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Edited Transcript of MITK earnings conference call or presentation 30-Apr-20 9:00pm GMT

Q2 2020 Mitek Systems Inc Earnings Call

San Diego May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Mitek Systems Inc earnings conference call or presentation Thursday, April 30, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey C. Davison

Mitek Systems, Inc. - CFO

* Scipio Maximus Carnecchia

Mitek Systems, Inc. - CEO & Director

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Conference Call Participants

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* Allen Robert Klee

National Securities Corporation, Research Division - Research Analyst

* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Darren Aftahi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Mark William Schappel

The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Todd Kehrli

MKR Group, Inc. - Co-founder & President

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Presentation

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Operator [1]

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Good day, and welcome to the Mitek Systems Second Quarter Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli, MKR Group. Please go ahead, sir.

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Todd Kehrli, MKR Group, Inc. - Co-founder & President [2]

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Thank you, operator. Good afternoon, and welcome to Mitek's Second Quarter Fiscal 2020 Earnings Conference Call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Jeff Davison.

Before I turn the call over to Max and Jeff, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its second quarter fiscal 2020 financial results. That release is available on the company's website at miteksystems.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website.

I want to remind everyone that on today's call, management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities, should be considered forward-looking statements. These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings including our most recent 10-K and 10-Q for a complete description of these risks. Our statements on the call today are made as of April 30, 2020, and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein whether as a result of new information, future events, changes in expectations or otherwise.

Additionally, throughout this call, we'll be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the 2 for the periods reported in the release.

With that said, I'll now turn the call over to Mitek's CEO, Max.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [3]

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Thanks, Todd. Good afternoon, everyone. Thanks for joining us today.

Jumping right in, as the COVID-19 pandemic continues to unfold, our foremost commitment is to ensure the health and well-being of our employees, their families and our worldwide community. As such, we have taken all necessary measures to maintain the continuity of our operations and to safely operate at full strength while complying with government's mandated stay-at-home directives.

As a modern digital business, we were able to pivot to work from home within 1 day, and all of our team members continue to be highly effective in this environment, delivering on all committed service levels. As such, Mitek is steadfast in our commitment to empower trust and convenience in a digital world. Our identity experts are working 24/7 around the globe to ensure that more businesses are enabled to transact digitally and secure their platforms through easy, fast and secure identity verification. We've increased human capacity to ensure more agents are available in more locations to support the increasing volumes for high-assurance identity verification. We are also partnering with financial institutions as well as the Federal Reserve here in the U.S. to expand usage of mobile check deposit amongst consumers.

To sum it up, our cloud-first technology provides a secure environment for both existing and new customers, and now more than ever, our enterprise-class expertise, products and services are being leveraged. This was reflected in our second quarter results, where we delivered record revenue of $23.2 million, representing growth of 16% year-over-year. We also generated non-GAAP net income of $5.4 million or $0.13 per diluted share, up 98% year-over-year, and cash flow from operations was $3.2 million.

During the quarter, we continued to see ongoing positive momentum in the identity verification market. We expanded with our existing customers, particularly in the gig economy segment, and our identity verification solution continues to gain traction with our transactional SaaS revenue growing 38% year-over-year. We also continue to experience growth from our highly profitable deposits product line with adoption and utilization continuing to increase.

While the current environment is certainly challenging and uncertain, the way we live and work is forever changed. The need for fast, secure remote services is magnified. And regardless of where our customers were in their digital transformation journey, the time is now to accelerate. Providing secure digital identity verification isn't just a question of convenience during COVID-19, it's become a necessity for organizations making this urgent shift to digital.

Identity verification is the essential digital use case, enabling businesses to onboard more good customers faster in this vital environment. As such, several of our customers escalated their transaction volumes during the quarter. Specifically, in the gig economy sector, we saw significant spikes from our home delivery customers. Almost overnight, they went from being a convenience to serving as a lifeline for millions of people following stay-at-home orders to slow the spread of COVID-19. Now more in demand than ever, Mitek is helping these customers bring new shoppers safely on board to meet the increase in demand.

One of our customers in Europe, who is a leading provider of digital identities, also experienced exponential growth in traffic volumes due to their service being the gateway to access government services such as COVID-19 benefits. Increased demand for online banking as well as insurance and lending also contributed to transactional growth in the quarter. At the same time, we saw a slowdown in travel and hospitality sectors, with slower-than-normal transaction volumes as a result of the pandemic.

As we look forward from a revenue perspective, we are currently receiving a benefit in our identity business from some of our existing customers who are experiencing significantly more traffic as a result of the current environment. But at this point, it is impossible to predict what impact COVID-19 will have on our current customers and our pipeline of potential new customers. These are serious times, and there are large swaths of the economy that are being affected, and our customers are not excluded.

Near term, it may be a bumpy road as we weather the economy. But internally, we are continuing to focus on execution. We are not pulling back on our investments to grow our business as we believe identity verification is more important now than ever to companies looking to digitize their businesses. However, we are proceeding cautiously to preserve our business, our bottom line and our resources.

Turning to our deposit solutions. If there ever was a time when mobile check deposit was essential, it is now. As the economic impact payment checks begin to circulate, consumers will use mobile check deposits, many for the very first time. This use case may even be a catalyst for digital or mobile banking adoption. Banks are investing significant resources to enable their customers through mobile and digital channels. And as they do this, mobile check deposit continues to increase. We remain the clear leader in this regard with over 7,000 financial organizations using our products. We are proud of our mobile deposit offering and its ability to assist people in this time of need.

As I noted last quarter, USAA filed 2 lawsuits in Texas against Wells Fargo for patent infringement related to remote deposit systems. And the juries in those cases return verdicts in favor of USAA. The court is still considering post-trial motions in those cases that could overturn the verdicts or result in new trials. In the event Wells Fargo is unsuccessful in overturning the verdicts or obtaining new trials, the 2 cases will be subject to appeal to the U.S. Court of Appeals for the Federal Circuit. In addition, the U.S. patent office is currently reviewing the validity of several of the patents at issue in the Wells Fargo cases. Final resolution of those issues may be over a year away.

Also, as I noted last quarter, Mitek filed an action in California seeking declaratory relief that Mitek's products do not infringe the patents at issue in the Wells Fargo -- in the first Wells Fargo lawsuit. In January, USAA filed a motion to dismiss or transfer our action to the Eastern District of Texas, and we opposed that motion. Recently, the California court ruled that this action should be heard in Eastern District of Texas. As such, we intend to vigorously prosecute our case in this new venue as Mitek invented all of its core technology, and we believe our products do not infringe on any USAA patents.

Today, we also filed a petition with the U.S. Patent Office challenging the validity of the only patent at issue in the first Wells Fargo lawsuit that is not already subject to challenge filed by Wells Fargo. We expect a preliminary decision on whether this challenge will be instituted in about 6 months.

In closing, we are pleased with our results, which include record revenue and significantly improved profitability. I'm proud to lead the Mitek workforce who have rallied without question to deliver the technology, products and services that our customers need and value during these extraordinary times. This is a seminal moment that Mitek has been created to enable. We have the teams, the vision, the technology and a market need of a solution that Mitek is uniquely positioned to deliver. Together, this amounts to a significant opportunity for our employees and shareholders.

Now I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we'll open the call up to questions. Jeff, please go ahead.

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [4]

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Thanks, Max. And thank you, everyone, for joining us this afternoon. Let's start with the Q2 revenue and operating results.

For the second quarter of fiscal 2020, Mitek generated record Q2 revenue of $23.2 million, a 16% increase year-over-year. Software and hardware revenue was $11.5 million, an increase of 8% year-over-year. Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services, was $11.7 million for the quarter, an increase of 25% over Q2 last year. This increase is due to growth in transactional SaaS revenue, which increased 38% year-over-year to $7.4 million. For Q2, deposits revenue increased 13% to $14.6 million, and revenue for identity verification increased 21% to $8.6 million.

We delivered strong software and hardware gross margins of 92% for the quarter. Gross margin on services and other revenue was 80% for the quarter, up from 78% in Q2 last year. Total gross margin for the quarter was 86%, up from 85% last year.

Total GAAP operating expenses, including cost of revenue, were $22.1 million compared to $21.6 million in Q2 last year. This increase is primarily due to investments in operations to grow our business and increased litigation costs. These increases were partially offset by lower expenses in our Paris operations as a result of the restructuring announced in July 2019 and the decline in acquisition-related costs and expenses. Sales and marketing expenses for the quarter were $7.4 million compared to $6.8 million a year ago. R&D expenses were $4.8 million compared to $5.3 million last year. And our G&A expenses were $5.2 million compared to $4.8 million a year ago.

GAAP net income for the quarter was $900,000 or $0.02 per diluted share. Our diluted share count was 42 million shares compared to 38.9 million shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition-related costs and expenses, stock comp expense, litigation expenses and the related tax impacts of these items. Non-GAAP net income for Q2 increased to $5.4 million or $0.13 per diluted share compared to $2.7 million or $0.07 a year ago. Our non-GAAP adjustments included $2.3 million of stock comp expense, $1.6 million of acquisition-related costs and expenses and $561,000 of litigation expenses for the quarter.

Turning to the balance sheet. We generated $3.2 million in cash flow from operations during the quarter, bringing our total cash investments to $42.5 million at March 31. Our accounts receivable balance of $13.7 million represents a DSO of 52 days.

As part of the share buyback program we announced in December, we repurchased approximately 137,000 shares during the quarter at an average purchase price of $7.33 per share. This leaves roughly $9 million remaining of the $10 million buyback program which runs through December 2020. Given the current global pandemic, our Board has opted to put the repurchase activity on hold for the time being.

Now moving to guidance for the remainder of fiscal 2020. Mitek is withdrawing its previously provided guidance for this fiscal year ending September 30, 2020, due to the uncertainty of the full impact of the COVID-19 pandemic on the economy, our customers and our business.

In closing, we are pleased with our results for the second quarter, which include record revenue and significantly improved profitability, and we look forward to continuing to deliver the essential services that Mitek provides.

Operator, that concludes our remarks. We will open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [2]

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Congratulations on the quarter. Can you talk a little bit about the new customer funnel for mobile ID and kind of what you're seeing there in this environment?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [3]

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Mike, it's Max. Thanks for the positive comments. Yes, I think we've been building that pipeline for the 6 quarters I've been with the business. We've been retooling a number of things within the organization, and the go-to-market is a big part of that, both our message, how we position and then the sales motions. Pipeline has grown really nicely in the course of the last 3 or 4 quarters. As those efforts have taken root, we've made a lot of additions to the team, powerful additions to the team by way of personnel, brought in our new sales leader at the beginning of the calendar year this year for the identity U.S. business, really made some big strides in Europe. About half of our identity business comes from the EU. So in that regard, I feel good about the opportunities. I think the unknown, and one of the things you heard in Jeff's remarks there, is just what does this mean, what is the pandemic and the shutdown and just the slowdown in overall consumer spending and big unemployment numbers that we're seeing? What does this mean to those opportunities and, more importantly, to the businesses that we have with those opportunities? So I don't know if that provides the color you're looking for, but that's probably as smart as we are this far into it.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [4]

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Got it. And in the mobile ID business, how much of that would you say is online? And what piece of it is sort of off-line at a physical location? Have you broken that out before?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [5]

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Yes, I'm not sure I understand the question. Could you pull on that a little bit?

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [6]

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Sure. With your mobile ID product, how much of it could be done from someone's living room versus maybe someone has to go into a physical store and use that mobile ID product?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [7]

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Okay, yes. Thanks for clarifying. Well, it could be 100% done remotely, right, from a mobile device, whether that's a phone, iPad or a computer. We do have use cases -- what's an easy example? A bank, a retail bank location, a branch where when you set up an account, typically, you provide your documents, and they take your documents and make a copy of them. We've got use cases where we do some of that, but that's a very, very small part of our business. The overwhelming majority of use cases, both the current transaction volumes that we're seeing as well as the pipeline we just talked about, over 95% of those use cases are wrapped around the idea that you're doing that remotely.

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Operator [8]

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And our next question is from Bhavan Suri with William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [9]

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Can you hear me okay?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [10]

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Yes.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [11]

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Great. Nice job. I guess I just want to touch a little bit on the current environment. We've obviously seen through conversations with CIOs that it's going to accelerate, especially coming out of the idea of digital transformation and things like that. But you're kind of at the forefront of some of this, right? So as you think about mobile check deposits and the idea of doing this remotely, you think about ID verification now and sort of being able to validate that remotely for all sorts of processes, whether it's stuff with DocuSign or things like that. I guess I'd love to understand sort of how those conversations are progressing. You talked a little bit about your pipeline, but a little more color in terms of sort of what do you think this is doing to drive transformation in your go-to-market, especially with the new SVP of sales.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [12]

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Yes, sure. I think it's -- we're trying to strike the balance between what you're pointing out, Bhavan, which is if you're a bank and you don't have -- if you don't have the ability to onboard new customers through a mobile device or digitally, expecting somebody to come down to a branch today is just -- it's not impossible, but it's highly unlikely. And I'll use a couple of examples. And we're balancing that against these big falls in GDP, high unemployment claims, just what's happening with the economy, was that due to folks -- how much credit card use is there going to be in the short term, how much buying is there going to be remotely.

So kind of back to your question, in this current environment, with that use case, the best kind of relevant example I can use is, when you think about Italy and just being kind of the center of the storm a month ago, and we've got customers in Italy, we've got banking customers in Milan. And folks who have basically signed up that are in the middle of implementation, and we were being urged by those customers and our partners, the implementation partners we have, to help accelerate those implementations because there was absolutely no way -- because the lockdown was so severe, there was no way -- is no way for Italian banking customers to go to a branch. And so the ability to actually use Mobile Verify to validate somebody's identity, even if they're an existing customer with somebody like a buddybank, just the ability for them to validate the transaction over a certain threshold of euros, a transaction over EUR 1,000, you're going to do another revalidation using the government-issued identity cards, those are the examples of the acceleration. Just a simple one in a really hot zone relative to the pandemic.

Jeff, anything you'd add to that?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [13]

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All I'd add is the way I view this longer term, this just really reinforces the need and, for us , opportunity for identification services for every business that needs to transact digitally. So longer term, this is all beneficial to what Mitek is trying to do. Near term, obviously, there's going to be bumps as companies, whether they were in our pipeline or looking to do something, figure out the impact of the pandemic on their business and what kind of projects they're able to take forward. The great thing is everything we're delivering -- well, most everything we deliver, I think, is towards helping companies get more revenue and sign up more customers. So it's important for businesses to be able to do that. So all good things in favor of identity verification.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [14]

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So maybe let me ask a more direct question, and Jeff, you know me a long time, actually know me well. I guess, I'm surprised you wouldn't see an acceleration in the business given people have got stimulus checks that are -- some are being deposited directly, but there's a whole bunch of checks being cut. There's more stuff being signed electronically with more of these sort of online transactions. And so help me reconcile that idea, and I understand people are making decisions slowly, but you're embedded in 3,000-plus banks. Those banks are seeing more check deposits, et cetera. And then obviously, you've got sort of a recurring business that's growing nicely, but you pulled guidance. So put those together, or maybe if you could just help me clarify that, that'd be really helpful.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [15]

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Yes. So I'll take on the identity, and then I'll let Jeff talk about the deposits a little bit the way the check model works there. I think everything you just said, Bhavan, is 100% correct. I think that's a great hypothesis. And now it's just a matter of when does that hypothesis play out. Does it take 30 days? Does it take 3 months? Does it take 9 months for us to get to that place? And we're bullish and optimistic that it will be sooner than later. But just in the last 45 days, it's been completely -- they're mind-boggling as to the rate of change things took place without absolute -- 0 visibility as to what was happening. On the identity side, yes, we're watching these projects accelerate. Some of the examples I just used, I can come back and let Jeff talk about deposits, but you're also doing that into the teeth of huge unemployment claims and the bottom falling out of the economy, at least for some period of time. I think we're trying to balance being responsible with the optimism we have for the longer-term wind in the sails that this ultimately helps accelerate.

Jeff, why don't you talk about the deposits a little bit?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [16]

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Yes. On the deposit side, we definitely expect to see an increase of volume usage due to the government checks that will be sent out or are being sent out. That definitely will flow through the network. But Bhavan, keep in mind the way that whole business works, right? All of our customers purchase upfront large blocks. And so the usage will need to flow through that. But then I imagine they'll come back and be repurchasing. Probably, we'll see some of that repurchases come sooner. So that's definitely favorable for our business. It is a one -- hopefully, it's a one-time thing that the government is issuing all these checks. But that will be a one-time thing that we will definitely benefit from. On the other hand, during this troubling economy, there's probably going to be a decline in checks that are written just due to people having less money. But also, there will be less payroll checks due to unemployment. So there's kind of a balance there. We expect real positive on deposit usage, but there are other factors in there as well.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [17]

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Got it. No, that's really helpful. One last one for me. Just on -- a quick update on the ruling. You've said you're expecting a ruling on the declaratory judgment in, say, Northern California and Texas. Just would love to understand how that's going or when would we expect the update. Has the time line for the legal stuff been extended because of COVID? And kind of maybe an update on milestones. So I know there's a couple of questions buried in there, but sort of an update on the process, with COVID extended, and then sort of milestones that us and investors should be looking for through the process.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [18]

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So the next milestone, obviously, is the CJ action that's now going to be contended in the Eastern District. From a timing perspective, I think it's natural to have expected that over the course of the last 45, 60 days, the wheels of justice that normally grind along, they'd continue to grind along. It's probably a little slower just because of everything we've already talked about and we're all experiencing personally. But it hasn't stopped, so the time line remains largely the same.

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Operator [19]

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And our next question comes from Mark Schappel with Benchmark.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst [20]

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Max, starting with you. I apologize, I jumped on the call a little bit late, so you may have covered this in your earlier prepared remarks. I was wondering if you could just review what the company is doing or what steps you're taking on the cost-containment front just to manage through the COVID disruptions.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [21]

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Yes, you missed the best part of the call. It was the front end. From a cost containment perspective, I think we're being conservative. It's one of the reasons that we pulled the guidance here, just because we don't know what to expect in the course of next month, 2 or 3. But from a spend perspective, while I think we're being judicious and we've hopefully established our reputation as good stewards of the business and being disciplined in the way that we make these investments, we're not pulling anything back. We were able to -- as we said in the beginning of the call, we were able to -- we're a modern digital business. Everything that we run is in the cloud. All of our employees have laptops. We have a highly secure VPN environment. We've been dealing with customers for a long time. And literally, the day that we announced work from home, the next -- people picked their laptops, picked the things they needed from their work areas, Jeff and I included, went home, and the next day, got up and went to work at my kitchen table. So I think we're going to continue to be judicious and continue to be conservative both in the projections we make but also how we run the business. But we're not pulling back. We continue to invest, and we continue to grow both sides of this business.

Jeff, anything you'd add to that?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [22]

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I would just add that we have continued to hire and onboard people in this work-from-home environment.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst [23]

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Okay. Great. And then, Max, on your ID business, with respect to the sales organization and ID, has there been a shift in focus from generating new customers to maybe just getting your existing customers to buy more of your product, more of your solutions?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [24]

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Yes. I wouldn't refer to that as a shift in focus. I think we actually have a dual focus at the beginning of our fiscal year, October 2019. We split the team. We basically took what had been a all-purpose go-to-market team and separated kind of new business from expansion within the hundreds of customers that we have on the identity side. And I think that was a natural outgrowth of just continuing to get bigger and more mature and wanting to have unique focus particularly on the Tier 1 and Tier 2 existing customers and then be able to create its own unique focus around those target accounts we had in the select segments of the market for new identity that we've been after. And those segments are the financial services, the fintech, and then marketplace gig economy customers. So it's a natural progression for us, a natural evolution for us.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst [25]

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Okay. Great. And then, Jeff, bringing you in here. Despite operating margins being up significantly year-over-year, our cash flow from operations was down this quarter. I was just wondering if you could run through some of the puts and takes in cash flow this quarter.

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [26]

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Sure. I guess the most unusual thing in the quarter for cash is we spent about $1 million on the stock repurchase. But other than that, the changes affecting the cash flow from operations number are really just accounts receivable a little higher at the end of the quarter, and we paid down some payables. So nothing going on in there other than just minor working capital changes really and then that stock buyback, which I don't know if you caught that on the call.

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Operator [27]

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And our next question comes from Allen Klee with National Securities Corporation.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [28]

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My first question was -- I just wasn't sure if I caught something right. When you talked about what the revenue growth rates were for identity verification and then for deposit imaging, I thought I heard 21% and 13%. Were those the numbers?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [29]

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Yes, that's correct. Deposits was up 13% and ID was up 21%.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [30]

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Okay. Wonderful. Then do you have a general sense of what percent of your revenue you get from segments that are kind of what you pointed to, like hospitality and travel, and any other areas that are the kind of the obvious ones that might get impacted?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [31]

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We don't publicly break that out. I would say our exposure to travel and hospitality is -- it's going to be on the lower side. We have a couple of customers that are of nice size, but we don't have like numerous customers in travel and hospitality. We've spoken to you before about Airbnb being a customer of ours. And as you can imagine, their business took a pretty big slowdown during the pandemic. I'm not sure when that bounces back. But that would've probably been the biggest impact for us there.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [32]

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It would have on the M&A transactions. I think, Allen, just to add on to what Jeff's saying, we did that acquisition of ICAR 3 or 4 years ago, and that's that hardware line you see in our income statement. And most of that hardware are actual scanners that are used by hotels and resorts in the Mediterranean. And I don't know those numbers off the top of my head, Jeff. They're not immaterial, but they're also not massive either.

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [33]

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Right. Yes. There is exposure there as well. They're used in hotels.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [34]

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And then if you look at your business, like how it's been doing in April compared to March, what can you tell us?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [35]

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Well, this call is about our Q2 results. And I don't think we're going to sit here and try to pontificate or provide information around what's happening in April. We'll do that in our Q3 earnings.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [36]

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Okay. And then my last question is on the checking side, you talked about kind of some of the pluses and minuses, one of the minuses being payroll checks. Can you give us a sense of maybe what percent of the revenues in that segment come from payroll checks?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [37]

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I actually have really no idea on that. We don't get -- all the reporting we get is the number of checks used or deposited. So we don't really see if they're payroll checks or if they're small business or if they're large business, any of those things. So I really couldn't answer that one for you.

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Operator [38]

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(Operator Instructions) And our next question is from Darren Aftahi with Roth Capital Partners.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [39]

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A couple, if I may. On the check volume side you maybe have seen, can you just anecdotally talk about -- I know you talked about some of the puts and takes, but what's kind of the trend line you've seen in terms of checks deposited across your network maybe in April versus March? Is that trend still increasing?

Second question, there's been a massive shift to everything e-commerce. And so I'm curious, as we talk about the gig economy, one, where are you seeing benefits amongst kind of the e-commerce ecosystem? Is it more on the logistics side, i.e. the Instacarts of the world? And/or are there new opportunities like in e-commerce? The reason I asked that is it's very hard to get a new cellphone now via a carrier store. Are opportunities like that topping up for you?

Three, you usually, I think, give the number of new ID customers. Curious if you have that.

And then more of a high-level question lastly. People may be more reticent to want to go to ATMs now. So I'm just kind of curious, conversations you're having with the bigger financial institutions, is there more of an accelerant new conversations that we need to have some of these solutions now in terms of opening up accounts and then doing everything remotely as opposed to seeing the ATM as a channel for transacting.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [40]

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I don't know, Jeff, do you want to take on the check trends first?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [41]

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Sure. Well, I'm going to say today is April 30, so we don't have a complete month yet of check reporting, so I couldn't really comment about April, Darren. The thing is when I look at the checks that were reported in Q2, it was usage as we expected in the low teens, like we've been talking about. I really don't know how to predict how many of the government checks will be issued in check form versus direct deposit. We've -- our team has worked with the Federal Reserve to make sure that the format of the check that they're working is going to work well with mobile deposit. So we're really looking forward to seeing what comes from that, but I really can't forecast anything on that right now. And as of April, I have no way to tell you.

Now let's see what else is on checks. The ATMs, I don't know that ATMs necessarily impact, unless I'm not thinking along the lines you are, but they impact identity. Most of our conversations are -- you don't want to -- you can't go to a branch now to deposit a check. Nobody wants to touch an ATM. So the best option is mobile deposit. So it's another thing that's in favor of encouraging people to use mobile banking, mobile deposit. We think we'll get users who haven't done it before. And so we think that, that's going to contribute to just continued increased adoption by consumers of mobile deposits. So again, favorable, but being 6 weeks into the pandemic, it's really hard for us to forecast anything this early. But we do feel that it's going to be very positive for the mobile deposit business.

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [42]

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Yes, likewise. If I pick up on the questions that are more identity-related, I think, Darren, right now, what we've seen kind of since the middle of March, maybe even a little earlier in March, is more of the reaction to this crisis, what started as the health crisis, which now has turned into a global economic crisis. And the things that we're seeing, where volumes are really going up, are exactly that, right? The shopping providers, you mentioned mobile phones, and Asurion's a big customer, great customer for us, and making phone claims if your phone is destroyed or not working or you use your phone, that kind of thing, we're seeing those volumes increase. We got a European customer that basically does identity verification for the U.K. government for government services like unemployment filing. And so what's another example in the financial service is all those PPP loans. We process thousands of transactions, from small mom-and-pop shops that didn't have merchant banking services when they were filing for PPP loans, which we're now seeing the second wave of that start to spark up based on the increased funding in that program with the SBA. Those are the kinds of examples we've seen so much -- so far. And I would refer to that as the reaction stage.

Hopefully, optimistically, over the course of the next month or 2, hopefully, we start to get to the place where we start to see the recovery mode. And I think that's back to your -- some of the questions that were asked by some of your colleagues and what you were alluding to, for e-commerce and digitization, who wants to go down to a bank and apply for a credit card or apply for a new account? That's just -- that's a dirty place with a lot of germs and potentially having viruses, right? And I think we're -- I used the example of Italian banks, but we're seeing that across the board, where folks that had these digital automation programs are accelerating those. And that's what we expect to happen. And I think we should expect that to happen broadly. Now it's just a matter of how long that takes and how serious folks are around that.

Did I miss anything in there, Jeff?

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Jeffrey C. Davison, Mitek Systems, Inc. - CFO [43]

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I don't think so.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [44]

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Can you give us the number of new ID customers in the quarter?

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Scipio Maximus Carnecchia, Mitek Systems, Inc. - CEO & Director [45]

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I think we track that now with the resellers for some of the ICAR solutions that we have. I mean those numbers are dozens and dozens of customers. I think the devil's always in the details as to -- you mentioned some of our bigger customers in your question. That's taking those dozens and dozens and sifting out who's going to be the next big customer, who's going to have those really big volumes. So I think tracking that number is just not that valuable. I don't know that it is helpful.

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Operator [46]

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And there are no further questions at this time. I would like to turn it back over to Mr. Todd Kehrli for closing remarks.

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Todd Kehrli, MKR Group, Inc. - Co-founder & President [47]

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Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day.

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Operator [48]

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This concludes today's call. Thank you for your participation. You may now disconnect.