Mitek Systems, Inc.

good day and welcome to the my tech system second quarter fiscal 2022 financial results conference call today's conference is being recorded at this time i'd like to turn the conference over to todd curly of mkr group please go ahead sir thank you operator good afternoon and welcome to my tech second quarter fiscal 2022 earnings conference call with me on today's call are my tech ceo max karnecchia and cfo frank terrell before i turn the call over to max and frank i'd like to cover a few quick items This afternoon, MyTech issued a press release announcing its second quarter fiscal 2022 financial results. That release is available on the company's website at mytechsystems.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 10K and 10Q for a complete description of these risks. Our statements on this call are made as of today, April 28, 2022, and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein, whether as a result of 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 8K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. With that said, I'll now turn the call over to MyTech CEO, Max.

Thanks, Todd. Good afternoon, everyone. Thank you for joining us today and a warm welcome to our Who You team members who are joining for the first time as members of MyTech Nation. I'm happy to report today that we again delivered strong financial results in the quarter with revenue growth of 21% year-over-year, non-GAAP net income up 49% year-over-year, and cash flow from operations of $7.4 million. Rather than review the quarter, I want to focus on the transformative acquisition we announced a little over a month ago that dramatically expands our addressable market and positions us for accelerated growth in the identity verification and identity authentication markets. On March 23rd, we announced the acquisition of WhoYou, the UK's leading KYC, or Know Your Customer, technology pioneer. WhoYou is an orchestration provider for identity verification and identity authentication processes. Orchestration is an elaborate way of saying that the end-to-end KYC process is optimized through a platform so that customers can easily manage users' journeys and accelerate identity decisioning when it matters most. Having a single platform that easily orchestrates and configures a KYC journey to manage identities and identify bad actors is becoming a prerequisite for businesses transacting digitally. To quote Gartner from their 2022 Market Guide for Identity Proofing and Affirmation, a good orchestration solution will reduce the cost and complexity of multiple vendor integrations while also enabling granular risk and trust assessment across a range of user events. Bringing together MyTech's leading document and biometric verification techniques with who use KYC and configuration services simplifies identity management and puts customers in control of digital access. Furthermore, the platform's low-code, no-code capabilities allows businesses of all sizes to quickly set up and manage the process without needing an army of developers. With this acquisition, MyTech is able to address a much larger slice of the identity digital identity market, including more use cases within existing customers and expanding to adjacent vertical markets. MyTech's proven offerings are used by the largest banks and global organizations. These large enterprises, mainly the top-tier financial institutions in the world, have the significant resources needed to solve this problem, including many application developers. But with the onslaught of fraud attacks, data breaches, and compromised systems, Almost all organizations also need identity service to verify the identities of those they do business with. Digital identity verification at onboarding is table stakes today, and how well organizations control their front doors has far-reaching impact long after onboarding. Our platform offers organizations a more complete picture of the consumer for more accurate decisioning throughout the customer journey. Furthermore, the orchestration capabilities enable MyTech customers to optimize workflow and improve efficiencies. These capabilities extend our services to a far broader market as businesses of all sizes can have the same features and functionality as the largest companies, but without having to develop it themselves. With this low-code, no-code offering, all financial institutions, the fintechs, the challenger banks, the cryptos, and pretty much anyone else who needs to know their customer will be able to quickly roll out our curated end-to-end platform with all of the best identity signals, workflow, and analytics to address current threat vectors. Our clients will be able to stand up the entire KYC process in days, not months, and to pick and choose what identity signals they want to use to verify and authenticate their customers. Whether it's government document verification, face or voice biometrics, document liveness, device and geolocation information, and any other identity signals, we will be able to provide a seamless way to optimize KYC workflows and put our customers in control of the KYC process. Identity data signals are ever-evolving and which ones customers want to use are ever-changing. With our KYC platform, we will offer our clients orchestration capabilities that allow them to use whatever signals they want to use while giving them the flexibility to change which signals they use with ease. Identity has moved beyond just being an enabler of digital commerce. it now serves as an integral element of most organizations' technology stacks. And we believe the next decade of fraud prevention will be defined by an organization's approach to the life cycle of continuous identity and access management capabilities. Traditionally, companies have focused their energies on establishing proof of identity at the onset of a digital customer journey, such as opening a new account. However, establishing trust in a person's digital identity is an ongoing process, especially in light of the data breaches, which increased 68% in 2021. This massive increase is putting even more pressure on getting identity right. This is not a solved problem. It's getting worse and much more complicated. But now we can offer the market a full end-to-end platform that enables them to fight back. As commerce shifts to digital, businesses have to balance the need for identification and fraud prevention with a smooth, omnichannel customer experience. Once Who You is integrated and deployed, MyTech will be able to provide businesses with a full end-to-end orchestration platform to optimize and control the entire KYC process in an easy-to-deploy manner. This expands our offerings substantially and will allow us to target significantly more customers giving us the ability to accelerate the growth of our identity business even further. We are delighted to have the Who You team on board for our exciting journey, and we look forward to sharing our progress with you all in the coming quarters. With that, I'll turn the call over to Frank to discuss the second quarter financial results in more detail. Following Frank's remarks, we'll open the call up for questions. Frank, please go ahead.

Thanks, Max, and thank you, MyTech Nation, for all your significant contributions this past quarter. Bridging from Max's remarks, the consumer's race to digital channels has meant that fraud attack vectors continue to accelerate and increase in complexity. As discussed, the torrid pace of these attacks has been especially difficult for small organizations that lack the internal technical resources and infrastructure to respond, and as such, has created an urgency for orchestration-enabled solutions. While this market momentum emphasizes and magnifies the relevance of identity platforms, we anticipate some headwinds within our core identity business. As we gear up for greater growth, Integrating our capabilities and harmonizing our go-to-market efforts is our number one priority. The quarters following the integration of HUYA will allow us to minimize the impact of these market dynamics and deliver a platform that is poised to capitalize on growing market opportunities. With that preamble, let's look at Q2 revenue and operating results. MyTech generated second quarter revenue of $34.7 million, a 21% increase year-over-year. Software and hardware revenue was $19.3 million, up 48% year-over-year. The increase in software and hardware revenue is primarily due to the contribution of IDR&D and the timing of mobile deposit reorders. Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services, was $15.4 million for the quarter, down 2% year-over-year, primarily due to the transition of one customer and the completion of a strategic identity verification project in Europe. As a result, our transactional SaaS revenue decreased 4% year-over-year to $10.5 million. For Q2 2022, deposit revenue increased 24% year-over-year to $21.3 million. Identity revenue increased 16% year-over-year to $13.4 million. We delivered strong software and hardware gross margins of 98% for the quarter. Gross margin on services and other revenue was 81% for the quarter, and total gross margin for the quarter was 90% compared to 87% for Q2 last year. Total GAAP operating expenses, including cost of revenue, were $29.9 million. compared to $26.4 million in Q2 of last year, and this increase is due to the investment to grower identity businesses and the additional costs associated with the acquisition of IDR&D and HUYU. Sales and marketing expenses for the quarter were $9.2 million compared to $8.5 million a year ago. R&D expenses were $8.2 million compared to $6.7 million last year, and our G&A expenses were $6.1 million compared to $5.7 million a year ago. GAAP net income for the quarter increased 88% to $1.9 million or $0.04 per diluted share. Our diluted share count was 46.1 million shares compared to 44.6 million shares a year ago. As a reminder, our earnings releases include 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, amortization of debt discount and issuance costs, and the related tax impact of these items. Non-GAAP net income for Q2 increased 49% year-over-year to $10.8 million, or 24% for diluted share. Our non-GAAP adjustments include $3.4 million of acquisition-related cost expenses, $3.3 million of stock comp expense, $2.4 million in cash tax differences, $1.7 million in amortization debt discounts and issuance costs, and $286,000 of litigation expense for the quarter. This was all offset by the income tax effect of pre-tax adjustments of $2.2 million. Now turning to our balance sheet, we generated $7.4 million in cash flow from operations during the quarter. We also used $127.1 million in cash to acquire WhoYou, bringing our total cash and investments to $93.4 million at March 31. As I indicated earlier, we are making the necessary investments to integrate our technology and go-to-market teams as quickly as possible to magnify the opportunity of WhoYou on our business. We're excited about the addition of WhoYou, which ended their year at just under $10 million in SaaS revenue and is growing nicely higher than our own identity business and the identity market CAGR. Once integrated, the platform will help us accelerate identity revenue growth. As we stated during the acquisition conference call, WhoYou is not yet profitable, and we expect the investments required to combine our solutions and fund our go-to-market activities will affect operating margins in the short term. As a result, we believe profitability for our identity business gets pushed back two to three quarters to the second half of fiscal 2024. All in all, a great investment worth making given the high revenue growth and expanded addressable market we believe the orchestration platform brings to MyTech. In closing, we are pleased with our second quarter results. While we are cognizant of the headwinds I mentioned earlier, and as Max indicated, the big news is our transformative acquisition of WhoYou. This is a crucial milestone for MyTech as we look to expand our leadership role in the digital identity market. Orchestration will be an accelerant to our business and allow us to address a significantly larger piece of the identity market. With this acquisition, there is no greater combination of identity tools on the market today. Operator, that concludes our prepared remarks. Please open the line for questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we will go first to Jake Robesha of William Blair.

Hey everyone, congrats on the great quarter and thanks for taking my questions. So just first off, now that you've compiled a more comprehensive platform with orchestration and biometrics and document verification, I'd love to hear how your initial customer and partner conversations are changing. Are customers understanding the ROI of combining these technologies into one platform or are they still primarily looking for point solution sales that they can stitch together themselves?

Thanks for the question. It's Max. The transformation that both Frank and I were referring to in our prepared remarks, this is something that we've been working to for five or six quarters, even pre-acquisition of IDR&D. We gave you a quote out of the most recent Gartner study when it comes to identity. We've seen this coming as far as the need for organizations to have a place to coordinate and orchestrate these various signals to reduce their own efforts and all of the big investments they have to make from an application development perspective for large companies. But as you get into even large companies that just don't have those application developers, there's a big need there. And as you kind of go down to more modern digital businesses that are moving very rapidly, writing an orchestration layer is just not something that they're going to be doing. So I think, you know, Jake, our customers, our prospective customers, the targets we're after, the heart of your question, they see this, they've been talking about it. That's, you know, that's what triggered our interest going back, you know, four, five, six quarters, you know, to start to assemble these capabilities. And orchestration has been on our, you know, it's been on our shopping list that entire period of time.

Great, thanks. And then I don't think you made any comments on it, but you've announced a string of new products over the past few quarters with ID Live Docs and Check Broad Defender. Can you just talk about how initial customer conversations have been tracking for those products and then maybe some color on the TAM expansion opportunities within these segments? I mean, still putting up some pretty impressive growth in mobile deposit. Just curious if you're seeing any signs of that being impacted by some of the new products you're offering.

Yeah, absolutely. And again, I apologize for not covering too many of the new things. Everything seems to be falling in the shadow of the WhoYou acquisition and now getting to the integration and all of the transformation we have to do to our go-to-market and our product integration. But good call-out. Check for a Defender was something we announced going back, I guess it was about 10 months ago. And that was the announcement of our intent to build it and get it out there. We lit that thing up, this was February of this year, with the first set of customers for the networked, hosted, you know, cloud offering. It's gone really well, both, you know, the use, the adoption, the learning. As with any 1.0, you know, offering, there's just a lot of places for us to, you know, to make improvements and to, you know, to make it better in a very short amount of time. So the 1.0 was kind of the, the MVP, the minimum viable product, most lovable product kind of offering there. But the broader interest from large financial institutions that suffer from check fraud and those hard dollar losses and the operating costs associated with them has been very positive. We're watching our pipelines grow with the top 50 banks, the top 50 financial institutions. So that's a quick update on Check Fraud Defender with the deposits business. IDLiveDoc was something that was announced by the IDR&D team, I guess it was at Money 2020 back in the fall, and then went live with that just in the last quarter as far as a production system. We've got a handful of customers for that already. We're watching transaction volumes go up really nicely with these partners, and then we've adopted it ourselves. So we're out in the market here in Q3, our Q3, with IDLiveDocs in a sandbox environment, ensuring that it's performing well and additive for our offerings, and the initial data and the initial kind of results of those experiments and the analysis have been very positive. So excited about both those things and a lot more that we probably didn't cover already.

Great. Congrats again on the great quarter, and thanks for taking my questions.

Thanks, Jake. Thanks, Jake.

And we'll go next to Alan Klee of Maxim Group.

Yes, good afternoon. Congrats on the quarter. I just wanted to make sure I heard. Did you say that who you did $10 million in revenue last year? And if so, and then can you give us some sense of how to think about the margins and the losses that they had done historically?

Yeah, Alan, thanks for the question. Yeah, the first part of that's correct. In the last 12 months, a little under $10 million in revenue, SaaS transaction revenue, similar to our identity business. You know, it was a loss-making business. It was, you know, a startup that was, you know, bootstrapping their way to the success and to building out their platform. We haven't disclosed what that is. We recognize that as a bootstrap startup, you know, they were trying to do everything they could to conserve cash. And, you know, while they ran a very good business and they have a fantastic team, we've identified places that, you know, we know we're going to have to shore up and make some additional investments there, as well as we just want to accelerate the integration for all the reasons we've talked about this big, you know, the big opportunity that we have together. And that's, you know, I think that's an investment worth making. So, you know, it's not overwhelming investment, but it is substantial.

So how do you think about a potential timeline for when you think it'll be integrated and you can sell this to your bigger customers?

Yeah, so we're on a very aggressive path. you know, both to our existing customers, but also the targets that we have in some of these segments that, you know, have evolved to require orchestration that we want to target, you know, some of the industries we just talked about. We'd like to be able to, in the next 90 days, be out in the market, you know, with something that's demonstratable, that shows the integration of mobile verify and biometrics, along with the core WhoYou platform offering, and then be able to turn that into pipeline, you know, sales cycles for that kind of business, at least historically for WhoYou have been, you know, 90 to 180 days, so three months to six months. So, you know, kind of building out that pipeline and starting to knock down deals first here in the U.S., but then also into continental Europe. So give you a sense of how we think about that.

Great. And then I just wanted to Last question. You mentioned that your services and other business was down, and I think there was a completion, you said, of a European identity customer project. Yes. Could you explain a little, and you also said there might be some headwinds in identity. I'm not sure I understand. I thought most of the identity customers were more transactional of kind of what you're alluding to for the identity segment. Thank you.

Sure. So we don't. normally do a lot of project-based business, but we did have an existing customer that uses us on a transaction basis that came to us about two years ago and asked us to do a substantial re-verification project. That project lasted about two years. It was quite successful, but it is now concluded, and so it's just created a very difficult comp for us in the period that was a substantial, what we consider a headwind, and we're going to have to deal with that comp over the next three quarters. And then the other headwinds that Frank was alluding to was just, you know, the ongoing evolution of some of these market segments that are requiring orchestration. And, you know, we've seen that coming. We've, you know, been actioning against that, looking for targets and acquisitions to kind of fill that requirement. And now we have it. And that kind of brings us back to, you know, the exciting transformation that we have now in combination with who you're

Great. Congrats. Thanks so much.

Thanks, Tom. Thanks, Pat. And as a reminder, it is star one for questions at this time. And we'll go next to Mike Grandall of Northland Securities.

Yeah. Hey, thanks, guys, and good afternoon. Hey, Frank, could you just repeat mobile check, mobile ID growth, and the revenue numbers year over year, and then what you said about transactional SaaS? You were going pretty quick there, and I don't think I caught it all.

Yeah, I'm happy to do that. Let me just go to the notes real quick. Let's see. So just from the beginning, again, 34.7% for the total. Software and hardware was 19.3%, up 48%. Obviously a big contribution to that was IDR&D and the timing of mobile deposits. And then deposit revenue was up 24% year-over-year to $21.3 million.

up 24% to 21.3%. And then mobile ID was up 16% to 13.4%. That's right.

Identity revenue, that's right, Mike. Identity revenue is 16% to 13.4%.

Okay. And what was the transaction SaaS revenue? Did I hear that as down 4%?

Yes. And as Max just indicated, largely driven by the, as we discussed, the completion of that large you know, project-based work we did for that customer.

Got it. And flipping the mobile check for a minute, were the reorders on the high side for you? You know, I know it's lumpy. If you could just kind of frame that a little bit and then just any comments on pricing and mobile check.

Yeah, I don't think there's a big update, Mike, on pricing yet. You know, we've been doing what we've been doing now for two and a half years from, you know, pricing discipline perspective. We just continue to do that. I don't think there's anything outsized or significant that we would report in Q2 with that. And then as far as just, you know, kind of how the reorders laid in, nothing unnatural. You know, these are the folks that were scheduled to be reordering now, and they did it, and, you know, I think we've talked before some of the 10-year history we have in this business of being able to do regression analysis and determine when some entity is going to be prepared for a reorder has been a little more uncertain in the COVID times just because they had such big reorders in the beginning because of the increased adoption of depositing checks through mobile devices in the beginning of COVID. But it seems like that behavior is sticking. folks aren't reverting to going back to the branch to deposit checks.

Sure, sure. Well, 24% growth, pretty nice. Pretty nice, that's for sure. You know, Frank, you kind of, you know, you talked about you're going to be making additional investments and you used the word substantial as it related to who you. Is that $5 million to $10 million, you know, kind of like a couple million dollars a quarter? that we layer in. Just give us a little framework around that.

Yeah, I think, Mike, just briefly, as Max indicated, we knew coming into it because, as he said, they kind of bootstrapped their way to what they were doing. There were some areas we could shore up. And there's also an accelerant we can pour into this in making those investments. So we're looking at that. We know where we have to invest. We're not quantifying it. But It's all designed, as Max indicated, to get us into a demonstrable product and market in 90 days and then starting to build pipeline 90 to 120 days after that. So, you know, we factored that in. That was part of the acquisition thesis, what we would have to do to shore it up and to accelerate. And, you know, those costs are, you know, we're focusing on now what areas to shore up and how to do it. But that's really how we focus on it.

Got it. Okay. Hey, thanks a lot.

Great talking to you, Mike. At this time, we have no further questions. I would now like to turn the call back to our presenters for any additional or closing remarks.

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.

And again, this concludes today's call. Thank you for your participation. You may now disconnect.