Mitek Systems, Inc. (MITK) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fiscal Second Quarter 2013 Mitek Systems Earnings Conference Call. My name is Tahitia, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference to your host for today Mr. Peter Salkowski, Investor Relations for Mitek Systems. Please proceed.

Thank you, Tahitia. Good afternoon. Thank you for joining us, everyone. Before turning the call over to Jim Debello and Russ Clark, I would like to cover a few quick items. This afternoon, the company issued a news release announcing its fiscal second quarter of 2013 financial results. That news release is available on the company's website at www.miteksystems.com. As a reminder, this call is being broadcast live over the Internet to all interested parties and the audio of this call will be archived on the Investor Relations page of the company's website. Before we begin, I'd like to remind everyone that on the call, we 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 our 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 any of our other SEC filings for a more complete description of these risks. Our statements on this call are made as of May 7, 2013 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 for any reason. Additionally, throughout this call, we will 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 non-GAAP and GAAP reporting, and presenting the reconciliation between the 2 for the period reported in the release. And with that, I'd like to turn the call over to Jim Debello, President and Chief Executive Officer of Mitek Systems.

Thanks, Peter, and good afternoon, everyone. Russ will provide details of the fiscal second quarter financials in just a few minutes, but before we do that, I'd like to discuss our accomplishments for the quarter. The Mitek team delivered strong second quarter results that demonstrate continued momentum in our business. Revenue came in at $3.2 million, an increase of over 170% from revenue of $1.2 million for the year-ago period. It was driven by our flagship Mobile Deposit product. For the fourth consecutive quarter, Mobile Deposit transaction usage increased sequentially by over 25%, contributing to an estimated $40 billion of mobile deposits since the product launched. In addition, U.S. Bank, the fifth largest retail bank in the nation, successfully launched our Mobile Photo Bill Pay Solution. During the quarter, 5 more banks signed agreements for Mobile Photo Bill Pay through our channel partner, bringing the total to 7, of which 2 are live commercially. Our 14th patent was granted in February, relating specifically to Mobile Photo Bill Pay, helping to further establish Mitek as the leader in the emerging markets for mobile imaging and document capture solutions. And following the end of our second quarter, we signed another contract with another top 5 property and casualty insurance company who will provide our proprietary mobile imaging technology to their customers. We're all extremely excited about this progress and I'd like to take a moment now to highlight some of the industry trends that's driving our business forward. As all of you know, the smartphone and tablet industries continue to grow at a torrid pace, taking center stage in our daily lives. Texting has become old-school. Now you can snap chat with your camera, just ask your teenager. But mobile banking has evolved too, equipped with cameras that have improved the customer…

Thanks, Jim, and hello, everyone. As I review the numbers, all figures are on a GAAP basis unless specifically described as non-GAAP. We have provided a full reconciliation from GAAP to non-GAAP with the earnings release, which is posted on our website. And now for the fiscal second quarter results. Total revenue for the second quarter of fiscal 2013 was $3.2 million compared to total revenue of $1.2 million for the year-ago period. Second quarter revenue was comprised of approximately $2.2 million in software revenue and $1 million in maintenance and professional services revenue. We had 5 Mobile Deposit reorders during Q2. Total operating expenses were $5.6 million compared to $4.1 million in the year-ago period. The year-over-year increase in OpEx was primarily driven by higher investments in personnel to grow the business, as well as litigation costs with the latter pushing total expenses above the $4 million to $5 million range we've been running at historically. Noncash stock compensation expense during Q2 was $704,000 compared to $651,000 in the year-ago period. Now let me break down Q2 expenses by category. Total cost of revenue in Q2 was $417,000 comprised of $263,000 related to maintenance and professional services and $154,000 related to software. This compares to total cost of revenue of $310,000 in the year-ago period. Gross margin for Q2 was 87%, which compares to gross margin of 74% in the year-ago period. The increase in gross margin was driven by higher revenue in the most recent period. Selling and marketing expenses were $1.4 million or 44% of total revenue compared to $712,000 or 60% of total revenue in the year-ago period. As we discussed previously, we have hired additional personnel to support our direct sales efforts. R&D expenses were $1.6 million or 51% of total revenue in Q2 compared…

[Operator Instructions] Your first question comes from the line of Joel Achramowicz from Merriman Capital.

Jim and Russ, any -- are you prepared at all to give us -- I mean, it's great to see the top line. Any contribution that you want to break out in terms of the Mobile Bill Pay application at this point ?

Joel, we haven't historically broken out revenues by product line. We talked in prior quarters about signings for Bill Pay, we've updated that this quarter, but what I would say is that in terms of total revenue contribution, Mobile Deposit still accounts for a large percentage of our license revenue.

Okay, fair enough. How about, Russ, what caused major bump in maintenance and professional services revenue, just new contracts? RBC contracts?

Absolutely. It's the -- as we continue to sign and you see those numbers increasing on the signed and live, as we continue to sign those, we get more maintenance payments in that number, that number grows.

It's great to see. And there's some consistency there, right, going forward?

Yes, I mean, when we talk about recurring revenue and consistency, it is nice to see that maintenance and professional services line grow. It is predominantly maintenance in any given quarter the professional services contribution to that has been $100,000 plus or minus. So it is the vast majority maintenance, which is recurring in nature.

And Joel. This is Jim. We've invested in our professional services team, we've brought in some excellent people. This is new for Mitek and we're building our book of business. It really helps foster the use of our Mobile Imaging platform and a variety of other use cases. So again, it assists us in growing our top line.

That's great. Jim, you had mentioned something like -- it was a little confusing to me in the patent side. Did you apply for 7 patents this year? I mean, or did you receive 7 new patents? You talked about that earlier and then at the back end of the call, you talked about having 14 issued patents and 25 applications pending? Could you just clarify that?

Sure. We have 14 that have been issued, one of which most recently is the Mobile Photo Bill Pay patent, which is very, very important to us. We built that intellectual property. We protected it on behalf of the company and our shareholders, and that's related to Mobile Photo Bill Pay. In addition to that, we have filed more patents as it relates to other use cases that we've developed for our core technology and other methods that we have developed as well, and those are pending right now and working their way through the USPTO. So we believe owning a large piece of not only the proprietary technology, but protecting it is an advantage for the company and one which will sustain our long-term growth.

That's great. Just a couple of other brief comments. Any comments on whether we might see sequential improvement in the third quarter in the top line, Russ or Jim?

Yes, Joel, we are still in a position right now. As I've mentioned, the vast majority of our license revenues generated from Mobile Deposit. We're still in the block pricing model there, which lends itself to a little bit of the variability we've had in our top line results. So not at a stage here today in this game where I have a large enough recurring percentage to give you any guidance.

[Operator Instructions] Your next question comes from the line of Patrick Cebrzynski from William Blair & Company.

Just one quick one for you, and I think this is kind of going back in a bit of a recall here. But when you talk about the unbanked or underserved market and you talked specifically about Walmart and the Bluebird card. Can you guys go through kind of your sales process there and if it's a direct sales or using one of your partners? And then, can you kind of also explain in terms of how that will play out in the future if that's going to other, I guess, other partners will that be a direct sale or are you going to use partners for that as well?

Sure, Patrick. So when Jim mentioned our history with mobile deposit of additional use cases coming up, that we didn't even think about when we set forth and we expect the same thing to happen for Mobile Photo Bill Pay. As we got into Mobile Deposit and we went through an indirect model primarily through our channel partners, we were initially seeing those channel partners deploy those transactions for just that Mobile Deposit, but what's occurred over time is we're seeing more use cases in the prepaid card market, including Bluebird for the Mobile Deposit technology. So it's the same front-end in terms of our technology that enables recognition of a check and extraction of the data. But on the backend, with Bluebird as an example, the funds are being loaded onto a prepaid card instead of into a DDA.

Great. And then can you remind us how many, I guess, partners you have in that underbanked or unbanked market besides Walmart?

Well, in total, there are around 12 primary channel partners that we work with for Mobile Deposit and I'd say a large number of those probably have some type of prepaid offering.

And Patrick, we've mentioned in the past 20 such prepaid initiatives, Walmart being just one of them. And to date we have 889 financial institutions now, which have signed agreements to deploy Mobile Deposit, most of which comes indirectly through our channel partners, the 12 of which Russ just mentioned.

I guess in that same realm, when you think of like a Chase who does -- I don't know the exact name of their prepaid card, but they use obviously Mobile Deposit through you guys. Are they using the same technology for their prepaid card?

They are. It's called Liquid and they use what they call Quick Deposit under their brand which deploys our technology to top-up prepaid cards that they offer.

The next question comes from the line of Elizabeth Colley from Needham & Company. Elizabeth Colley - Needham & Company, LLC, Research Division: One quick question. I'm just wondering if you could give us any additional details on the reorders? I didn't catch the number of reorders and maybe you could give us some color on changes in pricing if there were any?

Sure. On the reorder count, there were 5 during the quarter. We've been announcing that statistic, I think this is the fourth quarter in a row. In prior quarters, I've believe we've ranged from anywhere from 1 to 4 reorders. So again, we did see a handful of reorders during the quarter primarily through our channel partners as it's a channel model. And again, it's primarily just initial block transactions that have been exhausted from the initial order point here over the last several months and folks coming back to reorder more as they move ahead with the offering.

All right. Gentlemen, we have no more questions in the queue at this time.

Well, thank you very much for joining us. We appreciate your interest in Mitek Systems, and we look forward to updating you on our next earnings call. Have a good day. Take care.