Mitek Systems, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing is an annual report, not a standalone Q4 filing; quarterly figures below are unaudited. Mitek develops mobile image-capture and identity-verification software, primarily for financial institutions and other regulated businesses. It completed its IDchecker acquisition in June 2015.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $34.7 million | $25.4 million | +37% |
| Operating income | $1.8 million | $1.9 million | −4% |
| Net income | $2.0 million | $2.5 million | −22% |
| Diluted EPS | $0.06 | $0.08 | −25% |
| Operating cash flow | $7.9 million | $6.1 million | +29% |
- Software revenue grew 26% to $22.6 million; SaaS, maintenance and consulting revenue rose 62% to $12.1 million. Management attributed growth to license sales and renewals, maintenance arrangements, and additional SaaS revenue from IDchecker.
- Cost of revenue was 10% of revenue, implying a 90% gross margin. Operating margin was approximately 5.3%, down from 7.5% in FY2015; net margin was approximately 5.6%, versus 10.0%.
- Higher selling and marketing costs (+69%), R&D (+40%) and acquisition-related costs (+59%) offset revenue growth. FY2016 included a much smaller tax benefit than FY2015, which included a discrete $0.6 million benefit.
- At year-end, cash and cash equivalents were $9.0 million and investments were $26.8 million; working capital was $32.0 million. The company reported no material borrowing balance; total liabilities were $8.9 million, including deferred revenue and other operating liabilities. Contractual operating lease obligations totaled $2.6 million.
- FY2016 year-end total assets were $48.4 million and stockholders’ equity was $39.5 million. The company reported a $1.5 million increase in shares from stock-option exercises, and substantial stock-based compensation expense.
- In FY2016 Q4, revenue was $9.67 million, operating income $0.84 million, and net income $0.96 million, compared with $7.87 million, $0.96 million, and $0.96 million, respectively, in FY2015 Q4.
Material changes and business developments
- Revenue rose from $25.4 million to $34.7 million, with growth in both software licenses and recurring/service revenue. International revenue increased to 15% of total revenue from 5% in FY2015.
- One customer accounted for $6.3 million, or 18% of revenue, down from 25% in FY2015. Management said channel-partner license timing and renewals can cause significant period-to-period revenue variation.
- Mitek reported agreements with more than 5,400 financial institutions for Mobile Deposit and said its technology had processed over one billion check deposits. It added five patents during the year, bringing issued patents to 27.
- Goodwill of $2.9 million was not impaired in the FY2016 annual test. IDchecker-related contingent consideration was valued at $0.25 million at year-end.
Outlook, risks and contingencies
- Management expected R&D expense to increase in FY2017 as product development continued. It anticipated available capital and operating cash flow would meet working-capital needs for at least 12 months. The filing provides no numerical revenue or earnings guidance.
- Management cited mobile banking adoption and demand for digital onboarding and identity verification as growth opportunities, while noting that continued growth depends on product acceptance, execution and expansion into other verticals.
- Principal risks include dependence on mobile imaging technology, intense competition, lengthy sales and implementation cycles, timing of license renewals, customer concentration, product defects and data-security breaches, and the ability to integrate IDchecker. Foreign operations introduce currency, tax, privacy and regulatory risks.
- RMII patent litigation remained unresolved at the filing date. The Patent Trial and Appeal Board ruled in July 2016 that claims asserted across four patents were not patent eligible; Mitek requested judgment or dismissal, and RMII moved to dismiss without prejudice. Mitek stated it did not expect the matter to materially affect its financial condition or results.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions. Mitek did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether FY2016 revenue growth and the faster-growing SaaS/service mix continue, and how much growth reflects recurring usage versus license timing and renewals.
- Whether operating profitability improves as sales, R&D and integration spending rise; review stock-based compensation and share dilution alongside reported earnings.
- The ongoing contribution and integration costs of IDchecker, including the status of earnout obligations and international operations.
- Customer and channel-partner concentration, including whether the 18% revenue customer remains significant.
- The final disposition of the RMII litigation and any resulting costs or obligations to customers and distributors.
- Liquidity and investment quality, including the composition and maturities of available-for-sale securities and the company’s lease commitments.