Welcome to the Mitek's Fiscal 2024 Third Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Todd Kehrli, MKR Investor Relations. You may begin.

Thank you, operator. Good afternoon and welcome to Mitek's fiscal 2024 third quarter earnings conference call. With me on today's call are Mitek's Executive Chairman and Interim CEO, Scott Carter; and CFO, Dave Lyle. Before I turn the call over to Scott, I'd like to cover a few quick items. Today, Mitek issued a press release announcing its financial results for its fiscal 2024 third quarter, ended June 30, 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, August 8, 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 GAAP and non-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 Executive Chairman and Interim CEO, Scott Carter.

Good afternoon, everyone, and welcome. I appreciate your time today and your interest in Mitek. As you may know, on May 13 we announced my appointment as Interim CEO. In the three months since then, I have conducted deep dives into all aspects of the business and have received invaluable feedback from shareholders, clients and countless members of the Mitek team. Several important themes emerged, and I will discuss those today. Although there are revenue challenges we will address head on today, my first 90 days as Interim CEO has amplified my deeply-held conviction and the exciting opportunities ahead for Mitek and our shareholders. We have superior technology, important intellectual property, a high-quality team and are well positioned to capitalize on new and emerging market tailwinds. Before discussing this quarter's results, which are candidly mixed, I want to reaffirm the investment thesis behind our Identity product portfolio. Our initial vision has grown stronger, and our strategic investments have positioned us to capture significant opportunities in the evolving identity verification landscape. After pioneering mobile check deposit technology, a space where Mitek remains the market leader with proprietary technology trusted by the largest banks worldwide and thousands of others, we leveraged our expertise in verification technology to diversify into adjacent new markets, which we see as offering longer-term growth opportunities. We started with document verification and we then evolved to include solutions that serve the entire customer life cycle, including advanced biometrics and passive liveness, the ability to determine if there is a real human being behind the image or voice and doing so with minimal consumer friction. MiVIP serves to highlight our evolution from point solution to platform provider. MiVIP clients conduct a complete know your customer, or KYC, process through a single interface. We have reinforced our position as a…

Thanks, Scott. I'll begin by taking you through the fiscal Q3 2024 financial results and then comment on our outlook. Looking first at revenue. Total revenue for fiscal Q3 increased 4% year-over-year to $45 million. We saw a solid 18% year-over-year revenue growth from deposits, with mobile check deposit revenue being the primary growth driver and Check Fraud Defender showing a double-digit growth rate year-over-year. Mobile check deposit revenue saw a healthy cluster of earlier-than-expected renewals as continued strong transaction volumes led customers to utilize their prepaid transaction inventories faster than anticipated. Identity product revenue declined 14% year-over-year, with ID R&D biometrics revenue softness contributing to much of that decline for reasons described earlier by Scott. The pricing pressure on our Mobile Verify product as well as sunsetting ICAR hardware revenue contributed to the decline to a lesser extent. Looking more closely at Mobile Verify, the year-over-year decline was mostly attributable to some of our large customers renewing contracts at lower pricing. Notably, Mobile Verify transaction volume increased year-over-year and we saw close to zero customer churn during fiscal Q3, signaling healthy demand despite the competitive pricing environment. I'll talk more about how this could play out in my outlook commentary near the end of my remarks. Looking at revenue by reporting categories. Software and hardware revenue grew 6% to $22.7 million in fiscal Q3, mostly driven by mobile check deposit, but offset by declines in ID R&D biometrics product revenue. Services and other revenue grew 3% to $22.3 million year-over-year as we saw Check Fraud Defender begin to contribute to our transactional SaaS revenue with additional contribution from mobile check deposit maintenance revenue growth. GAAP operating expense for fiscal Q3, 2024 was $37.8 million compared to $35.6 million a year ago. The increase was primarily driven by $900,000 in…

[Operator Instructions] And our first question comes from Mike Grondahl from Northland Securities. Please go ahead, Mike.

Hey guys, pretty disappointing. Can you help -- I mean, there's about seven weeks to go in the year, and it looks like you're down $11 million to $12 million in revenue. And it sounds like it's because ID R&D and a couple of promotions in mobile ID slipping. I don't know. Can you just allocate the shortfall between those two buckets?

Yes. Mike, thanks for the question. I'll start and Dave, of course, will elaborate if I miss anything important. Both those items are material, Mike. I would say that the ID R&D miss was much more material than the timing issue with those promotional campaigns. We had a surge in very promising six and very substantial 7-figure opportunities, as I mentioned in the script. And based on the client feedback, the superior efficacy of this technology, there is an expectation that those deals would close in Q3 and Q4. But again, as I mentioned in the script, as Dave and I dug into that, it just became clear that those would push. But they're still very viable opportunities and we expect a good portion of those to remain viable going forward.

Yes. And just to provide a little more color on the numbers. You're right. So the midpoint of guidance, you're talking about an $11 million shortfall. The majority of -- the vast majority of that is related to Identity products. And I would say that the majority of that Identity shortfall was from the ID R&D biometrics revenue. And remember, the ID R&D biometrics revenue because of the software term license and it has a very high gross margin, $1 in revenue that's missed drops straight to the bottom line.

Got it. And I don't know, guys, you seem to have a lot of confidence in mobile ID, but it's just been so disappointing. I mean, have you thought about selling it or splitting the company?

Yes, I appreciate the question, Mike. I mean, just sort of go back. You followed the company for a long time. You understand the original thesis was that growth could eventually sort of decelerate in the Mobile Deposit business. We want to diversify our revenue streams. And there are significant adjacencies between what we did in Mobile Deposit and the sort of original Identity products. For quite some time, these businesses were, in fact, very distinct and separate. Despite these results this quarter, it's interesting because we're actually now beginning to see much more sort of validation of this thesis that the two belong together, right? So CFD, in particular, is a gateway for that. For the first time, we're seeing the same buyer, right? So the Check Fraud Defender buyer is very often the same person or very adjacent to the person that's buying our verification solutions. It's important to remember that the MiVIP platform fuels the Check Fraud Defender proposition. So that's an example of sort of where these capabilities are coming together and are integrated. I believe that as we get smarter about the portfolio optimization that I mentioned in the script, we can significantly change sort of the mix shift of where we're focusing. Underlying demand remains strong. So Mobile Verify, for example, has significant growth in transaction volume. So that speaks to sort of the growth in the market. And as we migrate those customers to the MiVIP platform, which has a stronger value proposition, we see much better margin profiles. MiVIP is a nice growth contribution to the company. We believe that we have evidence that we'll continue to have increased validation of the synergy between these businesses. And particularly with this integration now of the ID R&D business into the rest of the company, we've had -- I've been involved in recent conversations, for example, where we brought together experts from our ID R&D biometrics story, experts in check fraud and our traditional identity verification folks and we're telling a combined story that's allowing us to get access into much more senior audiences in the bank. And that's been very well received and it's encouraging to us.

A follow-up. I mean, clearly you're not going to be breakeven in mobile ID in 4Q. You said that. I mean, is there any chance you're going to be late '25 break even there? I mean, it seems like it's a multi-year chance to break even at this point.

Dave, do you want to start there and I'll fill on the finance?

Yes. A couple of things there. We have to remember that we've got a few products in their nascent stage moving into the accelerated growth stage, and we really see -- have to see how those play out as evidenced by what happened with the ID R&D biometric products in the current quarter and what we expect next quarter. So we have to see how that plays out to make that determination. That's why we -- I talked a little bit about in my remarks that we'll come back to you in the next earnings call after we get through our annual operating plan and get more specific there. So I think lastly…

Did you say what revenue was in Q3 for Check Fraud Defender?

We did not. We don't.

We're not disclosing that at the product level. Yes.

Yes. Just at the deposits level?

Yes. I remind you, Mike, the focus right now with this consortium flywheel kind of model is to get to a critical mass of adoption. We think we're quickly approaching that, underscoring the adoption of the top five customer, the top 10 customer -- top 10 bank rather and top 5 bank that we -- the top 10 bank, we expect to close this quarter. As you well know, you followed the company a long time, there are long sales cycles with banks. They are then further sort of lags to implementation and then ramping, right? And with a SaaS model, it'll take a while for that to ramp. But we're getting just terrific validation from customers that proof of concepts are very compelling. We have customers switching from other competitive products. All signs are quite positive. But we're focused more on getting to scale and getting that flywheel going.

And our next question comes Jake Roberge from William Blair. Please go ahead, Jake.

Yes. Thanks for taking the question. Scott, can you just help us understand when it became clear ID R&D wasn't going to meet numbers? And then you talked about the two banking campaigns that were pushed out into fiscal 2025 and then a few 6 and 7- figure transactions that were a bit more complex. Just to confirm, did any of those deals and campaigns fall completely out of the pipeline? Or is your expectation now just that they push into fiscal 2025?

Yes. The campaigns definitely shifted into 2025, the two that we highlighted. In terms of the timing on this, the surprise. As I said in the script, I was appointed May 13. The role became official June 1. Dave and I immediately began to conduct deep dives into all aspects of the business. I was personally conducting deep dive reviews of these large ID R&D biometrics opportunities. I think Dave will tell you I was probably the last one to give up on them and the last one to give up on profitability for Q4. And as a side note, in addition to the organizational change that I talked about, I also immediately appointed a new sales leader for the ID R&D business, who is someone I think very highly of, was a senior executive at a much larger biometrics company, scaled them from a startup stage to much larger than where Mitek's biometrics business is today. So I think we've got the right team in place today. This is a case of playing to strengths. We've got -- honestly, I've worked with lots of machine learning scientists over the years, very, very impressive ones. This is a world-class team of machine learning scientists. I'm excited about what we can do in integrating their best practices and driving R&D efficiency with the rest of the company. And at the same time, we can bring more rigor in how we evaluate product market fit, the business model, the revenue model, and that's where we'll be focused going forward with this portfolio optimization effort.

Okay, helpful. And then, Dave, can you just help us understand the expectations that underlie the guidance that you laid out for fiscal 2025? Are you expecting those big ID R&D deals to close next year? Just would be helpful to understand the expectations that underlie that.

Yes. Back to your original question also. Some of those deals we did take out of the forecast completely and they could come back, but nothing that we want to rely on, obviously. And then in terms of what's going to happen in '25. One of the reasons I made the comments about ID R&D product portfolio revenue starting to grow more in the second half is because we don't have enough clarity on exactly when those could close. Candidly, they could close in the short term or they could close in the next 18 months. That's kind of the range of prospects there. But we're working hard to make those close as fast as possible. It's just with these big multinational guys, as you know, they just take a long time to get through that process.

Okay. That makes sense. And then just one last one on my end. You said most of the miss was driven by ID verification, but that would imply that mobile deposit also had a slight miss in the quarter. Was that more related to core Mobile Deposit's volume or did Check Fraud Defender come in a bit lighter than you expected?

No, I think it was more deal timing than anything else. Was a very small number in terms of that $11 million.

Okay. Thanks for taking the questions.

And our next question comes from George Sutton from Craig-Hallum Capital. Please go ahead, George.

Thank you. I wondered if you could walk through the renewal dynamics. You talked about repricing issues as you were going through renewals. My assumption has been that you're moving folks from point solutions to the broader platform, and therefore you would see fairly good pricing dynamics as that happened. Can you just give me some clarity on that?

Yes. It's a great question. So what we've seen with MiVIP, as you move up the value proposition, I think this is fairly intuitive, you offer a stronger product, the price elasticity improves, right? So for those customers that are orchestrating more than just the sort of document verification piece, which is, I think, as Max talked about in prior call, been commoditized. The more of those sort of signals and data sources you're combining into that single platform, the stronger the value proposition and the higher the price point that can bear. We're also seeing -- and I alluded to this in the script, significant differences in the unit economics between agent reviewed transactions and auto transactions. And that has -- the agent transactions are dilutive. As we look at things like profitability by geographic market or vertical, we have an opportunity to, without tipping our hands to competitors, to increase emphasis in some of these segments, decrease emphasis in others, and aggressively sort of help migrate customers to best practices, both as they migrate Mobile Verify to MiVIP, but also to model the best practices that some of our most successful customers have had with MiVIP that also happen to drive very attractive contribution margins. On the lower end of our base, we see that there's relatively high CAC to support smaller customers, right? So we think there's a pretty intuitive opportunity for us to get smarter about sort of the direct versus channel model, pricing strategies for those customers and sort of where we focus from a product market fit standpoint. And with the high CAC, you might revert to inbound only or channel strategy. And these are the things now that we've done this much deeper dive that we're taking a close look at.

Got you. So on the Check Fraud Defender side, I think there's been some skepticism that a top five bank would not use your system given their broad range of what they were seeing and therefore, not benefiting from the network effect. So the fact you did sign a top five bank, I think, is very important. I just want you to confirm that in your marketing. But can you talk more broadly about -- you mentioned the demonstrably high ROI. Obviously, as banks are seeing this, I mean, it just seems simplistically to me this would be a very easy offering to sell, given that high ROI. So any updates on the kind of the sales process there?

Yes. First of all, the first part of your point I want to address, which is some of these banks do have a variety of sort of internally and other sort of third-party solutions. And some banks are more sophisticated than others in terms of the data science capabilities they have and so forth, right? What really turbocharges the value proposition for Check Fraud Defender is that we can look in real-time mode across the entire ecosystem. So a top five bank will only have visibility to what's happening on the checks that are happening in their environment. So if there is, for example, a high velocity of activity elsewhere with indications that there's bad actor activity, they wouldn't have visibility to that. So that's an example of why this consortium-based approach is, in fact, very additive to these top five banks. The challenge is, at the same time, they're big banks and there's a lot of inertia and it takes them a while to get things done. So I think I would underscore that the sales cycles are just long and it takes them a while to sort of get things done and through their internal processes. But all signs remain positive. The ROI piece, anecdotally I would tell you, we've had very compelling examples of customers saving tens of millions of dollars in the first number of months with the product. We're targeting typically, I think when Dave walked through his sizing model, and he talked about like a 10 to 1 ROI, which we think is very conservative. I think over time, as the consortium is established and the fraudsters, by the way, then migrate from the banks that are protected to those that aren't, we think we can capture prices as a sort of higher percentage of that ROI over time.

Understand. That’s it for me. Thank you.

[Operator Instructions] And our next question comes from Allen Klee from Maxim Group. Please go ahead, Allen.

Hi, this is Derek Greenberg on for Allen. My first question was just on, you had mentioned the transition from agent reviewed transactions to more automated. I was wondering if maybe you just had any metrics in terms of what percent is automated versus agent reviewed. And what the relative margin difference is as this continues to shift as well as just the capacity in terms of the percentage that can be automated versus manually reviewed?

Yes. Appreciate the question. I don't know that we have data kind off the top of available right now to talk about in terms of those specific metrics. I don't think we've disclosed those previously. We can talk offline and figure out what we can provide you after the fact. The point I would emphasize is that agent transactions are dilutive. There are -- it's highly variable depending on the customer and the use case and so forth. Scale matters. So customers -- large banks that have, say, sort of an 80% automation rate would just by virtue of scale economies, have better sort of margin profile than those on the smaller end, right? So that's something to think about. So what we have is an emphasis on having our sales teams and other client-facing teams take a more consultative approach to helping customers understand when they need to use agent transactions. There are certain regulatory dynamics in certain markets. And again, we'll take a sort of case-by-case basis. I'll underscore again and just to repeat the theme about as we migrate these single use case customers that are on, say, Mobile Verify and just doing the document authentication to the MiVIP platform, we can instantly provide stronger value proposition and improve the margin profile. And as they -- as we orchestrate those other data sources and so forth, frankly, there's less need for the step-up authentication by the agent because you can handle that through digital -- other digital sources.

Okay. Got it. That makes sense. And then my other question is just with the partnerships you had with like Experian and Equifax, just maybe some color and some updates on how that's progressing.

Very pleased with both of those partnerships. Experian is one that we've highlighted, I think, publicly. And it kind of goes back to the -- again, the portfolio optimization theme. As we think about putting a large channel partner like that to work for us, they have an ability to go to adjacent vertical markets or other, frankly, non-adjacent vertical markets where they have access granting relationships. They've got the distribution reach and they know the customer domain and language, right? So we've, for example, signed a very large health care provider in the U.K. with one of those partners. And I would suspect as we move forward with the portfolio optimization work, we'll be able to get smarter and smarter about where and how we leverage those channel partners.

Got it. Thank you.

And at this time, there are no further questions. I would like to turn the call back over to Todd for closing remarks.

Thank you, operator, and thank you for joining our call today and for your continued support. As always, if you have any follow-up questions, please feel free to contact me and I'll be happy to answer your questions. Thank you and have a great rest of your day.

This concludes today's conference call. Thank you for attending.