Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2023. The report was signed October 26, 2023. Mitek provides mobile check-deposit, identity-verification and authentication software, serving more than 7,900 financial-services organizations and other customers.
Financial performance
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Revenue | $43.1 million; up 10% year over year | $134.9 million; up 28% |
| Operating income | $1.8 million; operating margin about 4.2% | $18.9 million; operating margin about 14.0% |
| Net income (loss) | $(0.4) million; $(0.01) per diluted share | $9.5 million; $0.20 per diluted share |
| Operating cash flow | Not presented for the quarter | $28.1 million, versus $16.0 million in the prior-year period |
| Cash and investments | $131.0 million at June 30, 2023 | |
| Working capital | $124.5 million at June 30, 2023 |
Quarterly gross margin was approximately 86.7%, compared with 85.2% in the restated prior-year quarter. For the nine-month periods, gross margin was approximately 87.6%, compared with 85.9%. These percentages are calculated from reported revenue and cost of revenue.
At June 30, 2023, total assets were $417.5 million and stockholders’ equity was $207.6 million. Convertible notes had $155.3 million principal outstanding and a $133.6 million carrying value; they bear a 0.75% coupon and mature February 1, 2026. The company also reported $1.3 million of Spanish government-agency loans.
Changes and drivers versus prior periods
- Quarterly software and hardware revenue and services and other revenue each grew 10%. Mobile Deposit and IDLive sales, hosted mobile-deposit transactions and HooYu-related SaaS revenue contributed to growth.
- Nine-month software and hardware revenue rose 38%, primarily reflecting Mobile Deposit and IDLive sales. A significant multiyear Mobile Deposit license contract had its full-term license revenue recognized upfront in fiscal Q1 2023, an important timing factor in the comparison. Services and other revenue increased 19%, including HooYu-related growth.
- General and administrative expense rose 76% in the quarter and 62% year to date. Management cited higher audit and accounting, professional, technology and other costs; year-to-date expense also included executive-transition costs.
- Nine-month net income increased from $3.3 million to $9.5 million, while the quarter remained loss-making. The year-to-date comparison includes higher operating income and other income, but also a $4.4 million tax provision versus a $1.1 million tax benefit in the prior-year period.
- The 2022 comparative interim statements were restated for errors involving revenue recognition, HooYu acquisition accounting and related items, and classification of cloud-operations employee costs. Restated 2022 nine-month net income was $3.3 million, down from the previously reported $4.9 million.
Liquidity, outlook and notable matters
- Management stated that cash and cash equivalents and expected operating cash generation should meet working-capital needs for at least 12 months from the filing date. No quantitative revenue or earnings guidance is provided in the filing.
- Nine-month operating cash flow included a $9.9 million increase in income taxes payable, which management linked to use of most net operating loss carryforwards. Cash flow also benefited from non-cash charges; operating-asset and liability changes were a net use of cash.
- Investing activities provided $25.6 million, mainly from net investment sales and maturities. Cash and investments together increased from $101.0 million at September 30, 2022 to $131.0 million at June 30, 2023.
- Mitek was out of compliance with certain convertible-note indenture reporting covenants as of June 30, 2023 because of late SEC filings. Special interest applied under the indenture. The company reported that it was back in compliance as of October 26, 2023 after filing the outstanding reports.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2023 due to material weaknesses. Identified areas included revenue recognition, business-combination accounting, tax, financial close and reconciliations, risk assessment, IT controls, and documentation and review controls. Remediation was in progress and not yet complete.
- Legal matters include third-party patent claims against customers and related indemnification demands, which Mitek says it does not believe it is obligated to satisfy, but which could result in substantial costs if that view is not upheld. A customer BIPA lawsuit was dismissed without prejudice in September 2023; Mitek disclosed settlements with Truist and Instacart after the quarter, with settlement terms not detailed here. Mitek also pursued collection litigation involving UrbanFT.
- Revenue concentration is notable: one customer represented 16% of quarterly revenue; two customers represented 15% and 11% of nine-month revenue. International sales were 29% of quarterly revenue and 25% year to date.
- Management cites competition, lengthy sales and implementation cycles, dependence on a concentrated range of technologies, changing transaction demand, fraud and cybersecurity, foreign exchange exposure, and revenue-recognition timing as business risks. The filing says there were no material changes to risk factors previously disclosed in the 2022 annual report.
Important facts for investors to verify
- Review the restatement disclosures and assess whether the accounting-control weaknesses have been remediated and tested as effective.
- Assess how much reported growth depends on upfront recognition of the large Mobile Deposit license and on acquired HooYu revenue, versus recurring or usage-based growth.
- Track G&A spending, acquisition-related contingent consideration and the sustainability of operating cash flow, including the tax-payable contribution.
- Confirm the status and potential financial exposure of patent-related indemnification demands and other legal matters, including the disclosed settlements.
- Monitor customer concentration, the 2026 convertible notes and any dilution or cash-settlement implications, as well as timely SEC reporting and covenant compliance.