Mitek Systems, Inc.

Good afternoon, and welcome to the MITEC Fiscal 2025 First 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 telephone keypad. 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 of Pondo Wilkinson. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to MITAC's fiscal 2025 first quarter earnings conference call. With me on today's call are MITAC's 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, MyTech issued a press release announcing its financial results for its fiscal 25 first quarter ended December 31, 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 that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities, should be considered forward-looking statements. These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties which 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, February 10, 2025, 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 Mytex CEO, Ed West. Thank you, Todd, and good afternoon, everyone. For those who are new to MyTech, let me start with a quick overview of who we are, the problems we solve, and why our mission-critical solutions are becoming increasingly more important in today's market environment. MyTech Systems is a global leader in computer vision, digital identity verification, biometric authentication, and fraud prevention, trusted by over 7,900 organizations worldwide, including financial institutions, telecoms, fintechs, and marketplaces. We empower businesses to combat growing threats like AI-driven fraud, deep fakes and cyber attacks using advanced AI, proprietary biometrics and automation technologies, all delivered as software solutions. Our mobile check deposit solution, enabled by industry-leading computer vision technology, has revolutionized consumer banking, processing approximately 1.2 billion transactions annually. it has become a foundational element of North American financial services. This deep expertise in serving high-assurance industries has positioned us to expand our total addressable market with innovative solutions like MyVIP, an end-to-end identity verification, orchestration, and authentication platform, along with advanced fraud prevention tools such as Check Fraud Defender and Digital Fraud Defender. These offerings are designed to tackle sophisticated fraud threats using industry-leading technologies. We generate revenue through term license agreements for our heritage check-related products and standalone biometrics, as well as SAS agreements for our identity and fraud platform solutions. Our focus in fiscal 25 is on enhancing our solutions, operational excellence, and strengthening our foundation to position us for adorable, profitable revenue growth in fiscal 26 and beyond. As digital check deposits remain essential and the demand for fraud solutions intensifies in the face of sophisticated AI-driven threats, we are uniquely positioned to lead innovation and help secure the future of online transactions. Now, last quarter, we introduced a four-pronged framework to guide our transformation. Today, I'll provide some updates on our progress across the four pillars which are one, strengthening the foundation to provide a platform for durable, profitable growth in fiscal 26. Two, scaling our identity platform business to drive it towards the fulcrum point on profitability. Third, expanding our leadership in fraud solutions. And fourth, maintaining operational excellence as the cornerstone of organic revenue growth, free cash flow generation, and driving shareholder value. Now, let's walk through the progress we've made on each of these pillars since the end of last fiscal year. In Q1 and early Q2, we made meaningful progress on the first pillar of our strategy, which is strengthening our foundation for durable, profitable growth in fiscal 26 and beyond. I'd like to highlight a few key achievements. First, we're fostering greater collaboration across our go-to-market teams by breaking down silos and enhancing cross-functional execution for new and expanded business. I know it sounds pretty fundamental, but this effort is already bearing fruit by closing new business in Q1. We also have additional meaningful contract negotiations as well as new product developments currently underway as a result of these efforts. These are early validation points that leverage MITEC's extensive relationships and credibility with financial institutions with a growing request for identity and fraud use cases. Second, we have realigned our R&D resources and team structures to better support our growth objectives. We are advancing a one mind tech ethos by introducing a product-driven framework, centralizing engineering and AI machine learning resources, and fostering deeper cross-team collaboration. These initiatives get the machine learning engineers closer to the customer and are already driving greater effectiveness and accelerating innovation particularly within our identity portfolio, which I will quantify later. Our operational and cultural integration efforts serve as the catalyst for our technological integration, as I highlighted on our prior call. The key initiative is consolidating our identity verification, or IDV, engines into a single unified platform on MyVIP. By integrating our IDV and fraud prevention capabilities, we are simplifying the customer experience while enhancing our competitive position. In short, the walls within our business that remained after multiple acquisitions are rapidly coming down and we expect to see measurable benefits from this in our P&L in fiscal 26. Now turning to our second pillar, our progress towards the 80 to $85 million fulcrum point in identity. At the end of the first quarter, our last 12 months identity revenue was 70.7 million. up from $68.5 million at the end of fiscal 24, demonstrating progress towards this critical milestone. Now, it's important to note that the SAS transaction volumes and timing of software license sales can create upward and downward movement on a quarter-to-quarter basis. It's also important to recognize that the tipping point is dynamic. Any improvements in our unit economics and contribution margins along the way effectively lower the revenue threshold required to reach this key target. The two key drivers that we're closely monitoring in identity that are driving us towards our fulcrum point are as follows. One, an increased mix of MyVIP identity transactions, which carry more attractive unit economics compared to our inherited standalone document verification solutions, due to the platform's greater intrinsic value. And two, a higher mix of automated identity transactions, which carry a lower cost per transaction and reflect improvements in our algorithm efficacy. Together, these factors drive a higher contribution profit per transaction, and coupled with ongoing transaction growth, contribute to a growing bottom line. On the first of these two drivers, the 26% year-over-year growth observed in identity SaaS revenue was driven by accelerating transaction volume across the board. and most notably in MyVIP, with over 60% transaction volume growth in the quarter, primarily driven through expansion with existing customers. Currently, a minority of our identity transactions are running through our MyVIP platform, but as we improve our go-to-market execution with MyVIP and begin migrating customers from our standalone point solutions to our platform, we expect an increased mix of these higher value transactions. On the second driver, we had a double-digit percentage reduction in direct cost per transaction year-over-year as our enhanced algorithms improved our MyVIP agent productivity versus last year, and automated transactions continued to increase both sequentially and year-over-year. This shift towards higher margin automation drove the 300 basis points year-over-year improvement in gross margin in our services and other revenue. which Dave will discuss in more detail a little later. Finally, our go-to-market optimization efforts are yielding results as demonstrated by the transaction growth of recently acquired customers, expansion into new use cases with our existing customers, and acquiring new customers across geographies and industries. Looking at our customer cohorts, identity-related customers acquired just one year ago in Q1 of 24 are now spending almost 40% more with us, driven by higher transaction volumes and expanded use cases. Our Q1 2023 cohort, which are customers who have been with us for two years, have increased spending by more than three times compared to their initial spending levels. And looking at our top 10 identity customers today, their spending is now 80% higher than it was two years ago, underscoring the expanding scope of our relationships. Notably, among this top 10 are a number of leading financial institutions who initially partnered with MyTech for identity verification in online account openings, but have since significantly increased their investment. Today, they rely on MyTech as an end-to-end enterprise verification solution partner, with our solutions empowering a wide range of critical identity and fraud prevention workloads. These solutions enable our customers to provide best-in-class customer experience and safely expand the products they can offer in their digital channels. Examples of these expansions include digital mortgages, commercial onboarding, telephony authentication, mobile password resets, fraud and dispute claims, commercial KYC, document verification, and retail fraud prevention. Overall, this deepening adoption highlights the increasing strategic value we provide to some of the world's largest high-assurance businesses. At the same time, our ability to win and scale new business across industries and geographies reflects this early success of our go-to-market enhancements. Now let's dive into our third pillar, which is expanding the reach and impact of our fraud solutions with a spotlight on Check Fraud Defender, or CFD. By harnessing the power of our growing consortium data network, this strategy drives compelling results for both our customers and MyTech. CFD's annual contract value, or ACV, experienced considerable growth in fiscal 24, as highlighted on our prior call, with this momentum continuing in Q1, with ACV now approaching $12 million at the end of Q1 of 25. As mentioned, we have now seen checks from nearly all FIs in the country And we now have accumulated data sets on approximately 18% of all checking accounts in the country, up from 17% last quarter, reflecting our expanding footprint. While we successfully onboarded more paying customers in Q1, penetration remains below 1% of U.S. financial institutions, signaling the substantial untapped growth opportunity. Our confidence in this opportunity remains strong. reinforced by customer feedback indicating a clear preference for addressing check fraud through our consortium or shared data model. MyTech's competitive advantage lies in our credibility and expertise in check imaging and computer vision combined with the machine learning and fraud scoring. This is supported by our multi-decade track record of execution with these banking clients. Looking ahead, our goal remains to double CFD's ACV in fiscal 25 from our fiscal 24 exit, driven by an exciting pipeline of opportunities. While we expect variability in the quarterly pacing towards this goal, the momentum remains clear. Just last week, we signed another top 10 FI in CFD with a plan go live early next quarter. Each incremental institution strengthens the network, increasing the value of the data and insights for all participants. As the fraud landscape continues to evolve, MyTech is uniquely positioned to deliver industry-leading solutions and tackle our customers' most pressing challenges, from payment fraud to identity and digital fraud, helping them stay ahead of emerging threats. Finally, our fourth pillar, which is operational excellence, remains the cornerstone of our strategies. This is supported by durable organic growth, SaaS expansion, cost efficiency, and strong free cash flow conversion to maximize shareholder value. While overall revenue growth was clouded by the timing of mobile deposit reorders, total SaaS revenue grew 29% year-over-year during the first quarter, with deposit SaaS revenue up 64% and identity SaaS revenue up 26%. driven by CFD and MyVIP, respectively. Total SAS revenue for the last 12 months reached $67.8 million, a 13% year-on-year increase, now representing over 39% of our last 12 months' revenue, a notable sequential improvement. As mentioned last quarter, looking out to fiscal 26, we're pursuing a goal for SAS revenue to approach half of our total revenue. On the profitability front, adjusted EBITDA increased 32% year-on-year in the first quarter, driven by our commitment to cost discipline and operational efficiency. Last 12-month free cash flow conversion improved during the quarter to 83%, which is benefited by positive changes in net working capital and reductions in our non-GAAP adjustments, reflecting discipline management of these non-referring costs. So in summary, it's still early in the year, but we are encouraged by the company's progress in Q1 positioning my tech for durable, profitable growth in fiscal 26 and beyond. With that, let me turn the call over now to Dave for a few comments on the financials.

Thanks, Ed. I'll start by walking you through our results for the quarter, highlighting the drivers behind our performance. From there, I'll share some additional insights into how we're approaching the balance of the year. First, our fiscal Q1 25 results. Our total revenue for fiscal Q1 was slightly ahead of last year's, at $37.3 million, consistent with the revenue phasing remarks on our last earnings call. As expected, deposit products revenue was impacted by mobile deposit deal timing, declining 9% year-over-year. Our identity products revenue increased by 13% year-over-year, underscored by accelerating transaction volumes and a sequential acceleration in revenue growth from the fourth quarter. Our non-GAAP gross profit for the quarter was $31.5 million, representing an 84% non-GAAP gross margin, and an adjusted EBITDA came in at $7.8 million, representing a 21% margin. Both exceeded our expectations due to the benefits of cost efficiencies within our identity product portfolio and our company-wide focus on cost controls. More on this in a moment. Turning now to the specifics of our revenue performance, let's start with deposit products. Deposit revenue declined 9% year-over-year to $19.3 million in Q1, primarily due to a 21% decline in our deposit software license revenue. This decline reflects the anticipated timing air pockets in mobile deposit renewals, as highlighted in our prior call. Given the nature of the term license revenue lumpiness, we would encourage investors to look at longer-term trends to assess the health of this revenue stream and, therefore, would highlight that LTM deposit revenue for fiscal Q125 was $101.8 million. I'd like to provide additional insight into the nature of renewal timing in mobile deposit solutions. Customers and channel partners typically purchase one or more years' worth of transaction inventory in advance to ensure uninterrupted support and avoid disruptions. While purchase timing and usage generally move in tandem, they can occasionally diverge. Importantly, our revenue recognition occurs at the time of purchase rather than when the transactions are actually used. This dynamic creates variability in our revenue phasing. Renewal timing is influenced by two key factors, the number of years of transaction inventory purchased up front and the rate at which transactions are consumed. While we have good visibility into consumption patterns and can reliably anticipate when customers will need to replenish their inventory, the intermittent nature of their purchasing behavior contributes to the uneven revenue phasing. That said, our transactional volumes are more That said, our transactional volumes, a more stable indicator of the product's health, continue to maintain an annual run rate of approximately 1.2 billion transactions. Deposit revenue highlights this quarter included deposit maintenance revenue, which posted steady 3% year-over-year growth, and deposit SAS revenue, led by CFD, which grew over 60% year-over-year, accelerating from a 40% growth rate in the fourth quarter of last fiscal year. Now turning to identity. Revenue from identity products grew 13% year-over-year to $18 million, driven primarily by a 26% year-over-year increase in identity SaaS revenue. This growth resulted from accelerating transaction growth in both MyVIP and MobileVerify, which, due to less impactful pricing pressures from MobileVerify this quarter, allowed the transaction growth to shine through to revenue. All in all, we were pleased to see mobile verify revenue growth year over year for two quarters in a row and to see MyVIP continue its growth trajectory. Now to tie this all together, our total revenue increased nearly 1% year over year as 21% year over year growth in our services revenue streams were offset by a 25% decline in software and hardware sales. SAS revenue grew 29% year over year driving the increase in services revenue, helping to counterbalance the decline in total software and hardware revenue, which reflected fluctuations in our biometrics point solution software sales and the timing of mobile deposit software renewals. Moving down to P&L, we maintained strong unit economics, achieving an 84% non-GAAP gross margin in the quarter. This was driven by over 99% gross margins on our software license revenue, and more notably, a 77% gross margin on our services and other revenue, an improvement of nearly 300 basis points year over year, and our highest quarterly services gross margin in three years. As Ed highlighted, these results reflect the early financial benefits of our efforts to increase automation, improve cost efficiencies, and drive cultural integration particularly within our identity portfolio. Non-GAAP operating expense for the quarter totaled $24 million, a $1.9 million sequential increase from $22.1 million in fiscal Q4. The sequential increase was primarily due to the annual management bonus accrual reset, which occurred in our first fiscal quarter, and a return to normalized operational spending levels after enforcing some near-term cost controls on certain discretionary spending during the fourth quarter. We ended up approximately $2 million below the expected $26 million operating expense level, which we communicated in December, primarily due to delaying hiring and other discretionary spending while we finalized our go-forward plan with Ed as our new CEO. The $10.4 million bridge between our non-GAAP operating expense of $24 million and GAAP operating expenses of $34.4 million consists of $2.4 million in cash adjustments and $8 million in non-cash accounting adjustments as detailed in our earnings release. Focusing on our non-GAAP cash adjustments, this amount has decreased. from $5.1 million or 14% of revenue in the first quarter of 2024 to $2.4 million or 6% of revenue in this quarter. This 700 basis point free cash flow conversion improvement reflects discipline management of non-recurring costs such as executive transitions, legal, and one-time audit fees, all of which have declined both sequentially and year over year. Elevated restructuring costs this quarter are attributable to the cultural and operational integration initiatives that occurred, particularly during December, as discussed earlier by Ed. Tying this all together, adjusted EBITDA for Q1 2025 reached $7.8 million, up 32% year over year, representing a 21% adjusted EBITDA margin. After factoring in other income, interest expenses and taxes, this equates to $6.6 million in non-GAAP net income or 15 cents per diluted share based on 45.2 million diluted shares outstanding. Moving on to our balance sheet and capital allocation framework. Over the last 12 months, we generated $40.2 million in free cash flow and spent $27.2 million of this, repurchasing 2.6 million shares at a weighted average cost of $10.44 per share. At the end of Q125, our cash and investments balance was $137.9 million, and we have $22.8 million remaining under our current share repurchase authorization. As outlined on our December earnings call, we moderated our share with purchase activity in Q125 to maintain balance sheet flexibility while we actively assess and implement the optimal capital structure for our business. The key near-term priority in our capital structure strategy remains addressing our $155 million convertible senior notes, which mature on February 1, 2026. These notes feature an attractive 75 basis points annual cash coupon, a conversion price of $20.85, and an effective dilution threshold price of over $26 per share due to note hedges and warrants. We remain confident in our ability to retire these notes when economically advantageous, supported by our existing cash balance and cash flow generation as well as any external financing options that will be available to us. Now turning to the fiscal 2025 guidance. We are reiterating our revenue guidance range of $170 million to $180 million, and we are flowing through the cost benefits realized in the first quarter into our adjusted EBITDA margin range by raising the lower end of the range by 100 basis points. resulting in a new guidance range of 25 to 28%. From a revenue phasing perspective, we continue to expect quarterly revenue seasonality in fiscal 2025 to follow a similar pattern to that of fiscal 2024. Now, to help with operating expense modeling for Q2, we expect non-GAAP operating expense to increase sequentially to approximately $26 million, plus or minus $1 million, with depreciation expense around 70 basis points of revenue. Looking ahead, we anticipate non-GAAP operating expense will continue to modestly increase sequentially throughout the remainder of the year as we invest in R&D and sales to support our new products. And finally, our Excel-based supplemental financial package containing trended historical financials has been updated for Q125 and is now available on our Investors Relations website. Operator, that concludes our prepared remarks. Please open the line for questions.