Mitek Systems, Inc.
Q1 2013 Earnings Call Transcript

Published: 1 Feb 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2013 Mitek Systems earnings conference call. My name is (Regina) and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions) As a reminder, today’s event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Julie Cunningham, Vice President of Investor Relations. Please go ahead, Julie.

[Julie Cunningham:]

Good afternoon. Thanks for joining us, everyone. Before I turn the call over to Jim Debellow and Russ Clark, I’d like to cover a few quick items. This afternoon we issued a news release announcing our first fiscal 2013 quarterly financial results. That news release is available on our website at www.miteksystems.com. As a reminder, this call is being broadcast live over the internet and to all interested parties and the audio of this call will be available on the Investor Relations page of our website and also archived there. During this call, we will discuss some factors that are likely to influence our 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 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 for a more complete description of these risks. We will also discuss non-GAAP financial measures during this call. We believe these are useful measures to evaluate the company’s ongoing performance. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release on our website. And with that, I’d like to turn the call over to Jim Debello.

[Jim Debello:]

Thanks, Julie, and good afternoon, everyone. Russ will provide the first quarter financials in detail in a few minutes but first I’d like to discuss our big picture goals for fiscal 2013 and our accomplishments for the first quarter. Mitek kicked off the new fiscal year with record bookings for mobile photo bill pay and strong bookings for our entire suite of mobile imaging products. We announced a strategic partnership directly with US Bank as our first major photo bill pay customer and signed another large bank as a premier direct customer for our photo bill pay. This morning, we announced our first community bank photo bill pay customer in First Financial of Abilene, Texas, a $4.5 billion asset sized institution. We’re enabling financial institutions to build on existing consumer behavior and deliver a superior user experience to their customers with their smartphone or tablet camera. A recent American Banker article titled Wells Fargo Ally Bank See the Camera as Key to Mobile Banking highlighted the revolutionary aspect of using the camera as a keyboard. And I quote, “As revolutionary as mobile banking has been, it’s the camera that resides within smartphones that’s lighting the fire under adoption at banks such as Wells Fargo and Ally Bank.” Mitek is fundamentally changing the way millions of consumers interact with their information. Today, we’re leading the way for consumers to use the camera as a keyboard to simplify their daily financial tasks by avoiding cumbersome keystrokes and fat thumb typing mistakes on small touch screen keyboards. Instead, we’re enabling millions of consumers to take a photograph of any document from which our technology captures the information automatically and securely. As one senior executive at a major bank said to me recently, “We’ll buy anything that reduces friction for our customers.” Mitek’s job is to reimagine some fairly routine personal financial tasks and make them simple, secure and even fun. When was the last time you thought of banking or insurance as fun? Our technology minimizes friction and inconvenience and we convert (inaudible) with data entry task into an enjoyable experience. Some have even used the word gamification to describe that aha moment when you snap a photo to conduct a financial transaction. We’re focusing our proprietary mobile imaging technology on solutions for three core areas

[Russ Clark:]

Thanks, Jim, and hello, everyone. As I review the numbers, all figures quoted are on a GAAP basis unless specifically called out as non-GAAP. We provided a full reconciliation from GAAP to non-GAAP along with the earnings release which is posted on our website. I’ll begin with the first quarter results. Total revenue for the first quarter of fiscal 2013 was $3.3 million compared to total revenue of $3.5 million for the year-ago period. First quarter revenue was comprised of approximately $2.6 million in software sales and $739,000 in maintenance and professional services. We had four mobile deposit reorders and one MIP reorder during Q1. As Jim mentioned earlier, we signed a number of large software licenses for mobile deposit, mobile photo bill pay and other products, a portion of which was recurring in nature and, therefore, not reflected in first quarter revenue. These revenues will be recognized in future periods and you’ll see that deferred revenue increased sequentially to $2.17 million, including around $300,000 that is non-recurrent. We have said for some time that we expect to see more recurring revenue models for bill pay and our other mobile imaging products and we now have some market data points that support just that. Total operating expenses were $4.7 million compared to $3.5 million in the year-ago period. The year-over-year increase in OpEx was primarily driven by higher investments in personnel to grow the business, sales and marketing expenses and r&D associated with product development. Non-cash stock compensation expense during Q1 was $657,000 compared to $502,000 in the year-ago period. Now let me break down Q and expenses by category. Cost of revenue in Q1 was $340,000 of which $147,000 was related to cost of maintenance and professional services. This compares to cost of revenue of $302,000 in the year-ago period. Gross margin for Q1 was 90%, which was roughly flat year-over-year. Selling and marketing expenses were $1.3 million or 38% of total revenue compared to $850,000 in the year-ago period. I’d note that the sequential increase in sales and marketing costs largely reflects hiring as well as a redeployment of personnel from R&D to sales and marketing to support operations. This includes three people in professional services whose time was largely non-billable during the first quarter as the new team is focused on building the book of business. The corresponding $200,000 sequential decrease in Q1 R&D expenses was primarily due to this redeployment as well as utilizing fewer outside contractors. R&D expenses were $1.4 million or 42% of total revenue in Q1 compared to $1.2 million in the year-ago period. The year-over-year increase in R&D expenses reflects our continued product development efforts. G&A expenses were $1.7 million or 50% of total revenue during the first fiscal quarter compared to $1.2 million in the year-ago period. The year-over-year increase in G&A was primarily driven by litigation expenses and personnel costs including stock compensation. As an update on the litigation front, the USAA case has been consolidated and is proceeding in the western district of Texas and our suite against Top Image Systems is proceeding in Delaware. Our litigation-related expenses were approximately $300,000 during the first quarter and we expect those expenses to continue to fluctuate each quarter depending on the level of litigation activity. Our headcount at the end of Q1 was approximately 50 versus 42 in the year-ago period. Since the end of the first fiscal quarter, we have added approximately five people primarily in sales. GAAP net loss was $1.4 million or $0.05 per share. This compares to net income of $26,000 and break even on a per diluted share basis in the year-ago period. Non-GAAP net loss in Q1 was $703,000 or $0.03 per share compared to non-GAAP net income of $453,000 or $0.02 per diluted share in the year-ago period. Non-GAAP net income excludes stock compensation expense and our share count for Q1 was $26 million basic and fully diluted shares. Turning now to the balance sheet as of December 31, 2012, cash, cash equivalents and investments increased by $500,000 and totaled $15.1 million. This compares to $14.6 million at September 30, 2012. The sequential increase was due primarily to stronger-than-normal collections during Q1 as well as upfront payments received on the two bill pay deals that I mentioned earlier. Accounts receivable was at $1.6 million as of December 31, 2012 compared to $1.1 million at September 30, 2012, an increase primarily due to the sequential revenue increase tempered by the strong collections during the quarter. I’d also like to address a couple of questions we received about a proposal on this year’s proxy to increase the number of authorized shares by 20 million shares. We view this as a normal course of business given that we’re now down to 20% of our original authorized shares available. We believe that the additional 20 million shares will provide us with capacity for several more years. We’re at the epicenter of a rapidly changing mobile technology market and we want to stay ahead of the pack, maintain a high degree of flexibility and plan for growth. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Mayank Tandon – Needham & Company.

[Mayank Tandon:]

Jim, could you give us – I don’t know. In the past you haven’t quantified some of the reorder sizes. Could you give us a sense of the deal sizes this quarter as they be in relation to what you’ve seen in the past?

[Jim Debello:]

Of the four mobile deposit reorders we had, three were relatively more moderate in terms of block sizes and we did have one fairly large reorder from a channel partner.

[Mayank Tandon:]

And then I also wanted to get some sense on pricing. Have you see any change in the economics in terms of mobile check deposit, again, just given some of the fall out from the litigation that you guys have been discussion?

[Jim Debello:]

We really haven’t seen any change in economics from a pricing perspective. I think our pricing model for mobile deposit has held through in the marketplace.

[Mayank Tandon:]

And finally, the other question regarding OpEx, as we look ahead and given some of your expectations which obviously you haven’t given guidance but just as you look at your revenue outlook over the next several quarters, how should we be modeling OpEx?

[Russ Clark:]

Well, we will continue to invest, as we mentioned, hiring personnel if I had to rank order it on the R&D side and then the sales side. We’ve been in a $4 million to $5 million range in terms of total OpEx per quarter and we would expect too continue to stay in that range if you exclude any litigation expenses as those are a little bit tougher to predict. So again, in that same range of $4 million to $5 million; we will continue to hire. We added eight heads over the last year, as we mentioned probably that same pace maybe a little faster during the upcoming year.

[Jim Debello:]

We’ve added some terrific people to the team, both in our research development groups and in our field sales group and professional services. So we’re really clicking on all cylinders, executing on the plan to engage directly with major customers on all products other than mobile deposit in which we still have allegiance to our channel partners and they are doing a terrific job for us.

[Mayank Tandon:]

Finally , before I go, could you just remind us, Jim, in terms of how the model is going to work for bill pay and your imaging solutions versus the mobile check deposit in terms of the revenue monetization?

[Russ Clark:]

As we’ve said all along, with respect to pricing models as we move into bill pay and our mobile imaging platform products, we expect to see and now we have seen more of a hybrid model that would include both some platform fees upfront with maintenance and recurring click charges on the back end. So we’re encouraged to see some data points that are consistent with that and what we’ve expected all along.

[Operator:]

Your next question comes from the line of Joel Achramowicz – Merriman Capital.

[Joel Achramowicz:]

Jim and Russ, I just want to get a reset and calibration with you guys again. We had talked last quarter about changing – moving secularly towards a more transaction-based model. I’m not complaining about the $3.3 million in the top line this quarter but it’s definitely a pretty big jump sequentially, which, once again, I’m not complaining. But I was thinking that maybe this transition would create more of a stable sequential ramp. But are we going to still see this volatility going forward?

[Russ Clark:]

Again, if we take it down to the product level and talk about pricing models, the block model for mobile deposit has been in our portfolio for several quarters now. We have existing deals with channel partners, negotiated terms and, equally as important from a technical (rev rec) perspective, we’ve complied with (rev rec) rules all along. Once you do that, it’s difficult to change pricing models, so the lumpiness in mobile deposit for all those reasons will continue. Again, as we transition into a larger portion of our revenue mix attributable to mobile deposit and MIP with both platform fees and ongoing recurring fees, we should see more normalization or stable revenues, so we have a couple deals this quarter. It’s going to take some time. It’s not going to happen quickly but we, again, hope over time that that transition will lead to more – less volatility on the top line.

[Jim Debello:]

Let me add to that. We find it very desirable to migrate towards a recurring model and we are in the process of doing that. I think having the record bookings for bill pay is a great sign towards that and those deals are on a recurring basis. But still, we maintain our pricing models for mobile deposit and those have been very well received in the marketplace. So we’re working the issue. It’s going to take some time to migrate that way. So we didn’t intend to set your expectation for complete cross over. It will be a period of transition.

[Joel Achramowicz:]

I guess fair enough and, of course, your transactions continue to grow, as you mentioned, in the RDC area, so that’s a positive sign. With regard to the patent issues here, over the last few quarters, two or three quarters, you received a couple of additional patents, so your intellectual property library and portfolio seems to be increasing in a positive manner. Do you see this – how do you see this affecting your legal battles right now? Any comments in that regard, Jim?

[Jim Debello:]

Let me tell you, we’re investing in our patent portfolio. We think intellectual property is the lifeblood of this company. We have some outstanding scientists and engineers. We’re creating it. We’re filing it rapidly as this market evolves. We’re the innovator. We’ve been in this area since 2007 and actually doing recognition technologies well before that. So we have a demand expertise and we want to validate that and protect that IP. We think that’s on behalf of our shareholders and the company employees so we are investing in that and we will continue to do so. We added our sixth mobile imaging patent, as you know, 13th overall and we have 14 more in the queue plus more that we’re creating as we speak. So we’re pedal to the metal in terms of filing and protecting our intellectual property.

[Joel Achramowicz:]

And last question, Russ, could you just – I missed the – you definitely booked order, bill pay order revenue this quarter but you’re not going to quantify that, right?

[Russ Clark:]

Joel, what I mentioned was two bill pay deals that we did are both recurring revenue models and will recognize the vast majority of those revenues over the upcoming quarters.

[Joel Achramowicz:]

But you have definitely booked some revenue in the first quarter.

[Russ Clark:]

A small amount.

[Operator:]

Your next question comes from the line of (Patrick Sebrasky) – William Blair.

[(Patrick Sebrasky):]

Obviously we saw the announcement with Ally this morning for mobile photo bill pay. I guess I’m just curious. Obviously it sounds like that’s a little bit more geared towards the smaller regional banks and financial institutions. How does that partnership affect the economics and the pricing model for you guys?

[Jim Debello:]

What we think it represents is that this product applies to both top tier banks as well as smaller community banks creatively used throughout the country, which are 8000. So much like mobile deposit, we’re going to see broad adoption across a big slough of Americans. So if anything, I think it supports our model both economically. It supports our ability to engage consumers and have them use this product frequently.

[(Patrick Sebrasky):]

So let me just understand that correctly. So I would assume it’s still going to be more beneficial for you to go and sell it directly to the bank, correct?

[Jim Debello:]

Absolutely right. We feel it’s very important to engage with banks and we have done so and we are doing so. And so that has helped us create a list price, if you will, for our product and market validate of that with some big players and we’ll use that as we pursue our business with all segments of our banking industry.

[(Patrick Sebrasky):]

Then still on the topic of mobile photo bill pay, you said that US Bank would be launching hopefully sometime here soon and then the two others, one being the small regional. Do you have a timeframe for when you think those two will go live?

[Jim Debello:]

Specifically US Bank I said early 2013 and separately First Financial is live. And thirdly, the bank that we have not yet announced is actively in the integration phase and we expect them to be live early in 2013 as well.

[(Patrick Sebrasky):]

Then finally just obviously during the quarter there was some announcements by Bank of America at one of the conferences – I think it was the Goldman conference – which talked about their mobile deposit solutions specifically, some pretty encouraging statistics. I’m just wondering how do you quantify those statistics and then comparing them to your other let’s say top five banks as customers? Are you seeing similar trends or how are they comparing? And then also, as a result of them releasing that information, do you assume or expect any of your other bigger customers to release similar type of information here in the future?

[Jim Debello:]

We always speak with our customers and we encourage them as the leaders in their industry to reveal their performance metrics and we’re going to wait for them to do that. We’re not authorized to do that. But we do see the trends clearly. They are consistent across the major players an they are on a growth path and that’s very exciting to us. There’s two things, Patrick, you should consider. One is number of new mobile bankers who use the product and I mentioned that at 37%, a number provided to the industry by (Alex Partners). The second thing is among those consumers what’s the rate of repeated usage? And we’re seeing that grow as well. And so for the third consecutive quarter its’ been over 25% growth in usage pattern, so that to me says that this is a very powerful product. It’s absolutely hit the nerve with the consumers and we think the same thing will happen in with our mobile photo bill pay product.

[Operator:]

(Operator Instructions) Your next question comes from the line of (Leonard Deprasso – Jannie).

[(Leonard Deprasso:]

I just had a question on incremental margins. Just looking at revenues going forward in the longer term, what – how much are you expecting to fall directly to the bottom line and how much will you reinvest in the business? I’m just trying to get a feel for the incremental margins going forward.

[Russ Clark:]

We’d expect from a gross margin perspective consistent with what we’ve seen historically, somewhere in the mid 80% to low 90% gross margin range. When we get down to OpEx, obviously a lot of those relationships don’t hold true with the size of the company but as we grow over time, if we’re dropping 85% to the gross margin line, we should be able to approach somewhere around 50% on the OpEx side and have operating margins 30%, 35%. I don’t see any reason why we couldn’t get to that point over the longer term.

[(Leonard Deprasso:]

Just my other question was what is the proportion of revenues that is recurring just as of today?

[Russ Clark:]

Our maintenance stream has grown steadily over the past several quarters. We are around $700,000 in maintenance that we reported in this fiscal Q1. So at a baseline level, that’s really the starting point for our recurring revenue. As we go forward with a couple of these deals that I mentioned that will come in over time, it’ll help grow that base as well but at this stage of the game, our maintenance at $700,000 is the recurring base.

[Operator:]

Ladies and gentlemen, this concludes the question-and-answer portion of today’s event. A replay of today’s event will be available by calling 1-866-233-1854. The replay pass code is 31374365. The replay will be available approximately one hour after our conclusion today. Again, the number is 1-866-233-1854 with the pass code of 31374365. We would like to thank everyone for joining us for our event today. Thank you for your participation. You may now disconnect.