Hello, and welcome to Mitek's Fiscal 2024 First Quarter Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to hand the call to Todd Kehrli of MKR Investor Relations. Todd, please go ahead.

Thank you, operator. Good afternoon. And welcome to Mitek's fiscal 2024 first quarter earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Dave Lyle. Before I turn the call over to Max and Dave, I'd like to cover a few quick items. Today, Mitek issued a press release announcing its financial results for its fiscal 2024 first quarter as well as preliminary results for its fiscal second quarter ended March 31, 2024. 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 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, April 15, 2024, 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 Carnecchia.

Thanks, Todd. Welcome, everyone, to our fiscal year ‘24 Q1 earnings conference call. As always, we appreciate that you joined us today and thank you for your continued support and trust in Mitek. Today, I'll make some brief comments about Mitek's results and update you on the business priorities. I'll then turn the call over to Dave Lyle, our CFO, to review the first quarter financial results and provide our outlook. As previously discussed, in the first quarter of last year, we had a large one-time multi-year mobile deposit reorder that pulled forward three years of revenue into that quarter, creating a very difficult year-over-year comparison. It's important to note that this quarter's results are not representative of a business trend, in fact, to the contrary. With our fiscal 2024 guidance, we expect our Deposits of product revenue to grow 10% to 12% year-over-year on a normalized basis and our Identity product revenue to grow 10% to 12% year-over-year on an organic basis. We anticipate that much of this growth will occur in the second half of the fiscal year with the growth continuing in fiscal 2025. Our conviction in Mitek's significant market opportunity continues to grow as we leverage our collective AI-powered data solutions to answer an accelerating fraud management need in markets and geographies we serve. Evidence of this can be seen in three factors. Number one, the accelerated need for identity verification as fraud and cybercrimes grow in sophistication and continue to plague banks and enterprises of all sizes. Number two, the rapidly growing misuse of deepfakes and voice cloning poses a significant threat to personal and financial security. As a result, our award-winning biometric authentication technology is seeing rapidly increasing demand. And number three, the momentum we are seeing with Check Fraud Defender products offering is…

Thanks, Max. I'll begin by taking you through the fiscal Q1 2024 financial results and then comment on our outlook. Looking first at fiscal Q1 revenue, top line revenue for the fiscal quarter defined 19% year-over-year to $36.9 million due primarily to a large multi-year mobile check deposit reorder with one customer where Mitek recognized additional licensed revenue in fiscal Q1 2023 relating to future years of approximately $7 million and which deducted approximately $2.7 million from fiscal Q1 2024. Adjusting for that entry, top line revenue would have grown by 3% year-over-year. Software and hardware revenue declined 39% to $16 million in fiscal Q1 2024 primarily due to the multi-year contract just discussed. Services and other revenue grew 8% to $20.9 million in fiscal Q1 2024. This increase was primarily due to strong growth in SaaS revenue as well as increased maintenance revenue associated with deposits, product and software sales. Shifting to revenue for our two major product categories, Deposits and Identity, let's start with Deposits. Deposits revenue declined 30% year-over-year in fiscal Q1 2024 to $21.1 million for reasons just described. Adjusting for that multi-year contract, deposits revenue would have grown about 4% year-over-year. The quarter's revenue was also impacted by timing of reorders. Please note that 67% of deposits revenue was in Mitek software and hardware revenue and 33% was in services and other revenue. Identity revenue for the first fiscal quarter grew 3% year-over-year to $15.8 million driven by our SaaS products revenue. Growth from our newer identity authentication products, including MiVIP, MiPass and ID R&D biometrics, which grew faster than the market, was somewhat offset by the sun setting of our legacy ICAR hardware and software products, as well as some pressure from commoditization in the document verification market. Approximately 12% of Identity revenue within…

[Operator Instructions] Today's first question comes from Jake Roberge of William Blair.

Hey, thanks for taking the question. And appreciate the color on the one-time contract that was pulled forward last year, but even excluding that, the full year guide assumes a fairly large back half ramp. So could you just walk us through the building blocks that give you confidence in that guide, whether it be the new products like Check Fraud Defender ramping more meaningfully? And easier comps just given the large contracts and end-of-life products, would just be helpful to unpack what's exactly driving that strong half ramp in the guide.

Hey Jake, thanks for calling. I'll let Dave give you the building blocks. I think the top cap comment I would make is we've tried to, as we've shared with you guys before, we've tried to kind of provide some guidance around the idea that you need to look at these businesses not on a month-to-month, week-to-week basis. You got to look over a longer span of time and I think that's definitely what's going to come into play here, but I'll let the building blocks come from Dave.

Yes, I think you were characterizing correctly. We have our kind of heritage business and mobile Deposits as well as kind of document verification, those kinds of products, and we've got these new products that Max has talked about in the last couple of earnings calls on the Deposits side, the Check Fraud Defender product, which we think is very promising and it's kind of just now starting to pick up momentum and so we think that will drive growth in the second half of the fiscal year. And then also on the kind of ID R&D biometrics as well as the MiVIP platform, including MiPass are all opportunities for growth in the second half, all of which are kind of ramping at the same time.

Okay, very helpful. And then, yes, great to hear that you had over 20 customers using Check Fraud Defender and exiting that March quarter. Could you just give us a little more detail on those deals and maybe walk through how long those sales cycles took, what those customers were using before Check Fraud Defender, and then if you could just give us any insight into just how large annual contract value could be for some of those bigger deals that you've landed thus far, that would just be helpful in understanding kind of the opportunity with check fraud.

Sure, there's a lot to unpack in there, so if I miss anything, you just remind me which elements I missed with the question, Jake. So as a reminder for folks we co-created Check Fraud Defender in conjunction with one of the top five banks in the United States, obviously using the intellectual property and knowhow and kind of all of our frameworks around computer vision and machine learning and how to visually inspect the check and use over 20 different elements to pull that check apart and determine whether it's fraudulent or not. And so we've been at that, as I said, we introduced the product about two years ago, and as you'd imagine with any kind of consortium, especially in a banking environment that's so highly regulated and so full of lawyers and compliance professionals the first sales cycle there was well over 12 months. And if you kind of laid down the 20 contracted customers we have today, you're almost watching the sales cycles fall into half-lives, right? So to give you a sense, if I had to kind of paint a picture of those 20 participating consortium members, we focused very heavily on the top 100 banks, right? So we've got a healthy dose of the top 100 banks, but we also, about four or five months ago, announced in a relationship with Abrigo, and Abrigo, back in February, introduced kind of their first product based on CFD, and in the quarter, had success in this quarter, the March ending quarter, had success closing some smaller financial institutions. So now we've got some really big guys, and we're focused on that in a very direct way with our direct sellers. And now we're starting to light up that channel that has been so successful for mobile deposit, starting with a relationship I just mentioned, but to be followed very, very quickly by some of the other traditional channel partners we've had, the core banking service providers. So that hopefully gives you a flavor for it. It's hard to give you an average if you think about top 100 banks. Those contracts are multi-hundreds of thousands of dollars a year to low millions of dollars a year, and then some of these ones that we're now seeing in the longer tail through the Abrigo relationship they're under $100, 000 a year. But there's so many of them. There's just such a big opportunity there with the 8, 000 financial institutions that already know and really enjoy a relationship with Mitel.

Okay, very helpful there. And then if I could just sneak one more in. Now that you're current on the filings, have the 10-Q published, working on the 2Q filing, just curious if you could just give us any updated thoughts around capital allocation, whether it be buybacks or converse, just how you're thinking about capital allocation, whether Max being at the home for a few years now, or Dave, now you're taking a new look at the business. Just curious how you two are thinking about those plans moving forward.

Yes, I don't think we have anything new to announce today. I will remind you that almost on a monthly basis, certainly no less than quarterly, we're reviewing our capital allocation approach with our board, with our senior team, and with our outside advisors. Let us get the Q2 on file, and let us get current, and see if we've got more to talk about in the next call.

The next question comes from Mike Grondahl with Northland Securities.

Hey, thanks guys. A couple of follow-up questions on Check Fraud Defender. The first one is, you guys said that was exceeding your internal expectations. Just curious what that relates to is that revenue, number of banks, maybe if you can cover that. And then secondly, as you're expanding that reseller channel past Abrigo, is that going to include like the Fiserv, Jack Henry, FISs of the world? Like how extensive will your reseller partners be, and when do you expect that to start?

Yes, some great questions in there, Mike. So obviously, we're very bullish about Check Fraud Defender, both in the near term, but also on the more intermediate term. For the other callers or listeners here, just to state the top cap point of this, check fraud has become a board level issue for every financial institution in the United States. If you're a board meeting in a bank in the United States, it doesn't matter whether you're a small community bank or whether you're Jamie Dimon of JPMC, this is coming up in that meeting. I mean, that's the level of losses and the kind of disruption and damage to customer relationships that is going on with this activity. So back to your question, I put the spotlight on Abrigo because they started to have success and they turned the sales cycles very, very quickly, which we’re quite impressed with. But you pointed to some of the longer term, much larger institutions that serve as core service providers to the banks and that have, for the better part of 15 years, been very trusted partners, both to the banks and to Mitek. And I don't want to use any of the names, but we're very close to getting those folks signed up and getting them online with Check Fraud Defender. The start of your question was around our internal expectations. And I think if you had sat down with me and asked at the beginning of the year, on October 1st, the beginning of the fiscal year how many consortiums contracted customers will you have coming out of March? I would have said, if we do this the right way, we'll have 15, and we're over 20. So that's the reason that I feel like we're ahead of expectations is largely around that.

Got it. And then just one question on mobile check Deposits. I think you talked about, for the year 2024, sort of like 10% to 12% normalized growth. Roughly, is that half of that coming from price and half of that coming from transactions? How do we just get a feel for the mix there?

Yes, I'll let Dave see if he wants to take a swing at how we break the mix up. But when we said the normalized, again, it's trying to do the math backing out the additional three years of the contract, the very large contract we took in Q1 of fiscal year ‘23, and then laying in one third of that into Q1 of ‘24. I think we lay that map out either in the press release. Anyway, in the press release, yes. As far as that 10% to 12% it's, part of it is price increases and part of it is increase in option of mobile banking. I don't know if you break it out, Dave.

I haven't broken that further than that publicly, but those are the two variables that are at play.

And we probably shouldn't do that today.

No.

The next question is from Allen Klee with Maxim.

Yes, hi. Just some of the add-backs you have for coming up with your adjusted numbers. I had questions if you could kind of go into what was happening there, and if you're expecting any large ones in the first quarter, in the March quarter, you had a $2.2 million litigation costs in the December quarter or legal costs, and what is enterprise risk portfolio positioning and other related costs? Thank you.

Yes, thanks. It's a good question. In fiscal quarter one, taking out the, we'll address the legal questions in a second, but in fiscal quarter one, we use third-party experts to evaluate our product portfolio positioning, competitive landscape, enterprise risk, as well as some other related analyses, and that's really a one-time kind of study cost, so you won't see that come back in fiscal quarter two. And then on the legal side, I guess we had a $2 million higher legal expense. And if you look back into the details of fiscal quarter one, we used -- able to use quite a few third-party legal experts to do a variety of important activities. Some of those activities include getting our SEC file which was current, navigating the NASDAQ, and the potential delisting activities that happen with NASDAQ. There's some ongoing litigation that we show in the Q and that continues. And there was some outside legal expert help there. And then lastly, providing some support for customers in their own litigation. So it was a combination of events, not necessarily one thing that was specific.

The next question is from Chad Bennett with Craig Hallam.

Great. Thanks for taking my questions. So just maybe shifting over to the ID verification business and the 10% to 12% growth expectations there, is there a way to think about that side of the business from a transaction growth kind of same store sales standpoint versus a cross-sell upsell of MiVIP and MiPass, ID R&D type offerings and kind of how you think about that. And just generally from a transaction growth rate standpoint, are we seeing just year-over-year volume or transaction growth in that business this year? And do you see that strengthening throughout the year? And then maybe last one tied to all of it is, Max, you mentioned in the press release, I think product market fit for MiVIP and MiPass, and ID R&D. How do you kind of define that or what are examples of that? Thanks.

Sure, lots of facts there, Chad. I'll do my best. Maybe to start with a little bit of a bigger picture here. The identity market has changed pretty significantly in the last two or three years with all that's happened with interest rates and the slowing of maybe some of the new competitor formation and them trying to get funding. And we've definitely seen some pressure on some of our high-flying competitors from the last three or four years, which I think both in the intermediate term and long-term is going to benefit Mitek. And the reason I start there is today, our model is very much a land and expand model. We're targeted on these regulated industries, the top companies within those regulated industries, primarily in North America and in Europe. The majority of the Identity business is done through our direct selling activities, so about 80% of the revenues come from our direct selling activities and about 20% from our valued partners that get us into geographies, use cases, and certain industries that we don't necessarily focus on. But if I had to look back on the last 18 months and tell you that probably 75% of the growth that we've enjoyed in Identity has been from the expand part of land and expand. We've reported this before, but new logo acquisition has become a very, very hard fought battle front, both because of the desperation of some of the competitors that I started with explaining, but also just because of the uncertainty, the geopolitical landscape and the global economic uncertainty. And so we've really been able to enjoy the relationships that we have with these big institutions where we might start in the retail bank in one geography with an onboarding journey, and then two to three…

Got it. And no, that's great color. And then just in terms of the ability to get and maybe timing more importantly to get to what I think you guys have talked about on the identity part of the business as kind of an industry or market growth rate of kind of high teens. Is that a potential fourth quarter event or fiscal year ‘25 event? Is there anything company specific that needs to happen to achieve those growth rates or is it macro related or none of the above?

I think it's a combination of those things. Yes, so if we talk about 14% to 16% catered growth over the next five years, those numbers come from third parties like Gartner or Liminal, third party analyst firms that focus on this identity category that is a five year catered rate, so that's going to bounce around a little bit. We talked about the macroeconomic. But if we go back to some of the comments that both I made in the prepared remarks, but also Dave made in the prepared remarks, the composition of the Mitek Identity portfolio today is just head and shoulders of over where it was three or four years ago between the biometrics and liveness category creation that we're doing with ID R&D, then translating that into something that could be cloud consumed for customers through MiVIP and through MiPass, obviously plugging that into MiVIP, the end-to-end, lowcode nocode orchestration layer, there's just so many things going on there that we have to offer customers that just a short three years ago we didn't have. Those are the growth drivers in the Identity side of things, and I think you'll see that in the second half of this year, but you'll see it going into ‘25 as well. And that's without even, I don't want to reach back, but that's without even talking about CFD again, which very much is a digital banking offering, but I've said this many times now that there's this very growing important intersection between what we do for finding fraud for these financial institutions and what we do from an Identity perspective. It's very rare for somebody to perpetrate check fraud without simultaneously perpetrating identity fraud, and the access that we're having to these customers for Check Fraud Defender, the insights and the kind of challenges that they face, is helping us in both lines of business.

The next question is from Scott Buck with HC Wainwright.

Hi. Good afternoon, guys. Just one for me. With the ID business moving towards breakeven in the fourth quarter, what kind of margin tailwind on a consolidated basis should we be thinking about for fiscal ‘25?

We don’t guide for ’25.

Yes, our guidance for ’25 outside of what we already did, but I wouldn't say we're going to see directionally material changes to what we've seen in the past.

Thank you. This concludes our question-and-answer session. I'd like to turn the call back over to Todd Kehrli for closing remarks.

Thank you, operator, and thank you all for joining us today and for your continued support. As always, if you have any follow-up questions or would like to meet with management, please feel free to reach out to me, and I'll set something up. Thanks again, and have a great rest of your day.

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