Mitek Systems' (MITK) CEO James DeBello on Q1 2017 Results - Earnings Call Transcript

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Mitek Systems, Inc. (NASDAQ:MITK) Q1 2017 Earnings Conference Call February 2, 2017 11:00 AM ET

Executives

Todd Kehrli - Investor Relations, MKR Group

James DeBello - Chairman, President, and Chief Executive Officer

Russell Clark - Chief Financial Officer

Analysts

Bhavan Suri - William Blair & Company

Darren Aftahi - ROTH Capital Partners

Mike Grondahl - Northland Securities, Inc.

Mark Schappel - The Benchmark Company, LLC.

Spencer Bogart - Needham & Company

Operator

Good day, and welcome to the Mitek's First Quarter Fiscal 2017 Financial Results Conference Call. As a reminder, today’s call is being recorded.

At this time, I would like to turn the conference over to Mr. Todd Kehrli with MKR Group. Please go ahead.

Todd Kehrli

Thank you, operator. Good morning and welcome to Mitek's fiscal 2017 first quarter earnings conference call. With me on today's call are Mitek's Chairman, President and CEO, Jim DeBello; and CFO, Russ Clark.

Before I turn the call over to Jim and Russ, I would like to cover a few quick items. This morning, Mitek issued a press release announcing its fiscal 2017 first quarter 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 would like 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 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 more complete description of these risks. Our statements on this call are made as of today, February 2, 2017 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 and 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.

I’ll now turn the call over to Mitek's CEO, Jim DeBello.

James DeBello

Thanks, Todd, and good morning, everyone. Thanks for joining us. I'm happy to report that Mitek achieved total revenues of $9.3 million for the first quarter and that's an increase of 25% year-over-year. We also achieved non-GAAP net income of $1 million or $0.03 per share.

Our first quarter revenue is a testament to the focused execution of our strategy which is addressing the perfect storm that’s forming in the market. And by perfect storm, I'm referring to the following market conditions. First, accelerating demand for digital transformation. Secondly, increasingly strident regulations for Know Your Customer requirements. And lastly, tighter Anti-Money Laundering Regulations globally.

With continued global threats and data breaches, state mandated regulatory compliance is getting tougher. And this is a growth driver for Mitek’s identity proving products as exemplified by the deal that we announced earlier this week with MoneyGram, the second largest Money Transfer Company in the world.

We believe our strategy is perfectly matched with this perfect storm. Mobile Deposits continue to have significant, accretive and growing upside, which is providing a foundation for building an identity and access management powerhouse that addresses the increasingly urgent and growing needs for identity proving across many industries.

Let’s start by digging in to the opportunity around ID. We continue to make significant progress with our mobile ID Solutions business. In fact, a new industry report issued by Allied Market Research noted that the global consumer identity and access management market will exceed $10 billion in 2017 and it's growing at a double-digit rate. I'll expand on this report later in the call.

During the quarter, we signed several new mobile ID customers in the financial services sector where we already have over 5,500 customers using our industry leading Mobile Check Deposits solutions. These new customers include not only banks in the U.S. and Europe, but also companies doing business in sharing economy, crowdfunding and bitcoin.

We remain focused on further expanding our sales within the financial services vertical where these organizations must comply with increasingly tough KYC and AML regulations or risk significant liability and penalties. For example, payments companies and money transfers, who don't comply with AML requirements, are exposing themselves to significant liability recent examples of penalties have exceeded $500 million.

In Europe, AML regulations are becoming even more stringent with AMLD 4.1, a new regulation which will be enforced across the EU in late June this year. The monetary thresholds are being dramatically lowered, triggering identity verification and other KYC mechanisms.

For instance the thresholds to trigger ID verification for a prepaid card purchases used to be €2,500 and now it's less than $250 in a month. Additionally, there will be no exceptions for online only transactions like there have been in the past. Therefore, all customers must be identified for any online mobile prepaid card transactions that exceed $50.

We believe increasingly strident regulations like ALMD 4.1 will drive further adoption of our mobile ID verification solutions as companies look for technology to enable these transactions. And other growth driver for our mobile ID Solutions is the rapidly increasing amount of fraud within digital and mobile channels.

A recent article of the times noted that the single largest fraud being committed in the UK is bank account opening fraud. As consumers drive more financial transactions through the digital environment, the rapid proliferation of fraud requires increased investment in advance security systems to make these channels to safe and secure.

Mitek’s Mobile Verify enables financial institutions to instantly verify the authenticity of an identity document using the latest artificial intelligence and machine learning techniques. The authenticity of that ID document and the person presenting it can be verified digitally, eliminating the need for a customer to appear in person to prove their identity.

Mobile ID capture and verification is quickly becoming an essential ingredient for any enterprise that's looking to successfully engage customers through the mobile self-service channel. A recent example of this is with one of our ID customers, a large healthcare and pharmacy provider with 7,000 retail locations.

They're using our ID Solution as part of their mobile pharmacy signup process and are seeing tremendous results. In cases where our technology is deployed they've seen material improvements in completion rates, this type of fast and accurate ID verification process that's the key to unlocking revenue through the digital channel.

The new industry report from Allied Market Research, which I mentioned earlier estimates that the total consumer identity and access management markets will exceed $10 billion in 2017. With the identity proofing portion alone representing $3.3 billion and growing at a double-digit rate. The report highlights at Banking and Financial Services represent the largest industry vertical consistent with my Mitek’s focus.

Within our mobile ID Solutions squarely addressing this large and growing consumer identity and access management market. We believe ID verification will continue to be a significant growth driver for Mitek this fiscal year and beyond as companies look to deploy ID Solutions to help them optimize the digital channel for safe and compliant new customer on-boarding, payments and authentication.

Now let me quickly review our Mobile Deposit business where we continue to dominate in this large and growing market. Mitek’s Mobile Deposit Solution has been broadly adopted in the U.S. and Canada and it continues to grow among both consumers in the financial institutions that serve them. All of the top 10 banks in the U.S. use Mitek’s Mobile Deposit, and we now have over 5,500 financial institutions worldwide licensing our technology and more than an estimated 70 million users.

While consumers love the convenience and ease of use of Mobile Deposit, financial institutions love it even more as it’s one-tenth the cost of processing a check inside of branch. As financial institutions continue to spend marketing dollars to drive their customer to use Mobile Check Deposit, Mitek continues to benefit from this push to the lower cost mobile channel.

As noted before while adoption and usage of Mobile Check Deposits continues to grow only four out of 10 online customers in the U.S. have deposited a check using a mobile device according to a recent Futurion study. So we still have substantial room for growth. In fact, a Wells Fargo spokesperson recently said “less branches more Mobile Capture it's inevitable and necessary” that pretty much sums it up.

In conclusion, Mobile Deposit and its continued growth has laid the foundation for Mitek to establish itself as the leading provider of mobile ID vertical solutions and we are successfully executing that plan. With our market momentum, competitive advantages and solid balance sheet, we are well-positioned for continued growth this year and beyond.

And now with that, I'll turn the call over to Russ to discuss the financials in more detail. Russ?

Russell Clark

Thanks, Jim, and thank you, everyone for joining us this morning. Let's jump right in the revenue and operating results. As Jim mentioned Mitek generated total Q1 revenue of $9.3 million a 25% increase year-over-year. We also achieved non-GAAP net income in Q1 of $1.0 million or $0.03 per diluted share representing our 11th consecutive quarter of non-GAAP net income. Q1 software revenue of $6 million was up 26% compared to revenue of $4.7 million in the year ago quarter.

This growth is fueled by both mobile ID and Mobile Check Deposit products. We maintain strong software gross margins at 96% for the quarter. Q1 services revenue of $3.3 million increased 23% over last year's Q1 revenue of $2.7 million due to growth in both software maintenance and transactional SaaS revenues for our mobile ID products which increase 15% year-over-year to $1.2 million.

Q1 services gross margins were consistent at 79%. Total Q1 operating expenses were $9.9 million compared to $7.7 million in the year ago quarter. Q1 selling and marketing expenses were $3.8 million compared to $2.5 million in the year ago quarter and R&D expenses were $2.5 million in Q1 compared to $1.7 million a year ago. Our Q1 G&A expenses were $2.2 million compared to $2.1 million in the year ago period.

The year-over-year increases in OpEx reflect our continued investments in sales and marketing and R&D to grow our ID business. As a reminder our earnings releases includes the reconciliation between GAAP and non-GAAP net income, we believe non-GAAP net income provides the usual measure of the Company's operating results by excluding the following items.

Acquisition related cost and expenses, stock compensation expense and litigation cost related to protecting our intellectual property. In Q4, we incurred $518,000 of acquisition related cost and expenses, compared to $543,000 in Q1 of last year. Stock compensation expenses during Q1 was $1.1 million compared to $1.0 million in the year ago quarter. We had no IT litigation expenses in Q1 compared to $113,000 in Q1 of last year.

Moving on GAAP net loss in Q1 was $607,000 or $0.02 per share compared to a GAAP net loss of $322,000 or $0.01 per share in the year ago quarter. Non-GAAP net income in Q1 was $1.0 million or $0.03 per diluted share compared to non-GAAP net income of $1.3 million or $0.04 per diluted share for Q1 of last year. Our diluted share count for Q1 was 34.7 million shares compared to 32.1 shares in the year ago quarter. As of the end of Q1 we had 125 employees.

Turning to the balance sheet. We use $1.2 million of cash and operations during the quarter bringing our total cash investments balance of $34.5 million at the end of Q1. This net cash use was driven primarily by the Q1 timing of fiscal 2016 annual incentive payments. Our Q1 accounts receivable balance of $5.5 million represented DSO 55 days which is in line with our normal historical levels.

Now moving to guidance for the remainder of fiscal 2017. We are reiterating our previous guidance of annual revenue between $43 million and $45 million for our fiscal year ending September 30, 2017. Our guidance is based on continued strong growth in mobile ID products as well continued growth for Mobile Deposit. We continue to see strong market demand for mobile ID verification products and we continue to invest in this growth opportunity.

However, we also continue to expect to generate healthy, non-GAAP profit margins of at least 20% for the full 2017 fiscal year. We expect Q2 OpEx excluding acquisition related costs and expenses and stock compensation expense to be between $8.3 million and $8.8 million. We expect Q2 acquisition related cost and expenses to be between $500,000 and $600,000 and Q2 stock compensation expense to be between $1.3 million and $1.4 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we’ll take our first question from Bhavan Suri with William Blair.

Bhavan Suri

Hey, guys. Can you hear me, okay.

James DeBello

Yes, Bhavan.

Bhavan Suri

Great. Nice job there. On the quarter and then just wanted to delve into it, but just to start off with I guess, at a high level if you could just give us some color maybe Russ, maybe Jim just a sort of as you look at parsing out the growth for us, sort of how much was from the ID product because obviously some SaaS based business and some license based business and how much from Mobile Deposit?

Russell Clark

Sure, Bhavan. We gave some color last quarter on what we expected the breakdown to be for the year. So year-over-year we did about 25% in our ID business in fiscal 2016. Last quarter, we provided annual guidance that we expected that to grow to 35%. In the Mobile Deposit mix there that we’ve discussed 90 days ago, again for the year 65% share in 2016.

And with the ID growth that deposit competition is, we expect to be closer to 60% for the fiscal 2017 year. So still growing on all fronts with sort of dual legs of our product set, Mobile Check Deposit and ID. ID is obviously the faster growing of the two, but the smaller of the two, but Mobile Deposit continues to grow at a nice rate. We saw 20% growth last year and that continues to crank along.

Bhavan Suri

Okay. That’s really helpful. And then when you look at the Mobile Deposit business, if I look at the commercial banking market, we’ve talked about consumers, so that continues. Jim, you’ve provided some nice color on sort of how few people have actually deposited check or consumers deposited check. Is there any chance that rate could tick up as we sort of see the expansion into the commercial banking business or the business is using the Mobile Check Deposit product?

James DeBello

Hi, Bhavan, this is Jim. We certainly think so and we've actually invested in the Multi-Check Capture capability. We're going to be providing that through, obviously our distributor groups. We have some additional work that we're doing with payment networks that we hope to be announcing in the near future.

And thirdly, we will even have an app on the Apple store; we envision that will allow people to verify checks by taking multiple checks to verify some as an example. So we think there's opportunity to penetrate small medium sized businesses, who need to use our Mobile Check Deposit product. Today, the primary driver is retail. It continues to be the primary driver and it's been successful for us, but we do think there's room for growth elsewhere.

Russell Clark

Yes, Bhavan, I would add to that. That new use cases continue to emerge for Mobile Deposit. We had a press release with the American Cancer Society few weeks ago and just another way to help a non-profit, get funds and donations all that much more quickly. So still a lot of room to grow here.

James DeBello

Bhavan, if I can just underscore on a different topic with ID Solutions, just what we're seeing in the marketplace in terms of these regulations, Anti-Money Laundering is continuing to be a Bugaboo for financial institutions as we continue to face these threats. So the advent of additional regulations in Europe that are more stringent only helped drive our market demand and I think that's reflected in the MoneyGram deal.

So we continue to be excited about those opportunities growing both in Europe and the U.S. So we feel we're in a good position right now. We exceeded street expectation on the topline, but we continue to work very hard to drive new business, a lot of that business is coming in as cloud bookings as well. So those will show up in terms of annual run rates over the course of this fiscal year, the future and beyond.

Bhavan Suri

Yes. Jim, that’s actually is the next question, when you look at the large ID wins, you've got obvious – you pointed out the healthcare services, the business that you won, when you look at the implementation process for those guys for MoneyGram sort of how many are alive and sort of what do we think the timing expectations for some of the larger ones that you actually won look like as we think about what that ramp on that transaction card business could look like?

James DeBello

Yes, we've experienced this before in Mobile Deposit running with big enterprises and we always wanted to be tomorrow and it always ended up being longer to that. So with these large companies, it does take time. Sometimes it takes six months or longer. They typically go through field testing in selected states. They refine their user interface. So as you know Bhavan, we delivered core technology and MiSnap Capture experience, which gets built in to other people’s applications for lack of a better way of saying in.

So the enterprise and designs [indiscernible] the consumer experience, where the buttons are, what screens go through, things that are fundamental to making it easy to use and visible, and sometimes they do it well and sometimes they don't and so that's what the testing takes. So it's not really the core backend that takes a long time to integrate. It's really the user experience getting involved and doing their releases on their periodic schedule, which is typically every six months.

So the answer to your question, the delivery of our products is happening, the one that I mentioned earlier MoneyGram had an immediate need and they're just getting in the market now. So it's just very early stage, but Bhavan that was unusual. They had a regulatory requirement, they had to meet and that was pretty fast, but typically six months to 12 months.

Bhavan Suri

Got it. And Jim just as you seeing through the process a little bit, with Mobile Check Deposit, the banks had implemented and then had to market it to their users, right and say hey here is a way for you to do this. City do a lot of interesting ads, I mean the people had all sorts of different ways to get people to use the Mobile Check Deposit.

With verification that's not something you need to market. That's something it has to be done and rolled out, but that's not something you're marketing to an end consumer, right. That's something it's a requirement from AML or you Know Your Customer perspective right. So it's not sort of you have to go and get people to use it. It's just going to be built in the application where they use it. Is that a reasonable way to think about it?

James DeBello

Yes, absolutely Bhavan. And that we sold deposit primarily through our partners. The integrators and system OEMs like by Pfizer, IFS and NCR, and they're still terrific, doing a wonderful job out there and send others among them [indiscernible]. What we also are doing is creating a direct go-to-market to big enterprises, which means a direct sales force for ID.

Now, why are we doing that? Just for the reasons you mention to stimulate awareness demand and get the market faster, but underneath that we begin to layer a channel of distribution to capture other businesses that maybe aren't significant enterprise size, but are going to contribute to our cloud revenues.

So to be specific it's a different go-to-market strategy direct-to-customers who have one of two problems, A) they are digital marketing executives and they need to get more customers on their end and they are seeing their customers come to them through the online or digital channel or mobile, and therefore we're making it easier for that customer to sign up. That’s the first persona, the digital marketing executive.

The second persona is the fraud or digital risk manager and they typically are more worried about compliance and losses. So really within each organization there are silos. They often cooperate, but often there are two different sales within organizations. And so we're seeing the need for both and it's a little bit different geography wise too. We see digital marketing a little bit more of a thrust here in the U.S. and compliance a little more of the thrust in Europe because of the regulatory environment there.

So some of the substance is, yes, it is not going to be a big ad campaign for a ticked picture of your identity, but what our key drivers in the ID market are increased regulation, we're seeing that in Europe, increased concern over fraud and losses and also in the U.S. particularly increased need to capture and say yes to more good customers.

If I can add that, it's a little more color of the [ones] very interesting, just today Javelin Research reported 16% rise in ID that highest that they've seen since they've been doing the study in 2003. So this idea of identity take over, synthetic identities continues to grow, continues to be a problem and let me explain that these are meanwhile had announced earlier that for our customers who have implemented EMV terminals, POS terminals in the U.S. and that's about half of their customers less than that, they've seen half of the fraud.

So let me repeat that. Our customers who have deployed the POS terminals with EMV fraud has been reduced 50% of sales. Okay, so it's pushing the fraudsters in a different direction and we're seeing it bubble up in identity theft as evidenced by the Javelin report. So we're actually seeing these reports reflect what we're seeing with customers as we talk with them confidentially about what they see in the market is their demand drivers for our products. So regrettably that’s the situation in the world. Fortunately, Mitek is in the right place to take advantage of those trends.

Bhavan Suri

Yes, that's really helpful Jim. Thanks guys and nice job again.

James DeBello

Thanks, Bhavan.

Russell Clark

Thanks, Bhavan.

Operator

[Operator Instructions] We will now take our next question from Darren Aftahi with ROTH Capital Partners.

Darren Aftahi

Hey, good morning, guys.

James DeBello

Hi, Darren.

Darren Aftahi

Thanks for taking my questions and congratulations on the quarter. Couple if I may, one, I think Jim or Russ maybe you talked about in mobile ID growth, you spoke about sharing economy. Any more color we can kind of get around maybe new customers you kind of added there the opportunity?

Two, what was check reorder in the quarter? Third, I think last call you talked about your two large European bank customers were in pilot, are they still in pilot? If they are kind of curious you are going to understand any trends you're seeing if they are out of pilot and any kind of trends you're seeing as well. And then lastly, I think a couple quarters ago you maybe mentioned a number of instances on Mobile ID kind of on a quarterly basis, just kind of curious how that instance number is just kind of trended over the last couple quarters? Thank you.

James DeBello

Darren, happy to answer those questions and any others that you have, but let me start with characterizing the sharing economy and I’ll let Russ to address some of the other questions you have. So first of all, let’s define sharing economy that's obviously, if you have a car or you have a room in your house, if you have an asset that you use part time, you can share that.

And so we know that's manifested in companies like Airbnb and Lyft and Uber and organizations like that. In fact we see that growing worldwide. In Rome, they operated new service for Vespa drivers and so they have a Uber for Vespa. It’s not Uber, it’s some entrepreneur they created their own localized sharing.

So often when you do that you want to know the identity of the person who is either renting from you or jumping into the vehicle or doing these new travel experiences and some of these organizations are offering where you might be with somebody for a longer period of time. So you go to a city and you want somebody to take you around for three days.

So having some type of identity verification that is digital, which is consistent with how these services are delivered and particularly at mobile, is good. And so absolutely for peace of mind, for reduction of liability and for confirmation having the identity captured is important.

So we think the sharing economy is a very rich target environment for us. And we have customers in that area who are in the process of getting deployed, who we can’t speak about regrettably because the names you would recognize that will utilize our technology. So we really like that space for what it reflects and by the way those consumers of those technologies typically are very used to sharing information such as their identity and doing it digitally.

I'd like to add just a little more color to that Darren to even our CTOs – I'm latterly baseball coach. And as part of my application and literally you have to apply now. You may know that Darren you've got to send in your ID, so what you do. In the old days you would take an image of it on the copy machine and fax on over or physically go down to whomever you have to meet to prove your identity.

Well it wouldn’t be great to share that identity through a Mobile Capture and sharing of that ID and have it in a way that is secure. So it can't be utilized for any other means. So we're looking into opportunities again to share ID's to provide our ID verification to sharing economy and other verticals.

And I just want to make sure you understand, we have not deviated from our focus on what we consider our core beachhead which is financial services. We have over 5,000 banks now know Mitek, use Mitek and are comfortable with Mitek. And so it's a much easier cross sell for us to go there. So that's our first choice and our first vertical of approach, but we're getting a lot of inbound calls in ancillary or adjacent industries that are very complimentary and desire our technology.

So you're going to see us report a variety of different types of customers, but I just want to emphasize that we still look at ourselves as specialists in the whole financial services area, particularly for high value money transfers, lending, credit card applications, DDA accounts at banks opening, insurance, mortgages and things like that. Okay, so that's number one. Why don’t we go to your second question? Russ.

Russell Clark

Yes. Darren you asked about Mobile Deposit reorders. Yes, I didn't include that metric in the script I think is we've discussed on previous calls. It's sort of lost a little bit of its meaningfulness, so I didn't provide that. I will tell you just in terms of trajectory and color was a little less than the number last quarter. That's not a bad thing. I think as we look at sort of metrics for the Mobile Deposit business, some of the metrics Jim threw out on the call little bit ago. I'll give you a range, I mean in the reorders this quarter.

Again, the mix includes both SaaS offerings from our channel partners and some named end user banks that wanted to sign a separate deal for whatever reasons for our channel partners. So we can have reorders in any given quarter over $1 million and we can have reorders under $10,000 and certainly we saw that range again this quarter. You also asked about the couple of larger European banks that I mentioned in the last quarter. So we continue to work with them and maybe to amplify on Jim's comments a little bit ago on the process between signing and going live.

Go live, we get a lot of questions about that and go live isn't an inflection point I think as we’ve said before, as Jim mentioned there's stage rollout. So many of the large enterprises that we've signed are in the process of going live or are live, but as we've mentioned they are live in limited markets could be an internal friends and family and then smaller markets along the way. So we continue to work with two larger banks in Europe as well as smaller ones with their ID products there. And I think Darren maybe you asked about your last question I think the number of ID customers or…

Darren Aftahi

It was more then one housekeeping, is more around sort of the number of instances on kind of your mobile ID products just kind of a quarterly run rate any kind of color outside of revenue kind of how fast instances are growing if you will?

Russell Clark

Yes, I don't have any color for you on instances. I can tell you from a customer base perspective, we have a handful of larger customers in the cloud platform. The bulks are sort of medium size and we have a number of smaller ones from the ID checker business. So the direct sales and marketing effort that we're spending in both the U.S. and Europe. We're focused on the top end of the market and that's how we're able to win customers like MoneyGram and some of the others we've announced.

Darren Aftahi

Got it, that’s helpful. And then lastly, I can cut the growth rate on SaaS, but not the actual revenue number for the quarter?

Russell Clark

Yes, Darren, I did include that in my remarks. The SaaS revenue number for Q1 was $1.2 million that was up 15% year-over-year. It was – you will notice down sequentially by a 150,000 or 200,000, so a good reminder for everyone that our SaaS business is pay as you go. We render invoices on a monthly basis based on transactional volume. So they are subject to variability.

But Jim mentioned, the bulk of our bookings, our SaaS in the book our bookings our SaaS deals in the financial services vertical. And when I say a financial service that includes not only banks, card issuers, payments processors, money transfer companies, but also alternative lenders, we've seen a lot of interest in that area as well. So it is subject to fluctuations down a little bit sequentially. We're focused from a selling perspective there with the majority of our bookings and we expect to continue to see SaaS growth on an annual basis.

Darren Aftahi

Great, thank you.

Russell Clark

Yep.

Operator

We will now go to Mike Grondahl with Northland Securities.

Mike Grondahl

Yes, thanks guys for taking my questions.

James DeBello

Hey Mike.

Mike Grondahl

The first one is just to help us track Mobile Fill and Mobile Verify. Can you give us just a total number of clients you've signed and how many are lives today?

Russell Clark

Yes, Mike I don't – we aren't disclosing total customer accounts I can tell you from a trajectory perspective, the mix as we've always said we expected the mix to change more from still to verify over time. So if you go back even one, two, three, four quarters, a lot of the interest was on the Fill side.

As Jim mentioned in his remarks, so a lot more compliance regulations out there the AML laws changing in the EU reducing the transaction size above which you have to Verify ID down to €150. So there's a lot of secular trends going on here from a compliance perspective that are changing the conversation not just with the digital markers who are trying to sign up new customers, but also the compliance and risk managers of the large enterprises as well.

So we certainly seen that in our sales efforts in our pipeline in our book of business. So we’re – that the vast majority of conversations that we're having today in the pipeline are more on the Verify side and the Fill side.

Mike Grondahl

Got it, are most of the ones you've signed live?

Russell Clark

So most of the ones we've signed I guess Mike I go back to the process we've been talking about between sign and live. And again live isn't in inflection point. It's not as if we sign a large enterprise and once we hit live, we get every single transaction for every consumer that's a member of that enterprise. These are rolled out in stages. So as Jim mentioned, we've seen this with deposit. We've been here before and that's what we reflected in our guidance.

Mike Grondahl

Got it, and then any update specifically on the Fortune 500 if you signed any new ones there or if any flip live?

James DeBello

Yes, Mike, thanks for the question, a good reminder as well. We are very focused with the investment we're making in sales and marketing in the financial services vertical that we serve. That's our beachhead with some of the companies I just mentioned, so not just banks, but alternate lenders and money transfers.

So we continue to focus there. It’s our bread and butter with 5,500 accounts and we certainly – we aren’t focused, we don't have sales targets let say sign Fortune 500 companies. We did announce many Fortune 500 companies last year, primarily because we saw interest in other verticals as well. They were with inbound interest as a result of our digital marketing efforts.

So again, all of our outbound marketing is focused on some of these areas in financial services. We did have seen some inbound interest, but it's not – our sales team doesn't wakeup everyday, thinking I've got to go sign another Fortune 500. They're looking to sign leading companies in the financial services vertical.

Mike Grondahl

Got it. And then could you describe the use case at the money transfer company you signed up or announced last week?

James DeBello

Sure. So again, along the same trends of compliance and more stringent AML laws when transactions pop up above certain threshold as different organizations define them either from a regulatory perspective or an internal policy perspective. They are required to check ID. So we play very nicely into that process when there's a requirement to check an ID because it’s above a dollar or euro threshold or maybe it’s based on the location of the money transfer where the funds are coming from or they're going to.

Obviously, in Europe with some of the unfortunate activities over there recently they've really restricted things like prepaid cards and money transfers and especially cross border transfers just to make sure that they're not funding other illegal activities. So the basic use case is, here is the money transfer, it's popped a red flag based on whatever attributes it has. There's a requirement to verify ID and our customers are using our Mobile Verify product to check the box and that requirement and check an ID document.

Mike Grondahl

Is that only to certain countries, is it all of the MoneyGram network, I mean – and then just as a follow-up to that I mean when they looked at their 2016 book of business and you guys had to negotiate price. Do you have a feel for what that volume could be, so you can price accordingly or how do we think about price in that kind of case?

Russell Clark

Yes. MoneyGram is no exception to everything we've been saying, so large enterprise, large customer base they had a very specific compliance need that they needed to satisfy by the end of last calendar year. So we engaged with them. Again, very consistent, they are rolled out with us in five initial markets, different countries in Europe. So starting small, where they have the compliance requirement and we hope to continue to see things grow from there.

Mike Grondahl

Got it. And last question, are you talking to other money transfer companies?

Russell Clark

Absolutely Mike, again, as I mentioned as we see the book of business shift from Fill to Verify and all of the secular trends in compliance, there's certainly a lot of interest in the money transfer space.

Mike Grondahl

Got it. Okay. Thanks a lot guys.

James DeBello

Thanks, Mike.

Operator

And we’ll now go to Mark Schappel with Benchmark.

Mark Schappel

Hi. Good afternoon or good morning and nice job on the quarter.

James DeBello

Hi, Mark.

Mark Schappel

Hey, Jim. Starting with you, have there been any thoughts within the Company was coming up with some secondary sales metrics that might help investors get a better read on the two separate businesses, the Mobile Deposit and the mobile ID?

James DeBello

Sure. Mark, we think about that all the time and we've been trying to open the [indiscernible] as best we can without compromising our confidentiality or providing information to selective party. So we really have tried to give some guidance now that we've never done before on an annual basis, we even gave a little projection into what Q1 would look like and we exceeded that fortunately. We are working very hard on continuing to drive adoption on both bookings and our cloud as well as revenues as we deliver the services.

So we are transforming the model, as you now we’ve talked about this with everybody from our traditional Mobile Deposit block sales, which are all recognized up front in the nonrefundable of GAAP compliant to more of a cloud first offering particularly for ID, which are being used and build as they're being consumed.

So we're getting a feel for the market as well and we want to make sure that we down over stated, continue to have conservative FD practices and do the right thing. So Mark we do think about it. We'd like to open up more information and as we become more comfortable with it and it becomes more regular in an emerging market, we will do that.

Mark Schappel

Great, thanks. And then a follow-on question, which builds on an earlier question, and based on your prepared remarks, it sounds like the fraud detection business – yes, it sounds like fraud detection is the principal driver of your mobile ID business right now rather than mobile account opening. Am I reading this correctly?

James DeBello

I think that's fair particularly in the European theater and let's talk about that. Next week, we're going to be at a large conference called FinovateEurope. It's in London. We're presenting on stage our Mobile Verify product which does a couple of things. Clearly it captures the identity document and looks for abnormalities or any aberrations of the fraud and things that have been changed and confirms the authenticity of that document.

But beyond that in addition to reading the identity, we also can take a selfie compared to the photo demonstrating that. And thirdly, we’re reading the NFC chip in a password, which is very common and their requirement that's emerging in the European market, why? It's because of Anti-Money Laundering. Obviously, they have threats like we do in the U.S., funding terrorist organizations and a variety of cross-border transfers, very fluid between countries in the EU. So demand there is high and that speaks to your question about fraud and that's why we are actively selling in the UK and on the continent.

In the U.S., however, we're seeing the demand continuing to grow for enrolling people safely, securely and accurately. And we mentioned the domestic retailer of pharma healthcare company with 7,000 retail stores. That happens live and that is to sign up for your pharmacy prescriptions, and so that's a Mobile Fill application.

So I hope I characterized the market differences, Mark in that regard. Not just say that there isn't Mobile Verify demand in the U.S., there is and also in Europe, but we're sort of seeing that as the markets shape up in those two specific areas. But let me add a third element just a sort of for fun is that of course, we've been experts in the area of clients and apps that are downloaded on to your phone and MiSnap is thriving. MiSnap is deployed in over a half of our big banks meeting, over 80% of DDA accounts that have access to Mobile Deposit have MiSnap accessibility.

MiSnap is also a key driver for ID. It simplifies the user experience, but not only for the client, but also in the Mobile Web environment. So I want to underscore Mobile Web is very critical and very tricky, activating the camera on an iOS device through a browser or on an android device through its browser allows us to provide this service of ID capture from a web. So you're browsing on the web as an example. You see an ad. You go to the website for a big bank. You say, Oh, I want to take out a loan for my car. Right from the browser, you can snap a photo of the ID and have that same magical experience with MiSnap.

So we see that ad and we're still working on refinement in certain areas, but we think we have the best Mobile Web offering out there using MiSnap on top of that makes it a superb experience and that’s a driver, so we really like that both for the European market and the U.S. market. Mobile Web is a key element to engage consumers right where they sit on the browser.

Mark Schappel

Great. And then finally Russ, question for you. Deferred revenue growth was down substantially in the quarter. I was wondering if you could just go into a little bit of why that was and what we should or should not read into that.

Russell Clark

Yes. Sure. Mark, it's really just a timing effect. So in particular with that deferred balance here at the end of December, we have a couple sizable deposit customers that have annual maintenance payments around that timeframe. And we didn't get them in the door by the end of December and we expect to get them here in Q2. So really just a timing issue there, nothing to be concerned about, just timing with a couple large maintenance renewals.

Mark Schappel

Great, thank you. That's all for me.

Russell Clark

Thanks Mark.

Operator

[Operator Instructions] We’ll now go to Spencer Bogart with Needham & Company.

Spencer Bogart

Hey, good morning. If you guys can kind of take a step back here and just update us on the sales strategy for the mobile ID and authentication space and maybe specifically on how you think about – is that primary a direct business or are you seeing a lot of demand from some of your channel partners?

James DeBello

Yes. Spencer, Jim here and let me describe that, very clearly it's a direct sales strategy to a large enterprises as a primary thrust and that's how we could sign a company like MoneyGram or some of the other larger banks that we have signed and engage or other vertical markets.

Those are primarily made from outbound efforts and occasionally from inbound efforts derived from our digital marketing strategy, so an active webinar, active utilization of assets that we consider such as white papers, occasionally some banner ads, but not much and industry participation in trade shows and of course, cross selling to existing customers, right, so we pick up the phone and go.

So why direct as opposed to a more cost effective indirect channel strategy we use for Mobile Deposit. So compare and contrast it took us two years to get Mobile Deposit across the goal line, engage our distributors and grow that business. We're finding faster traction by going direct.

That's a way to get a beachhead or toehold and get some testimonials going and white papers and we're building a channel underneath that. So in addition to activity with the direct businesses the big enterprises, we are building indirect channel. So we are working with Experian in Europe actively. We've been engaged with them now for about a year, but more actively recently as that market is continued to pick up particularly because of these new Anti-Money Laundering regulations and other activities there. So we really think that the channel is going to be a major driver for us to capture business for ID.

And the third element and I want to say is for smaller businesses, who have an active need, but maybe don't need our threshold of being defined as an enterprise. We do have a way when we generated leads and those leads are growing to turn a marketing qualified lead into a sales qualify leads. The difference is this. Marketing qualified leads are people of expressed interest, want more knowledge and are generally in the categories that we service in terms of geographies and businesses.

A sales qualified lead is the next step whereby sales person would actually qualify or he will have idea of a budget or he going to buy within a year, the size and scope of the opportunity and engagement? And half of those are not enterprises, but smaller deals that are important to us and we have a team that's in-house, that actually manages most of those closings through telephone and e-mail work. So again, direct touch, indirect through major distributors and resellers such as an Experian and others that we are working on and soon to be announced and thirdly through an inside sales effort.

Spencer Bogart

That's great color. Thanks for that. And then I think it was last quarter that you mentioned some hiring. I think it was sales hiring and slipped out of the quarter. I’m just kind of curious you guys are back on track there or what you see if that kind of keeps you in the rest of the area?

Russell Clark

Yes. That's a great question. We are back on track and as I mentioned last time, we had a lot of confirmed higher dates coming out of Q4 into Q1 and you saw in our headcount is up about 10 heads during the quarter from September to December, so all those higher dates were confirmed and people are on Board, where the 125 employees here at the end of Q1.

And as we go ahead in terms of investment levels in areas we're in pretty good shape. If I sort of categorize them, we've been investing pretty heavily in sales and marketing and R&D to a lesser extent, so with our 20% or better non-GAAP profit margin guidance for the year, we'll look to moderate that spending a little more than we saw last year.

James DeBello

Yes. Spencer, I think it’s a good question and good answer by Russ with regard to our continued investment, but with an eye towards the bottom line, we certainly delivered better than expected non-GAAP EPS. We really are actively focused on the bottom line as much as we are at that topline.

Again, this is a new and emerging market, it is a global market, it does take investment, in the way we sell just as I described to you is costly, but there is leverage coming and we believe that we're beginning to build a brand both overseas as well as what we have built here in the U.S. So we're very encouraged by the results this quarter. We see good demand across multiple industries and we're getting deeper into our beachhead markets in financial services. So as far as we're concerned, all systems will go right now.

Spencer Bogart

That's great color. Thanks for taking my questions.

Russell Clark

Thanks, Spencer.

End of Q&A

Operator

[Operator Instructions] Okay. And that concludes our question-and-answer session. I will now turn the call back to Mr. Kehrli for any additional closing remarks.

Todd Kehrli

Thank you, operator, and thank you everyone for joining us today. Management will be attending the 29th Annual ROTH Conference in Orange County in March. We hope to see you there. If you are planning on attending please stop by and say “hi,” otherwise this concludes our call. Thank you and have a good day.

Operator

And that concludes our conference for today. Thank you for your participation.

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