Good day, and welcome to the Mitek Fiscal 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Mitek's fiscal 2023 second quarter and first six months earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia; and Interim CFO, Fuad Ahmad. Before I turn the call over to Max and Fuad, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its fiscal 2023 financial results for its second quarter and first six months. This 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, September 14, 2023, 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. Thank you for joining us today. We're very excited to be talking with you today, having just released our fiscal 2023 second quarter and first six months results. We expect to file our 10-Q for the second quarter soon and anticipate filing our 10-Q for the third quarter before the expiration of our NASDAQ extension deadline of October 13. With that filing, we will be current with our SEC filings. Before I review the second quarter results, I want to take this opportunity to recognize and thank the Mitek nation for their tremendous efforts, which has resulted in an exceptionally strong quarter. You have shown resilience despite the disruptions and distractions presented through the rigorous audit process. Thank you for your commitment to building a stronger Mitek. Now let me talk about fiscal 2023 second quarter results. We recorded record second quarter revenue of $45.3 million, representing growth of 35% year-over-year. We delivered GAAP net income of $4.4 million for the second quarter and non-GAAP net income of $13.1 million. Also, we delivered cash flow from operations of $6.3 million during the quarter. These stellar Q2 results, coupled with our record first quarter results, reflect some of our major accomplishments in the first six months of fiscal 2023, including being first to market with a multimodal biometric solution to elevate the fight against growing fraud. Beyond just our record revenue and earnings performance in the first six months of the fiscal year, we have distinguished ourselves as a critical solution in the fight against fraud. So let's dive a bit deeper into our two lines of business, starting with Deposits. The two major products, Mobile Deposit and Check Fraud Defender, continue to yield strong revenue growth with deposits revenue increasing 35% year-over-year. Mobile Deposit continues…

Thanks, Max, and thank you, everyone for joining us this afternoon. I'll start with our Q2 of fiscal 2023 revenue and operating results. For the second quarter of fiscal '23, Mitek generated $45.3 million of revenue, a 35% increase year-over-year. Software and hardware revenue was $25.3 million, up 39% year-over-year. The increase in software and hardware revenue is primarily due to the growing contribution of ID R&D and continuing mobile deposit reorders. As we have previously noted, ID R&D is transactional in nature and is part of our Identity business. However, since it is offered on-premise, we put that revenue into software line for accounting purposes. Services and other revenue, which includes transactional SaaS revenue, maintenance and professional services was $20.1 million for the quarter, up 31% year-over-year. Moreover, our transactional SaaS revenue increased 33% year-over-year to $13.9 million, driving this growth in the transactional SaaS strategy was increased Mobile Verify volume as well as the addition of HooYu revenue. Deposits revenue for the second quarter increased 35% year-over-year to $28.8 million, driven by mobile deposit reorders. Identity revenue also increased 35% year-over-year to $16.6 million, driven by the addition of HooYu SaaS revenue and strong contribution from ID R&D and Mobile Verify products. We delivered software and hardware gross margin up 99% for the quarter. Gross margin on services and other revenue was 72%, and total gross margin for the quarter was 87%, consistent with gross margins in the last year of the second quarter. Total GAAP operating expenses, including concept revenues were $37.4 million compared to $30.8 million in Q2 of last year. This increase is due to the investments to grow our Identity business and additional costs associated with the acquisition of HooYu, as well as higher G&A expenses related to enhancing our back office systems and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jake Roberge with William Blair. Please go ahead.

Hey. Thanks for taking the questions and congrats on the results. I know the check business is lumpy and you expect growth to decelerate through the year just given the timing of deals, but growth in that segment has been very durable. If you had to stack rank growth drivers, what could be the highest contributors between the conversion of more checks to mobile deposit, Check Fraud Defender layering deeper into the model or are price increases starting to be more meaningful? Just would love to kind of really understand what's driving growth in that segment this year?

Sure, Jake. I would stack ranks from highest impact to lowest impact, mobile check deposit adoption, so the online banking apps on your phone and use of that for depositing checks instead of going down the branch, number one. Number two, Check Fraud Defender, and number three, price increases, in that order. I think over time, Check Fraud Defender, as it becomes a more significant part of our business certainly has an opportunity to move up that lead table.

Okay. Helpful. And then given these results for the quarter ended March, could you talk more about when you started to really feel the impact from the macro on those transactional volumes? Did you actually see any headwinds in Q2 or did that become a lot more pronounced in Q3 and Q4? And then from your comments, it seems like ID verification may be getting more impacted than Mobile Deposit, but would love to kind of hear the puts and takes that you're seeing in each business as it relates to the macro.

Yeah. I think we've probably seen it going all the way back to -- you may not see it in the numbers, but the revenue numbers, but we've seen it probably going all the way back to November, December of last year, just the nature of how revenue gets formed meets those businesses being so different, there's kind of a lag in the way some of the contracts come up for deposits. So it's not as pronounced there. But I think those are contextualization I would give you for both lines of business.

Great. Sounds good. Thanks for taking my questions.

Our next question comes from Mike Grondahl with Northland Securities. Please go ahead.

Hey, guys. Thanks. Mobile ID and Mobile Deposits both grew 35%. Is there really anything to call out for either of those high growth rates, sort of what drove it or anything one-time?

Yeah. I wouldn't say there's anything onetime. It seems like Q2 FY '23 was the quarter of 35, right? 35% growth in both lines of business and then overall for the company. In the mobile identity business, I would tell you on the Mobile Verify business, the Identity business, we definitely had greater impact in the revenue from long-time existing customers that had increased volumes and increased usage. I think that was a contributor there for sure. We have some -- the banks that had some real big successful marketing campaigns for acquiring new customers. And then in Mobile Deposit, we had -- I wouldn't call it an outlier, we had a couple of big contracts. But every quarter, we typically have a -- the team has just done a wonderful job of smoothing out as best as possible the big contracts that come in that way.

Got it. And then going back to the March quarter, you had that contract extension with a large reseller and they got a four-year price lock. Can you talk about the price increase that you got there? And are there other large retailers where you think you could get a similar price increase?

Yeah. I'd remind you, Mike, we've been on the -- I want to call it just -- it's principled approach to pricing, right? If we kind of go back to four years ago when we -- when the team undertook this endeavor, we primarily sell the Mobile Deposit solution through a channel of resellers. And the historical nature of those relationships was very inconsistent, and it was kind of hard to see a true line as to how pricing works. And as we've adjusted pricing and those contracts have come up, we've done it on a much more principled approach, and that's allowed us, in many instances to increase pricing. What you saw in the Q1 number and Fuad reiterated today in the prepared remarks, this kind of outside contract that we ended up with that we're very proud to have, it was the reengineering of a long-standing contract that had probably been not one of our best. And so I'm not going to go into any of the specifics other than to say we got them to what we think the general market for our product and our resellers is. And that's good for the market, and we think it's good for the partner, and certainly, it's good for Mitek and our shareholders.

Got it. Are there other large retailers, you got to play catch up on?

We're four years into this. There may be one or two left, but I don't think you'd -- I wouldn't model in anything like as extreme as what we saw in the Q1 results.

Got it. And lastly, Max, now that you're almost caught up with your filing, what two things are you going to be most focused on?

I’m going to Disney World. Just kidding around there, Mike. Yes, certainly, we’re coming up on the end of our fiscal year. So not only do we want to get current, but we want to finish our FY ‘23 strong. So focused on that, focused on getting our annual operating plan in place. And then we’re going to be focused on kicking off, right, getting everybody armed, aimed and excited about the opportunity that’s before us and the adjustments and the improvements that we have to make for FY ‘24.

Got it. Okay. Hey, thanks, guys.

Next question comes from Allen Klee with Maxim Group. Please go ahead.

Yes. Good afternoon. In Identity, strong growth. Trying to understand to what degree -- I remember that maybe it was a year or two ago, there was one quarter where a marketing campaign of a bank ended and it had some impact. Is there anything of that the strength is maybe not recurring because there's kind of a shorter-term contract that might be ending or do you just think that you're just being a little cautious on macro overall? Thank you.

Sure, Allen. Well, I think two things. First, the example you're using, I think it was a little over 12 months ago. We had a -- one of our partners supports a gaming customer, online gaming. And the gaming company introduced a new game, and there was an age verification requirement. And we used that as an example of some of the episodic nature of transaction volumes in our Identity business. And that was a very popular game, and you had to verify that you were over 13 years old to be able to play. And they had over 1 million kids or results sign up to play the game and that drove some revenues for us that they just weren't going to repeat the next quarter because unless there was a new spectacular blockbuster game. We see that the banking community, when they run a marketing campaign, I don't think there's anything here to call out. We had strong transaction volumes with the banks, as I indicated. I think the other thing that I neglected to indicate is, obviously, we've got the benefit of the HooYu acquisition. So we had -- you've HooYu with us for the -- I think it was almost a full quarter on a year-over-year same-store basis comparison, right?

That's helpful. And then for your full biometric solution, can you give us an update of kind of where it stands in terms of where you are going to the market? And how we can think about maybe the sales process and what the size of those deals could potentially be compared to what you've been doing before? Thank you.

No problem. So yeah, this is -- obviously, you would imagine that MiPass, the multimodal biometric solution, which allows you to use both face and voice and the corresponding likeness of both of those biometric attributes, to have a very high assurance, very low friction way of authenticating who's on the other side of that device. And with a likeness, obviously, it's not -- it's not an AI or a bot or some sort of recording or a replay. But back to your question, that's a very new thing. We announced it at Money 2020 last year. It's now in full production and available. We've got a couple of customers for it. We've got even more, not just pipeline, but folks who are testing it and using it to figure out how they're going to insert it into their production environments. Hard for me, I think just based on the amount of data we have, it's probably hard for me to give you a sense of what we think the average deal size is going to be, but there's a pretty wide swing there is to the place where we can add value. We certainly could find smaller opportunities in midsized businesses where we're going to manage that service for them, maybe in conjunction with MiVIP. And that's going to be something that's maybe $50,000 or EUR50,000 a year, where we've got some much larger opportunities where this could be not just hundreds of thousands, but potentially millions of dollars a year and more oriented towards a true subscription as opposed to a transaction pricing model. Hopefully, that's helpful, Allen.

That's great. Thanks. My last question, it sounds like you're doing great on the patent side. What should we, from the outside, be kind of looking for over the next six to 12 months of news flow related to what's going on?

Yeah. The two things I would keep an eye open for. The first is the ongoing PTAB rulings. So having that patent trade office rule on the patents that are out there that USAA is using to try to campaign against the banking industry. So more news there. Obviously, we're not involved in that, but we're following that very closely. And then as we indicated in the prepared remarks, we still have our declaratory judgment action that's on appeal. And we do expect over the course of the next six months to hear something in that matter.

Okay. Great. Congratulations. Thank you.

Thanks.

[Operator Instructions] Our next question comes from Scott Buck with H.C. Wainwright. Please go ahead.

Hi. Good afternoon, guys. Thanks for taking my questions. First one, Max, on the macro, is it just as simple as folks getting better visibility around what the Fed is going to do and interest rates and -- what else is out there that could potentially alleviate some of these potential customer concerns?

Gosh, Scott. I think you're giving me way too much credit to be a global economist here. What we hear from our customers is things are slowing for them, right? We're a B2B company. And from B2B to C, I mean, obviously, there's end consumers on the endpoint of the device, but we're mostly going through those -- those banking institutions or through partners. And they are the ones that are seeing loan growth and mortgage refinancing and e-locks and credit card delinquencies. That's where they're seeing the slowdown. Now -- that's a big part of our business is helping these customers grow their portfolios and grow their revenues. With the fraud dimension of where we're playing, where we've been growing, when the economy slows, fraud goes up, and so there is, I wouldn't call it silver lining, but there is a -- there's a positive cycle that thinks that the negative side outweighs the positive side by a couple of factors.

No, that's fair. I appreciate that color. Second one, if we could talk a little bit about capital allocation, you're starting to build a fair amount of cash back onto the balance sheet here. What are you thinking about in terms of use cases? Is M&A back on the table? Or thinking about paying down some of the debt -- what is kind of your thoughts?

Maybe I'll take that, and I'll ask Max to jump in. I think at this point, the first thing we got to do is kind of get completely current on our filings, right? So before we start thinking about potential M&A or even stock buyback, I think we have to be current on our filings, and we're going to get, hopefully, as Max said in his prepared remarks, before the filing -- in that we committed to NASDAQ, which is October 13. So I think that's got to be and has to be and is our priority right now. And then after that, I think then we do open up for business again, so to speak. So I think that's the way I'd say it for now. Our capital allocation, the way I was thinking about it is more focused internally, how we invest wisely and efficiently to grow the business at -- maximally the AOP, we go through that exercise and making sure that the capital that we have available, that we're allocating that prudently internally. And prudently meaning efficient, right? So right now, that's the focus. An outward focus. I think that's going to be not until we get ourselves current on the filings.

Yeah. I think, Scott, the only thing I'd add to that is just because of the very favorable terms of that convertible debt, it's hard for me to imagine we would prepay that or pay that down prematurely. Not to say it's impossible that there's some circumstance that that -- we wouldn't be interested in doing that, but it's -- under course and speed of current, doesn't make any sense.

Yes. That makes sense, guys. I appreciate the color. That's it for me. Congrats again on the results.

Thanks, Scott.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.