Mitek Systems, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; the filing was signed November 30, 2017. Unless otherwise noted, financial figures are in U.S. dollars.
Business context
Mitek develops mobile image capture and identity-verification software using computer vision, artificial intelligence, and machine learning. Its offerings include Mobile Deposit, Mobile Verify, Mobile Fill, Mobile Docs, and multi-check capture. More than 5,900 financial institutions had signed agreements to deploy its Mobile Deposit technology. The company reports one operating segment.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $45.4 million | $34.7 million | +31% |
| Operating income | $2.8 million | $1.8 million | +52% |
| Net income | $14.1 million | $2.0 million | Includes $10.9 million income tax benefit |
| Diluted earnings per share | $0.40 | $0.06 | FY2017 benefited materially from tax allowance release |
| Cash from operating activities | $10.4 million | $7.9 million | +33% |
- Software revenue rose 31% to $29.6 million; SaaS, maintenance, and consulting revenue rose 30% to $15.7 million.
- Operating margin was approximately 6.1% in FY2017, versus 5.3% in FY2016; gross margin was approximately 91.1% in FY2017. These percentages are calculated from reported figures.
- At year-end, cash and cash equivalents were $12.3 million and investments were $34.1 million, for $46.3 million combined. Working capital was $41.3 million, compared with $32.0 million a year earlier.
- Total assets were $71.7 million and total liabilities were $10.3 million. The filing reports no borrowings at year-end; operating lease obligations totaled $2.3 million. The company said available capital and expected operating cash flow should cover working-capital needs for at least 12 months.
- FY2017 investing cash outflow was $7.8 million, primarily net investment purchases of $7.3 million and capital expenditures of $0.5 million. Financing cash inflow was $0.7 million, from stock-option exercises.
Material changes and notable items
- Revenue increased $10.7 million year over year, reflecting higher software license sales and recurring/service revenue. Management cited growth in mobile deposit and identity-verification solutions and timing of license renewals.
- Operating expenses increased 30% to $42.6 million, including higher sales and marketing, R&D, and general and administrative costs. R&D expense rose 34% to $10.4 million.
- Net income rose sharply, but the $10.9 million income tax benefit from reducing the deferred-tax valuation allowance was a major non-operating contributor. Operating income was $2.8 million; pretax income was $3.2 million.
- One customer represented $10.4 million, or 23%, of FY2017 revenue, compared with 18% in FY2016. International revenue was 14% of total revenue, versus 15% in FY2016.
- Quarterly FY2017 revenue increased from $9.3 million in Q1 to $12.9 million in Q4. Q4 net income of $12.9 million included an $11.0 million income tax benefit; Q4 operating income was $1.7 million.
Outlook, risks, and contingencies
- No specific FY2018 revenue or earnings guidance is provided. Management expected R&D expense to increase in FY2018 and said it intended to extend growth by developing mobile banking and identity-verification products for additional markets.
- Principal risks include intense competition, dependence on mobile imaging technology, volatile license timing and quarterly results, lengthy customer implementation cycles, cybersecurity and privacy threats, intellectual-property exposure, and the ability to retain key employees.
- Revenue concentration and channel-partner license timing can make results uneven. Management noted that one customer contributed 23% of annual revenue; license sales to channel partners can be significant in individual periods.
- The ICAR Vision Systems acquisition closed October 16, 2017, after fiscal year-end. The stated purchase price was up to $15 million: $4.1 million cash and $5.6 million in Mitek shares at closing, plus up to approximately $5.3 million tied to FY2018 and FY2019 milestones. Integration costs and realization of expected benefits remain risks.
- RMII patent litigation was dismissed with prejudice on September 15, 2017, following PTAB decisions finding the asserted claims unpatentable. Mitek’s motion for attorneys’ fees and expenses remained pending in the filing.
- The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether ongoing revenue and operating profit growth can offset rising operating expenses, particularly R&D and selling costs.
- How much FY2017 reported earnings depended on the one-time $10.9 million deferred-tax valuation-allowance release, and whether deferred tax assets are ultimately realizable.
- The durability of the large-customer and channel-partner relationships, and the effect of license-renewal timing on future quarters.
- ICAR’s final consideration, milestone performance, integration costs, and contribution to revenue and profitability.
- Developments in the RMII fee motion and any other intellectual-property, privacy, cybersecurity, or regulatory matters.
- Future cash generation and investment liquidity; the filing does not provide a specific FY2018 revenue or earnings forecast.