Mitek Systems, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. Mitek provides mobile image-capture and digital identity-verification software, serving more than 7,000 financial-services organizations and other brands.
Financial performance and liquidity
| Metric | Quarter ended Mar. 31, 2020 | Quarter ended Mar. 31, 2019 | Six months ended Mar. 31, 2020 | Six months ended Mar. 31, 2019 |
|---|---|---|---|---|
| Revenue | $23.2 | $20.0 | $45.3 | $37.7 |
| Operating income (loss) | $1.1 | $(1.7) | $1.4 | $(6.2) |
| Net income (loss) | $0.9 | $(0.7) | $1.5 | $(3.9) |
| Diluted EPS | $0.02 | $(0.02) | $0.03 | $(0.10) |
| Operating cash flow | Not separately provided | Not separately provided | $8.4 | $6.6 |
- Quarterly revenue grew 16%; six-month revenue grew 20%. Quarterly gross margin, calculated from reported revenue and cost of revenue, was approximately 86%, versus 85% a year earlier. Operating margin was approximately 4.6%, compared with a loss margin of approximately 8.3%.
- Quarterly revenue comprised $11.5 million of software and hardware and $11.7 million of services and other. For the six-month period, those categories were $23.0 million and $22.3 million, respectively.
- At March 31, cash and cash equivalents were $16.9 million and investments were $25.6 million, totaling $42.5 million. Working capital was $35.0 million. Management said cash and expected operating cash generation should meet working-capital needs for the next 12 months from filing.
- Six-month investing cash outflow was $7.8 million, primarily reflecting net investment purchases; financing cash outflow was $0.3 million. Cash and cash equivalents increased $0.2 million over the six months.
- No borrowings were outstanding on the $10 million revolving facility, which matures September 30, 2020. Other borrowings were $0.5 million under Spanish government loan agreements. Operating lease liabilities totaled $7.5 million.
Changes versus the prior comparable period
- Growth came from Mobile Deposit and CheckReader software and increased Mobile Verify transactional SaaS revenue. In the quarter, Mobile Verify SaaS revenue rose 38% year over year; six-month services growth was led by a $3.7 million increase in Mobile Verify SaaS revenue.
- Legacy on-premise identity software revenue declined as those products are phased out. Deposits revenue was $14.6 million in the quarter and identity-verification revenue was $8.6 million.
- Six-month operating results improved to income from a loss, alongside higher revenue and lower R&D, general and administrative, and acquisition-related expense as a share of sales. The prior-year six-month tax benefit became a tax provision in 2020.
- Operating cash flow increased to $8.4 million from $6.6 million. Investment purchases shifted investing cash flow from a $1.9 million inflow to a $7.8 million outflow.
Outlook, risks and notable items
- No quantified revenue or earnings guidance is provided. Management expects demand opportunities from digital transactions, fraud prevention, and regulatory requirements, but said the overall effect of COVID-19 was uncertain. It noted that remote work and curtailed travel could delay or reduce sales and productivity, while greater digital adoption could create opportunities.
- COVID-19 was identified as a material risk to customer spending, contract renewals, implementation activity, operations, financial markets, and liquidity. Management reported transitioning employees to remote work and modifying travel, events, sales, implementation, and support activities.
- Customer concentration is notable: two customers each represented 14% of quarterly revenue. For the six-month period, two customers represented 16% and 11%. Customer receivables exceeding 10% of revenue totaled $5.0 million.
- USAA obtained jury verdicts of $200 million and $102 million against Wells Fargo in separate mobile-deposit-related cases; the verdicts remained subject to post-trial motions and appeal. Mitek was not a defendant in those cases, but filed its own declaratory-judgment action concerning four USAA patents; that case was transferred to the Eastern District of Texas in April 2020. Mitek reported $1.0 million in related legal fees for the six months and said it would vigorously defend its position.
- Other disclosed litigation includes an approximately $0.9 million claim against ICAR, for which Mitek says it is entitled to acquisition-related indemnification, and a dispute with UrbanFT involving delinquent payments and patent claims. The filing does not state a clear estimated loss for these matters.
- The company reversed $0.1 million of prior restructuring accruals. Adoption of lease accounting on October 1, 2019 added $8.2 million of lease liabilities and $6.8 million of right-of-use assets at adoption. A $0.8 million goodwill adjustment corrected a contract-asset classification; management said the error was not material to previously reported statements.
Most important facts for investors to verify
- Whether COVID-19 affected customer purchasing, contract renewals, implementation timing, and subsequent-period revenue after March 31, 2020.
- Whether the revenue mix and growth in Mobile Verify SaaS and deposits products continued, and whether legacy identity-product declines accelerated.
- Developments in the USAA-related cases, potential customer indemnification exposure, and the UrbanFT and ICAR disputes; the filing provides no clear loss estimate for these matters.
- Customer concentration, receivable collectability, and whether operating cash generation and the $42.5 million cash-and-investment balance remain adequate.
- Repurchases under the $10 million authorization, share-based compensation and dilution, and the status or renewal of the revolving credit facility before its September 2020 maturity.