Mitek Systems, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended March 31, 2019. Mitek develops mobile capture and digital identity verification software, serving more than 6,500 financial services organizations and other brands. Results include A2iA, acquired in May 2018.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $20.0 million | $14.3 million | $37.7 million | $26.4 million |
| Operating loss | $1.7 million | $1.3 million | $6.2 million | $3.6 million |
| Net loss | $0.7 million | $1.2 million | $3.9 million | $6.9 million |
| Diluted loss per share | $0.02 | $0.03 | $0.10 | $0.20 |
| Operating cash flow | Not separately stated | Not separately stated | $6.6 million | $3.8 million |
- Q2 revenue grew 40% year over year; six-month revenue rose 43%. Service and other revenue grew 71% in Q2, primarily from Mobile Verify transactional SaaS growth and acquired-company maintenance and professional services. Software and hardware revenue rose 21%.
- Q2 gross margin was approximately 85%, versus 88% a year earlier; six-month gross margin was approximately 84%, versus 87%. Higher transaction-related personnel and hosting costs, hardware costs, and A2iA maintenance contributed to the increase in cost of revenue.
- Operating expenses increased alongside revenue, including acquisition-related amortization and higher staffing and integration costs. Q2 operating loss widened, while net loss narrowed, partly reflecting an income tax benefit.
- Six-month net cash from investing activities was $1.9 million, and net cash from financing activities was $1.4 million. Cash and cash equivalents were $18.7 million, and short-term investments were $5.9 million at March 31, 2019.
- Working capital was $21.8 million. Total liabilities were $29.6 million; the company reported $0.5 million of Spanish government borrowings and no revolver borrowings. The $10 million secured revolving facility was extended in May 2019 to September 30, 2020.
Changes, outlook, and material matters
- Growth includes the contribution of A2iA and organic increases in Mobile Verify and Mobile Deposit. Identity verification software and hardware revenue declined in the quarter, while identity verification services and other revenue increased.
- Mitek adopted ASC 606 in October 2018 using the modified retrospective method. The company reported that adoption reduced Q2 revenue by $0.6 million and six-month revenue by $1.3 million versus amounts calculated without adoption; comparisons with prior periods are therefore not fully on the same accounting basis.
- Management said cash and expected operating cash generation should meet working-capital needs for at least the next 12 months. It provided no quantified revenue or earnings guidance. Management intends to prioritize identity verification innovation and expand adoption through its financial-institution relationships.
- On May 1, 2019, Mitek announced that its strategic-alternatives review had concluded without an acceptable purchase offer; management said it believes continued execution of its strategy can create more shareholder value.
- Key risks include dependence on a limited range of mobile imaging technologies, competition, quarterly revenue timing and customer/channel concentration, acquisition integration, foreign-exchange exposure, and cybersecurity and regulatory risks. Two customers represented 31% of Q2 revenue; one represented 18% of six-month revenue.
- Mitek disclosed a $0.9 million claim against ICAR in Spain, plus interest, concerning an alleged breach of a services agreement; the proceeding was ongoing, and Mitek stated it is subject to acquisition-agreement indemnification, subject to its terms. The filing also describes mobile-deposit patent litigation against customers, including Lupercal lawsuits for which Mitek had received indemnification requests; Mitek said it did not then believe it was obligated to indemnify those customers.
- Management assessed disclosure controls as effective at March 31, 2019. The assessment excluded A2iA’s internal controls while integration continued; Mitek expected to complete A2iA control implementation in Q3 FY2019. ERP implementation was also underway.
Important facts for investors to verify
- How much reported growth reflects A2iA and ASC 606 timing effects versus underlying organic demand, particularly in Mobile Verify and Mobile Deposit.
- Whether gross-margin pressure, acquisition amortization, integration spending, and stock-based compensation affect the path to profitability.
- Revenue renewal timing and customer/channel concentration, including the reported major-customer exposures.
- Developments in the ICAR claim and customer-facing mobile-deposit patent cases, including any indemnification obligations.
- Execution of acquisition integration and ERP/control remediation, and continued availability of liquidity under the revolver’s terms.