Please stand by. Good day, everyone. And welcome to the Mitek Fourth Quarter and Fiscal 2018 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn things over to Mr. Todd Kehrli, MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Mitek's fiscal 2018 fourth quarter and year-end earnings conference call. With me on today's call are Mitek's Chairman, Bruce Hansen; and CFO, Jeff Davison. Before I turn the call over to Bruce and Jeff, I'd like to cover a few quick items. This afternoon Mitek issued a press release announcing its fourth quarter and full-year fiscal 2018 financial results. That release is available on the company's website at miteksystems.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'd like 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 could cause actual results to different 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 November 1, 2018 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 and expectations or otherwise. 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 presents a reconciliation between the two for the periods reported in the release. Two housekeeping items, first during the question-and-answer session, we request the questionnaires limit themselves to two questions and then re-queue with any follow ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example statements regarding our fourth quarter refer to our fiscal fourth quarter ended September 30, 2018. With that said, I'll turn the call over to Mitek’s Chairman, Bruce Hansen.

Great. Thanks, Todd and good afternoon, everyone. Thank you for joining today. As most of you know by now my name is Bruce Hansen. I've been a Mitek Board Member since 2012 and its lead Director since 2016. I also assume the role of Chairman on August 27 following the announcement of the departure of our CEO. And I have 20 years of industry experience as the Co-Founder and CEO of ID Analytics, which we sold to LifeLock in 2012 and before that as President of Machine Learning pioneer HMC software, which was acquired by SICO [ph] in 2002. I want to start the call today by addressing a few framework items regarding where we stand and where we are going as a company. I will also address the public letter put out yesterday by ASG regarding their interest in acquiring Mitek. First, it was an outstanding quarter and year at Mitek. We achieved record revenue for both the fourth quarter and the full year as well as our 19th consecutive quarter of non-GAAP profitability. I will focus on the details related to our earnings more fully later in the call but suffice to say that we're hitting on all cylinders and remain confident in our growth prospects. Second, I've been assisting with the search for Mitek's new CEO along with new CFO. The company has retained top national executive search firms for both searches and I'm pleased to report that we've narrowed the search down to a few finalists in each case and expect that we'll be able to announce our selection soon. Third, and perhaps most importantly, I would like to make some or at least a few comments on behalf of our board, with respect to our singular focus on maximizing value for you, our shareholders. Mitek…

Thanks Bruce, and thank you everyone for joining us this afternoon. Let’s start with the Q4 revenue and operating results. For the fourth quarter of fiscal 2018, Mitek generated record revenue of $21 million, a 63% increase year-over-year. Software and hardware revenue of $14.3 million was up 70% year-over-year. The increase in software and hardware revenue was due primarily the growth of Mobile Deposit and the addition A2iA and ICAR. We maintained strong software and hardware gross margins at 94% for the quarter. SaaS maintenance and consulting revenue was $6.8 million for the quarter an increase of 51% up over revenue of $4.5 million in Q4 last year. This increase was primarily due to growth in transactional SaaS revenue, which increased 64% year-over-year and 27% sequentially to $4 million. SaaS maintenance and consulting gross margin was 73% for the quarter up sequentially from 71% last quarter. Total GAAP operating expenses including cost of revenue were $22.4 million compared to $11.2 million in Q4 last year. The year-over-year increase in operating expense reflects our continued investments to grow our identity business and increase in acquisition related costs, the addition of operating cost associated with our acquisitions of ICAR and A2iA, increased stock compensation expense and one-time executive transition costs. Sales and marketing expenses for the quarter were $5.8 million compared to $3.5 million a year ago. R&D expenses were $4.7 million compared to $2.9 million last year and our G&A expenses were $6.5 million compared to $3 million a year ago. G&A expenses for the quarter, include $1.6 million of executive transition costs. GAAP operating expenses improved $2.6 million of acquisition related cost compared to $690,000 a year ago. GAAP net loss for the fourth quarter was $2.1 million or $0.06 per diluted share, which is mainly attributable to increased acquisition…

Certainly. [Operator Instructions] We will go first to Bhavan Suri with William Blair. Please go ahead.

Hey, guys. This is actually Arjun, Arjun Bhatia on for Bhavan. Congrats on the quarter. Just wanted to, I think I missed this in your prepared remarks but what was the contribution from A2iA in the quarter and can you provide some commentary on how the cross sell efforts are going with A2iA? And if you could share, is that primarily in the Mobile Check Deposit business or you've seen some cross sell in ID verification as well?

Hi, Arjun. Thanks for the, congrats. We're really happy with the year. So A2iA contributed about $3 million in top line revenue to the quarter, which was great. That was pretty much what we targeted. So we're really pleased with the performance there. The products that they're selling, it's primarily their check reader product. And then a little bit the document reader. As to the cross sell, we have actually seen pipeline opportunities develop true relationships with A2iA and banks in Europe and those pipeline opportunities are in fact to our IT products. So I think that's a great benefit that we've already seen, you notice three months into that position and we'll continue to look for more as our pipeline grows and the relationship integrates.

Okay. That's helpful. And just in the quarter 63% growth that's significantly higher than we saw for the first three quarters in the year. Was there anything internally that you guys that Mitek change around or is it generally demand trends that you can attribute the increase growth too?

I would say the trends were pretty consistent with what we're seeing. Keep in mind you add the $3 million of revenue for A2iA. So that bumps up, that add some nice growth. But we also had a really nice strong quarter in Mobile Deposit and we were planning for a strong quarter, but they had good numbers come in and that group turned in a nice growth rate in excess, total payments in excess of 25% for the year.

Okay. And then just a last one for me on sales and marketing expense, we saw sequentially, it was generally flat as a percentage of revenue, starting as a percentage of revenue in total dollars. Was that expected going into the fourth quarter? And what can we expect in 2020, in fiscal '19 on sales and marketing expense?

Sure. Yeah, our plan was, all year long that we were ramping earlier in the year. So we were building a sales team. As we entered 2018, we had a lot of infrastructure there, we added sales reps. And so, I guess it slowed a little bit over the last months of this summer. We're going to continue to invest in sales and marketing to probably lumpy as at significant rate, as you saw at the beginning of 2018 that we're going to continue to ramp that team as the ID and it market really opens up.

Great. Thanks for taking my question.

Sure.

We'll move now to Darren Aftahi with Roth Capital Partners. Please go ahead.

Hey. Good afternoon. Thanks for taking my questions. Just two, if I may. So first your fiscal '19 guidance. Can you talk about kind of the mix composition of ID versus payments? And then second question and then you called out the $1.6 million executive transition, it sort of seem like G&A expense is still fairly elevated. Is there anything in that number, that sort of non-core maybe perhaps related to what's going on in the capital markets area or anything else to call out? Thanks.

Hi, Darren. So let's go to your first question on 2019 guide. The mix for ID and payments next year, it's not going to be a lot dissimilar than where we ended this year. If you recall, we were on a trajectory where ID was approaching 40%, but when we added A2iA that brought the payments backup. I expect next year 2019 payments will be somewhere between 60% and 65%. So probably around 62%, 63% and ID will be the inverse probably around 38% or so. So not just similar but ID shouldn’t, as that market up as up and we grow ID business it will increase. On the G&A expenses, yeah there is $1.6 million of executive costs in there, there is like a good $3 million size of I think its $3 million. There is big stock based compensation number in there as well. The company had a full impact of the LTIP this year versus 2017 and so that gives a pretty good bump in the stock base comp. Otherwise the G&A expense is just reflecting the normal growth to support the company. We may have a had a little more legal costs in quarter just due to some of the activity going on but I can’t think of anything else unusual in there.

Great. And then just one last one. So, I know there is seasonality in the business but the net margin of 27% in the fourth quarter and you guys are guiding to 18% to 20% next year, which excited to the midpoint 200 basis points higher. I’m just kind of curious, how to kind of connect between 27% net margins and guide the midpoint of the 19% going forward? Thank you.

Sure. So just if you look back at Mitek's history over 2018 and 2017, the way the years have ramped from a margin perspective is pretty low single-digits even sometimes in Q1 and then that has ramped over the year and that’s primarily related to how the payments, mobile deposit revenue comes in and the timing of those transaction reorders. So when we look forward to 2019, that’s -- it's going to be very similar. You’re going to have a step down in Q1 and then it's going to come back over the rest of the year in Q4 next year, you’ll have a greater than 20% margin again, because it's going to bring it back up. So it will be pretty consistent with what’s happened and part of the reason for that and the strength in Q4 is the mobile deposit strength in revenue, plus that A2iA revenue that comes in, that comes in at a nice margin. So that helps the company.

Thank you.

Thank you. Our next question will come from Mike Grondahl with Northland Securities. Please go ahead.

Hi. It's Michael on for Mike. Thanks for taking our questions. Maybe first up just on the ID side, obviously a strong 79% growth number in the quarter, is that more just seasonal strength, is there any kind of lumpiness in that number?

The ID growth at 79% that is you know -- pardon me.

Sorry. Go ahead.

Its form through the ID Group. Over the year, we have been investing in that team, we have been building pipeline and closing deals. And the transactions are coming in. So we had some really nice transaction growth from a few of our top customers in ID on a monthly basis, a couple of them I think there was just some things in their business that was maybe seasonal that came up and then we had a couple that came on with a good set of new transactions for us. They opened up like a new branch. So one of those for example is our company in the UK, that is performing work for government offices and they are using our product to verify identities for constituency in regard to the government for services. We saw a nice increase in that and I believe it's due to them just turning more of our service. So, it’s the adoption of these products increases that’s where that’s really starts to pay off in Mitek and this transactional revenue model will continue to see the growth. I hope that answers your question?

Yes, that’s helpful. And then maybe a little bit more on the 2019, 18% to 20% margin guidance. Is there any maybe for Bruce as well, as far as the expense structure anymore granular thoughts on that?

I missed the last part of your question, what's about it?

This is as far as cost structure as a whole. Any thoughts on that?

Yeah. I'll take a quick shot of that and then Jeff I'm sure will have some to add my estimate point as well. Yeah. We've made a ton of investment on the operating cost and infrastructure side over the last couple of years. And we're starting to see the benefits of scale and leverage on that. So certainly we're going to keep investing on both the R&D and the sales and marketing side. They think how to scale our business but not as heavier rate as we have historically, just simply because of scale and some of those investments have already yielded benefit. So but we haven't done anything structurally different and that's what you're getting at. Just growing into the frame that the company's built particularly in the ID business over the last two or three years.

Yeah. I just add on that, previously we've been investing we made the investments. The investments will continue probably not at the ramp that we just did but that's where we said we're going to see leverage come out of the ID model and out of that business. And we expect that business to be contributing to the bottom line here the next couple of years. So to get there you're going to see margin improvement and it's going to come, you expect to see it in 2019.

Thank you. We'll move next to Mark Schappel with Benchmark. Please go ahead.

Hi. Thank you for taking my question. Jeff, starting with you, the payments business, Mobile Deposit and A2iA. Revenue growth for the year I think if I recall correctly was 28%. I was wondering, if you just give us a sense of what the organic growth rate would have been if you stripped out A2iA for the year?

17%.

17% great, thanks.

Yeah. So that's -- sorry to be so brief. That's right in line with our, we were, we've been looking at that. I think our last guidance was 15% to 20% growth and they ended right in the middle there and then when you pair with A2iA we're at the 28%.

Okay, great. And then cash flow from operations. According to my model numbers here it was -- is basically flat or basically there was zero for the quarter. And that's down from about $3.2 million last year. Why was that the strong quarter, why was the cash flow from ops offers this quarter?

Yeah. That was -- that's good question. That was actually when we finished up and closed the books is like, (Inaudible). We just had a large number of sales transactions coming at the end of the quarter. And so they're all sitting in receivables. So you had $17.2 million in receivables and I think last quarter was $12 million. So it's huge record receivables for us. And with that working capital change it just hit that cash from ops number.

Okay, that's helpful. And then Bruce the question for you, question for Bruce with respect to the executive searches, why interview and hire a CEO and CFO in parallel? Why not just hire a CEO and then let him or her bring in their own person?

Yeah. It's an excellent question. And that actually is our preferred plan that to get our CEO onboard and allow them to make the selection on CFO. But we felt then with the fact that Jeff is going to stated out here within the next month or so that it would be prudent to also concurrently start a search for CFO to get to a final set of candidates that we hope a handful, if you will, of highly qualified invited candidates that have met our audit committee members and they met the key members of the team that we could deliver on a silver platter, if you will, to our freshly minted [ph] CEO and give them potentially a jump start at getting a CFO onboard. It also and certainly a new CEO may have their own candidates, they want to throw onto the mix. And we'd absolutely encouraged that but what we didn't want to do is be in a position where the CEO search lags for some reason. And the company for an extended period of time was without a CFO. So with this way we left ourselves the backstop option to potentially hire a CFO ahead of CEO. Although that's, I don't think it's going to play out that way and it certainly not our preferred option. We just felt, we need to do it for contingency purposes.

Thank you, helpful. That's it from me.

I hope that helps?

It does. Yes.

Thank you. [Operator Instructions] We'll go next to Ilya Grozovsky with National Securities. Please go ahead.

Thanks. First a clarification on the mix. In the quarter the ID business contributed what percentage. I think I got it but I just wanted to make sure I got it right. What was that number?

In the quarter, I don't know if I actually gave you that number. Hold on a second here.

Okay. And then while you're looking for that. Also I wanted to…

It's okay. It's about 28%, about 28%.

28% in the quarter, okay. And then just I wanted to kind of delve into that ID piece a little bit. How big is the sales force right now that's focused on the ID?

On the ID business?

Yes.

We don't ever give out just the number of sales reps but we do describe our sales and marketing and go-to market organization and that's well into the 40 to 50 headcount. But that's going to include customer facing people. So sales reps we have a group of solution consultants or sales engineers, we have channel sales reps, we have strategic account reps, we have enterprise reps, we have customer success managers in there and we have a group of DDRs or sales development reps. So it's a full fledge software sales organization. And kind of when you grow it all together you get to those numbers 40 to 50.

And that 40 to 50 is focused on the ID exclusively right?

Yes, yes.

Okay. And.

We keep focus on the -- go ahead.

Sorry. And then if you can just talk about the sales funnel on the IDP's kind of how big is the funnel right now. And wins versus losses, when you don't have success in this, what is the customer going with? What do you -- who you're seeing out there in this -- on the ID side? Thank you.

Well, I don't think that the competitive landscape hasn't really changed. It's all the same usual suspects that we've been seeing. The sales funnel we don't ever give out the size of the sales funnel. So we've seen great progress in building the sales funnel this year. The sales team has done fantastic job, just going out, identifying leads, responding the leads, pulling them in and developing those into opportunities in our sale funnel. So we're very pleased with that. And the results that we saw in Q4 demonstrated closing many deals that were in the funnel that brought us a good tap to the year on the ID team. So we really pleased with the performance there. Win loss, I would say we win more than we lose. A lot of these opportunities are proof-of-concept, a lot of them sometimes are pilots. Some of them are baked [ph] offs. And it's a matter of does the prospect have a fully baked concept of what they're going to do because sometimes that’s moving target. They're not quite sure how to go about identifying their or where when they want to verify their identity for their consumers. So I don't know if that answers your question but I would say that the company we feel pretty good about our competitive ability to win when we're in a -- capture competitive sales opportunities.

Great, thanks.

Thank you. That will conclude our question-and-answer session for today's call. At this time, I would like to turn the conference back over to the company for any additional or closing remarks.

Thank you operator and thank you everyone for joining us today. We look forward to updating you again next quarter. This concludes today's call and have a great day.

Again, everyone that will conclude today's conference. Thank you all for your participation. You may now disconnect.