Mitek Systems Inc. (MITK) CEO Max Carnecchia on Q3 2019 Results – Earnings Call Transcript

Mitek Systems Inc (NASDAQ:MITK) Q3 2019 Results Conference Call July 25, 2019 4:30 PM ET

Company Participants

Todd Kehrli – Investor Relations

Max Carnecchia – Chief Executive Officer

Jeff Davison – Chief Financial Officer

Conference Call Participants

Bhavan Suri – William Blair & Company

Darren Aftahi – ROTH Capital Partners

Mike Grondahl – Northland Capital Markets

Ilya Grozovsky – National Securities Corp


Good day and welcome to the Mitek Systems’ Third Quarter Fiscal 2019 Financial Results Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Todd Kehrli of MKR Group. Please go ahead, sir.

Todd Kehrli

Thank you, operator. Good afternoon, and welcome to Mitek’s third quarter fiscal 2019 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 would like to cover a few quick items. This afternoon, Mitek issued a press release announcing its third quarter fiscal 2019 financial results. That release is available on the Company’s website at 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 would like 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 and future performance.

forward-looking statements are subject to a number of risks and uncertainties which could cause actual results in different materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K and 10 to 10-Q for a complete description of these risk factors.

Our statements on this call are made as of today, July 25, 2019, 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 and expectations or otherwise.

Additionally through this call, we will 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 a reconciliation between the two for the periods reported in the release.

With that said, I will now turn the call over to Mitek’s CEO, Max.

Max Carnecchia

Thanks, Todd . And good afternoon, everyone. Thank you for joining us today. I’m thrilled to report another quarter of record revenue for Mitek. We generated revenue of $21,900,000 in Q3, which represents growth of 36% year-over-year and reflect solid revenue growth in both our product families.

We also achieved our 22nd consecutive quarter of non-GAAP profitability. Once again, the third quarter saw strong performance from our deposits products and solid growth from our core identity products.

We remain excited by the opportunity with the identity verification market, which is very large, early stage and rapidly opening up to new use cases that service the digital world and we continue to expect growth from our highly profitable deposits product lines as we move forward.

I have been with Mitek for nine months now. As I shared before, I view Mitek as a good small business with an opportunity to grow to a significantly bigger and better business. As the new CEO, I spent the first few months getting to know the Company. But I also had the unfortunate distraction of addressing a strategic process that was forced upon the Company.

One positive consequence of that exercise was that it caused us to look at this organization through a different lens. We ended that strategic process in April and with that behind us, I have since been able to dedicate my full attention to the operation of the business.

We have spent the last few months identifying and implementing adjustments to the people, products and plans needed to organize the business is for success going forward. This includes focusing our resources and efforts on the strategic elements that are going to help us propel the business forward and develop shareholder value for the future.

First, the identity business. Digital identity verification is an early stage, fast growing, mission critical category. Since it is early stage, customers are still learning how to best address the problem and are only just beginning to develop their strategies. Mitek is very well positioned with our mobile verified products to lead this market.

However, we have accumulated seven different systems mostly through acquisitions that need to be rationalized where appropriate. Each of those systems were purpose built to address unique problems and as such, each has a different approach to the technology.

We are now in the process of deliberately rationalizing these platforms and putting a much sharper edge on how we can accelerate this platform consolidation, which will eliminate many of the outdated legacy technologies.

This clarity will increase velocity and improve our ability to capitalize on the sizeable identity business opportunity. However, in the short-term, there will be some revenue dis-synergies related to the older platforms that we are sun setting.

Similarly, within the mobile deposits business a little over a year-ago, we acquired A2iA in France, with the intent of expanding our deposits business. At the time of the acquisition, we knew that we were acquiring a business that had about 85% of its revenue from the cheques business and the balance coming from part of the business that leveraged OCR and computer vision technology to deliver bespoke project based engagements.

In the early part of this year, we identified this non- cheques business to be off strategy, unprofitable, and largely unrelated to where we are taking Mitek. Being sensitive to the changes that follow these decisions, we have been working for several months with an outside consultant in France to help us begin restructuring the business for the best possible outcomes.

Those actions were triggered in June, and will allow us to form the right size organization and team to support our cheque processing business going forward. This means significantly reducing the staff in Paris, and associated revenue dis-synergies from those non- cheque products, which we will no longer pursue.

We took a restructuring charge in the third quarter related to our separation with the departing employees. And Jeff will cover more of this in his comments. These adjustments are necessary to create clarity and focus and to sharpen our execution so that we can actualize the big opportunities in the two core markets we are focused on deposits and identity.

These changes will allow us to redirect our resources and attention to our strategic business, which will help us continue to grow and scale the Company.

Now, let me provide an update on the business and are two product offerings. Starting with mobile deposit, we remain the clear market leader with over 6,400 financial institutions using our products. While cheque deposits via mobile devices continued to rise, the mobile channel captures less than 20% of all retail cheques deposits, demonstrating the upside potential for this business.

Retail banks are investing significant resources to drive customers to this digital channel and as they do this mobile cheque deposits continue to increase.

The need for this unique technology continues to expand and we are using our knowledge and success with financial institutions to generate new channels in other verticals. For example, we are working with some of the largest charities including St. Jude’s Children’s Hospital to enable their fundraisers to collect cheques on the spot using their mobile phones.

And we are enabling new digital banks to leverage mobile deposits to speed deposits into new transactional accounts. We are proud of how mobile deposit has changed financial services and we are excited about the significant opportunities ahead as we work to expand adoption into new verticals.

Moving to identity. Identity verification is an essential step to establishing trust in a digital world where customer relationships are being created without ever physically meeting. While the market for identity verification still in its early days, it is large, fast growing and represents a significant opportunity for Mitek.

During the third quarter, our identity verification solutions continue to gain traction with our transactional SaaS revenue growing 71% year-over-year, and our SaaS transactions growing 76% year-over-year. In addition to these transactional metrics, we measure our success by both new customer acquisition and existing customer expansion.

Mobile Verify our industry leading product continues to be adopted by partners and customers of all sizes around the world. During the quarter, we added many new identity verification customers. Some examples of the types of mobile verified customers we signed in the quarter are another top 10 Bank in the U.S.A., the largest credit card provider in the Netherlands, a leading online home selling service, a new generation stock exchange for direct trading and securities, a large Latin American Apple reseller, and the list goes on.

Our continuing customer acquisition underscores the increasing need for identity verification and it’s vital use case, which is to enable businesses to onboard more good customers faster, a value proposition that Mitek centers around.

One of our new customers is BrightStar, a multinational company providing supply chain, buyback trade in and financial solutions to the largest consumer electronics resellers worldwide. BrightStar has partnered with us to deliver a retail micro lending solution targeted at the under banked in Latin America.

Mitek solution will be integrated into this Apple resellers solution on their in store iPads. They will use the solution to verify customers identity at the point of purchase when consumers request credit with their Apple equipment purchase.

ABN AMRO is a great example of our customers are expanding their usage of Mobile Verify across the enterprise to securely onboard customers while meeting stringent Know Your Customer KYC regulations.

Eu KYC financial sanctions are set to soar in the coming months and years. According to a study we released this quarter with partner Consult Hyperion, a typical European Bank serving 10 million customers could save up to €10 million annually and avoid growing fines by implementing solutions to improve the KYC processes. We are proud to partner with European banks such as ABN AMRO. To help them in this regard.

The increase in new customers as well as the increased usage of our existing customers is further evidence of the success of Mobile Verifying and its ability to facilitate secure and compliant on-boarding of new customers in the digital world.

In closing, we are very pleased with our Q3 results, we achieved record quarterly revenue driven by meaningful top-line growth in both our product families and delivered strong bottom line results. As we move through the remainder of the year. We continue to sharpen our strategy and make operational improvements to further fine tune our execution.

Now, I will turn the call over to Jeff to discuss the financial results in more detail. Following Jeff’s remarks we will open the call up for questions. Jeff, please go ahead.

Jeff Davison

Thanks, Matt and thank you everyone for joining us this afternoon. Let’s start with the Q3 revenue and operating results. For the third quarter of fiscal 2019, Mitek generated record revenue of $21.9 million, a 36% increase year-over-year.

Software and hardware revenue of $11.9 million was up 14% year-over-year. The increase in software and hardware revenue was due primarily to the addition of A2iA and the growth of mobile deposit revenue. We delivered strong software and hardware gross margins of 93% for the quarter.

Service is another revenue which includes transactional SaaS revenue, maintenance and consulting services was $10 million for the quarter an increases 77%over revenue of $5.7 million in Q3 last year. This increase is primarily due to strong growth and transactional SaaS revenue, which increased 71% year-over-year to $5.3 million and the addition of maintenance revenue from A2iA.

Gross margin on service is another revenue was 77% for the quarter up from 71% in Q3 last year. Combined gross margin for the quarter was 86% compared to 83% last year.

Total GAAP operating expenses including cost of revenue were 24.8 million, compared to 19 million in Q3 last year. The year-over-year increase in GAAP operating expense reflects the addition of operating costs associated with our acquisition of A2iA. Costs associated with the restructuring of A2iA which I will discuss in more detail later in the call, as well as our continued investments to grow our identity business.

Sales and marketing expense for the quarter were 6.9 million compared to 5.7 million a year-ago. R&D expenses were 4.7 million compared to 4.2 million last year and our G&A expenses were 5.1 million compared to 3.2 million a year-ago. GAAP net loss for the quarter was $100,000, or $0.00 per diluted share. Our diluted share count was 41.2 million shares, compared to 36.2 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, IP litigation costs, costs related to the strategic process and costs associated with the restructuring of A2iA.

Non-GAAP net income was 4.8 million or $0.12 per diluted here. In Q3, our non-GAAP adjustments include 2.3 million of stock comp expense, 1.8 million of acquisition related costs and expenses, $500,000 of litigation and strategic process costs and 3.2 million in charges related to the restructuring of A2iA.

At the end of June, we recorded a one-time charge related to restructuring of our business at A2iA, the company we acquired in May of 2018. At the time of the acquisition, we shared with you that we had identified approximately two million in potential cost synergies that we could realize within the first two years post acquisition.

Those items were related to executive management changes and the reduction of royalty costs for technology used in our mobile cheque deposit products. We are well on our way to realizing the savings. In addition, we shared that we would be looking to identify additional cost savings.

One year in I can say we are very pleased with many aspects of the combination. The core business of A2iA cheque processing has performed well in our first year together. However, we have evaluated the non- cheques product performance, which includes document reader, field reader and text reader products, and have decided to discontinue the sale of these product lines.

The market for these products is small with little growth opportunity and the deployments tend to be costly non-repetitive engagements that are not core to our Mitek strategy, nor do they contribute to Mitek’s profitability.

This decision was made with much consideration of our Company, customers and employees and how we can best focus our resources going forward. As a result, we are reducing approximately 25 positions in our Paris operations.

The restructuring charge includes the costs related to this decision including severance pay and benefits, related taxes and other charges incurred and working through the restructuring. The activities related to the restructuring will occur over the next few months.

We anticipate the elimination of these product lines will have a negative impact on our revenue for comparison purposes. Historically, these products contributed approximately 15% of A2iA’s revenue. The reduction of 25 employees on the other hand represents about 2.5 million of annual expense. We expect to invest these funds in our business and to help improve our profitability.

Turning to the balance sheet. We generated 1.3 million in cash flow from operations during the quarter, bringing our total cash and investments to 28 million at the end of the third quarter. Our accounts receivable balance of 14.6 million represents a DSO of 55 days.

Now moving the guidance for the remainder of fiscal 2019. Based on the revenue dis-synergies mentioned earlier, we are updating our previously provided full-year total revenue guidance for fiscal year ending September 30, 2019, to be between $84 million and $85 million, which would represent growth of approximately 32% to 34% year-over-year.

We continue to expect our non-GAAP operating margins in fiscal 2019 to be between 18% to 20%. For Q4 of fiscal 2019, we expect total revenue to be between 24.5 million and $25.5 million, representing growth of approximately 17% to 21% year-over-year.

We expect total expenses, including cost of revenue for Q4 and excluding our non-GAAP adjustments to be between 17 million and 17.5 million. For the quarter, we expect acquisition related costs and expenses to be between 1.8 million and two million in stock comp expense to be approximately 2.5 million.

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

Question-and-Answer Session


Thank you [Operator Instructions]. We will hear first from Bhavan Suri form William Blair. Please go ahead, sir.


Hey, guys, can you hear me? Okay.


Good, yes we can.


Great. I want to touch first, I think on your comments around the platform consolidation, sort of rationalizing the something. You know could you guys just give a little color sort of on which side of the business that was, you know obviously you acquired stuff of mobile deposits A2iA. And sort which piece do you sort of think strategically keeping and sort of a little color to what doesn’t make sense, especially the ID verification side because on the mobile cheque side, the reduction of some of the – business is one off, one time customer just make sense, but not too sensitive, a little more color, what is being rationalized and sort of where the focus is headed.


Sure Bhavan. This is Max, let me take that on. So in the course of the last three or four years, Mitek has done two significant acquisitions on the identity side of the business. About four years ago and acquired a company called the ID Checker out of Amsterdam and then more recently about two years ago acquired the company called ICAR out of Barcelona. As well as having some of its own identity legacy on prem systems things for doing mobile fill some of the early efforts in identity when identity was super formative.

I think the company has in the past talked about those acquisitions and some of those systems as legacy systems. Me as the new guy coming in and having three decades worth of experience operating businesses and understanding what it takes to not just do a deal and do an acquisition, but actually properly integrated the people, the processes and then the products, just putting a much sharper edge and maybe an accelerated effort to try to get all the wood behind the Mobile Verify are alright right. So the Mobile Verify is to go forward, has been flagship identity product.

Some of these other things have been kind of bumping along and now we are just getting very clear eyed about how we get as many of those customers as appropriate over to Mobile Verify. And for the systems that should be shutdown sunset end of life, doing that with a very cogent plan that is just going to help us, really not just to focus but eliminate a lot of distractions in the business.


Got it. And then [indiscernible] you raised it a little bit just now, so that have been the focus for the Company again, pre-dating your time and pre-dating just time. But I guess if you go back on bank to the U.S. and tie to sort of pay day guys or cards for like sort of just the payment cards was a focus. Do you think that continues to be a focus for you guys? Or is that sort of one of the things that maybe doesn’t make as much sense? – you sort of mentioned a little bit about outside the U.S.. It seemed like a big opportunity in the U.S. it’s a marked opportunity in the mobile cheque deposit space. But I was wondering what your thoughts were there? And then I had a quick follow-up.


Yes. So I’ll try to keep this short. But the concept of unbanked or even under banked in the United States. Unbanked outside of the United States in developing economies really kind of comes back to how do you determine who is on the other side of that mobile device or who is on the other side of that computer when you don’t have a face-to-face physical relationship.

And when you do that in the United States there are a lot of factors, there is a lot of signals to determine the identity and in many instances, the creditworthiness of the individual on the other side of that device, right they have a credit file, they are very large Experian, Equifax, TransUnion, there is all kinds of new in disruptors coming up to provide information around that.

When you get into economies where maybe they aren’t as developed, that under banked, you don’t have the benefit of credit files to be able to determine not just credit worthiness to be able to determine identity to validate and verify identity.

So we definitely think it’s an opportunity for us, because in those environments, the number one predictor the most high assurance factor for determining somebody’s identity is going to be their government issued identity card, passport, residence permit, driver’s license.


Got you. So let’s touch on the growth drivers for a second. Growth, obviously, really solid that was awesome. I have to two sort of questions in this one. Sort of what is driving the growth, so some color on whether it’s the new logos, you mentioned a fair number, or is it the use cases with existing customers, how would you break out that growth rate between the two sort of between expansions if you thought about net [indiscernible] retention rates or something like that or et cetera or the new logos. What is really driving that growth today? And then I want to sort of understand sort of in that business across all you have talked about sort of banks now, the top 10 banks, doing Mobile Verify, this obviously done cheque deposits, but where is that cross up? Thank you.


Sure. So again, let me try to take that on. I don’t think we are going to provide numbers here, but both of those vectors, expanding within our existing businesses existing customers, as well as bringing on new Mobile Verify identity customers, that is how this business is growing and that is how it will continue to grow and bringing more focus and better execution and repeatability to that. That is what we are doing everyday getting better at those things.

I mean, just to put a little color. When we sell a new customer and sign a contract if that happens on let’s call it day one, we have reported in the past that this idea is time to live, how quickly can we get that implemented, integrated, get our SDK on their mobile app, how quickly can we get our API integrated in their stack their application stack.

And we have taken that time to live in half. If you looked at those statistics, how long it took us to get a new customer from contract to live. Last year was over 200 days, in the most recent quarter that we are talking about here, it was sub-100 days, I think it was 96, to be precise.

So that number will bounce around a little bit. Different industries, banks take longer, because there is a lot more compliance and regulatory requirements. The marketplace and e-commerce companies can go a lot more quickly, they have the tendency to be a little bit more agile, and adaptable. But kind of bringing that all the way back, it really is a combination of both knocking down those new guys getting them live.

And then once they are live, our customer success teams which are just outstanding showering them with love and a very customer intimate model that takes them form the initial implementation on through to higher and higher adoption whether that is more geographies, whether that is – we’ll come back to the point of your question around the banks and the cross sell.

But really making sure that they are hitting their business issues that they are achieving the success metrics and the success goals that they have, we do a real good job of that and it’s a it’s a competitive distinction for us.

So the last part of that is the banking example and what we are finding with larger banks is that we may start with a single use case where it’s a credit card application and we are validating the individual on the other side of that mobile device. But the banks are telling us these large financial institutions both domestically as well as in Europe, that they want to put a layer in their stack that they can rely on for identity verification.

Sometimes we do that with a partner like Experian, sometimes we do that directly with the financial institution themselves. But in these larger institutions, we are hearing that there are literally dozens of use cases, dozens of business units. So it truly is a cross sell opportunity for us to go find those other use cases, and basically light those up. And, you would think of that as expansion kind of horizontal expansion within your install base. So I will pause and hopefully have thoroughly answered your question there.


No, no. That was super helpful. Thank you guys. Nice job again especially on the Mobile Verify side. It’s just great numbers and thanks for taking my questions.


Thanks Bhavan.


We will hear next from Darren Aftahi from ROTH Capital Partners.


Hey, guys, good afternoon and thanks for taking the questions. If I may, first to start with the restructuring. Jeff I think you quantify the cost side. So first question on that on an annualized basis when does the cost benefit kick in and if my memory serves me correct, if you’re saying 15% of sort of non-core products or 50% of revenue kind of related to non-core products, is that kind of a similar revenue run rate about annualized kind of cost savings maybe a twitch lower. And one when did that kick-in and do that impact the software and hardware line at all in the June quarter?


Okay. Make sure that question apart. So the 15%, that is on the annualized business which was around 14 million or so give or take when we bought them. The 2.5 yes, that is an annualized savings that we should see. That isn’t going to kick-in immediately, because there are – the restructuring accrual itself includes all the costs that you’re allowed to put into that. But there are some notice period costs that are actually going to flow through Q4. So you’re not going to see all of that impact Q4.

So there shouldn’t be a lot of hangover of costs in 2020. So we should be pretty clear by then of that and those funds should be available for us to invest elsewhere in the business and then as we really tune our plans for 2020 we will look at how much of that we are going to take to bottom-line if we are. And what was the other piece?


That part was basically on the cheques versus non- cheques effect on revenue.


You know there is probably some minor impact of that. There hasn’t been impact of that in Q4, so it’s starting. So both of the synergies that Max mentioned in his comments, the platform rationalization and the A2iA are both impacting Q4 a bit.


Well we announced that Darren, kind of a hard stop for the team on the non- cheques portion of the A2iA selling in the quarter, in Q3. So there is some behavioral changes there that have to take place, but a lot of those – won’t necessarily be with the business. So you see that happen pretty quickly.


Okay and then could I follow-up on that. It looks like the software line growth wise decelerated quite a bit. So I understand the mobile deposit business is going to be lumpy. But anything you would call out there?


Software line, so you have got decline in some of the ID on premise stuff is going to be impacting that. As you have seen a little bit of that this year. You have got the timing of the deposits and then you have got a quarter where we had some A2iA revenue a year-ago in that line. So next quarter will be a filler comp quarter, I guess, if you look at it that way, there is a little bit in this year. Otherwise nothing else really going on there.


Got it and then just one last one. On the SaaS transactional growth, you obviously called out financial institutions as kind of a bellwether. If you exclude those and Max I appreciate your comments some of the e-com companies are signing and writing stuff a lot faster than banks. Any particular sort of use case where you’re seeing kind of repeat wins? I know you called marketplace – economy, but going even more granular I’m just kind of curious, if you could dive a little bit deeper and anything that you’re seeing in terms of where adoption and ramp. Actually signed contracts and ramping the use are kind of accelerating within kind of non-financial institutions? Thanks.


Yes. So maybe Kentucky vintage. If you took 100% of the SaaS business today, SaaS transaction business on the identity side, you’re going to see probably two thirds of that falls broadly into and it varies from quarter-to-quarter, month-on-month, but about two-thirds of that falls into what you would consider financial services. And then you would find about a quarter of it is this is – the marketplace e-commerce and I’ll come back and use the use case. And then the balance is some stuff that falls around the edges.

So we do find ourselves doing some transportation every once in a while and insurance company but just don’t happen to be the – from our go-to-market perspective they are not the point of focus in what we are trying to do from demand generation and kind of account campaigning.

Back to your question on the marketplace, e-commerce side, the overwhelming use case is new customer opening, right whether that is you want to sign up to be a guest at Airbnb. You want to sign up and actually sell something on Poshmark in that marketplace. And those are the – if you want to go look at a home through open door. Those are the examples and there are other examples, we can be on the other side of the of the marketplace. Airbnb, you could be the host or Poshmark you could be the seller. But the majority of those examples are typically new customers on the buy side.


Great. Thank you.


We will move next to Mike Grondahl from Northland Securities.


Yes. Thanks, guys. In the mobile cheque prepared comments. You talked a little bit about you are target some new digital banks. Could you talk a little bit if you have signed up or won any there and kind of the kind of usage and how that is going?


Yes. So just to be clear. Mike, are you asking on the deposit side? Are you asking on the identity side?


First on the deposit side. I think that was kind of that along with – I don’t know, you mentioned something else some new channels you were looking at.


Yes, so the two examples we used is two broad industries that we just referred to were the FinTech, internet only world of banks. And then the second was these the charities and being able to use mobile deposit to capture the donations and the charitable giving, kind of at the point of giving with the mobile deposits, you just basically take picture of the cheque and be done.

On your question on the on the financial services, kind of the new internet based banks, what are some easy examples. Access that used to be the bank, the internet Robinhood, which is Silicon Valley, Unicorn, Varo, or Varo Money, all our examples and there are many, many more where these guys are doing very interesting things without having any branches without having any retail locations. But they still have to take deposits from those customers. Right.

They are on-boarding new customers. So there is an identity, mobile identity opportunity for us and Varo is a great example where they are doing both. But they also have to be able to take a cheque as the initial deposit or when new funds are coming into the account.


Got it. Are you seeing that accelerate that channel, the internet only bank Robinhood, you know Varo?


Yes I mean FinTech is red hot right now. In financial services, there is just a ton of money, whether it’s Silicon Valley money, whether it’s venture or private equity, the more traditional banks themselves investing in those disruptors. Yes, so we see, we see plenty of that.

And on the charity, I think that is more – it’s not necessarily that it’s a growing industry so much as it’s a unpenetrated market for us and we have now put some focus on it and whether it’s the Komen Breast Cancer Foundation, or whether it’s the example we use with St. Jude hospital.

It’s a great opportunity to stop leakage, right. If you have ever kind of run for the cause or fight for a cause. You collect the cheques and sometimes they don’t all make it, they don’t all make it to the to the destination. So this is a way to prevent that leakage.


Sure, and is the pricing the same as your bank customers, is it kind of a per transaction per drip model.


It is the same basic model, the volumes have a tendency to be lower and per unit charge has a tendency to be significantly higher.


So you can price for that a little bit. Cool. Just shifting gears a little bit over, in that mobile cheque area, you sell into a lot of resellers, can you remind us how your contracts with those resellers are kind of structured, the average length and maybe the potential down the road to increase pricing?


Yes. So first, there is probably less than 10 really meaningful resellers that service financial institutions, everything from the biggest guys that we all bank with and know names of on through tow very small regional local credit unions.

And those are the Fiserv, MCRs, FIS, I mean I don’t think there is Jack Henry, there is no magic here, I think we disclosure in our SEC filings. And the nature – I will let Jeff talk about the model and such. But this is again a transactional based model and it isn’t necessarily – terms of the contracts, or the length and duration of the contracts have more to do with how fast they can burn down those transactions.


Yes. So this is Jeff, hey Mike. The contracts, they can vary between those processors, because some of the processes operate differently, for example, some of them buy for their system, and then spread it amongst their customers. So they may have one purchase from us and then they spread it.

Others come to us and they will tie specifically for individual customers. Now, when they do that, say for example, they come and buy for individual customers that may be under a master three year contract, that then has pricing or has pricing per customer.

So they all vary, they are one to three year contracts, there is pricing that can vary. But the thing is every time that our team is having a conversation. There is going to be opportunity to talk about price. That doesn’t guarantee that they can actually impact price in that, because it may be a longer term contract.


I guess coming back Mike to the genesis of your questions. We believe there is pricing power there for a number of reasons, first the only intellectual property and the patents we do an outstanding job, our end customers not just the banks and financial institutions, our partners and then us as consumers all acknowledge that hey cashing a cheque using a mobile device is fun, it’s easy, and it just works.

And trying to replace that in a world where you’re being disrupted, right name a big bank, they are under attack, we just is talked about the FinTech. This is a solved problem and our ability to kind of keys back through the agreements that Jeff was just referring to and take a more principled approach to pricing so that we are getting here the value and some equity around how these banks and the service providers are paying for this. We think there is some leverage in there.


Can I ask just a follow-up. in the last six months, or calendar 2019, do you have a couple examples where you have raised price or is that all in the future?


No they are definitely examples. I’m being a little careful Mike. I mean being a public company, the great benefit is that we are very transparent. There is an awful lot of information that our customers and our partners can get on us. That gives them comfort that we are a trustworthy organization that is going to be there.

This is one of those topics where the more you talk about it publicly, it can kind of whipsaw and kind of do a reversal I mean so I just want to be a little – I want to be a little judicious in what I share with you.


That is fair. And maybe the last mobile cheque question. A while ago, you talked about maybe an opportunity to kind of cheque fraud, all the data you kind of get from your customers and whatnot. Any progress there kind of -.


Yes so you are referring to basically – yes, I think if you broadly think about it as kind of a second – product that we can bring back to the 6400 customers where we have got this very unique not just the channel but the relationship and the great reputation and trust of these organizations. We are hard at work at that. I’m not prepared to announce anything today. But yes, that is definitely something that we are continuing on.


Okay, great. Hey, thanks, guys.


You got it Mike.


[Operator Instructions] We will hear next Ilya Grozovsky form National Securities.


Thanks. Two questions. Number one, when you are winning these deals on the ID side? Who with anybody are you seeing out there in a competitive perspective or what alternative solutions, perhaps is the better question in terms of verifying IDs are you seeing and winning business from or alternatively, not winning business?

And then also, just as a sort of a follow up to that, if you look at your trajectory of revenues on the ID side and on the mobile deposit side, at what point do you think the majority of your revenues comes from the ID piece relative to the cheques piece, like how far in the future is that? Thanks.


Sure Ilya this is Max, I’ll take on the first question and then I’m going to hand it over to Jeff for the second part of your question. Yes it’s a really – I think it’s a thoughtful question too. If our customers if we use a bank, as an example, or financial services organization, they refer to this concept of a trust funnel, right.

Somebody comes to them through their mobile device, they don’t know who they are, and now they are trying to establish some level of identity verification. The concept of the trust funnel is you start with the most passive, least friction way of determining, can I trust this – do I have a level of assurance, is this a bad actor, is this a fraudster, you know, is this a fake, trying to do something bad to my organization.

And there are a number of signals that you can use for that, right. The telemetry that comes off the device, the time of day, the geo location of where they are just you know kind of some of the behaviors on the phone itself.

And so, we fall in that trust funnel much further down. The signal that we use these government issued identity documents paired with the biometric of lightness selfie comparison to the picture on the identity card that is a relatively high friction, high assurance, way of determining identity.

So when you talk about alternative solutions, there are a number of things that you can use, you can use phone numbers, and one time usage, two factor authentication things that are maybe a little easier, maybe a less assurance, but their friction levels and the speed in which you can get them are there.

Ultimately though, for the bottom part of the funnel, we have got the absolute best answer and you’re trying that biometric of who you are to something you have. And the Government issued identity document is the gold standard on something that you’re going to have.

The competition amongst folks who do similar things does hasn’t changed radically since last time we talked about it. I’m not going to use any names just because I don’t want to give them the credit of the air cover. But it’s still in early days market.

So they are depending on what geography you’re in, the competition may be slightly different, who we compete with in England and UK is different than who we necessarily compete with here in the United States versus who we compete with in some place like the Netherlands.

But we are, I think still a very active market. There is still a lot of not just competition, but I think there is new entrance coming into the market, which just goes to tell you that it’s yet to be a solved problem. So maybe that is a little bit on competition in the trust funnel.

With that I’ll let Jeff talk about the ID revenue trajectory, and how that compares to when it eclipses the deposits business.


Sure. So we have been tracking – actually, last year, we had actually been tracking a 40/60. But when we acquired A2iA that kind of – more to the 30 to 70, 35/65 ID to deposit revenue. But I would say as you probably looking out 18 to two years where that actually becomes equal in size. We do expect it will probably get the identity business profitable before then, but I think for identity to pass over and revenue, it’s going to be 18 months to two years, would be my thoughts there.


Okay. Thanks.


Thank you, Ilya.


At this time, there are no additional callers in the queue. I would like turn the conference back over to your host for any additional or closing comments.

Todd Kehrli

Thank you, operator and thank you everyone for joining us today. We look forward to updating you again next quarter. This concludes today’s call. Have a wonderful day.


That does conclude today’s teleconference. We thank you all for your participation.