check via their phone from practically anywhere. Mitek's technology is helping power the Mobile Deposit feature of this new offering, as well as the technology behind over 20 other prepaid cards, including the American Express Bluebird Card offered by Walmart. These companies are counting on Mitek's convenient and secure Mobile Deposit technology to better serve the 68 million people in the United States whose financial needs, for one reason or another, are not fully served by the current banking system.

We also see this segment, eventually as an important addressable market for Mobile Photo Bill Pay. As an industry, banks have spent hundreds of millions of dollars to implement online bill pay systems. But their complexity to consumers has resulted in only 15% of all bills being paid via these bank bill payment consolidators. We're encouraged by consumers' response to simplicity and accuracy of our photo bill pay solution. I think we have another tiger by the tail to help banks solve the conundrum of engaging more consumers while reducing cost of delivery, all with the Mitek MiSnap fun experience.

We continue to sign up new customers and at the end of the quarter, we now have 20 banks that have licensed Mobile Photo Bill Pay, with 13 of those in production. After seeing the solution implemented by U.S. Bank and First Financial, American Banker magazine deemed the technology a top innovator of 2013 and "the next killer app for banking."

Last week, Mitek added another new product to our suite of Mobile Imaging solutions. But this one, unlike the others, is designed for companies that send the most frequent paper bills directly to consumers, bypassing banks altogether. We call it Mobile Photo Payments, and it's a first of its kind. Prospects for this product include credit card issuers, utility companies, mobile phone carriers, cable television service providers, mortgage underwriters, auto finance companies and institutions that provide student loans, among others. It's currently in production with a leading national cable, telecommunications and media company.

The user snaps a photo to extract billing information from a paper bill and then snaps a photo of a check or credit card to provide the payment information. It's also our first solution that's able to use an image of a credit card to make a payment. Of course, our technology reads the account number and payment details from the bill. We've designed this solution to be delivered as an Android or iOS app for the iPhone or, for the first time, available through a mobile browser. Now what's great about the mobile web implementation, using a browser, from a consumer's perspective, is that there's no requirement for the customer to log in, simplifying the process even further. This is another breakthrough from Mitek and another example of how we help people and companies do business more easily. That's the essence of our mobile imaging technology.

We believe direct billers stand to gain in several ways from this product. First, they'll to have more opportunity to engage with consumers and leverage cross-selling opportunities. Second, they'll improve customer satisfaction by providing an easier way for people to pay their bills. And thirdly, and finally, the billers can accelerate their accounts receivable process, as well as reducing the number of support issues arising from forgotten passwords. It's a win for everyone involved.

We're very excited about the size of the direct biller market and the consumer bill payment trends. Javelin Research estimates that there are $2.1 trillion in bill payments made every year, with less than 2% of these payments being made from a mobile device. Given the trend towards mobile only, we believe the direct biller market represents an excellent opportunity for growth.

As you can see, Mitek provides best-in-class solutions to reduce many of the pain points companies face with their consumers. And we're still on the early stage of the mobile only revolution. We're in a great position to leverage our mobile imaging platform and capitalize on the consumer habit we created with Mobile Deposit. More than ever, we're focused on expanding our addressable market and scaling our business.

Following successful tests with beta participants, I'm excited to preview the launch of the Mitek developer network later this month. This means we'll be opening up our technology platform and grant access to our open APIs to image processing and data extraction routines, so third-party developers can find new and creative applications for Mitek technology.

Just like other great companies, such as Salesforce and LinkedIn, we expect Mitek's developer network to enable us to scale our business by allowing our solutions to reach a variety of new vertical and geographic markets. This occurs without having to commit a lot of capital from our company. This seems to be limitless ideas out there on how to use mobile imaging. We're already impressed and inspired, in fact, by the creative applications for Mitek technology that are being developed by these early participants.

Smartphone and tablet shipments continue to grow rapidly, and some expect them to exceed 5 billion devices by 2016. With consumer habits becoming increasingly mobile, and with each device equipped with a camera, Mitek's solutions are well positioned to help companies attract and interact with their customers. As we gain momentum in diversifying our solution offerings and expanding into new markets, we're excited about our new Mobile Photo Payments product for direct billers. It builds on our success with Mobile Deposit and our full suite of solutions.

Complementing our Solutions business, we're launching a Platform business, and we're looking forward to seeing developers leverage our technology and in the soon-to-be launched developer network. This Mitek hosted service should expand our markets and geographic reach in exciting new ways.

And with that, now, I'll turn the call over to Russ Clark.

Russell C. Clark

Thanks, Jim. And thank you to everyone joining us on the call today. As usual, I will discuss our quarterly results on a GAAP basis, unless I specifically call out a figure as non-GAAP. Our earnings release includes a reconciliation between these 2 measures.

Now for the Q1 results. Total revenue for the first quarter of fiscal 2014 was $4.5 million compared to total revenue of $3.3 million for the year-ago period. First quarter revenue was comprised of the $3.2 million in license revenue, including revenue from 4 Mobile Deposit reorders and $1.3 million in maintenance and professional services, or PS, revenue, compares to year-earlier software revenue of approximately $2.6 million, and maintenance and PS revenues of $700,000. Our maintenance base continues to top $1 million per quarter, and this past quarter, we also generated over $200,000 of PS revenue. The PS team continues to engage with our customers to help them optimize the mobile user experience through the use of MiSnap Auto Capture, as well as Mitek technologies.

Total operating expenses were $5.9 million compared to $4.7 million in the year-ago period. The year-over-year increase was primarily driven by investments in R&D, sales and marketing personnel to continue to develop innovative mobile imaging products and expand our customer base, as well as litigation costs related to protecting our intellectual property rights.

Noncash stock compensation expense during the first quarter of fiscal 2014 was $829,000, compared to $657,000 in the year-ago period. Breaking down Q1 expenses by category, selling and marketing expenses were $1.8 million, compared to $1.3 million in the year-ago period. As we discussed previously, we have hired additional personnel to support our direct sales efforts as we continue to extend the product portfolio, and go-to-market for account opening, bill pay, insurance and, now, direct biller products.

R&D expenses were $1.5 million in Q1 compared to $1.4 million in the year-ago period. Areas of focus include continuing to enhance the user experience for our products by providing industry-leading technologies and functionalities, such as Mitek's recently launched Mobile Photo payments product.

G&A expenses were $2.0 million during the first fiscal quarter compared to $1.7 million in the year-ago period. The year-over-year increase in G&A was primarily driven by IP litigation expenses.

Our IP litigation expenses were around $500,000 during the first fiscal quarter and we're lower than expected due primarily to the timing of expert testimony. We currently expect expert testimony in the USAA case to continue through, at least, the end of fiscal Q2. The court has not yet set a trial date for this case. Given the movement of activity in the experts phase of the case, from fiscal Q1 to fiscal Q2, we expect Q1 litigation expenses to equal or exceed the highest level of activity we've seen to date.

GAAP net loss was $1.5 million, or $0.05 per share, compared to a net loss of $1.4 million, or $0.05 per share in the year-ago period. Although our GAAP net loss for fiscal Q1 was slightly higher year-over-year, it's important to note that our non-GAAP net loss for Q1 was slightly lower than last year at $639,000, or $0.02 per share, compared to $703,000 or $0.03 per share in the year-ago period. This narrowing of the non-GAAP net loss was achieved despite a year-over-year increase in fiscal Q1 litigation expenses of around $200,000. Non-GAAP net loss excludes stock compensation expense and our EPS share count for the first fiscal quarter was approximately 30.4 million basic and fully diluted shares. We expect total fiscal Q2 OpEx to be between $5.25 million and $5.75 million, excluding litigation expenses.

Turning to the balance sheet, as of December 31, 2013, cash, cash equivalents and investments totaled $27.4 million, compared to $29.0 million at September 30, 2013. Our accounts receivable balance of $2.9 million, represented a DSO of 59 days for Q1, which we consider to be more reflective of the normal state of our business.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bhavan Suri with William Blair.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Just a question, obviously, on the ramp here of the Mobile Photo Bill Pay, you've got 20 banks signed, 13 in production, when we -- go back to the ramp of the Mobile Deposit, there were some lumpiness there and the way you sold it, given the buckets, led to some lack of visibility. Help us understand how the ramp, if we layered that on of Mobile Photo Bill Pay could look like.

James B. DeBello

Bhavan, this is Jim. We actually look at the ramp of Photo Bill Pay compared to Mobile Deposit experience, and our assessment is that it's ramping more rapidly than Mobile Deposit did. So the time to market has been slightly compressed. Clearly, we're getting success with large banks and small banks. And what's different about this approach is that we've been addressing some of the larger banks directly, because they have requested us to do that. But we are now in the process of augmenting our sales process by engaging with channel distribution partners, much like we did with Mobile Deposit. So I think we'll see continued success in increasing number of signed deals for Mobile Photo Bill Pay.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Great. Great. And then, as you look at the reorders in the period, you had, obviously, the 4 for Mobile Deposit, is there a sense of sort of, not reorders, but sort of, how do we say, the -- you've got a subscription based plus a network fee, is the way I think of the Mobile Photo Bill Pay, is there a sense to get a number of users in the banks that you're selling directly on that platform today, of the 13 that are live?

James B. DeBello

Bhavan, we don't have that information available. But I can tell you one thing, what's interesting about this market is that companies are beginning to launch this now, financial institutions, and it's beginning to percolate into the user awareness. We don't and have not yet seen the national TV advertising campaign, that were instrumental in Mobile Deposit's growth and we hope to see those in the future, but I can't predict when that will happen. Once that does happen, however, you'll see this becoming more of a mainstream product.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Yes, Mobile Deposit has taken time too. I just saw the Wells Fargo ad, which is now almost, what, I guess, 1.5 years old, for them to put it out. But certainly, it's taken some time.

James B. DeBello

Just to add to that, Bhavan, with regard to the direct biller product, Mobile Photo Payments, that really complements the strategy by allowing us to go to corporations who bill consumers directly and that's an enriching opportunity for them to engage their consumers and reduce that friction of their bill payments. So the company gains by reducing the days sales outstanding or increasing the accounts receivable. And the consumer benefits by being able to pay the bill more quickly and more easily.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Sure, sure. And the credit card piece is nice, too. When you look at the developer network, you and I talked about this at little while ago, Jim, is that hosted by you or at Amazon? And I know you'll talk about it a little more, but give us some sense of sort of how the pricing of that might work, when people embed the functionality in their whatever applications they might build?

Russell C. Clark

Hey, Bhavan, it's Russ. We are working with a Tier 1 hosting provider to host that, but we're providing the application management in that scenario. So we are providing it on that basis. In the pricing, the idea here, really, is, as Jim mentioned in his script, is to make sure that were getting the technology out there for each and every use case that anyone who's interested in the development community is interested in pursuing. So I'm making the technology available, we'll be able to go after use cases that we don't have, that time and resources do, to go after today. And then, once some of these new applications are out in the market and generating revenue, we would share in that revenue with the licensee from the developer network.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay, got it. And then, one last one from me. With the mobile check deposit, the banks advertise and then that drives usage of the bank and that drives flow and more demand reorders from you. And with the Mobile Photo Bill Pay and also what you're doing with a large cable provider, that's direct sales to the cable provider, and then they advertise that functionality to drive customer stickiness. As you add sales people, also, could you maybe comment, Jim, a little bit on the marketing initiatives to drive growth around the development network, because that's going to be a very different approach, sort of mass viral approach, maybe, I don't know what you guys are thinking. But some color on sort of how you think marketing will drive growth in that space, and how you plan to spend would be hopeful.

James B. DeBello

That's interesting, Bhavan, that's a good question. We unfortunately, have received a number of inquiries from developers who come to us already prompting us to go down this path and seeing an opportunity to grow our business as a result. So we currently are in the process of working with a number of developers, who are third party companies, who are experiencing the benefits of Mobile Imaging. And we expect that to grow virally, but there is an outreach effort to the developer's community. And as you know, in the industry and in pockets around the country, are very active developers who are very creative, creating applications using the camera, that we can assist. And so, by virtue of us providing our open APIs, they can easily get to market more quickly, with a better consumer experience, based on the Mitek MiSnap experience. So all these reasons allow this to grow virally, but with some outreach to specific developer communities and also at specific trade journals that these developers follow. Just recently, we were covered in PC Week as an example, and also we're covered in the telecommunications industry newsletter, this is new for Mitek. Our primary coverage in the past has been among industry banking financial journals. So we're seeing now, the awareness of Mitek grow beyond financial services into the more broadly based technology, information technology, communities.

Operator

[Operator Instructions] Our next question comes on the line of Elizabeth Colley with Needham & Company.

Elizabeth Colley - Needham & Company, LLC, Research Division

So last quarter, you guys gave us an idea on customer transaction growth. I think, historically, it's was growing around 25% sequentially. Is there something you can share with us on what that looked like this past quarter?

Russell C. Clark

Sure, we remain in the double-digit sequential growth area over the last couple of quarters, so that's really the color I can provide you there. And I think, if we look at metrics, we had reported in the past, sequentially, double digits still put you on a nice pace on an annual basis as well.

Elizabeth Colley - Needham & Company, LLC, Research Division

Okay, great. And one more question. We noticed that deferred revenues are up about $700,000 sequentially, and they're fairly steady in -- last year, in fiscal year '13. So can you help us understand exactly where this boost comes from, like specifically, as it related to this push towards recurring pricing or maybe it's related to like growth in maintenance?

James B. DeBello

Yes. The biggest piece of that, there is a little bit of seasonality in the deferred revenue but it has been fairly consistent the last couple of quarters. The increase you're seeing is primarily related to timing of maintenance renewals and additional users signed on for both Mobile Deposit and Mobile Photo Bill Pay and our other products. So it's mostly driven by the recurring maintenance stream.

Operator

We have no further questions at this time. I'd like to turn the call the floor back over to Peter Salkowski for closing comments.

Peter M. Salkowski

I'd just like to thank everybody for joining us today on Mitek's fiscal first quarter earnings call. And very much appreciate your interest in the company and, everybody, have a good day. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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