Mitek Systems, Inc.

Good day, and welcome to the MiTech Fiscal 2024 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Todd Curley, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to MyTech's fiscal 2024 second quarter earnings conference call. With me on today's call are MyTech's CEO, Max Karnecchia, CFO, Dave Lyle, and Chairman of the Board, Scott Carter. Before I turn the call over to MyTech leadership, I'd like to cover a few quick items. Today, MyTech issued a press release announcing its 50th 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 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 different 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 this call are made as of today, May 13th, It takes no obligation to revise or update publicly any of the four witness statements contained herein, whether as a result of new information, future events, changes in expectations, or otherwise. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8K describe the differences between our GAAP and non-GAAP reporting and present the reconciliation between the two for the periods reported in the release. Zach Carter. Welcome, everyone, and thank you for joining us today. I am the chairman of the board for MyTech, and have served on the MyTech board since February 2022. I'm joining the call today to talk to you about the press release the company issued this morning announcing a CEO transition. In the press release, we announced that Max Karnakian will transition from the business and his role as MyTech CEO on May 31, 2024, but will remain a member of the MyTech board of directors and will be available to assist with the CEO transmission process. Now that MyTech has successfully navigated through delayed SEC filings and is well positioned to enter its next phase of growth, the Board of Directors determined that putting new leadership in place would provide the best path for that growth. Before I go any further, let me express the Board's gratitude to Max. He has worked tirelessly and passionately on behalf of our team, our customers, and our shareholders. Also, I want to make sure to say that, for the importance of any doubt, there have been no allegations of wrongdoing or improprieties. Rather, we just finished a difficult chapter where we caught up on our SEC filings, regained NASDAQ compliance, announced the share repurchase program, and are now at an important inflection point. Our board of directors is enthusiastic about the opportunity ahead of MyTech and has strong conviction in what the company is capable of achieving. both in the near term and the long term. We have an obligation to regularly assess the leadership skills that will be required in the coming years and to stay ahead of that curve. As such, we concluded that in order to achieve what we think is possible over the next couple of years, a different success profile is required than what we needed six years ago. So much has changed. The market we operate in, the complexity and scale of our business across geographic and vertical markets, product lines, use cases, and the potential to integrate transformational technology, particularly around AI. I can't emphasize enough what an exciting opportunity we have in front of us. We've become the market leader in voice and face biometrics liveness, well positioning us to lead the industry response to the rising problem of deepfakes and voice spoofs. Our innovation engine continues to thrive. We've launched several new offerings. This includes our MyPath solution, combining voice and facial biometrics in a single transaction. It also includes check for our defender, or CFD, where we are gaining considerable market traction. We also have new innovations in IDRD technology that allow for our voice biometrics to authenticate payment transactions on a mobile device, which opens up several new avenues for growth. None of these technologies were in our portfolio six years ago. So we are at the beginning of a new and exciting chapter and embarking on an ambitious and promising journey. After six years, it will be healthy to inject new leadership into the company with fresh perspectives and new energy. Maxwell remained as CEO through the end of May, and the board has asked me to take over as interim CEO after his departure to assist with a seamless transition while we conduct our search for a new permanent CEO. The board has engaged the services of a leading global executive search firm and has commenced the search for a new CEO. The profile we've developed for the new CEO emphasizes public company and domain expertise, along with the ability to enhance our strategic vision and drive operational execution. Moreover, the ability to foster a high-performance collaborative culture and continue to develop a world-class team will remain a priority. While the board conducts this search, I look forward to working with the leadership team and partners to continue strengthening our business and driving profitable growth through operational discipline and execution. In my role as Executive Chairman in 2023, I was deeply involved in MyTech's operations and was engaged with our product and sales teams and many of our customers. So I have a company-specific background needed for continuity and performance optimization. I intend to leverage my CEO track record in the identity and fintech ecosystems to add value to MyTech out of the gate with a specific focus on accelerating profitable growth. MyTech's recent product innovations, including Checks for our Defender, MyVIP, MyPass, and IDR&D biometrics are gaining market acceptance, positioning us well for continued profitable growth, which is why the board also announced today that it's authorized a two-year share repurchase program of up to $50 million of MyTech common stock. The share repurchase program plan reflects our confidence in our strategy for long-term profitable revenue growth and our belief that we can capitalize on the substantial market opportunities ahead for our new product offerings and delivering long-term shareholder value. With a strong balance sheet and cash flow, we can repurchase shares while maintaining sufficient cash resources to fund their operations and invest in growth opportunities. Before I turn the call over to Max and Dave to take us through the business performance, I want to thank MyTech's finance, operations, and legal teams for your extraordinary work in getting us back on track with our filings. We are very happy to get back to our normal cadence of reporting on time. With that, I will turn the call over to Max to update you on MyTech's progress this quarter. Thank you, Scott, and thank you, MyTech Nation, for the privilege to lead this organization over the last six years. Together, we've achieved a lot and grown this business into one of the leading identity and fraud authorities in the markets we serve. It is my pleasure to talk with you all today about how we continue to meet our customers' needs and grow our fraud prevention businesses in the second quarter and the bright future ahead for MyTech. I'll then hand the call over to Dave. We'll discuss our financial results and outlook. At MyTech, it has always been about mission. which is to advocate for yes, to help our customers say yes to more good customers, more deposits, and more transactions with increased intelligence and customer safety. Never has this important mission been more relevant. In a world where Gen AI is enabling digital transformation at a record pace, the imperative to aid banks in their fight against fraud while protecting their users has never been more present. With the dramatic surge in digital transaction volumes and the growing audacity of fraudsters, the challenge has reached unprecedented levels. The global adoption of Gen AI has only exacerbated this situation, leading to a surge in fraudulent activities across all channels, be it online, mobile, or in-person transactions. This trend is reflected in our results through increased consumption of our fraud management solutions. New and existing customers are expanding usage or rolling out new use cases as fraud creeps into new channels across their businesses. So let's break it down a little further, starting with identity. Our MyVIP platform is now processing millions of transactions each month for customers across geographic markets. This data gives us insights into behaviors, fraud trends, and the impact of our solutions. enabling us to innovate and provide answers to the most current threats. This quarter, we launched critical use case functionality for injection attack detection and uninterrupted web streaming video. Both threats have evolved rapidly due to the advances in generative AI. Injection attacks are on the rise. This type of attack involves using face swap videos to trick online verification systems. Advances in Gen AI have made face swaps more believable, and hackers are now submitting manipulated videos to verification systems by digitally injecting the video. These deep fakes are quickly evolving type of synthetic media used for a variety of nefarious purposes, including scooping facial recognition algorithms. According to the IDAP Research Institute, 95% of facial recognition systems cannot detect deep fakes. So organizations are rapidly searching for effective liveness solutions. This is where MyTech MyPath solution stands out as the first truly multimodal biometric solution that captures four essential points of security, face match, face liveness, voice match, and voice liveness. It provides our customers with the advanced biometric authentication they require to but also meets their end user demand for effortless usage. Customers are using MyPass to replace passwords and one-time passcodes. They use it for a stringent layer of defense for large value transactions, and most popular this quarter, MyPass is being used in conjunction with MyVIP in retail stores to aid retail assistance in approving transactions with confidence. From banks fortifying in-branch security to auto rental companies seeking dedicated kiosk protection during pickup to a wireless service provider navigating the challenges of in-store transactions, MyPass offers customers an integrated omni-channel solution that not only safeguards transactions but enhances the overall user experience. The importance of protecting biometric security from beef face, and injection attacks cannot be overstated. Continuous authentication has become a focal point in this landscape. It ensures that users' identity is constantly verified throughout a session, mitigating risks associated with unauthorized access. The market opportunity for biometric authentication is projected to grow at a CAGR of over 10% from 2024 to 2032. to reach more than $60 billion in annual spend by 2032. MyPath is a tangible example of MyPath's best-in-class biometrics authentication offering and a key differentiator from our competitors. We see MyPath as another strong growth engine for MyPath, and while it is in the nascent stage of its growth, we are very excited about the opportunity MyPath has to be a winning solution in the biometric authentication market. Moving to deposits business, our second quarter revenue returned to growth driven by mobile deposit reorders. We continue to see increased adoption of our industry-leading solution as the number of checks being deposited through mobile check deposit continues to increase. We are riding the wave of mobile check deposit up, not the trend of check writing down. CheckBroad Defender is another one of our growth engines that we are extremely excited about. During the second quarter, we continue to see momentum build with strong market demand for this new solution. CFD is uniquely built to visually detect check fraud, which is easily missed by traditional fraud prevention protocols. In 2023, check fraud was the largest year-over-year fraud increase for U.S. financial institutions, comprising 31% of all fraud dollar losses, according to the Federal Reserve. As these check fraud rates continue to surge, CheckFront Defender provides financial institutions with a highly effective defense system powered by AI and securely hosted in the cloud. Our CFD value proposition continues to resonate as we close several new CFD customers during the quarter through our direct sales, which is focused on the top 200 banks in the U.S., and through the channel, which we have just started to build out and will focus on the remaining long tail of U.S. financial institutions. To highlight the early momentum we are seeing on the partner front, one of our channel partners already has over 20 opportunities in their Q3 pipeline, and we are actively working on adding more channel partners for CFD as we strive to become the leading provider in the growing check fraud prevention market. To that point, one of our newest technology partners on the check fraud side is Viewpoints. a leading managed content service provider handling billions of documents, including historical check images, for some of the world's largest financial firms. They are recognized as one of the largest service providers to regulated industries. This partnership will allow mutual customers to enhance their fraud detection capabilities and start fighting check fraud faster. Once integrated, viewpoint customers looking to deploy Check Fraud Defender will be able to leverage their existing secure viewpoint connectivity by flipping the CFD switch. Even though we are just scratching the surface of the CFD opportunity, we are already processing tens of millions of transactions per month, and we have information from over 300 financial institutions in our consortium models. The velocity of the consortium, coupled with the significant dollar savings from losses in fraud prevention, and the operational cost savings of the solution is yielding a very healthy and growing pipeline of potential CFD customers. Looking ahead, these are exciting times at MyTech. We have developed several significant growth opportunities with CFD, MyVIP, Biometrics Aliveness, and MyPass. And while they are still in their nascent stage of growth today, each represents tremendous upside for MyTech and our shareholders. Before I turn the call over to Dave, I want to commend all my techians again for their hard work this quarter and over the last six years. Your execution and discipline across the business, coupled with the very positive customer feedback we are receiving, give me strong conviction in the opportunities the company has in front of it. With that, I'll turn the call over to Dave to discuss the second quarter financial results in more detail. Following Dave's remarks, we'll open the call up for questions. Dave, over to you.

Thanks, Max. I'll begin by taking you through the fiscal Q2 2024 financial results and then comment on our outlook. Looking first at revenue, top-line revenue for fiscal Q2 increased 2% year-over-year to $47 million at the top end of our previously announced preliminary revenue range of $46 to $47 million. We saw solid year-over-year growth from our new identity products such as MyVIP, MyPath, and IDR&D biometrics, but that growth was offset by our heritage identity products revenue, such as Mobile Verify, where, as we said last quarter, we are seeing lower revenue as we shift more of these transactions from agent review to automated review. Our automated solutions are priced lower than agent transactions. However, these transactions are more profitable. and are contributing to our efforts to get our identity products to profitability at fiscal Q4 2024. In addition, we've seen some desperate pricing strategies from some of our identity competitors, which has created some additional pricing pressure with our heritage document verification systems. Mobile deposits orders rebounded during the quarter, which we expected, but did not generate significant growth due to last year's second quarter being one of mobile deposits' strongest quarters in the company's history. Check Broad Defender also contributed to year-over-year revenue growth. Software and hardware revenue declined 1% to $24.9 million in fiscal Q2 2024. Services and other revenue grew 6% to $22.1 million year-over-year, as we saw increases in transactional SaaS revenue from identity product revenue growth. Deposits revenue grew 3% year-over-year in fiscal Q2 2024 to $29.5 million. 76% of deposits revenue was in MyTech software and hardware revenue, and 24% was in services and other revenue. Identity revenue for the second fiscal quarter grew 1% year-over-year to $17.5 million, driven by our SaaS products revenue. Approximately 14% of identity revenue was in my tech software and hardware revenue, and 86% was in service and other revenue for the second quarter of fiscal year 24. Moving on to gross margin. The total gross margin for fiscal Q2 24 was the same as a year ago at 87%. We continue to deliver strong software and hardware gross margins of close to 100% for fiscal Q2 24, While on services and other revenue, our gross margin was 72%, both similar to a year ago. Gap operating expense for fiscal Q2 24 was $40.1 million compared to $31.5 million a year ago, with the increase primarily driven by fees associated with our delayed SEC filings. Non-gap operating expense for fiscal Q2 24 was $27.9 million, compared to $22.7 million last year and up sequentially from $25.8 million in Q1-24. The year-over-year increase in non-GAAP operating expense was primarily related to fees associated with our delayed filings. The $2.1 million sequential increase in non-GAAP operating expense was due mainly to higher personnel costs associated with merit increases and calendar year reset of vacation accrual and payroll taxes. Excluded from our non-GAAP operating expense was $12.1 million of non-recurring items, of which $7.7 million were non-cash accounting items and $4.4 million were cash items. The non-cash items were comprised of amortization of purchased intangibles and stock-based compensation expense. The cash items were primarily comprised of about $2.4 million in non-recurring audit fees, $560,000 in executive transition costs, $530,000 in restructuring costs associated with shutting down our legal entity in Russia, and other various legal costs. We see our earnings released for a more detailed reconciliation process. Our non-GAAP operating income was $12.8 million in fiscal Q2-24, or a non-GAAP operating margin of 27%. Again, please see our earnings release for more eco-GAAP to non-GAAP reconciliation. GAAP net income for fiscal Q2-24 was $0.3 million, or one penny per diluted share on 48 million shares, and non-GAAP net income was $11.5 million, or 24 cents per diluted share on Turning to our balance sheet, our cash and investments of $130.3 million was increased $6.4 million sequentially from Q1. Moving on to guidance, we are reiterating our fiscal year 2024 revenue guidance range of $180 to $185 million. We are also reiterating our guidance for fiscal year 2024 non-GAAP operating margin to be in the range of 30% to 31%, which implies an increased margin in the second half of the fiscal year with much of the margin expansion above the guided range in fiscal Q4 as we begin to see G&A expenses normalizing following heavier expenses related to getting SEC filings current in prior periods. In fiscal Q4, we expect non-GAAP G&A expense to begin to normalize and to be in the range of $8.5 million, but may fluctuate depending on circumstances in that quarter. We also continue to expect our identity business to reach standalone profitability on a fully burdened basis in the fiscal fourth quarter. Before I conclude, I'd like to briefly comment on capital allocation. As you saw in today's release, our board of directors authorized a two-year share repurchase plan for up to $50 million of our common stock. Although we will not disclose our trading strategy, The first window available for us to trade will be Thursday, May 16th. As we thought through our repurchase plan options, we determined that for now, we wanted to keep open the ability to repay our $155.3 million principal amount convertible debt in cash when it's due on February 1st, 2026. With our cash balance at $130.3 million at March 31st, 2024, and an expectation that we will continue to generate cash through that due date, we also want to have sufficient minimum cash along with our revolving line of credit for working capital purposes. Our approach considers that we have several new growth products beginning to ramp up from their native stage into the accelerated growth stage, and we need to see how that growth plays out. We believe we will have much better clarity about how much cash flow those products will provide over the coming year. In the meantime, our current focus is to continue to invest excess cash flow in our growth products, check for our defender, high DR&D biometrics, in particular, liveness capabilities, and MyPath and MyVIP, as well as follow-on products that can expand our current market opportunity. We will also continue to invest to optimize our product cost structure to maximize margin expansion opportunities. terms of growth through acquisitions, we believe we have sufficient growth opportunities with our organic product portfolio and do not foresee embarking on acquisitions in the near term. Now I would like to briefly touch on where we are with our SEC filings. 10Q for fiscal Q2 2024 filed last Friday. We remain current and expect to file our fiscal Q3 2024 filing on time in August as we are now back on a normal filing basis. And lastly, I want to say thank you to Max. We built a very strong partnership very quickly, and I have thoroughly enjoyed working with you to advance my tech forward. You operate with the highest degree of integrity, professionalism, and respect, and on a personal level, I am sad to see you go. Operator, that concludes our prepared remarks. Please open the line for questions.