Good day everyone, and welcome to today’s Mitek Systems First Quarter Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I’d like to turn things over to Mr. Todd Kehrli, MKR. Please go ahead, sir.

Thank you, operator, good afternoon and welcome to Mitek's first quarter fiscal 2021 earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Jeff Davison. Before I turn the call over to Max and Jeff, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its first quarter fiscal 2021 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 a webcast replay 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 or 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 for a complete description of these risks. Our statements on this call are made as of today, January 28, 2021, 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 non-GAAP and 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 Mitek's CEO, Max.

Thanks, Todd. Good afternoon, everyone. Thanks for joining us today. I hope all of you and your families are staying healthy and safe. Jumping right into it, the first quarter was a solid one all around for Mitek with both lines of business and each geography performing well. We delivered significant new account wins and impressive existing customer expansion, all of which resulted in another record quarter. First quarter revenue was a record $26 million, representing growth of 18% year-over-year. We also generated record non-GAAP net income of $6.2 million or $0.14 per diluted share, up 23% year-over-year and cash flow from operations was $8.7 million. We are energized by the ongoing momentum in the identity verification market, and the strength of our financial results demonstrates the expanding opportunity. We added significant new customers during the quarter, particularly in our target segments of financial services, gig economy, and marketplaces. And we continue to broaden our coverage with existing customers as they deploy our technology into new used cases, and increased transactional volumes for traditional use cases. Almost all aspects of modern life now use digital channels. So the need to establish trust in the digital identities of customers, citizens, partners, and employees is rising rapidly. Identity verification has never been more relevant. Rapid advances in artificial intelligence are enabling novel forms of fraud such as synthetic media, like bots and deepfakes. And increased scale and frequency of data breaches are all adding heightened pressure on organizations to protect their customers’ data and access. Perpetrators and their methods of crime continued to evolve and accelerated during 2020. So, even the best anti-fraud programs need to be continually assessed and refined. Organizations no longer have the luxury to simply verify access at the point of on-boarding. Instead, they need to continuously authenticate…

Thanks Max and thank you, everyone for joining us this afternoon. Let's start with the Q1 revenue and operating results. For the first quarter of fiscal 2021 Mitek generated record Q1 revenue of 26 million, an 18% increase year-over-year. Software and hardware revenue was 12.3 million, an increase of 7% year-over-year. Services and other revenue, which includes transactional SaaS revenue, maintenance, and consulting services is 13.7 million for the quarter, an increase of 30% over Q1 last year. This increase is due to the growth in transactional SaaS revenue, which increased 45% year-over-year to 8.9 million. For Q1 2021, deposits revenue increased 7% year-over-year to 15.6 million. Identity Verification revenue increased 40% year-over-year to 10.4 million. We delivered strong software and hardware gross margins of 90% for the quarter. Gross margin on services and other revenue is 79% for the quarter. Total gross margin for the quarter was 84%, compared to 87% in Q1 last year. Total GAAP operating expenses, including cost of revenue were 24.4 million, compared to 21.8 million in Q1 last year. This increase is due to increased cost of revenue, and increased expenses due to investments to grow our business. Sales and marketing expenses for the quarter were 7.4 million, compared to 6.6 million a year ago. Our MBA expenses were 6.2 million, compared to 5.3 million last year, and our G&A expenses were 5.1 million, compared to 5.3 million a year ago. GAAP net income for the quarter was 2.2 million or $0.05 per diluted share. Our diluted share count was 43.9 million shares, compared to 41.8 million shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition related costs and expenses, stock comp expense, litigation expenses, and the related tax impacts of these items. Non-GAAP net income for Q1 increased to 6.2 million or $0.14 per diluted share, compared to 5 million or $0.12 per diluted share a year ago. Our non-GAAP adjustments include 2.7 million of stock comp expense, 1.7 million of acquisition-related costs and expenses, 385,000 in cash tax difference, and [341,000] of litigation expenses for the quarter. This is all offset by the income tax effect of pre-tax adjustments of 1.1 million. Turning to the balance sheet, we generated 8.7 million in cash flow from operations during the quarter, bringing our total cash and investments to 72.6 million at December 31. Our accounts receivable balance of 12.7 million represents a DSO of 50 days. In closing, we're pleased with our results for the first quarter, which include record revenue and significantly improved profitability. And we look forward to continuing to deliver the valued services that Mitek provides. Operator that concludes our prepared remarks. Please open the line for questions.

Thank you. [Operator Instructions] We'll hear first today from Bhavan Suri with William Blair.

Hey, guys, can you hear me okay?

We can. Hey, Bhavan.

Hey, Bhavan.

Great. Congrats, Jeff. Jeff, we're going to miss you. But you know, we'll understand how it works, but congratulations on the numbers. Great said numbers. I would love to just touch on the ID verification side. As you think about demand in the pipeline, love to get a little color around how that's playing out, especially around as you think about the gig environment, the Airbnb customers, how you think it plays out, maybe not even over the last 12 months, but maybe over the next, you know, 36 months to 60 months, three to five years, love to think about how you guys see that business growing up?

Yeah, that's big question Bhavan. Just meaning it's far reaching. You know, certainly, the idea of being able to not just validate identities digitally, you know, is a big deal. It's still, you know, we've talked about this being early stage market that's growing rapidly that, you know, is a big category where the problem hasn't fully been solved. I think what we've seen in the course of the last couple of quarters is new used cases, and what we're referring to is the lifecycle of, you know, an end user, where they're being on-boarded, which has been historically the used case we've been used the most in, you know, determining somebody when they're first kind of coming to your bank to, you know, digitally to apply for a loan or a credit card or something. But what we've seen in the course of last couple of quarters is additional used cases around re-verifying that same individual after they've established a relationship with you could be because they've changed phones or change to address or changed name, got married, change their name and need to be re-authenticated, basically re-verified for rebinding to that device. And so, we're seeing those used cases within both our existing customers, as well as new customers. I think back to your question, you know, for the markets we serve, the best estimates we can come up with is, you know, identity verification is growing someplace between 20% and 40% a year and you know, Gartner the experts are telling us that, you know, the penetration rates at this point are 20%, 30% and they’ll be at 75%, 80%, you know, over the course of the next three years. So, I think we're going to have a lot of action in what we do today. And you're going to see us continue to compliment, you know, the current signals and capabilities we have, through ongoing innovation, as we've demonstrated in the last 12 months. And then bringing on additional signals through partnership and ultimately, perhaps even through acquisition.

Yeah. No, Max that’s a great answer, I guess, and great color. I guess, if we think about it, right, there's lots of ways to approach this concept, right? You've seen Equifax’s recent acquisition of Kount, you've seen LexisNexis talk about like, oh, we can identify a device and give you a score on the risk of a device? I guess the biggest question is, an [obviously] is a part of a DocuSign. There's this concept of like actual, not just ID verification, but ID management. I'd love to get a little bit of color strategically about how you guys think about ID management? So not just, yes it's a passport, it's a driver's license, it's valid, they're valid, etcetera. So the concept of actually understanding that [indiscernible], who is in Chicago did not buy a place in Mexico, because he never has [indiscernible] his account. But how do you think about that longer term strategy?

Yeah. So what you just outlined there is, you know, there's a lot of different approaches, a lot of different not just providers, but, you know, concepts and how to how to attack this problem. You mentioned a number of folks that are either complimentary or channel partners to Mitek. And ultimately, what you're trying to, you know, what you're trying to put your finger on is, where does this go and how do we ultimately end up with, you know, a really definitive digital identity that is, you know, highly private, super secure, but can be used, you know, throughout our daily existence, whether it's…

[Indiscernible] things like the MasterCard, Visa have the rails of credit, it’s the rails of ID, exactly. You’re absolutely right. In fact you could [indiscernible].

Yeah, yeah. So, you know, I think the question becomes, and, you know, the way we're trying to position ourselves is, who's going to own that identity? Who's going to be the source of, you know, put the technology aside? You know, we say Blockchain and all that, but is it going to be the banks? Is it going to be, you know, big technology could it conceivably be the government, and you have to think about this through multiple dimensions where, you know, we're serving our customers in dozens and dozens of countries. So, the idea that the government of the United States is going to figure out digital identity, and that's going to work for the folks in, you know, Germany, UK, you know, around the world, that's just not, that's just not the case. So, back to your question. You know, we have strong feelings as to what direction this is going to go, but we've positioned ourselves so that we can participate, regardless of who emerges, as that, you know, kind of controlling stake or consortium of, you know, of digital identity. Personally, my own personal view, to make a prediction is, you know, the Holy Grail here is self sovereign identity, and that is going to take a massive change in behavior, and, you know, adoption of technology that, you know, it's not going to happen on the timeline that you just, you know, you refer to three to five years, I think it's a much longer timeline than that. But again, our jobs here and the strategy, you know, that we're taking is to position ourselves so that we can participate and be a meaningful value add to the segments and the geographies that we're focused on, almost regardless of what direction it goes.

No, and I appreciate the color and I appreciate the candor and the neutrality. One last one from me and I’ll turn over to queue. Competition, you've seen a number of folks come out and say, okay, so we can do ID verification with matching the ID to passport or like driver's license, everything else. And the approach, the business has risen to more than ID matching, but like ID verification, but ID management, and I'd love to have your color as to how you think the [competitive one] is evolving, given, you know, guys of [indiscernible] like, how do you think about it to [better environment]? Who do you see? And how do you win? Thank you.

Sure, sure. Again, another really big question. So, I think, you know, what you touched on is this idea of, you know, identity access management, which is a much larger category, that IDV, Identity Verification is adjunct to, and you know, partners making these predictions that those two categories are starting to couple and intersect where you've got to have really accurate customer on-boarding, or else you're never going to be able to authenticate and re-verify. And so, you know, partnering with organizations that, you know, are expert in the IAM space, particularly, you know, beyond just their employee, you know, for employees, but also for consumers and customers, you know, that's part of our strategy. And we don't view those folks as competitors today. We view them as, as partners and complements to what we're doing. The names that you use to kind of the direct heads up competitors, that we see day-to-day, within, you know, prospective customers, you know, fighting for business, and, you know, the COVID, the last 10 months is really, I think, changed the competitive landscape where, you know, what we're seeing is folks like ourselves and a couple of others, that have been able to go fully, you know, remote and do it successfully without any business interruption, and, you know, really rising to this, you know, to this circumstance. And then we've seen some kind of historical competitors that are maybe a little longer [indiscernible] using some more antiquated technology that's not, you know, as scalable or is not as effective. And they're struggling through this. So, I think you're starting to see a separation in this, what has been a relatively crowded field. So, we're starting to separate the, maybe the winners from the losers or the wheat from the chaff, whatever the right metaphor, there is. Hope that helps.

No, no, that's very helpful. Thank you, guys. Appreciate it and congrats. That growth number and ID verification was great. Appreciate it. Thank you all.

Thanks Bhavan.

We’ll hear next from Mark Schappel with Benchmark.

Hi, good afternoon. Thank you for taking my question. And nice job on the quarter. Next, starting with you, the company's performance has been, let's just say quite good since the financial guidance was withdrawn early last year, I was wondering if you could just give us a little color on what it may take for the firm to reinstate financial guidance going forward?

Sure, Mark. Well, thanks for the kind words. You know, we went through the guidance along with, you know, I think the overwhelming majority of the Russell 2000 companies back in the March, April timeframe. And the reason we did that because there was just so much uncertainty, not just around COVID, but then the, you know, the knock on consequences around the uncertainty what that was going to mean in the economy. You know, we're now 10 months a little bit longer into it, and, you know, appreciate your kind words about our performance. I'm really proud of the team here. At the same time, you know, you can't have missed a new cycle in the last 30 days and think that, you know, the uncertainty is anything less than it was back in April. So, I think once we get comfort with, you know, the externalities, the things that were out of – that we're not in control of, like the spread, and not just the United States, the spread of coronavirus, the new mutations to coronavirus, and what that's going to mean knock on consequences to economies. We're happy to – you know, used to be in a public company for we've had, we've had guidance out there, we just got to have confidence with the guidance we give you guys we can stand behind and deliver on.

Great thanks. And then switching gears a little bit here to your channel network, you know, because building up your partner network has been a big initiative of the company over the last year or two. I was wondering if you had any progress report on that front this quarter.

Yeah, I've become really cautious in these calls of using customer names or channel partner names only. Because, you know, it is a competitive environment. And we've got a lot of competitors. Since we're the only public company, we got a lot of competitors to get the benefit of listening in on these calls. We have invested in the channel over the course of the last year, year-and-a-half, and we've had big impact from that. The best is still to come. And those channel partners are both helping us, you know, co-sell into the segments that we have our direct relationships, and earn direct activities, you know, around financial services, Fintech and the marketplace gig economies. We've also, you mentioned, or others have mentioned, Adobe and DocuSign, the relationships we have there, which are more horizontal in nature, and cut across different, you know, different industries, different geographies, and really take us into places that, you know, on our own, we probably wouldn't be ready for today just from an investment in direct resources, or getting us to used cases that, you know, we're just an element of a larger workflow. So yeah, we've had quite good progress there. But as I said, I think the best is still to come.

Thank you. That's helpful. And then, Jeff bringing you into the equation here, I was wondering if you could just provide an update of where the company is with respect to sunsetting the legacy on-premise platforms?

Sure. So, we – I think we started that initiative two to three years ago and said it was going to take us a while to get through it. We've done a great job getting, sunsetting the on-premise identity platforms. They were all domestic, and primarily in Europe. The only thing that's left this on premise is some of the products sold in the Spanish and Latin America territories. And that's probably two years out before those are completely gone. So, you'll still see revenue in that hardware and software line for, you know, the next four to six quarters, probably.

So it's just the one that's left for the most part.

Yeah.

Great. Thank you. That's all from me. Thanks again.

We'll move on to Mike Grondahl with Northland Capital Markets.

Hi, it’s Michael on for Mike. Thanks for taking the questions and congrats on the quarter. Maybe just to start off with anything specifically call out in the new deposit releases in the quarter or is that just more general updates there?

Mike, thanks for calling in. Can you just repeat the question? You broke up there, just as you were asking.

Oh, sorry. I think you just mentioned there was a couple new releases for mobile deposit updates in the quarter. Is there anything specific there or these just general updates for the software?

Yeah. So there were some pretty, you know, we get down into the details, some pretty important additions and capability improvements for our existing customers in both those releases. So, it was the Mobile Deposit 4.8 and the Global Deposit 2.2. There were some things under the hood that, you know, I think the layman wouldn't necessarily find all that interesting, but if you were a big, you know, core service provider, like a, you know, Pfizer or FIS, or Jack Henry, or one of the larger banks that, you know, that host us directly, you'd find some big improvements there, where the things just go faster or run more smoothly. I think the important, you know, the important message we wanted to get across is these are mature releases. These are very stable releases, these are very scalable releases, secure releases, that, you know, as these volumes, you know, at some point in the next 12 months, we're going to process our 5 billionth check, right. So there are a lot of checks going through these systems in the 7,500 financial institutions that are taking advantage of these solutions. And, you know, both for our partners and our customers directly, the ability to rely on these things and not have to, you know, not have to babysit them. You know, I think that's a really meaningful thing. And that's what we wanted to get across in, you know, in the prepared remarks.

Got it. That's helpful. And then just in the legacy systems, I mean, it's pretty safe to assume the most that – from the previous questions cleaned up. So, from a kind of a cost perspective, operating perspective that's [largely are you seeing] the benefit of that?

Yeah, I don't know that it's – it's all behind us for sure. I think Jeff did a good job of outlining where we are in that, you know, in that process. Every quarter, we have less of those legacy systems out there. Obviously, we're not, you know, continuing to provide or sell new ones. And so that’s in decline, as Jeff said, over the course of the next two years, the, you know, the go forward platform of mobile verify continues to grow. It continues to grow because we've got more new customers coming on to it. We've got existing customers finding new used cases, and we've got customers that just have expanding volumes. So, I think it's, you know, this divergence of watching the legacy kind of bleed off over the course of the next two years and watching the go forward platform really ramp up feels good.

Thanks. That’s helpful.

[Operator Instructions] We'll move on to Allen Klee with Maxim Group.

Good afternoon. I'd like to hear your thoughts on mobile deposits, and how you think this might react as we get to the end of the lockdown, and people start going back out again? It strikes me that that this is a behavior that would tend to remain sticky, but I'd like to hear what's your best guess about it?

Sure thing, Allen. So first, congratulations on your new gig, and great to have you on the call today.

Thank you.

We referenced in the prepared remarks a report that was just released by an organization called Cornerstone that did a couple thousand consumer surveys regarding digital banking, and specifically the use of remote check deposit from a mobile device. And that I believe you can get that a link to it through our website, if not, we can we can get your copy, but it's really interesting not only to see, you know that as consumers kind of got forced to adopt digital banking, their feelings about, gosh, how easy this is. And you know how convenient this is and how sticky it's going to be. That report, which again, is not our report, but we certainly would love the information that's in there, supports the hypothesis that you just outlined. Consumers are saying, yeah, I did this mobile deposit thing. I did this digital banking thing, and I'm going to keep doing.

Yeah, that seems to make sense. And then the numbers on identity were – are very good. The outlook is very good. How do you feel about and this business has good gross margins, but it's kind of an emerging business, but can you remind us of how you think about what this can look like, when it's more at scale?

Yeah, for sure. And just to remind everybody, the [indiscernible] business is [Technical Difficulty], we're investing heavily. And because the time is now and balance that we’re tracking is being disciplined and thoughtful about those investments, you know, so that as it does scale, as all these cloud mobile businesses do, you know, it turns to breakeven, and then very highly profitable. I'll let Jeff make some comments as to where that can go. But you know, we're still in that investment stage today. But every quarter and every year, we're thinking about, you know, what the right discipline and what the right balance is. This is, you know, this is absolutely the kind of business that as it scales, you know, there's a lot of leverage in it. And so I don't know, Jeff, if you want to bracket that with anything more specific?

I think the only thing I would add is, you know, on the gross margin line, that'll improve over time. And, you know, the reason that improves is, we're delivering this in the cloud and you know as cloud businesses go, the more and more volume you put in, you get more efficiency, and you can leverage the cloud, so it'll be a more profitable model, that's gross margin level. Also, if you recall, we provide agent assist services, when our automated systems don't actually – are unable to read the documents. And as our systems get better and better and improve, you know, less and less agent assists, resources will be required, and that'll help improve gross margin as well.

Thank you so much. And then just, I apologize, but when you were going over the patent litigation – the litigation stuff, when you talked about the efforts that you were making, where you went to the patent office, could you just repeat kind of what the actions were and what your next steps are with that?

Yeah, so specifically on the on the PTO, we had asked the PTO to crack those USA patents open and take another look at them. And they refuse to do that on a procedural matter, it had nothing to do with necessarily the validity of the patents and the challenge there. And that's really, you know, the some of that, that part of the prepared remarks. Other than that, it's really not a lot of change since the last update.

So what is – what are you planning to do as a result of that?

Right now, there's not a lot for us to do. You know, both the courts and the patent office while they're still open, due to COVID things that are just, you know, what is normally a glacial, kind of timeline and very, very slow progress has managed to downshift into something that's even slower.

Got it. Okay. Thank you so much.

[Operator Instructions] And with that, I would like to turn things back to Mr. Kehrli for any closing remarks.

Thank you, operator, and thank you, everyone for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day.

Again, that concludes today's conference. Thank you all for joining us.