Mitek Systems, Inc.

Welcome to the MyTech Fiscal 2024 Third Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session. I would now like to turn the call over to your host, Todd Carely, MKR Investor Relations. You may begin.

Thank you, operator. Good afternoon and welcome to MyTech Fiscal 2024 Third Quarter Earnings Conference Call. With me on today's call are MyTech's Executive Chairman and Interim CEO Scott Carter and CFO Dave Lyle. Before I turn the call over to Scott, I'd like to cover a few quick items. Today, MyTech issued a press release announcing its financial results for its fiscal 2024 Third Quarter end of June 30, 2024. 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 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 this call are made as of today, August 8, 2024, 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 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. With that said, I'll now turn the call over to MyTech's Executive Chairman and Interim CEO, Scott Carter.

Scott Carter Good afternoon, everyone, and welcome. I appreciate your time today and your interest in MyTech. As you may know, on May 13, we announced my appointment as Interim CEO. In the three months since then, I have conducted deep dives into all aspects of the business and have received invaluable feedback from shareholders, clients, and countless members of the MyTech team. Several important themes emerged, and I will discuss those today. Although there are revenue challenges we will address head on today, my first 90 days as Interim CEO has amplified my deeply held conviction in the exciting opportunities I have for MyTech and our shareholders. We have superior technology, important intellectual property, a high quality team, and are well positioned to capitalize on new and emerging market tailwinds. Before discussing this quarter's results, which are candidly mixed, I want to reaffirm the investment thesis behind our identity product portfolio. Our initial vision has grown stronger and our strategic investments have positioned us to capture significant opportunities in the evolving identity verification landscape. After pioneering mobile check deposit technology, a space where MyTech remains the market leader with proprietary technology trusted by the largest banks worldwide and thousands of others, we leveraged our expertise in verification technology to diversify into adjacent new markets which we see as offering longer term growth opportunities. We started with document verification and we then evolved to include solutions that serve the entire customer lifecycle including advanced biometrics and passive liveness, the ability to determine if there was a real human being behind the image or voice and doing so with minimal consumer friction. MyVIP serves to highlight our evolution from point solution to platform provider. MyVIP clients conduct a complete know your customer or KYC process through a single interface. We've reinforced our position as a leader in the financial service technology, financial technology industry as a one-stop shop for identity verification. This is much stickier product than our historical sales motions of selling individual point solutions. While our identity revenue was disappointing this quarter, we remain confident in our strategic direction. The synergies between our identity and deposits product portfolios leveraging our core expertise and overlapping customer base will enable us to deliver sustained value and continue building a robust and integrated identity verification platform. Now moving on to the third quarter. While our deposits revenue continued its solid performance, our identity product portfolio revenue was materially impacted by the IDR&D biometrics part of our business and execution challenges associated with scaling our IDR&D product portfolio. To a lesser extent but also material, we experienced a timing shift related to promotional campaign driven transaction volume from two large banking clients. This pushed out some additional expected MyVIP and mobile verify product revenue. Based on customer input, we now expect these campaigns to occur in fiscal 2025. Let's dig deeper into the IDR&D related revenue shortfall. As a reminder, IDR&D solutions are delivered as on-premise software term licenses. Given software revenue recognition standards, term license revenue associated with new deals is typically recognized in the quarter in which the deal is closed. You may recall that during our last earnings call, we discussed some uncertainty regarding the timing of some perspective larger deals across Q3 and Q4 of fiscal 2024. In the June time frame, we conducted deep dives and deal by deal inspection and it became apparent to us the prior forecast for IDR&D biometric product revenue was unlikely to be achieved in the second half of this fiscal year. IDR&D had a number of promising six and seven figure opportunities which were anticipated to close in the second half of our fiscal 2024. However, upon review, these deals proved to be more complex than anticipated. These are deals with large multinational corporations for disruptive new applications of our biometrics technology. Dealing with customers of this size and complexity often leads to longer sales cycles. Now let's talk about our go-forward plan. Following our acquisition of IDR&D in 2021, our goal was to foster innovation and to leverage the entrepreneurial spirit, speed, and agility of the IDR&D teams by maintaining their original organizational and operating structure. As such, this team continued to operate with its own CRM and forecasting tools. As we look forward, the opportunities for biometric solutions are expanding. The IDR&D customer mix and use cases are much more diversified and the vertical markets are large. Given these expanding opportunities, we have taken action to fully integrate IDR&D's technology, product development, sales and marketing, and operations into the rest of the company

to improve

execution.

The

new structure is in place today. This will also include a gradual migration of the IDR&D brand into MyTech. I want to underscore the significant opportunity we have with IDR&D as customer and third-party evaluations confirm the superior efficacy of our proprietary biometrics technology. Our new organizational structure will improve our ability to execute upon that opportunity, playing through our respective strengths across the company. A recent Wall Street Journal article reported a staggering 700 percent increase in peep fake incidents in 2023. According to a recent Liminal article, the deep fake detection market was valued at $5.5 billion last year and is expected to reach $15.7 billion by 2026, a CAGR of 42%. In a few weeks, we will plan to launch MyTech's deep fake detection product to address this This launch follows several quarters of critical R&D work. Built on IDR&D technology, we believe this product is at the leading edge of combating this ballooning deep fake problem. It is designed to verify a user's authenticity, ensuring they are real humans and not computer generated or digital imposters. We have commenced early stage conversations with our installed base of IDR&D partners and are pleased with their favorable response and interest. Stay tuned for a press release on this new product soon. Now, turning our attention to the rest of our Identity product portfolio. Our Identity transactional SaaS revenue came in moderately short of our expectations in the third quarter. As I said before, this is mainly due to two of our largest Identity customers delaying promotional campaigns until our fiscal 2025. Expansion revenue remains a large opportunity for MyTech and was a strong component of Identity revenue in Q3. And our almost 100% customer renewal rate is strong validation of our industry-leading Identity solutions. Today, the vast majority of Identity transactional SaaS sales are in financial services, but there is much more opportunity within this vertical. Bear in mind that over 7,000 banks in the US alone benefit from MyTech mobile deposit. Yet, we have only penetrated a single digit percentage of banks across our core geographic markets in the US, UK, and EMEA with our Identity solutions. We are now laser focused on cross-selling the combined IDR&D and MyTech identity and deposit story to senior executive audiences. This has served to significantly elevate our conversations. One of those cross-sell opportunities is with MyPass. Our MyPass product combines voice and facial biometrics in a single transaction, replacing legacy approaches such as username and passwords with more modern, safe, and frictionless authentication. MyPass is being used or tested by five of the top 10 banks in the UK, further validating interest in this disruptive product offering. MyPass leverages technology from IDR&D, but is sold and delivered through traditional MyTech sales channels and as a transactional SaaS business model. Looking ahead, we are keenly focused on product portfolio optimization. Close inspection of customer-level profitability, growth, and contribution margin by geographic and vertical market and by use case and product reveal opportunities to target our resources in a way that drives the best ROI. In Identity, we will increasingly target direct selling efforts towards the most profitable customer segments while adjusting pricing and channel strategies for unprofitable customer segments. Let's use MyVIP as an example. MyVIP is a platform that provides customers with the ability to integrate a variety of MyTech proprietary and third-party partner point solutions into a one-stop shop for identity verification. This creates a stronger value proposition and a stickier customer relationship, therefore supporting higher price points and driving higher contribution margins. Accordingly, we are refining -to-market motions so that we can capitalize on this opportunity for improved quality of earned earnings in our identity business. Likewise, when it comes to document verification, whether that be in our mobile verify offering or as an individual point solution within MyVIP, automated transactions provide a higher contribution margin than agent transactions. This too further informs our pricing and sales strategies as well as our assessment of product market fit going forward. These and other portfolio optimization efforts further increase our conviction and the opportunities ahead to drive improved return on invested capital in our identity business. Now turning our attention to our deposits product portfolio, I'll start by highlighting our mobile deposit franchise which we are pleased to report continued to deliver growth in this highly cash generative revenue stream. Revenue for this product grew year over year in Q3 due to a combination of increased consumer adoption, finding of check orders and continued price increases catching up in our efforts to capture our fair share value that we created through this technology which has transformed the entire retail banking industry. Now I want to turn our attention to Chex Fraud Defender or CFD which continues to grow its customer base, underscoring the strong interest from banks for this industry-leading innovative offering. As a reminder, Chex Fraud Defender, our cloud-hosted product building consortium data and AI technology and powered by MyVIP enables customers to identify fraudulent checks. This quarter, a top five US bank went live on the consortium. This bank implemented CFD in its real time mode and is live in all of its 2000 plus branches. Real time mode enables CFD to evaluate check deposits whether through mobile deposit, ATM or in branch to instantly flag likely fraudulent checks. There are now over 40 banks under contract for the consortium. This should position us well to achieve our goal of 50 plus CFD customers by the end of this fiscal year. Already in Q4, we've signed another top 30 banks and we expect another top 10 banks to sign in Q4. As you can see, demand for CFD is strong and as the consortium continues to grow, the flywheel effect of this networked model will continue to take hold. As I just mentioned, a top five bank went live on Chex Fraud Defender during the third quarter. Importantly, three of the top five banks are already using a prior on-premise generation of CFD. These stand-alone implementations provide the banks with protection for only their individual institutions. However, even they are quickly realizing the power of our AI-based cross-bank consortium and are actively evaluating CFD as the next step in their check fraud migration strategy. As check fraud continues to be an acute problem for banks and continues to grow rapidly, the ability to leverage AI and machine learning to observe industry-wide patterns and activity and develop sophisticated profiles of both normal consumer behavior and bad actor activity across the ecosystem drives a demonstrably high ROI. In summary, over the past three months, we've identified some key challenges and opportunities. We've taken decisive action to address the challenges and capitalize on the opportunities. While our identity revenue performance has been underwhelming, strong client engagement suggests it's a temporary setback. Our identity product portfolio has shown solid renewals and expansions. As digital transformation and secure online access become increasingly critical, we are well positioned to capitalize on a massive market opportunity, leveraging our strong banking customer base. Also, as mobile deposit continues to grow and generate cash flow, CFD is gaining momentum and poised to be a significant future revenue driver for MyTech. Lastly, I want to provide an update on our CEO search. While we are still interviewing new candidates, several have advanced to the later stages of our process and each has a strong track record of simultaneously driving growth and margin improvement within or adjacent to the markets where MyTech already operates. We are confident we will be able to hire a new CEO who builds shareholder value by leveraging our industry-leading product offerings and driving growth while at the same time driving sustained profitability across all of MyTech's businesses. Before I hand it over to Dave, I'd like to acknowledge his impact as our CFO over the past seven months. He led us through audit and NASDAQ compliance challenges, improved our finance and accounting teams, and has invaluable experience from his previous technology-related public company CFO roles. Dave, I want to thank you for these contributions and I look forward to continuing this partnership. Now over to you to provide an update on our Q3

financial results and outlook.

Dave, thanks

Scott. I'll

begin by taking you through the fiscal Q3 2024 financial results and then comment on our outlook. Looking first at revenue, total revenue for fiscal Q3 increased 4% year over year to $45 million. We saw a solid 18% year over year revenue growth from deposits with mobile check deposit revenue being the primary growth driver and check fraud defender showing a double-digit growth rate year over year. Mobile check deposit revenue saw a healthy cluster of earlier than expected renewals as continued strong transaction volumes led customers to utilize their prepaid transaction inventories faster than anticipated. Identity product revenue declined 14% year over year with IDR&D biometrics revenue softness contributing to much of that decline for reasons described earlier by Scott. Pricing pressure on our mobile verify product as well as sun setting e-car hardware revenue contributed to the decline to a lesser extent. Looking more closely at mobile verify, the year over year decline was mostly attributable to some of our large customers renewing contracts at lower pricing. Notably, mobile verify transaction volume increased year over year and we saw close to zero customer churn during fiscal Q3 signaling healthy demand despite the competitive pricing environment. I'll talk more about how this could play out in my outlook commentary near the end of my remarks. Looking at revenue by reporting category, software and hardware revenue grew 6% to $22.7 million in fiscal Q3 mostly driven by mobile check deposit but offset by declines in IDR&D biometrics product revenue. Services and other revenue grew 3% to $22.3 million year over year as we saw check fraud defender begin to contribute to our transactional SAS revenue with additional contribution for mobile check deposit maintenance revenue growth. Gap operating expense for fiscal Q3 2024 was $37.8 million compared to $35.6 million a year ago. The increase was primarily driven by $900,000 in compensation related cost of living adjustments for employees we relocated from our offices in Russia which have now been shut down as well as $300,000 of investments in our AWS cloud service technology and $300,000 in retention expense associated with key -to-market and technical product personnel. Non-GAP operating expense for fiscal Q3 24 was $27.1 million compared to $25.5 million a year ago and down $900,000 sequentially from $28 million in Q2 24. The year over year increase in non-GAP operating expense was primarily due to employee related costs associated with the move from Russia and to a lesser extent due to the investment in the AWS cloud services for our growing transactional SAS business and biometrics technology. The $900,000 sequential decrease in non-GAP operating expense was due mainly to lower sales expenses from cost optimizations made in the quarter, lower management bonus accrual as well as lower external contract support costs as we began our path to normalization following previous filing delays. Excluded from our non-GAP operating expense was $10.8 million of non-recurring items of which $7.3 million were non-cash accounting items and $3.5 million were cash items. The non-cash items were comprised of the amortization of purchased intangibles from prior acquisitions and stock-based compensation expense. The cash items were primarily comprised of about $1.3 million in executive transition costs, $1.1 million in restructuring costs associated with our cost optimization efforts and $1 million in non-recurring audit fees. Please see our earnings release for more detailed reconciliation. Gap operating income was $0.7 million in fiscal Q3-24 or a GAP operating margin of 2%. Our non-GAP operating income was $11.6 million in fiscal Q3-24 or a non-GAP operating margin of 26%. Gap net income for fiscal Q3-24 was $0.2 million which rounds to zero cents per diluted share on 48 million shares. Non-GAP net income grew 27% to $12 million and earnings per diluted share was $0.25. Turning to our balance sheet, our cash and investments at the end of fiscal Q3 were $133.2 million, $2.9 million higher sequentially versus fiscal Q2. It's important to note that during fiscal Q3 we repurchased about 820,000 MyTech shares at an average share price of $12.25 including trading costs totaling about $10 million. Therefore, adjusting for share repurchases our cash and investments balance would have increased by $12.9 million during the quarter. Let's now shift to our fiscal 2024 outlook. With regard to revenue, we are resetting our fiscal 24 revenue range to $169 to $173 million from our previous range of $180 to $185 million which implies fiscal Q4 revenue to be in the range of $40.1 to $44.1 million. This is primarily due to the shortfall in larger pipeline deals from our IDR&D biometrics products that were expected to close in the second half of fiscal 2024 as well as expected softness from too large identity customers delaying promotional campaigns until our fiscal year 2025. These revenue shortfalls also require us to lower our previous guidance for fiscal year 2024 non-GAP operating margin. We now expect our non-GAP operating margin to be in the range of 23 to 25% due primarily to the revenue shortfall from the IDR&D biometrics products as software term license revenue has very little cost of revenue associated with it. Given the challenges we are seeing with the identity product revenue shortfall in the second half of this year, our updated forecast models indicate that the total identity product portfolio will not be profitable in fiscal Q4 on a fully burdened basis. Therefore, we don't expect to achieve our previously communicated target. At this time, we feel it prudent to reassess the and timeline for this target following our annual operating planning process and we will share the plan to achieve profitability and identity with you on our next earnings call. We want to assure you that achieving long-term sustainable profitability across all of my techs business remains a primary objective. We will continue to be laser focused on disciplined operating expense control and optimization while ensuring sufficient investment in our significant market opportunities. Moving on to our previous G&A expense outlook, we are reiterating that we expect our non-GAP G&A operating expense to be approximately $8.5 million in fiscal Q4. Looking ahead to fiscal 2025, we expect Q1 total revenue to be down year over year due to timing of mobile deposit or reorders. Historically, Q1 is our weakest quarter of the year. We anticipate that we will resume year over year revenue growth in fiscal Q2-25 led by mobile deposits with growth also expected from identity. In the second half of fiscal 2025, growth will be driven primarily by CheckFraud Defender, MyVIP and MyPass and IDRD biometrics products. For the full fiscal year 2025, we expect identity to return to double digit growth. Let's talk more about each of these products going forward. Starting with CheckFraud Defender, one of our original customers, a major money center bank, uses MyTech's on-premise CheckFraud solution with software term license revenue recognized all up front in Q3 for this customer. This causes about a $4 million revenue spike in Q3 of each fiscal year until they transition to a cloud-based SaaS model, which will result in smoother -to-quarter revenue recognition. For most all other banks, the solution will be offered only as a cloud-based SaaS solution with ratable revenue recognition over the contract period. Now let's look at MyVIP and MyPass. We are witnessing a shift in our existing customer behavior as many migrate from point solutions like MobileVerify to our comprehensive MyVIP orchestration platform, which more holistically addresses growing fraud detection and prevention needs. To be clear, customers moving to MyVIP may continue to use MobileVerify inside the MyVIP platform and therefore have access to expanded identity offerings such as MyPass. This trend also includes new customers seeking a unified solution for verification and authentication. Finally, we expect solid revenue growth from our IDR&D biometrics products through customer expansion, increased transactions, and new product launches. However, as Scott mentioned earlier, penetrating new market verticals with larger deals may take time, with growth from these deals most likely later in fiscal 2025. In fiscal 2025, we also expect some modest headwinds in our Mobile Deposit product and MobileVerify products. First, as I mentioned earlier, Mobile Deposit is facing some renewal timing-related headwinds in fiscal Q1. We expect first half 2025 deals to be more concentrated in the second quarter as a result. Given the high margin profile of Mobile Deposit product deals, it will also cause a temporary headwind to our non-GAP operating margin for the first quarter. However, we expect this margin to return to levels similar to fiscal 2024 and fiscal Q2 2025. Now on to MobileVerify. We continue to face competitive pricing pressure, but it is important to note that a large portion of this revenue comes from banks that use products from our deposits product portfolio presenting significant cross-sell synergy opportunities. In our 2024 fiscal year earnings call, we will introduce our revenue and operating target ranges for fiscal 2025 and provide more detail. Operator, that concludes our presentation. Please open the line for questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your phone now and you will be placed into the queue in the order received. Once again, to ask a question, please press star one on your phone now. And our first question comes from Mike from Northland Securities. Please go ahead, Mike.

Hi. Hey, guys. Pretty disappointing. Can you help? I mean, there's about seven weeks to go in the year and it looks like you're down 11 to 12 million in revenue and it sounds like it's because of ID and RD and a couple promotions in mobile ID slipping. I don't know, can you just allocate the shortfall between those two buckets?

Yeah, Mike, thanks for the question. I'll start and Dave, of course, elaborate if I missed anything important. Both those items are material, Mike. I would say that the IDR and DMS was much more material than the timing issue with those promotional campaigns. We had a surge in very promising, sex and very substantial seven figure opportunities, as I mentioned in the script. And, you know, based on the, you know, the client's feedback, the superior efficacy of this technology, there's an expectation that those deals are closed in Q3 and Q4. But again, as I mentioned in the script, as Dave and I dug into that, it just became clear that those would push, but they're still very viable opportunities and we expect a good portion of those to remain viable going forward.

Yeah, and just to provide a little more color on the numbers, you're right. From the mid-point of the vast majority of that is related to identity products. And I would say that the majority of that identity shortfall was from the IDR and D biometrics revenue. And remember, the IDR and D biometrics revenue because of software term license and it has a very high gross margin, you know, a dollar in revenue that's missed drops straight to the bottom line.

Got

it. And

I don't know, guys, you seem to have a lot of confidence in mobile ID, but it's just been so disappointing. I mean, have you thought about selling it or splitting the company?

Yeah, I appreciate the question, Mike. I mean, just sort of go back, you followed the company for a long time. You understand the original thesis, you know, was that, you know, growth could eventually sort of decelerate in the mobile deposit business. We want to diversify our revenue streams and there are significant adjacencies between what we did in mobile deposit and the sort of original identity products. For quite some time, these businesses were in fact very distinct and separate. You know, despite these results this quarter, it's interesting because we're actually now beginning to see much more sort of validation of this thesis that the two belong together, right? So CFD in particular is a gateway for that. For the first time, we're seeing the same buyer, right? So the check fraud defender buyer is very often the same person or very adjacent to the person that's buying our verification solutions. It's important to remember that, you know, the MyAVP platform fuels the check fraud defender proposition. So that's an example of sort of where these capabilities are coming together and are integrated. I believe that, you know, as we get smarter about the portfolio optimization that I mentioned in the script, we can significantly change sort of the mix shift of where we're focusing. Underlying demand remains strong. So mobile verify, for example, has significant growth in transaction volume. So that speaks to sort of the growth in the market and as we migrate those customers to the MyAVP platform which has a stronger value proposition, we see much better margin profiles. MyAVP is a nice growth contribution to the company. We believe that we have evidence that will continue to have increased validation of the synergy between these businesses and particularly with this integration now, the IDR&D business into the rest of the company. You know, we've had, I've been involved in recent conversations, for example, where we've brought together experts from our IDR&D biometric story, experts in check fraud, and our traditional identity, you know, verification folks, and we're telling a combined story that's allowing us to get access into much more senior audiences in the bank and that's been very well received and it's encouraging

to us.

A follow-up, I mean, clearly you're not going to be break even in MobileID and 4Q. You said that. I mean, is there any chance you're going to be late 25 break even there? I mean, it seems like it's a multi-year

chance to break even at this point. Dave, you want to start there and I'll fill in the page?

Yeah, a couple things there. You know, we have to remember that we've got a few products in their nascent stage moving into the accelerated growth stage and we really have to see how those play out, you know, as evidenced by what happened with the IDR&D biometric products in the current quarter and what we expect next quarter. So we have to see how that plays out to make that determination. That's why we, you know, I talked a little bit about my remarks that we'll come back to you in the next earnings call after we get through our annual operating plan and get more specific there.

Did you say what revenue was in Q3 for CheckFrod Defender?

We did not. We're not disclosing that at the product level. Yeah. Yeah,

just at the deposits level.

Yeah, I remind you Mike, you know, the focus right now with this consortium flywheel kind of model is to get to a critical mass of adoption. We think we're quickly approaching that, you know, underscoring the adoption of the top five customer, the top ten customer, top ten bank rather, and top five bank that we, the top ten bank we expect to close this quarter. You know, as you well know, you've followed the company a long time. Long sales cycles with banks. There are then further sort of lags to implementation and then ramping, right? And with a SAS model, it would take a while for that to ramp, but we're getting just terrific validation from customers. The proof of concepts are very compelling. We have customers switching from other competitive products. All signs are quite positive, but we're focused more on getting to scale and getting that flywheel

going. Got it. Okay. And our next question

comes from Jake Robares from William Blair. Please go ahead, Jake.

Yeah, thanks for taking the question. Scott, can you just help us understand when it became clear IDR&D wasn't going to meet numbers? And then you talked about the two banking campaigns that were pushed out into fiscal 2025, and then a few six and seven figure transactions that were a more complex. Just to confirm, did any of those deals and campaigns fall completely out of the pipeline, or is your expectation now just that they push into fiscal 2025?

Yeah, the campaigns definitely shifted into 2025, the two that we highlighted. In terms of the timing on this surprise, as I said in the script, I was appointed May 13th. The role became official June 1st. Dave and I immediately began to conduct deep dives into all aspects of the business. I was personally conducting deep dive reviews of these large IDR&D biometrics opportunities. I think Dave will tell you I was probably the last one to give up on them, and the last one to give up on profitability for Q4. And as a side note, in addition to the organizational change that I talked about, I also immediately appointed a new sales leader for the IDR&D business, who is someone that I think very highly of, was a senior executive at a much larger biometrics company, scaled them from the startup stage to much larger than where MyTech's biometrics business is today. So I think we've got the right team in place today. This is a case of playing to the ranks. We've got, honestly, I've worked with lots of machine learning scientists over the years, very impressive ones. This is a world-class team of machine learning scientists. I'm excited about what we can do in integrating their best practices and driving R&D efficiency with the rest of the company. And at the same time, we can bring more rigor in how we evaluate product market fit, the business model, the revenue model, and that's where we'll be focused going forward

portfolio optimization effort.

Okay, helpful. And then Dave, can you just help us understand the expectations that underline the guidance that you laid out for fiscal 2025? Are you expecting those big IDR&D deals to close next year? Just would be helpful to understand the expectations that underlie that.

Yeah, back to your original question also, some of those deals we did take out of the forecast completely. And they could come back, but nothing that we want to rely on, obviously. And then in terms of what's going to happen in 2025, one of the reasons I made the comments about IDR&D product portfolio revenue starting to grow more in the second half is because we don't have enough clarity on exactly when those could close. Candidly, they could close the short term, or they could close in the next 18 months. That's kind of the range of prospects there. But we're working hard to make those close as fast as possible. With these big multinational guys, as you know, they just take a long time to get through that process.

Okay, that makes sense. And then just one last one on my end. You said most of the miss was driven by ID verification, but that would imply that mobile deposit also had a slight miss in the quarter. Was that more related to core mobile deposits volume, or did check fraud defender come in a bit lighter than you expected?

No, I think it was more deal timing than anything else. It was a very small number in terms of

that $11 million. Okay, thanks for taking the questions.

And our next question comes from George Sutton from Craig Hallam Capital. Please go ahead, George.

Thank you. I wondered if you could walk through the renewal dynamics. You talked about repricing issues as you were going through renewals. My assumption has been that you're moving folks from point solutions to the broader platform, and therefore you would see fairly good pricing dynamics as that happened. Can you just give me some clarity on that?

Yeah, it's a great question. So what we've seen with my VIP, as you move up the value proposition, I think this is fairly intuitive. You offer a stronger product, the price elasticity improves. For those customers that are orchestrating more than just the document verification piece, which I think Max talked about in prior call, been commoditized, the more of those sort of signals and data sources you're combining into that single platform, the stronger the value proposition, and the higher the price point that can bear. We're also seeing, and I alluded to this in the script, significant differences in the unit economics between agent review transactions and auto transactions. The agent transactions are diluted. As we look at things like profitability by key graphic market or vertical, we have an opportunity to, without tipping our hands to competitors, increase emphasis in some of these segments, decrease emphasis in others, and aggressively help migrate customers to best practices, both as they migrate mobile verify to my VIP, but also to model the best practices that some of our most successful customers have had with my VIP that also happen to drive very attractive contribution margins. On the lower end of our base, we see that there's relatively high cact to support smaller customers. So we think there's a pretty intuitive opportunity for us to get smarter about either the direct versus channel model pricing strategies for those customers and where we focus from a product market fit standpoint. With the high cact, you might revert to inbound only or channel strategy. These are the things, now that we've done this much deeper dive, that we're taking a close look at.

Got you. So on the check fraud defender side, I think there's been some skepticism that a top bank would not use your system given their broad range of what they were seeing and therefore not benefiting from the network effect. So the fact you did sign a top five bank, I think, is very important. I just want you to confirm that in your marketing. But can you talk more broadly about, you mentioned the demonstrably high ROI. Obviously, as banks are seeing this, it just seems simplistically to me this would be a very easy offering to sell given that high ROI. So any updates on the sales process there?

Yeah. First of all, the first part of your point I want to address, which is some of these banks do have a variety of internally and other third party solutions. And some banks are more sophisticated than others in terms of the data science capabilities they have and so forth. Right. What really turbocharges the value proposition for check fraud defender is that we can look in real time mode across the entire ecosystem. Right. So a top five bank will only have visibility to what's happening on the checks that are happening in their environment. But there is, for example, a high velocity of activity elsewhere with indications that there's bad actor activity, they wouldn't have visibility to that. Right. So that's an example of why this consortium based approach is in fact very additive to these top five banks. The challenge is at the same time they're big banks and there's a lot of inertia and it takes them a while to get things done. So I think I would underscore that the sales cycles are just long and it takes them a while to sort of get things done and through their internal processes. But all signs remain positive. The ROI piece, you know, anecdotally I would tell you, you know, we've had very compelling examples of customers saving tens of millions of dollars in the first number of months with the product. We're targeting typically I think when Dave walked through his is a sizing model and he talked about like a 10 to 1 ROI, which we think is very conservative. I think over time as the consortium is established and the fraudsters, by the way, then migrate from the banks that are protected to those that aren't, we think we can capture prices as a sort of higher percentage of that ROI over time.

Understand. Okay. That's it for me. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your phone now. And our next question comes from Alan Klee from Axum Group. Please go ahead, Alan.

Hi, this is Derek Greenberg on for Alan. My first question was just on, you had mentioned the transition from agent reviewed transactions to more automated. I was wondering if maybe you had any metrics in terms of what percent is automated versus agent reviewed and what the relative margin difference is as this continues to shift as well as just the capacity in terms of the percentage that can be automated versus manually reviewed.

Yeah, I appreciate the question. I don't know that we have data kind of off the top of available right now to talk about in terms of those specific metrics. I don't think we've disclosed those previously. We can talk offline and figure out what we can provide you after the fact. The point I would emphasize is that agent transactions are dilutive. It's highly variable depending on the customer and the use case and so forth. Scale matters. So customers, large banks that have say sort of an 80 percent automation rate would just by virtue of scale economies have better sort of margin profile than those on the smaller end. So that's something to think about. So what we have is an emphasis on having our sales teams and other client-facing teams take a more consultative approach to helping customers understand when they need to use agent transactions. There are certain regulatory dynamics in certain markets and again we'll take a sort of case by case basis. I'll underscore again and just sort of repeat the theme about as we migrate these single use case customers that are on State Mobile Verify and just doing the document authentication to the MyVMP platform, we can instantly provide stronger value proposition and improve the margin profile. And as they orchestrate those other data sources and so forth, frankly there's less need for the step up authentication by the agent because you can handle that through other

digital sources. Okay got it. That

makes sense. And then my other question is just with the partnerships you had with like Experian and Equifax, just maybe some color and some updates on how that's progressing.

Very pleased with both of those partnerships. Experian is one that we've highlighted I think publicly and it kind of comes back to the again the portfolio optimization theme. As we think about putting a large channel partner like that to work for us, they have an ability to go to adjacent vertical markets or other frankly non-adjacent vertical markets where they have access granting relationships, they've got the distribution reach, and they know the customer domain and language. So we've for example signed a very large healthcare provider in the UK with one of those partners. And I would suspect as we move forward with the portfolio optimization work, we'll be able to get smarter and smarter about where and how we leverage those channel

partners. All right got it. Thank you.

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

Thank you operator and thank you for joining our call today and for your continued support. As always if you have any follow-up questions please feel free to contact me and I'll be happy to answer your questions. Thank you and have a great rest of your day.

This concludes today's conference call. Thank you for attending.

The host has ended this call. Goodbye.