Mitek Systems, Inc.

Good day and welcome to MyTex Fiscal 2024 Fourth Quarter and Year-End Earnings Conference Call. All participants will be in a 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 1 on a touch-tone phone. To withdraw your question, please press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Todd Curley of MKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to MITEC's fiscal 2024 fourth quarter and full year earnings conference call. With me on today's call are MITEC CEO Ed West and CFO Dave Lyle. Before I turn the call over to Ed, I'd like to cover a few quick items. Today, MITEC issued a press release announcing its fiscal Its financial results for its fiscal 2024 fourth quarter and full year ended September 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, December 16, 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 the 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 CEO, Ed West.

Thanks, Todd, and good afternoon. It's an honor to address you for the first time as CEO of MyTech. I would like to share my thoughts coming into the business, my learnings over the last 60-plus days, as well as the opportunities and actions that we're taking. Dave will cover the Q4 and fiscal 24 results and provide some insight regarding the outlook for the year. We will then open up the call for Q&A. There are four key takeaways I would like for you to hear from today's call. First, the company now has an experienced leadership in place supported by a team with deep domain expertise who are executing against a clear plan to get back to durable growth. Second, We're nearing the fulcrum point for profitability on the identity side of our business. Third, MyTech is becoming a comprehensive solution for fighting fraud and mitigating identity-related cybersecurity risks, including deep bank and gen AI fraud, a significant and growing problem for all businesses everywhere. And fourth, organic growth is our near-term focus and operational discipline for long-term value creation is our North Star. So on to the first point. I recently joined MyTech in October, inspired by its legacy as a trusted partner to thousands of financial institutions, or FIs. While the company has faced challenges, we are actively addressing them and strengthening our foundation at Fiscal 25 to drive profitable organic growth. With a clear plan in place, we are well positioned to create significant value for customers, shareholders, and employees. My confidence in MyTech's potential is rooted in my experience as CEO at Cartronics. where we delivered shareholder value by fostering innovation, driving organic growth while enhancing margins, and building a scalable network serving over 1,000 FIs, fintechs, and the nation's largest retailers. These experiences, along with my alignment with shareholder interests, drive my commitment to executing our growth and operating strategy here at MyTech and unlocking the transformative opportunities ahead. Since MyTech's founding almost 40 years ago, we have been at the forefront of innovation, delivering mission-critical software solutions to some of the world's largest financial institutions. From enabling mobile banking to ensuring secure digital transactions, we've consistently solved the pressing challenges that our customers face. Today, we find ourselves uniquely positioned to tackle new and rapidly evolving threats, particularly the rise of AI-driven fraud. My comments today regarding the market are informed by meeting and speaking with numerous strategic customers over the last several weeks in Europe, United Kingdom, and the U.S., mostly very large FIs. At the core of our success are mission-critical solutions. Serving over 7,900 companies globally, including FIs, telecoms, fintech companies, and marketplaces, MyTech is a trusted leader in computer vision and identity-related application of AI and fraud prevention. We revolutionized check processing with our mobile check deposit solution, and we've continued to push boundaries with innovations in identity verification, authentication, and fraud management. This includes proprietary best-in-class multimodal biometrics, frictionless liveness, injection, and recently released deepfake detections. At our core, our heritage solutions and mobile deposits has been fairly steady over the last three years, with total transactions exceeding $1.2 billion each year. Over the past five years, MyTech has undergone a decent amount of growth. In fiscal 19, the company had 85 million revenues, primarily driven by check-related products. Fast forward to today, we've almost doubled in size to 170 million in revenues and expanded adjusted EBITDA margins to 27%, now with over 40% of the business focused on fighting fraud and verification. While this growth is impressive, it hasn't come without its challenges. The COVID-19 pandemic accelerated digital transformation, driving significant demand for our solutions and pushing the company to prioritize speed over scalability, outpacing its operational infrastructure. This challenge was amplified by executive turnover and major acquisitions, which placed considerable strain on our accounting, finance, and legal teams. This created issues that you are all too familiar with. With the dust settling, Fiscal 25 marks a pivotal year for MyTech as we focus on strengthening our foundation, unifying products and technologies, and optimizing our go-to-market strategy to prepare for the next phase of growth. Now, turning to the second key takeaway, which has understandably been a major focus for the investment community, we are nearing the fulcrum point in identity. The company is committed to the goal of returning to double-digit revenue growth during fiscal 26 and beyond. This will be achieved through streamlined technology, optimized go-to-market strategies, and cost efficiencies that will scale revenue while leveraging prior investments. In fiscal 25, we have shifted our focus towards innovation and enhancing customer experience while slightly reducing overall identity spending levels to position the portfolio for profitability. Historically, Identity has been ash-consuming, and we have carefully considered feedback from our shareholders, our value partners, in addressing this moving forward. To provide some context, this product portfolio was diluted to our overall consolidated adjusted EBITDA margins by high single-digit percentage points in fiscal 24. And with the disciplined execution against the following four-point plan, We believe achieving 80 to 85 million in run rate identity product revenue is the fulcrum point at which this portfolio becomes margin-accretive. The plan is as follows. First, cultural integration. Over the past five years, our total headcount has more than doubled to 630 in fiscal 24, bringing in exceptional talent but also creating silos that have hindered collaboration and efficient execution. We're now focused on integrating past acquisitions, aligning teams, and driving product enhancements in cross-selling. We believe this initiative will boost revenue through better upselling and product expansions while reducing costs by streamlining redundancies. Second, technological integration. Our acquisitions have significantly bolstered our technology stack with advanced biometrics, liveness, and platform capabilities, but managing separate systems to preserve their unique innovation created fragmentation. For example, We have been operating multiple identity document verification systems, both homegrown and acquired, that addressed similar customer needs but differed in functionality. We have been integrating these into a single streamlined platform, and we've already seen positive customer feedback highlighting enhanced performance and ease of use. This consolidation is driving opportunities for revenue growth through cross-selling and improved customer retention, while reducing operational costs by eliminating redundancies. The third action to getting to the fulcrum point in identity is cost efficiency. The key priority for us is reducing reliance on costly manual or agent-reviewed transactions, which limits scalability. Through the integration of acquired technologies and enhanced AI models, we significantly ramped up automation, reducing the direct cost per transaction for identity by over 25% in 24. With automated transactions now, the vast majority of our total transactions. As we continue to increase the proportion of automated transactions, we expect continued improvements in our unit economics. And finally, go-to-market optimization. To accelerate growth, we're focused on three key initiatives. First, increasing the maturation of recently acquired customers. Second, expanding within our existing customer base, such as new use cases, new products, new geographies, and expanding to other business units. And third, acquiring new customers. Our MyVIP platform has driven considerable growth, with transaction volumes more than doubling in several Tier 1 accounts following the first year of adoption. Its user-friendly interface and flexible architecture allows customers to rapidly deploy new use cases and activate additional signals, driving further customer value and revenue per transaction for MyTech. In FY24, revenue per transaction on MyVIP was a multiple of that on the mobile verified document verification engine, underscoring its stronger value proposition as well as exhibiting pricing resiliency when compared with the pricing pressures experienced by standalone document verification. Simply stated, we want to leverage our proprietary differentiated capabilities and lessen the exposure to standalone commoditized offerings. As customers increasingly leverage the full suite of MyVIP products, we expect an uplift in revenue per transaction. With trust enabled to cost thousands of FIs in our growing partner ecosystem, the opportunity for new customer acquisition remains significant. By deepening customer relationships and driving new customer acquisition, we're positioning MyVIP as a market leader in identity verification, authentication, and fraud management. That said, we want to assure investors that we will closely monitor the execution of this strategy in fiscal 25. And if any significant deviations from our targets arise, we are committed to taking decisive, data-driven actions to maximize shareholder value. To support this, we will continue to provide transparency, offering our investors insights into our progress against these key milestones. Now let's unpack the third key takeaway. MyTech is becoming a comprehensive solution for fighting fraud and mitigating identity-related cybersecurity risks, a growing problem for all businesses. Customers are increasingly seeking integrated platforms, not just point solutions. to combat rising AI-driven threats and defects. Our fraud platform stands out with proprietary capabilities with an established track record of leading entrusted third-party and U.S. government-led benchmarks. This independently verified technological leadership, combined with our exceptional talent and domain expertise, positions MyTech to lead in this evolving market. The rapid proliferation of AI leads to a new and growing period of Gen AI-driven fraud. We are uniquely positioned to address this growing problem as a result of our proprietary technologies and proven track record in high-assurance market segments. MyText platform protects customers through onboarding, transaction enablement, identity verification, and integrated authentication, all enhanced by advanced four-factor biometrics and digital fraud detection capabilities, which include defenses against deepfakes, presentation, and injection attacks. Our passive liveness detection and biometric solutions have earned strong recognition from NIST and, more recently, the Department of Homeland Security, highlighting our commitment to excellence in the field, technical capabilities, and innovation in a rapidly changing fraud environment. Similarly, our check fraud defender, or CFD product, though in its early stages, is already showing strong uptake. Annualized contract value, or ACV, grew by nearly 60% year-over-year, exceeding $10 million at fiscal 24's close. And we are currently seeing strong interest in CFD and are targeting to more than double CFD's ACV in fiscal 25. The consortium model behind CFD, where more participants enhance the data asset, is proving effective. We have already seen checks from nearly all of the 8,700-plus FIs in the United States, and we have accumulated data sets on approximately 17% of all checking accounts in the country, all while having less than 1% of these FIs as paying members of our consortium. With our strong mobile deposit foundation and relationships with major FIs, we are poised to deepen these partnerships and drive continued growth through cross-selling CFD. Now, last but not least, let's discuss the fourth key takeaway. Organic growth is our near-term focus and operational discipline for long-term value creation is our North Star. Our focus is on organic revenue growth, increasing the share of more predictable SaaS revenue, expanding margins, and generating free cash flow, all underscored by a disciplined capital allocation strategy to maximize shareholder value. Every initiative we've outlined today is designed to sharpen this focus, ensuring we strengthen the foundation in fiscal 25 and deliver accelerating and profitable growth in fiscal 26. Here's how this approach will drive measurable improvements in five key areas of our financials. First, organic revenue growth. By expanding transactions with existing customers, introducing new use cases like check fraud defender and digital fraud defender, cross-selling within the MyVIP platform, and acquiring new customers, we aim for steady organic revenue growth. Second, a higher percentage of SaaS revenue. We aim to transition towards a higher proportion of SAS revenue, which offers greater predictability and reduces volatility. In fiscal 24, approximately 37% of our revenue came from SAS. But as this becomes a larger portion of our sales, we expect to dampen the impacts of volatile term license revenue, which still dominates our revenue today. Looking out to fiscal 26, we're pursuing a goal for SAS revenue to approach half of our total revenue. Third, margin expansion. By driving cost efficiencies, integrating operations, and scaling revenue to achieve operating leverage, we anticipate a considerable improvement in adjusted EBITDA margins as we look out to fiscal 26. In fiscal 25, we expect to lower expenses associated with the identity product portfolio while we invest in accelerating demand for CFDs. While this CFD investment temporarily reduces margins by mid-single-digit percentage points, we believe the strong ROI justifies it. Fourth, free cash flow generation. As we reduce non-recurring and extraordinary costs tied to acquisitions, executive transitions, and audit fees, we expect a stronger free cash flow conversion of adjusted EBITDA with a more significant impact starting in fiscal 26. And finally, capital allocation. We remain committed to balancing growth investments with returning capital to shareholders and maintaining a strong, flexible balance sheet. In conclusion, operational discipline is not just about fiscal 25. It's the foundation for creating durable long-term value for all of our stakeholders as we look forward to fiscal 26 and beyond. I'd now like to turn it over to Dave.