Mitek Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the fiscal first quarter ended December 31, 2013, compared with the three months ended December 31, 2012. Mitek develops and licenses mobile imaging software, including mobile check deposit and related financial and business applications. Revenue is primarily from software licenses sold directly or through channel partners.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $4.46 million | $3.31 million |
| Gross profit / gross margin | $3.89 million / 87% | $2.97 million / 90% |
| Operating loss | $1.48 million | $1.37 million |
| Net loss | $1.47 million | $1.36 million |
| Net loss per share | $0.05 | $0.05 |
| Cash used in operating activities | $1.54 million | Cash provided: $0.80 million |
Revenue increased 35% year over year: software revenue rose 23% to $3.17 million and maintenance and professional services revenue rose 75% to $1.29 million. Gross margin declined as cost of revenue grew faster than sales, partly due to a higher mix of products with third-party royalties. Operating expenses increased 27% to $5.37 million, including higher selling and marketing costs and legal fees.
At December 31, cash and cash equivalents were $10.18 million and investments were $17.23 million, totaling $27.41 million, versus $29.03 million at September 30, 2013. Working capital was $20.73 million. Current liabilities were $6.05 million; the filing reports no material borrowings, although it notes capital lease obligations. Management said cash and expected operating cash generation should meet working-capital needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven mainly by larger Mobile Deposit license purchases and renewal timing, plus additional maintenance contracts and billable services.
- Operating loss widened by about $0.11 million despite revenue growth. Selling and marketing expense rose 46%; general and administrative expense rose 20%, primarily reflecting higher intellectual-property litigation and patent-prosecution fees.
- Operating cash flow shifted from $0.80 million provided to $1.54 million used. Cash and investments declined overall, in part as funds were invested in marketable securities, including $4.05 million classified as long-term.
- Two customers accounted for 54% of quarterly revenue (33% and 21%), compared with three customers accounting for 60% in the prior-year quarter.
Outlook, risks, contingencies and unusual items
No quantified revenue or earnings guidance is provided. Management cited mobile banking adoption as a growth opportunity and said continued growth depends on developing attractive products and strategic alliances. Risks include competition, reliance on mobile imaging products, lengthy customer implementation cycles, license renewal timing, and customer/channel concentration. Two large customers contributed more than half of quarterly revenue.
The company is litigating with USAA over patents, licensing and other claims, and is pursuing a patent-infringement case against Top Image Systems. Mitek said it believes USAA’s claims lack merit and does not expect their outcome to materially affect its financial condition or results; the filing reported no material developments in historical proceedings since September 30, 2013. Deferred tax assets remain subject to a 100% valuation allowance due to sustained losses. Stock-based compensation was $0.83 million, and $9.38 million of unrecognized compensation expense remained at quarter-end.
Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material changes to risk factors from the fiscal 2013 Form 10-K.
Important facts for investors to verify
- Whether license purchases and renewals sustain revenue growth, given their timing-driven and upfront-recognition characteristics.
- Whether customer concentration and implementation delays affect future sales, collections or renewals.
- Whether expense growth, litigation costs and stock-based compensation moderate as revenue expands.
- Developments in the USAA and Top Image Systems litigation and any resulting financial or intellectual-property effects.
- Whether operating cash flow improves and management’s stated 12-month liquidity expectation remains supportable.