Mitek Systems, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Mitek develops mobile capture and digital identity verification software and serves more than 6,600 financial services organizations and other brands.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $21.9 | $16.1 | $59.6 | $42.5 |
| Operating loss | $(2.9) | $(2.9) | $(9.1) | $(6.4) |
| Net loss | $(0.1) | $(2.8) | $(4.0) | $(9.7) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $7.9 | $4.4 |
Q3 revenue increased 36% year over year. Software and hardware revenue rose 14% to $11.9 million, while service and other revenue rose 77% to $10.0 million. Management attributed service growth principally to Mobile Verify transactional SaaS, along with maintenance and professional services. Gross margin was approximately 85.5%, compared with 83.4% a year earlier. Despite near-flat operating loss, Q3 net loss narrowed substantially, with a $2.7 million income tax benefit and improved other income contributing to the result.
For the nine-month period, revenue grew 40%. Operating loss widened, including a $3.2 million restructuring charge; net loss narrowed as the period included a $4.9 million income tax benefit, versus a $2.3 million tax provision in the prior-year period. The nine-month effective tax rate was 55%, affected in part by excess tax benefits from option exercises and tax credits.
Liquidity, capital and balance sheet
- At June 30, cash and cash equivalents were $16.1 million and short-term investments were $11.9 million, totaling $28.0 million, up from $17.5 million at September 30, 2018. Working capital was $25.5 million.
- Nine-month operating cash flow was $7.9 million. Cash also benefited from $4.9 million of equity-plan proceeds; investing activities used $4.3 million and financing activities provided $3.6 million.
- No borrowings were outstanding on the $10.0 million revolving credit facility. The facility maturity was extended to September 30, 2020. Other borrowings were $0.6 million, consisting of non-interest-bearing Spanish government loans.
- Common shares outstanding increased to 40.2 million from 38.0 million at September 30, 2018.
Material changes, outlook and risks
- Restructuring: In June 2019, Mitek began restructuring A2iA’s Paris operations, discontinuing certain products considered noncore, low-growth and unprofitable and reducing staff. It recorded $3.2 million of costs, principally severance, expected to be paid over the following 12 months. Management expects benefits but gives no quantified savings target.
- Revenue accounting: Mitek adopted ASC 606 on October 1, 2018. The company reported that adoption increased revenue by $1.6 million for the nine months versus the prior accounting method, primarily by changing the timing of software and hardware license revenue recognition. Comparatives were not restated.
- Outlook: No specific revenue or earnings guidance is provided. Management plans to prioritize identity-verification innovation and use its mobile-deposit customer base to expand verification products. It believes cash and expected operating cash generation will meet working-capital needs for at least 12 months from filing.
- Key risks and contingencies: Revenue can fluctuate with the timing of channel-partner license purchases and renewals; two customers represented 16% and 11% of Q3 revenue, and one represented 18% of nine-month revenue. The company highlights competition, potential decline in check usage, acquisition integration and restructuring execution, foreign currency exposure, cybersecurity and privacy risks, and dependence on a concentrated set of technology products.
- Legal matters: A claim against ICAR seeks €0.8 million plus interest; Mitek says it is entitled to indemnification under the acquisition agreement. Customers have also sought indemnification relating to patent suits involving mobile deposits. Mitek does not currently believe it is obligated to indemnify those customers but says costs could be substantial if that position changes.
- Mitek concluded its strategic-alternatives review on May 1, 2019 without an acceptable offer to acquire the company; it said it would continue executing its current strategy. Disclosure controls were assessed as effective at June 30, 2019.
Investor verification priorities
- Assess how much of reported growth is organic and recurring, particularly Mobile Verify SaaS growth versus A2iA/ICAR contributions and license-renewal timing.
- Track whether the A2iA restructuring produces the expected benefits and whether further restructuring or integration costs arise.
- Review the sustainability of operating cash flow, the tax benefits supporting reported net results, and the effects of ASC 606 revenue timing.
- Monitor customer concentration and developments in the ICAR and customer-related patent litigation, including any indemnification exposure.
- Check future share-count growth, including equity compensation and option exercises, and the status of liquidity and revolver conditions.