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 question-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 8-K 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 MITEC's Executive Chairman and Interim CEO, Scott Carter.

Good afternoon, everyone, and welcome. I appreciate your time today and your interest in MyTech. As you may know, on May 13th, 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 ahead 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 leverage 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 have reinforced our position as a leader in the financial technology industry as a one-stop shop for identity verification. This is a 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 directions. 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 at solid performance, our identity product portfolio revenue was materially impacted by the IDR&D by metrics 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 MobileVerify 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 prospective larger deals across Q3 and Q4 of fiscal 2024. In the June timeframe, we conducted deep dives and deal-by-deal inspection, and it became apparent to us the prior forecast for IDR&D by metric product revenue was unlikely to be achieved in the second half of this fiscal year. IDRD 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 to our respective strengths across the company. A recent Wall Street Journal article reported a staggering 700% increase in deepfake incidents in 2023. And according to a recent liminal article, the deepfake 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 deepfake detection product, to address this problem. This launch follows several quarters of critical R&D work. Built on ID R&D technology, we believe this product is at the leading edge of combating this ballooning deepfake 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. 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 U.S. alone benefit from MyTech mobile deposit. Yet, we've only penetrated a single-digit percentage of banks across our core geographic markets in the U.S., U.K., 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 go-to-market motions so that we can capitalize on this opportunity for improved quality of 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 in 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, timing of check reorders, and continued price increases catching up in our efforts to capture our fair share of value that we created through this technology, which has transformed the entire retail banking industry. Now I want to turn our attention to Check 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, SecFraud Defender, our cloud-hosted product built on consortium data and AI technology and powered by MyVIP, enables customers to identify fraudulent checks. This quarter, a top five U.S. bank went live on the consortium. This bank implemented CFD in its real-time mode and is live in all of its 2,000-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 bank, and we expect another top 10 bank 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 ChexRod Defender during the third quarter. Importantly, three of the top five banks are already using a prior on-premise generation of CFD. These standalone 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 capitalized 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 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 will build shareholder value by leveraging our industry-leading product offerings and driving growth while at the same time driving sustained profitability across all of my tech 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.