Good day and welcome to the Mitek Systems' Third Quarter Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Mitek's third quarter fiscal 2021 earnings conference call. With me on today's call are Max Carnecchia, Mitek's CEO and Frank Teruel, Mitek's CFO. Before I turn the call over to Max and Frank, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its third 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 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 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, July 29, 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 and thank you for joining us today. We have a lot of cover and I would like to focus my comments on four key areas. First, our all-time record revenue and strong financial results; second, the key investments we made during the quarter in people and technology; third, providing more insight into the breadth of our growing product landscape which henceforth resulted in a doubling of our total addressable market. Before I begin, I want to take a moment to acknowledge my technicians. It has been over 16 months since we all started working remotely and I continue to be inspired by the commitment and resilience from the global Mitek teams. This quarter, we embraced virtual first as our workplace culture providing our global teams with more individual flexibility and alternate remote work options. Remote work is now our primary experience for all of our employees globally and the offices provide a hub for collaboration and teamwork. We have reopened our North American offices in San Diego and New York City, and the teams are taking advantage of the opportunity to meet in person. We look forward to reopening all of our offices in Europe as country specific conditions allow. In the meantime, thank you to all Mitek teams, your response and dedication to making our customers successful, is invigorating. And because of your dedication, we had another outstanding quarter, reflecting our laser focus on providing exceptional customer value to the world's leading banks, fintechs and marketplaces. Jumping into our financial results for the quarter, our transactional identity verification revenue continued its strong performance growing 33% year-over-year, highlighting our leadership in this market and our deposits business grew 23% year-over-year, as consumer adoption of mobile deposit continued to increase. All of this resulted in record…

Thanks, Max. And thanks everybody for joining us this afternoon. Before I go through the numbers for the quarter, I want to thank Max and the Mitek family for welcoming me with open arms. Although I've just started the company, I feel as though I've been a Mitek nation member for some time. As Max mentioned, prior to joining Mitek, I was Chief Operating Officer at ADARA and before that General Manager and CFO at ThreatMetrix. I've worked in the digital identity and fraud management space for many years and I am very excited to be part of the Mitek team, especially as we expand our role to facilitate inclusion while fighting fraud in this digital world. Mitek's recent acquisition of ID R&D and its launch of Check Fraud Defender are two great examples of Mitek's commitment to leading this charge. And the fact that major financial institutions today place their trust in Mitek with its very important sensitive imperative speaks very loudly to me. So thank you, Max, and thank you team. So with that, let's dive into the Q3 numbers. For the third quarter of fiscal 2021, Mitek generated all-time record revenue of 31.8 million, a 25% increase year-over-year. Software and hardware revenue was 17 million, an increase of 28% year-over-year. Service and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was 14.8 million for the quarter and an increase of 21% over Q3 last year. This increase was due to growing transactional SaaS revenue, which increased 33% year-over-year to 10.1 million. As was mentioned on last quarter's conference call, this is the first comparable year-over-year quarter since COVID began and we're very happy with this significant growth year-over-year. For Q3 2021, deposits revenue increased 23% year-over-year to 20.8 million. Identity and verification revenue increased…

Operator, that concludes our prepared remarks. Please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Bhavan Suri with William Blair.

Hey, gents. Can you hear me okay?

Sure can.

Great, great and congratulations. A great quarter and it was good to see sort of all of the cylinders firing there. And welcome Frank.

Thank you.

I wanted to touch really quickly sort of on the check fraud product a little bit. It was great to see sort of the banks adopt it. I guess I'd love to understand sort of the pricing model and sort of as you think about penetration, it makes sense that every bank would have it. So maybe talk a little about pricing and then the competitive environment, what's out there that would mean that maybe you don't get 100% penetration against [ph] what you've done with tech deposits.

Sure. Thanks. So, first, Bhavan, good to hear from you. And let's just start kind of lay the foundation for Check Fraud Defender. So this is technology that we have had and we talk about some of the adoption from some of the bigger, top 25 banks. That has been for some on-prem use where they're trying to do check fraud prevention and detection kind of with the with the check flow that they're seeing. And it's a little spotty. We've got a bank or two that have adopted very big time, over the course of the last 12 months. And then we've got some folks that are just starting. And that's what gave us confidence to re-factor the product, basically push it up into the cloud and open this up to a consortium so that banks can basically see cross-tenant, be able to see across a network of banks, where there might be some check fraud. And so you think about it as a signal, right, for each individual check, we're able to send a signal back to the banks in very rapid time whether that check is potentially a fraudulent check, so enough on the how. The competitive question is a good one, there are a number of tools that are out there that help banks by looking at data on a check and being able to determine if it's potentially a fraud, and that data is information about accounts and balances, and how long the account has been open. And the way that that works today typically takes 24 to 48 hours for those services to help bank determine whether that check is a potential fraud or fake. What we're talking about is something that's going to work in much, much shorter timeframes, a matter of hours, and being able to use the optics, basically, the visual inspection of the check, so the signature and how the check is laid out, the check stock itself, how things are printed, the numbers, the [indiscernible] comparison of the written out number versus the numeric number characters on the check. And so this is not an idea, this is not a concept, this is something that's already at minimum viable product, we've proven the market fit. And we're seeing that adoption, and now the idea of bringing it to the cloud and turning it into something near real time to be able to provide that signal to the consortium. That's the real excitement and what we're expecting to see here really impact our business over the next two years. From a pricing perspective, the consortium model isn't fully fleshed out, but the things we have done on-prem to get the MVP and the product market fit, those have been subscriptions. And so I think you'll see us continue to kind of expand the repertoire of business models over here and turn that into something that could be quite significant for us, a legitimate second act product in our deposits business.

Great, great, I look forward to seeing sort of how that layers onto the deposit business because obviously, you've got some of the points, which is checks sort of going away slowly, slower than people anticipated but obviously, the growth in check fraud growing dramatically. So it'd be nice to see that play out. Let me let me jump to ID verification a little bit. I'd love to understand a little about sort of how you've seen a return or have you seen a return in demand from some of the more impacted verticals, as you did last quarter. And then when I look at that sort of growth rate of 33%, I would love to understand where you think that is vis-a-vis the market, is that - it's a great growth rate, no one should laugh at 33%. But do you think that that accelerates, you think this is a 40%, 50% growth market? Maybe talk us about the return in some of those impacted verticals and sort of what that might play out, without giving guidance, I know you're not guiding to what the growth in the business might be?

Yeah, and just as a reminder, in our last earnings call, we gave some perspective that compared to Q2 of this year because of some one-time events, it was going to be a tough comp. Last quarter, it was a 50%, the SaaS transaction revenue grew 50%. And compared to Q3 of last year, at the beginning of COVID, we had a couple of customers that just really spiked and so, on a year-on-year basis, it's a little bit of a tough comp. I think the heart of your question, though, we're seeing most of the customers get back into a normal flow. And what we've seen in the last couple of quarters with financial services and fintech being very strong adopters of this technology, we continue to see that happen. Those one-time events that we saw in Q3 of last year, the April, May quarter when COVID just started and delivery services went through the roof and unemployment checks needed to be validated, the identity for unemployment claims, that's kind of washed its way through the system. It's hard for me to tell you, I mean, at 33% I think we're probably on the high end of where the overall market growth is. For the segments that we're focused on, I think that over time, we can do better than that. And, again, I don't want to guide but that's certainly how we're pushing the teams here. That's certainly what the customer demand and prospect demand is leading us to believe.

Gotcha. I want to delve into that a little more. You he touched a little bit in prepared comments. And you and I talked a lot about synthetic fraud, and sort of the acquisition you just made starts to address the ability. I take a picture of my face on someone else ID, it is a picture of a picture and so I can cheat the system a little bit. And so the acquisition sort of addresses that. But are companies understanding the value of that or is that still sort of evangelical to get sort of this, hey, I want to see that it's actually a picture of someone live and real, and not just a picture of a picture to avoid the idea of synthetic fraud. Can we talk a little bit of how that sales motion is going? And how much of that is evangelical today, especially for the new offerings, vis-a-vis sort of people totally get that and this is going to be built in and we'll see that laying very easily. Just kind of how are the nuances there and how's it playing out?

Yeah, so first, for folks who maybe aren't as familiar as you are Bhavan, this idea that a biometric is something that you are a DNA test, retina scan, face, voice, fingerprint, doing that at enterprise grade, right, not some consumer grade things, just on your iPhone, that's first in line. And I think that is generally accepted now in the market as being the kind of the standard of play. The point that you're bringing up, which I think is more nuanced is, okay, well, how do I ensure that that's actually alive person, when I'm checking that biometric and that liveness test is very unique to what ID R&D has invented, it is a very clever innovations of their scientists and their engineers. Back to your point, I wouldn't call it evangelical, but I absolutely - I sit in sales calls, I sit in these meetings, mostly through Zoom and you can watch the compliance and fraud and product managers within the financial institutions have like aha moments, when it occurs to them that they're being beat because somebody is doing a video replay or somebody - the bad actor is basically taking a picture of a picture or somebody with a mask. And when we show them with a single image, a single frame across all the channels, iOS, Android, web, that I can detect whether that human is alive or not, and do it with a payload that's a single frame, that you do see some heads explode. So I don't know if I'd call it spadework or education, but it certainly differentiated.

Great, great. I think that was helpful. I guess a quick follow up that is, and so, as that layers in, I'd love to get - I know, again, I am not forcing for guidance. I'd love to get some color on how you think that impacts growth rates for the business on the ID verification side? Could it be an accelerant over time? Is it just like bundled in and be part of the feature functionality? How do we think about that laying into numbers? Thank you.

Yeah, I think on the intermediate term, we absolutely believe that we wouldn't have made the move. Again, to your point, I'm not going to provide guidance, and we've got some integration to do. I don't mean company integration, I mean, taking additional elements of their product, the voice, the voice liveness, they've now got some things in their lab around document liveness, which is very novel. We've got to get that fully integrated in mobile verify, and that's probably going to take us a quarter or two, and then we can be selling in the market before then but then somebody has to get implemented. So it's going to take a little bit of time, but we're very bullish about what it means to our business long term.

Awesome. Thanks for taking my questions, guys. Thanks for all the color. Appreciate it.

Next question comes from Mike Grondahl with Northland Securities.

Hey, guys, congratulations on the quarter. Did you disclose any revenue in the quarter from Check Fraud Defender, the new product?

Yeah, so we did not have - if we did, it was de minimis. We literally have just kind of cracked the cover on this thing and made the announcement, it was the last couple of days of June, so more to come, Mike, in Q4.

Okay. And I was just trying to get a sense for mobile deposit, if that was clean, or if it had a little bit of new revenue layered in.

It was clean.

Got it. No, that's great. Kind of staying in mobile deposit, any update on pricing? I know you've been sort of as you've been renewing some customers getting a little lift, can you kind of speak to where you're at there?

Yeah, so just as a reminder for anybody kind of new tuning in over the course the last, probably, now eight or nine quarters. We have been taking a strong stand with some of our customers, some of our reseller partners around what I would consider some poorly negotiated arrangements historically between Mitek and those entities and there's a tremendous amount of value that is delivered from mobile deposit. Not only do customers love it, just because it's easy and it's magical, but it's a huge savings to the banks themselves. It's fractions of the cost of having a check go through a teller at a branch bank or even an ATM. And so, back to your question, we've been in the course of the last eight quarters taking a strong stand with these customers and partners and re-negotiating contracts and trying to get what we think is the reasonable and fair value for - on a per check basis for this product. And so, we continue to do that. It's a slog. It's basically hand-to-hand combat. Every one of these - no customer wants a price increase. No partner wants their cost of in-licensed technology to go up. But we believe this is the right thing and it's fair across the partner base, because not everybody is at the same place, so we've taken a principled approach to it. And Mike, I don't think - let's say we're halfway there, this is just something that we're going to have to continue to do. And we'll probably be talking about it for the next eight or nine quarters as well.

Good, good. In terms of mobile ID, any new use cases, in the June quarter, just where you've seen a customer come to you with an idea and you're able to kind of execute for that customer, something you maybe hadn't seen before, kind of thought of?

Yeah, I think one of the things you saw in the prepared remarks and you see us talk more and more about is this identity lifecycle, right, where historically most of our customers have been using mobile verify, to do an identity proofing step, when you're opening a new account, or when there's an on-boarding journey for new account opening. And what we've seen in the course of the last five or six quarters is more and more customers are interested in doing that, and then re-verifying that identity or doing some sort of account authentication after that account has been established. And so a good example there is you sign up for a credit card with somebody and we helped that bank with the on-boarding journey there. Now, they want to do a re-verification of that identity for some sort of high dollar amount wire transfer, or some sort of high dollar amount, transfer of money out of that account. So, making this example up, but now you want to do a $50,000 or more account transfer and it turns around and asks you to take a selfie. And that way, we're making sure that it's actually you, we can compare that to some picture that's in a registry someplace, and we can do that liveness test that we were just talking about. That's a great example. And I think those kinds of use cases of authentication, re-verification, we're just seeing more and more of those and you'll see us come to market with products to specifically address that more out of the box.

Got it. Congratulations again. Thank you.

Thanks, Mike.

[Operator Instructions] Our next question comes from Mark Schappel with Benchmark.

Hi, thank you for taking my question. Nice job on the quarter and Max, welcome, welcome aboard. Or excuse me, Frank, welcome aboard. Max, a quick question for you - first question for you, mobile deposit is particularly strong this quarter? I assume that a lot of that had to do with maybe just the timing of transaction blocks but would you still consider mobile deposit to be a mid-teens revenue growth, say, on a normalized basis?

I think as we look forward, we've talked about over 10%, obviously, we're well over 10% this quarter. Maybe just first on the statement you made, I think the really nice performance in mobile deposit this quarter is a matter of just timing and where those gas tanks kind of hit E and needed to be refilled up. Having said that, I think when we now add back, where we think Check Fraud Defender, as a second act product can help enhance our deposits business overall 10% to 15% growth, yeah, I think that's we're - yes.

Okay, great, thank you. That's helpful. And then with respect to ID R&D, I was wondering if you just give us maybe a real world example of how their technology would work with your core ID technology.

Sure, so kind of back to some of these examples of real verification, so today, you establish your identity by taking that picture of your driver's license or passport or identity card front and back, and then you take the selfie. At the same time, you could very passively be capturing a voice biometric, right, so both establishing liveness but also taking that voiceprint, and that ends up in a registry at a bank or at a marketplace, like an Uber or a Lyft or an Airbnb. And here's a great example with Uber, the drivers at Uber, how do you know that the driver is actually the person behind the wheel that day, right. You registered to drive for Uber, but then you had a tough day, the next day, you're going to let your brother in law drive your car and use your phone and that's a big risk for Uber. And it's not just a risk around the liability of some sort of accident, but the driver - the passengers themselves. And so periodically pinging a text or an email to that phone saying speak these words into the Uber app and being able to establish not only yeah, it was Frank who signed up to drive and Frank's the guy there, and Frank is alive. It's not a recording of Frank's voice, he says the three words his favorite football team or basketball team, or whatever it happens to be. That's an easy example. Same sort of, I just used the example with Mike Grondahl, about the idea of a step up for money transfer in an existing account. Now, you want to take a picture, you take a picture, you want to do voice, you do the voice. It's just so passive liveness and being able to do this in a less frictionful way where it's just kind of a natural interaction. You're going to see us continue to pursue that with other modalities, with other potential signals.

Okay. Thank you.

You got it, Mark.

And at this time, I'm currently showing no further questions.

Okay, 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.

Ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect your phone lines.