Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Mitek develops mobile capture and digital identity verification software, serving more than 6,100 financial-services organizations. All amounts are U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2018 | Year-over-year change | Nine months ended June 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $16.1 million | +37% | $42.5 million | +31% |
| Software and hardware revenue | $10.5 million | +40% | $26.4 million | +24% |
| SaaS, maintenance and consulting revenue | $5.7 million | +30% | $16.1 million | +43% |
| Gross margin | Approximately 83% | Down from approximately 90% | Approximately 86% | Down from approximately 91% |
| Operating income (loss) | $(2.9) million | Prior-year income: $0.5 million | $(6.4) million | Prior-year income: $1.0 million |
| Net income (loss) | $(2.8) million; $(0.08) per diluted share | Prior-year income: $0.6 million; $0.02 per diluted share | $(9.7) million; $(0.28) per diluted share | Prior-year income: $1.2 million; $0.03 per diluted share |
| Operating cash flow | Not separately provided for the quarter | — | $4.1 million | Down from $7.2 million |
Revenue growth reflected Mobile Deposit sales, higher Mobile Verify and other services revenue, and contributions from acquired businesses. Higher cost of revenue, sales and marketing, research and development, and acquisition-related expenses outweighed revenue growth. Acquisition-related costs were $3.2 million in the quarter and $5.6 million year to date. The quarterly net loss also included $1.3 million of foreign-exchange remeasurement expense related to the A2iA acquisition.
Financial position and material changes
- At June 30, cash and cash equivalents were $8.6 million and short-term investments were $9.4 million, totaling $18.0 million, versus $46.3 million in cash and investments at September 30, 2017. Working capital was $15.3 million, compared with $41.3 million.
- Total assets rose to $124.1 million from $71.7 million, principally reflecting acquisitions. Goodwill was $34.0 million and net intangible assets were $34.9 million, compared with $3.0 million and $2.3 million, respectively, at September 30.
- Total liabilities were $29.9 million and stockholders’ equity was $94.2 million. No borrowings were outstanding under the $10 million secured revolving credit facility at June 30. The facility matures May 3, 2019, bears a floating rate with a 4.5% floor, and includes financial covenants when drawn.
- Nine-month investing cash outflow was $8.2 million, including $29.7 million paid for acquisitions and $3.2 million of capital expenditures, offset in part by net investment sales and maturities. Cash declined by $3.7 million during the period.
- Mitek acquired A2iA on May 23, 2018, paying $26.8 million net of cash acquired and issuing 2,514,588 shares valued at $21.9 million, plus $0.2 million of transaction liabilities. The company also acquired ICAR in October 2017; additional milestone consideration may be payable.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash generation should meet working-capital needs for the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Management identified competition, changes in demand or pricing, and concentration in mobile imaging technology as risks to revenue and margins. License renewals can cause period-to-period revenue volatility; certain customers represented significant portions of revenue, including one customer at 24% of nine-month revenue.
- International sales were approximately 24% of quarterly revenue and 25% year to date. Mitek cited exposure to foreign-exchange fluctuations, particularly the euro.
- The nine-month tax provision was $2.3 million despite a pretax loss, including $4.4 million of expense related to the Tax Act. The quarter had a $1.4 million tax benefit. Interim tax results may be volatile.
- Mitek expected adoption of ASC 606 in fiscal 2019 using the modified retrospective approach. It anticipated changes to the timing of some license and guaranteed-minimum revenue recognition and deferral of qualifying contract commissions; it did not expect a significant timing effect on hardware or SaaS, maintenance and consulting revenue.
- The company reported that the RMII patent cases were dismissed with prejudice in September 2017; its motion for attorney fees was denied July 27, 2018, and the cases were closed. Other ordinary-course legal matters were not expected by management to have a material aggregate effect.
- Management stated disclosure controls were effective. Its internal-control assessment did not include ICAR or A2iA, which were still being integrated. Management reported no material change in risk factors from its prior Form 10-K.
Important facts for investors to verify
- Whether revenue growth and subscription/service expansion continue, and whether margins recover as acquisition and integration costs evolve.
- The cash and working-capital trajectory following the acquisitions, alongside the terms, covenants and availability of the revolving facility.
- Final acquisition purchase-price allocations, acquired-asset amortization, contingent consideration and milestone payments, and the integration performance of A2iA and ICAR.
- Customer and channel-related revenue timing, including the impact of significant customer concentrations and license renewals.
- The realized effects of ASC 606 adoption and the Tax Act, as well as foreign-currency exposure and ongoing litigation or other contingencies.