Mitek Systems - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered modest top-line growth with total revenue of $45.7M (+2% y/y) and non-GAAP diluted EPS of $0.22; both exceeded S&P Global consensus for revenue ($43.68M*) and EPS ($0.188*). Adjusted EBITDA was $13.1M (28.6% margin), up 170 bps y/y.
• Guidance tightened and effectively raised: FY25 revenue range to $174–$177M (implies Q4 revenue of $39–$42M) and adjusted EBITDA margin to 28–29% (from 26–29%).
• SaaS momentum is accelerating (Q3 SaaS revenue $19.3M, +23% y/y) as identity and fraud solutions scale; management emphasized platform unification and operational discipline as drivers of margin improvement.
• Strategic narrative: Identity portfolio approaching durable profitability; Check Fraud Defender ACV ~$13.1M (+56% y/y) with expanding consortium coverage (~¼ of U.S. checking accounts), positioning Mitek for a broader enterprise fraud platform.

What Went Well and What Went Wrong

What Went Well

• SaaS growth accelerated: “SaaS revenue growth accelerating to 23% year over year,” reaching $19.3M in Q3; clear demand for identity/fraud solutions.
• Margin and cash discipline: Adjusted EBITDA margin rose to 28.6% (+170 bps y/y) and LTM free cash flow reached $55.8M (99% conversion), reflecting cost discipline and unit economics improvement.
• Identity profitability inflection: Management highlighted approaching the “fulcrum point” where identity contributes positively on a durable, fully burdened basis; LTM identity revenue at $75M and efficiency gains lowered breakeven to “less than $80M”.

What Went Wrong

• Deposits software decline: Deposits software fell to $17.5M from $21.8M (-19.6% y/y) on renewal timing; management emphasized LTM stability and 1.2B mobile deposit transactions annually, but quarterly mix remains volatile.
• Slight gross margin compression: Non-GAAP gross margin dipped to 85.0% from 86.0% y/y due to a mix shift away from higher-margin deposits products.
• Non-GAAP net income eased y/y: $10.2M vs $12.0M prior year, reflecting the mix shift and continued investment in platform integration despite operational efficiencies.

Transcript

Speaker 2

Good afternoon, ladies and gentlemen, and welcome to the Mitek Systems Fiscal 2025 Third Quarter Financial Results. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. This call is being recorded on Thursday, August 7, 2025. I would now like to turn the conference over to Ryan Flanagan, ICR. Please go ahead.

Speaker 0

Thank you, operator. Good afternoon, and welcome to Mitek Systems' Fiscal 2025 Third Quarter Earnings Conference call. With me on today's call are Mitek Systems' CEO, Ed West, and CFO, Dave Lyle. Before I turn the call over to Ed, I'd like to cover a few quick items. Today, Mitek Systems issued a press release announcing its financial results for the fiscal 2025 third quarter ended June 30, 2025. That release is available on the company's website, 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 for 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 our listeners to review our SEC filings, including our most recent 10-Ks and 10-Qs, for a complete description of these risks. Our statements on this call are made as of today, August 7, 2025, and the company undertakes no obligation to revise or update publicly any 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 a reconciliation between the two for periods reported in the release.

With that said, I'll now turn the call over to Mitek Systems' CEO, Ed West. Ed?

Speaker 1

Great, thanks, Ryan. Good afternoon, and thank you for joining us today, and welcome to our Q3 update call. This has been a solid quarter in terms of business performance, but even more importantly, it marks a quarter of disciplined execution against the objectives that we outlined at the beginning of the year. Let me start with three key takeaways from the quarter. First, based on the growth in operational efficiencies that we've implemented, we are rapidly approaching the fulcrum point for durable profitability in our identity product portfolio. Second, our fraud and identity solutions continue to grow and scale, posting 23% year-over-year SaaS revenue growth and representing over 41% of total revenue for the last 12 months. Third, we're running the business with sharper operational discipline. Free cash flow for the last 12 months was $56 million, representing a 99% conversion rate.

Now, for those of you newer to the Mitek Systems story, we provide the core identity and fraud infrastructure that high-assurance businesses rely on to operate securely in today's dynamic threat environment. Our technology verifies identities and documents, authenticates users, and detects fraud from onboarding to login to transactions. We serve over 7,000 organizations globally, including top banks, fintechs, and telecom providers. Mitek's platform has become important for companies that need to balance security with a seamless user experience, especially today when fraud is increasingly driven by generative AI and synthetic identity attacks. Generative AI has essentially allowed fraud to be democratized. Our solutions span the customer journey from onboarding to authentication to transaction monitoring.

This includes our identity verification and orchestration platform, MyVIP, which helps customers onboard users securely and at scale, biometric authentication tools like MyPass, and our Mobile Deposit technology, which has revolutionized consumer banking and supports approximately 1.2 billion transactions annually. Each solution is underpinned by advanced AI, proprietary biometrics, and automation technologies, and are all delivered via software solutions. Underlying this platform is a powerful and growing data asset, our fraud prevention consortium, now encompassing approximately a quarter of all U.S. checking accounts, or around 100 million accounts. That footprint continues to expand as we onboard new financial institutions and as existing members contribute more data, whether through newly opened accounts or checks received from customers at other banks. In either case, the data flows through our systems to detect fraud. Now, let's move to the progress against the four strategic pillars that we outlined in prior quarters.

As a reminder, those four pillars are: first, strengthening our foundation; second, scaling identity; third, expanding fraud solutions; and fourth, driving operational excellence. On the first pillar, which is strengthening our foundation, this quarter we continue transforming how we operate with tangible changes now visible across every function of the business. Teams across R&D, marketing, product, engineering, and G&A are being aligned on platform execution with simpler systems and clearer accountability, enabling reinvestment without increasing our cost base, as we position Mitek Systems to drive durable, profitable growth in fiscal 2026 and beyond. Over the last 12 months, we improved our unit economics by automating more of our transactions and modernizing our technology stack, which has improved our cost of goods sold. Overall, our non-GAAP operating expense intensity has improved from 64% down to 55% of the last 12 months' revenue, driven primarily by reductions in vendor spend.

These actions have not only lowered our structural cost base, but they've also sharpened our execution with a heightened focus on profitability. On the technology front, we made further progress automating key workflows and laying the groundwork for a unified, scalable platform. We've also expanded our use of the AI-assisted development tools across engineering, helping us to activate customers more efficiently. Behind the scenes, we've continued building out our data science capabilities, which is an important evolution in our shift towards intelligence-driven fraud prevention. Now, moving on to the second pillar, which is scaling identity, we are nearing the fulcrum point where our identity product portfolio is contributing positively on a fully burdened and durable basis. We're making excellent progress towards this important milestone. Trailing 12-month identity revenue has reached $75 million, up 13% year over year.

During this time, we have also improved the fulcrum point to less than $80 million on a fully burdened basis and a result of the efficiency and scale gains. This is not just a financial milestone, it's a structural turning point. Identity, which was previously a margin drag, is now helping fund the broader business. It's important to note that on a contribution basis, before allocating overhead, identity is contributing positively today. That shift reflects a disciplined execution over the past year, driven by increased automation, improved gross profit per transaction, and transaction volumes reaching a scale that efficiently leverages a predominantly fixed cost base. MyVIP continues to lead the portfolio in transaction growth with more identity journeys, incorporating advanced verification steps like liveness detection, face mesh, deepfake analysis, and behavioral signals. These multi-layered workflows are materially improving unit economics.

Just as important, we're seeing real convergence between identity and fraud. Customers are increasingly looking to deploy both together across onboarding, transaction verification, and step-up authentication. This convergence is accelerating our evolution into a unified full-stack platform that secures the customer journey from first touch through transaction verification to ongoing engagement. As fraud continues to grow more sophisticated, we are seeing increased customer interest from MyPass, Mitek Systems' authentication solution. We're fielding more authentication opportunities and embedding identity verification at critical points in the user journey to build trust, reduce friction, and strengthen security. Our solution encompasses a highly secure, passwordless biometric authentication, all back to a verified identity. As an example, a leading UK financial institution significantly expanded its commitment to Mitek Systems this quarter by deploying MyPass in multiple new use cases.

What began as a single reauthentication use case has grown into a broad set of high-risk scenarios, such as payment authorization and changes to personal information. Unlike traditional verification, which is typically used once at sign-up, MyPass enables transactional authentication that secures interactions across the bank's existing customer base. By replacing outdated tools, MyPass is helping the institution deliver faster, more secure digital experiences at scale, saving time for consumers while strengthening fraud defenses. Naturally, the expanding role in identity is closely linked to the growing demand for real-time fraud prevention, which is our third pillar. CheckFraud Defender continues to scale with annual contract value reaching approximately $13.1 million, up 56% year over year. Enterprise banking deployments of CheckFraud Defender tend to unfold through multi-stage rollouts with validation cycles and complex procurement processes.

We continue to run test cycles, all the while negotiating the contracts to enroll several large, well-known FIs. Accordingly, we have good visibility towards a potential step-up in ACV growth. We're also seeing strong momentum through our channel partner network. In Q3 alone, we closed nearly 40 new FIs who joined as partners, through partners, expanding our reach into the long tail of community and regional institutions. As I mentioned earlier, CheckFraud Defender now has visibility into check activity from approximately a quarter of all U.S. checking accounts, which includes mostly production and a small amount of pilot data. This trajectory highlights the growing engagement with our platform and its increasing relevance as a source of real-time, industry-wide fraud intelligence. What we're building with CheckFraud Defender is just the starting point. We see this as a foundation towards a broader enterprise fraud platform.

Now, on to our fourth and final pillar, building a more durable, cash-generative, and fully integrated business model powered by disciplined operational excellence. While we continue to scale our fraud and identity solutions, we're equally focused on how we run the business, driving operational excellence as first and foremost about the customer experience that delivers incremental value and insight while enabling us to do more with less. The latter is driven by leverage and focus. SaaS revenue now represents over 41% of trailing 12-month revenue, up from last quarter, a steady strategic mix shift that improves visibility, enhances scalability, and positions us for long-term margin expansion. At the same time, we're instilling stronger financial discipline. Through tighter cost controls and more focused execution, we accelerated EBITDA growth and achieved a 99% free cash flow conversion rate on an LTM basis, giving us the flexibility to reinvest where it matters most.

This quarter, we launched a series of company-wide efficiency initiatives spearheaded with precision and urgency by our new COO, Garrett Gaffkey, including a comprehensive vendor audit, renegotiation of major contracts, and consolidation of legacy infrastructure. These efforts are already freeing up resources we're using to reinvest directly into the platform, advancing automation, improving performance, and ultimately enhancing the customer experience. We're also evaluating new opportunities to better align our go-to-market resources to support growth in our current geographies, strategic relationships, and channel partnerships. As we look ahead to year-end, we anticipate ongoing changes to ensure our operating model is in alignment with the most compelling opportunities in fraud and identity. In short, we're operating with greater focus, tighter integration, and a growing ability to convert operational discipline into product enhancements and innovation, margin expansion, and free cash flow per share.

In closing, I would like to summarize our journey over the past three quarters and how the business is evolving. Mitek Systems comes from a history of several strong assets, ranging from pioneering Mobile Deposit, which led to the credibility with thousands of financial institutions, to leading technologies in a nascent but evolving digital identity space, all supported by terrific technical talent and capabilities, all of which are the very reasons that I joined. These assets were clouded by CEO and CFO turnover, material weaknesses, years of late filings as a public company, and unintegrated acquisitions. Now, we have made clear progress in putting that chapter behind us. We have executed against the initiatives that we outlined at the beginning of the year, streamlining and integrating the business and moving the identity product portfolio towards durable profitability.

We are approaching the fulcrum point for on a durable basis for identity and believe we are well situated to reposition Mitek Systems as a fraud and identity business that works with its customers to detect and prevent fraud. As a result of growing and persistent AI-driven fraud, customers are asking for integrated platforms that unify identity, authentication, and fraud detection. Purpose-built to protect what's real across every digital interaction, that is Mitek Systems' purpose. With that, I'm going to turn it over to Dave Lyle for some financial highlights and a discussion of our improved outlook.

Speaker 3

Thanks, Ed. I'll begin with a review of our Q3 financial results, including the key drivers behind our performance, and then provide context on how we're approaching the final quarter of the year and discuss our updated full-year outlook. For the third quarter, total revenue was $45.7 million, up 2% year over year, driven primarily by our identity products, which grew 24% year over year, fueled by 19% growth in identity SaaS and continued strength in transactional volumes. Deposits revenue came in as expected and in line with the quarterly seasonality associated with Mobile Deposit renewal timing, as we outlined in prior calls. Our non-GAAP gross margin for the quarter was 85%, about 100 basis points less than a year ago, due to a slight mix shift away from our higher margin deposits products.

Non-GAAP operating expense came in at $26.3 million, at the lower end of our previous guidance range. This represents a 3% year-over-year improvement, driven by a broader focus on cost discipline and operational excellence. Adjusted EBITDA was $13.1 million, representing a solid 28.6% margin and 170 basis points better than a year ago. Turning now to the specifics of our revenue performance, starting with deposits products, revenue was $26.2 million. As we've noted before, term license revenue, which is roughly 70% of the deposits mix, can fluctuate meaningfully based on renewal timing, so we focus on trailing 12-month trends for a clearer view. Trailing 12-month license revenue totaled $69.1 million, just below our long-term average of $70 million, reflecting the continued resilience of the $1.2 billion Mobile Deposit annual transactions, even as overall check volumes decline.

Notably, maintenance revenue in the deposits portfolio grew 4% year over year, supported by healthy renewal cycles and a few early renewal pull-ins, helping to smooth quarterly license variability. Turning to our fraud solutions within deposits, CheckFraud Defender continues to gain traction. Deposit SaaS revenue, where this product is primarily recognized, delivered growth of 55% year over year, albeit off of a small base. This was driven by organic usage growth and expansion across both direct and partner channels. In summary, our deposits product portfolio generated $103 million in revenue over the last 12 months, up modestly from $100 million a year ago, a reflection of the resilient but slower growth profile in deposit solutions, especially as the market for check-based workflows matures.

Those pressures are increasingly being offset by growth in our fraud prevention solutions that solve a fundamentally different and more urgent problem: detecting and preventing fraud before losses occur. Now turning to identity, which delivered another strong quarter with revenue up 24% year over year to $19.5 million, driven by a 19% increase in SaaS and solid performance across both our MyVIP platform and Mobile Verify point solutions. SaaS growth was fueled by deeper adoption within existing accounts, especially in high-assurance verticals, and increased usage of complex multi-signal journeys. We also saw higher-than-expected overages from several large customers, further boosting revenue. MyVIP continues to account for a growing share of identity journeys, reflecting growing demand for end-to-end orchestration. Importantly, customers are not only running more identity checks; they're embedding more verification steps across the user lifecycle, from onboarding to reauthentication and fraud remediation.

These deeper integrations make the platform stickier and drive more durable revenue. As Ed mentioned, identity is progressing in the right direction with improving contribution and greater scale efficiency. Turning to SaaS revenue and building on what Ed outlined, we continue to see strong SaaS momentum, with SaaS revenue becoming an increasingly larger share of our mix, today representing 41% of total trailing 12-month revenue. Moving down the P&L, we delivered a non-GAAP gross margin of 85% in Q3, supported by strong unit economics across the business. This includes nearly 100% gross margin on software license revenue, primarily driven by Mobile Deposit, and a 74% gross margin on services and other revenue, including our identity SaaS offerings, which improved by approximately 200 basis points year over year. This expansion reflects operating leverage within our fixed-cost services infrastructure.

As identity volumes scale, combined with ongoing improvements in automation and delivery efficiency, these gains reflect the efficiency of our platform and the automation improvements discussed earlier. These trends reinforced our confidence that as the business continues shifting towards SaaS, the underlying margin profile will continue to strengthen, giving us greater flexibility to either expand profitably or reinvest in growth as attractive opportunities arise. Non-GAAP operating expense for the quarter was $26.3 million, up modestly from $25.7 million in Q2, driven by higher sales commissions and fiscal year-end audit costs, partially offset by lower marketing and personnel-related expenses. We're particularly pleased with the continued improvement in G&A efficiency. On an LTM basis, non-GAAP G&A expenses improved by 18% year over year, reflecting our progress in streamlining external services and building a more scalable, cost-effective corporate function.

Adjusted EBITDA for Q3 2025 reached $13 million, up 8% year over year and representing a 28.6% adjusted EBITDA margin. After factoring in other income, interest, and a modest increase in tax expense, this translated to $10.2 million in non-GAAP net income, or $0.22 per diluted share on 46.8 million diluted shares outstanding. Turning to our balance sheet and capital allocation strategy, over the last 12 months, we generated $55.8 million of free cash flow, a 99% conversion of adjusted EBITDA, reflecting strong earnings quality, higher interest income, and improved working capital efficiency. As the impact of interest arbitrage goes away when our convertible notes are retired and working capital improvements are left, we expect free cash flow to be predominantly driven by recurring contributions from our core operations.

We ended Q3 in a healthy net cash position with over $175 million in cash and investments and $155 million in face value of convertible notes due February 2026. With the notes carrying a low 75 basis points coupon and a convertible feature trading well out of the money, we're earning favorable carry and intend to retire them at the most economically advantageous point. To support our flexibility, we already secured a $100 million credit facility in May, which remains undrawn. Our strong financial position allows us to balance reinvestment in the business with shareholder returns. Since the authorization of our current $50 million buyback program was made in May of 2024, we've returned $29 million to shareholders, which includes $27.5 million executed through the end of Q3 2025 and $1.5 million since quarter end through end of trading yesterday, August 6, leaving $21 million remaining on the authorization.

We remain focused on disciplined capital allocation and building a more efficient, scalable business that delivers sustained free cash flow per share and long-term value. Against this backdrop, we are tightening our full-year fiscal 2025 revenue guidance to a range of $174 million to $177 million, with a $175.5 million midpoint, modestly above our prior guidance. This implies fourth quarter revenue of between $39 million and $42 million. This range reflects seasonally low Mobile Deposit revenue due to renewal deal timing, with the high end reflecting potential higher usage-based activity in identity, which could drive incremental overages in Q4. On profitability, we are raising our full-year adjusted EBITDA margin guidance to a range of 28% to 29%, up from 26% to 29% previously. This increase reflects the flow-through of our continued improvements in operational efficiency, a leaner G&A structure, and stronger unit economics across both identity and deposits.

For the fourth quarter, we expect non-GAAP operating expenses to be in the range of $25 million to $26 million, with depreciation at approximately 80 basis points of revenue. While we remain disciplined on cost, we will continue to invest in strategic priorities, particularly in unifying and enhancing our product portfolio. Overall, we're encouraged by continued SaaS momentum, improving unit economics, and positive signals across key KPIs as we build on the operational discipline and strategic progress of the past year. Looking ahead at fiscal year 2026, our strategy centers on scaling a unified platform that integrates identity, authentication, and fraud. Product investments and go-to-market efforts are aligned around this foundation, and while the groundwork is well underway, we expect the benefits to build gradually over time, positioning fiscal year 2026 as a year of continued execution and setup for scalable, durable growth. Lastly, an important housekeeping item.

Our updated investor presentation and Excel-based supplemental financial package for Q3 are now available on our newly revamped and redesigned Investor Relations website. With that, I'll turn the call back over to the operator for questions.

Speaker 2

Thank you so much, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to remove your hand from the queue, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Just a moment for your first question. Your first question comes from Mike Grondahl with Northland Securities. Please go ahead.

Hey, guys. This is Logan on for Mike. Thanks for taking our question. Now with SaaS revenue up 23% year over year and being 41% of trailing 12-month revenue, how are you guys thinking about return to double-digit growth in 2026? Is there any updates to call on your strategy?

Speaker 3

No, we're a couple of things here. We're not going to guide 2026 in this call. We'll do that in our next earnings call. Just to provide some preliminary color on 2026, we think next year is going to be a year of continued execution where we'll focus on unifying our platform and continuing to strengthen our foundation. We anticipate also revenue growth to come out of the SaaS solutions, primarily the fraud and identity products. We also anticipate that cost discipline will allow us to reinvest in the areas that matter most, which is really the long-term platform transformation.

Thank you for that. Is there anything to call out? I saw that the top software revenue is down 20% year over year. How are you guys viewing that going forward? Is that expected to stabilize in the coming quarters?

On the transaction volume side, we've seen real stability quarter to quarter LTM, so we're pretty happy about that. We've managed to offset any reduction that we see out there in potential revenue declines with increases in ASPs over time. We've done a good job there.

Speaker 1

I think overall there, Logan, it's important for the Mobile Deposit side of the business to look at it on a trailing 12-month basis. As Dave Lyle mentioned, trailing 12-month revenue there is pretty well in line with historical levels. As we've mentioned on previous calls, we've seen transactions approximately around $1.2 billion transactions a year on the underlying use of the solution. Overall, it's been relatively stable. It's just not to get caught up, that's part of the problem on how it was originally set up in terms of selling the software. It's just led to a very jumpiness, which is why, strategically, to the first part of your question, one of our clear priorities is growing the SaaS part of the business and now seeing that at 41%.

We outlined a while back, it's our goal to try to get to where the business, the majority of that is SaaS driven to get better visibility and stability to the business.

Speaker 3

Yeah, and I'll just add one more thing here, Logan, which is if you actually look at what we said in the last earnings call about Q2, Q2 was our largest revenue quarter, really, I think, in the history of Mitek's history. That was driven by the deposit side, and some of that uptick that we saw was just deal timing, deal timing on the renewal side, where we actually saw some revenue get pulled in from the quarter we had expected it, which was this third quarter. This is kind of all where we think it would be going forward. On an LTM basis, we're feeling pretty good about it.

Thank you for the clarity. That was helpful. Switching over to CheckFraud Defender, how is the pipeline looking for new partners, and anything big to call out in the near term?

Speaker 1

In terms of the ongoing dialogue and conversations, they're excellent. We're having conversations with multiple partners. As you know, we have significant relationships with many of the large OEM and processors in the industry, and we continue the ongoing dialogue there. Our current partners have been doing terrific. As I mentioned, nearly 40 new institutions came into the consortium this past quarter, and there's more on your way. At the same time, we have some fairly large institutions that are in a pilot phase right now and who are ongoing and testing and evaluating. We're having conversations and discussions with contracts there. We're optimistic in seeing some of those convert over time and have good visibility to us.

So far, the performance there has been great, and the fact that we now have visibility to a quarter of all checking accounts in the U.S., having just built up over the last couple of years, is very encouraging. We feel like this is an ongoing long-term opportunity. As I mentioned in my points, strategically it is a foundation for an enterprise solution for fraud detection.

That's great. Thank you. One last one from us. What are you guys most excited about for the rest of fiscal year 2025 and heading into 2026? Yeah, thank you.

Just executing on exactly what we talked about. I mean, we're a team, as I pointed out, you know, we outlined our goals and objectives earlier in the year and just executing against those, hitting singles and doubles, integrating this business, pulling these acquisitions in, consolidating the platform, and starting to see growth. We're really enthusiastic about, you know, seeing the SaaS growth, stability in the Mobile Deposit business and overall deposit software solutions, the stability there, and the growth potential. I would tell you personally, I'm most encouraged by every time I talk to customers and prospects because what we have here, I think, is a terrific asset with the history and the credibility of financial institutions and the capabilities and technical capabilities with where the puck is going in terms of fraud, synthetic fraud, mostly by generative AI.

We're well positioned where digital identity and ongoing, I think, it was one of the reasons I touched in on one of the institutions who expanded with us this past quarter, where they're now recognizing the ability and need to take this level of security now on ongoing authentication where, you know, we do have that closed loop network where we can verify biometrically on a passwordless base back to a verified identity for their base. I just think we're well positioned for it, and, you know, it'll continue to evolve over time and just about executing.

Yep, for sure. Thanks, guys. Congrats on the quarter.

Thanks, Logan.

Excellent.

Speaker 2

Your next question comes from Jake Roberge with William Blair. Please go ahead.

Yeah, thanks for taking the questions. Could you talk a little bit more about what you're seeing on the demand front for CheckFraud Defender? Do you still feel confident in that product hitting your $20 million ACV target? Now that you've gotten more customers on that solution, do you feel like the new logo opportunities are maybe better understanding the ROI of the solution, that you can start getting these new deals across the finish line quicker? Thanks.

Speaker 1

Hey, Jake. Good afternoon. I would just say, just going back to and consistent with the last discussion around the opportunities that we currently have underway and in discussion with in terms of the test we have ongoing, additional partners that we're in conversations with, as well as several very large financial institutions that you know are all evaluating and going through in the data that we see through that. With most of those, we're in contract discussions with right now. We're optimistic about getting into our, as we talked about with our goals and wanting to see ACV double. It's a matter of time when that occurs, whether, you know, which month and when it occurs, can't, you know, give you definitiveness on that. We're optimistic about achieving that and, frankly, just the ones that we have visibility to right now. The ROI is very real. People see it.

It just takes time, you know, evaluating it and then kind of going through the whole procurement process. These are significant changes for the institutions, many coming off of other internal systems that they may use or others. There's a big change, but so far, the results speak for itself.

Okay, very helpful. Last year, you had the larger IDR and D deals that had pushed out a little bit. Can you give us an update on how those deals are trending and just how the integration of that IDR and D team has been into the broader fraud and ID verification suite?

Speaker 3

Yeah, and you're talking about the standalone biometrics revenue that shows up as software revenue the way we disclose it. I think you're also talking about it was about a year ago that a bunch of larger deals got pushed out from some larger potential customers out there. Those, you know, I think some of those have changed. Some of those are still staying the course and just taking longer. We're not betting on it, but we're certainly focused on closing those deals still.

Speaker 1

I would say to the second part of your question, strategically, some of the changes we've been making are integrating the business all in tightly with overall MyTech, part of the sales, in particular on a go-to-market in the team there. We're seeing, as I mentioned earlier, where identity and fraud are becoming closer and closer interlinked with one another. A lot of our transactional growth is some of the new solutions we've rolled out with the capabilities there around whether it's liveness, injection and attack detection, presentation and attack detection, deepfake detection. Those were all strong capabilities from IDR and D and now integrated into our platforms. That's just the team integrating in on the evolution and now getting tighter and tighter from a product. That's, again, part of the efforts that we've been outlining over the last couple of calls.

Okay, that's helpful. If I could just sneak one more in, you all obviously brought in Garrett Gaffkey a couple of quarters ago. Can you just talk about some of the low-hanging fruit that he's been able to identify within the organization to help improve some of the operational efficiencies around the business?

Yeah, as I mentioned, that was last quarter. Frankly, I would just say, as I pointed out in here, we kicked off various cost exercises in streamlining that and also just accelerating the pace of change in the organization, bringing focus to integrating these solutions. As we talked about at the beginning of the year, we're very serious about integrating this business as opposed to having multiple platforms from multiple acquisitions over the years. We need to be highly integrated and be able to capture the data insight and leverage that as a business. He is an absolute champion of that. I would just say accelerating that pace, then ultimately, getting it to where the data and capabilities with that become a stronger and stronger asset for the company and our customers.

Great. Thanks for taking the questions. Appreciate it.

Thank you.

Thanks.

Speaker 2

Your next question comes from George Sutton with Craig Hallum. Please go ahead.

Speaker 1

Thank you. First, I just want to make sure I have the numbers right. On the identity side, I believe you mentioned you last 12 months have had $75 million of identity revenues and $80 million of fully burdened costs. That fulcrum you speak to is in front of us. Did I get those numbers correct?

Speaker 3

Yeah, the $75 million, you're correct. That's on an LTM basis. When it comes to the fulcrum point, you know, you've heard Ed and myself talk about having durable, profitable growth. We've already seen some profitability out of identity. We're now focused on making sure that that is durable. We think we're nearing that point pretty quickly here.

Speaker 1

What I mentioned, George, is that from previous conversations where we talked about that kind of fulcrum point, it is roughly $80 to $85 million. Because of all the actions that we've been taking over the last few quarters, we've actually been able to move that break-even point below $80 million and are seeing positive contributions now. Frankly, what we want to see is, as to today's point on that last statement, the second point there that is durable, we've seen it over a trailing 12-month basis. We're pretty close to getting there. Once that's achieved, we'll declare it and move on. I would tell you, just based on the actions, the activity, current visibility, it's very close to happening as we speak. Just so I'm clear, in identity, the goal is still to migrate customers to the platform away from the point solutions. Is that effort continuing, accelerating?

Yes, that's all correct. We're seeing the benefit of the platforms. I mentioned in my comments on MyVIP, that's actually where we've seen the largest amount of growth in the transactional growth, where we're also having more and more journeys there, but also more transactions per journey. Additional insights are coming in, additional signals, as I mentioned on there. Absolutely, that's ongoing. It'll take time because obviously, there's migration. In terms of new efforts going forward for new relationships to come on, the focus is on a platform approach versus just selling a point solution. Ed, separate from this conversation, you've begun to talk about taking the CheckFraud Defender concept and migrating it to the broader payment market. Is this similar to what you're now starting to refer to as the enterprise fraud platform? It is one use.

Obviously, with checks right now, we've continued to grow and grow with checks. Is that as a platform in payments? Can we go beyond just checks? Because of the credibility we have with checks and checking accounts, those transactions, there's fraud that's taking place every day with financial institutions outside of checks. We have the visibility with checks. Is there any interoperability with that through other payment types? An example would be like check hiding. With check hiding, that also then gives you visibility into other payment types, such as wires or an ACH or other things. The more we can do here, better insight for the financial institution, more fraud signals to help them detect and prevent fraud. At the same time, on some of those financial institutions, we may be doing verifications for them, which again is additional signals, additional insight that can be brought forth.

The conversations that we have now, George, where we kind of move from a particular conversation on a product or in a particular department in FI to now, you know, the head of fraud. Fraud's looking across the business, whether that be in payments, which may be a check or other form of payment, in verification, in authentication, account takeover. They care about fraud and are looking to us about being a signal-rich environment to help them prevent fraud. That is where we see this evolving into more of an enterprise solution. We are pretty unique of being able to bring forth these various assets and have the deep relationships with many financial institutions. Gotcha. Last question for me. You mentioned that you're seeing positive signals across a number of your KPIs. I'm wondering if you could just be more specific what you're referring to there.

Speaker 3

As we see, especially on the fraud and identity side, as we start to see improvements in, for instance, gross profit per journey, as well as rapid growth in our transaction volumes, more journeys with more transactions, all of those kinds of KPIs are really important to us watching closely.

Speaker 1

Gotcha. Okay. All right. Thanks, guys. Thank you.

Speaker 3

Thanks, George.

Speaker 2

Your next question comes from Derek Greenberg with Maxim Group. Please go ahead.

Hi. I was wondering, just looking at the balance sheet with $175 million in cash and then generating $55 million, $56 million over the last 12 months, I was wondering if you could maybe talk a little bit about how you plan to allocate cash and cash flow going forward. I know part of that will be used towards paying off the debt in February, but thereafter, just wondering how you plan to use your resources.

Speaker 3

Yeah, at this point, we talked about we have a $100 million credit facility, as you know, that we put in place to help us repay the debt if we choose to use it. It's a $75 million delayed withdrawal term loan associated with it for that purpose. We don't have to make that decision now. You know, we have a healthy arbitrage opportunity on our 75 basis points loan. We also kind of have a balanced approach on our capital allocation here, invest in the business and return capital to shareholders. We still have $21 million left in our share repurchase program that we will take advantage of opportunistically. Once we get through paying the debt off, we'll determine how much of that we're using our own cash for and how much we've borrowed. Then we'll determine our capital allocation approach after.

Speaker 1

There is also kind of a second part of that where, you know, maybe unsaid in your question is something we've been consistent and clear about, you know, for this past year, the last three quarters, we have a very strong focus on organic growth and deploying capital back into the business or returning it to shareholders and driving organic growth in the company, you know, integrating the business and then having growth from our own product expansions. That is where 100% of our focus is right now in generating the free cash flow.

Okay, got it. My other question is just in prior quarters, you had outlined some of the margin improvement you received from automation on cost. I think last quarter it was around 230 basis points in the services gross margin. I was wondering if you had any statistics like that for this quarter and going forward if you still see potential incremental improvements from automation or if you think you've largely tapped that avenue as a driver of margin expansion.

Speaker 3

Yeah, we saw this quarter a 200 basis points year-over-year improvement already again. We're feeling really good about, you know, delivering that, the benefit of automation into our gross margins. We think we can continue to do that. We're not tapped out in terms of ability to automate more, especially as we move from our Mobile Verify point solution to our MyVIP platform. It becomes more and more important. We've got room to grow there.

Speaker 1

That is just a mindset of when we talk about operational excellence. It is just a mindset of continuing to drive improvement in the business. It will ebb and flow from quarter to quarter. How do we continue to expand margin, delight customers, deliver more and more value, and operate more efficiently and expand margins and free cash flow?

Speaker 3

Okay, got it. Thank you.

Speaker 1

Thank you.

Speaker 3

Thank you.

Speaker 2

There are no further questions at this time. I would like to turn the call back over to Ed West.

Speaker 1

Great. Thank you very much for your time today, and we look forward to seeing you in person and talking about the business. Thank you for your support and good day.

Speaker 2

Ladies and gentlemen, this concludes today's conference call. Thank you so much for your participation. You may now disconnect.