Mitek Systems, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017. Mitek provides mobile capture and identity-verification software; revenue is primarily from software licenses, with growing SaaS revenue. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $11.80m | $9.11m | $32.49m | $25.03m |
| Operating income | $0.48m | $0.69m | $1.04m | $0.98m |
| Net income | $0.62m | $0.74m | $1.23m | $1.00m |
| Diluted earnings per share | $0.02 | $0.02 | $0.03 | $0.03 |
| Operating cash flow | Not separately provided | Not separately provided | $7.19m | $5.29m |
- Q3 software revenue rose 30% to $7.46m; SaaS, maintenance and consulting revenue rose 30% to $4.33m. Management attributed license growth mainly to Mobile Fill and Mobile Deposit, and service growth largely to Mobile Verify SaaS.
- Nine-month software revenue increased 32% to $21.24m; SaaS, maintenance and consulting revenue increased 25% to $11.24m.
- Q3 operating income fell despite revenue growth, as operating costs increased. Net income included $0.15m of other income and a $0.02m income tax provision.
- Q3 cost of revenue was 10% of revenue versus 9% a year earlier; nine-month cost of revenue was 9% versus 10%. Higher Mobile Verify transaction volume increased royalty costs.
Balance sheet, liquidity and cash flow
- At June 30, cash and cash equivalents were $9.30m and investments were $33.62m, totaling $42.92m, compared with $35.83m at September 30, 2016. Working capital was $36.5m, up from $32.0m.
- Total assets were $56.54m and total liabilities $10.40m. The balance sheet reports no borrowings; total liabilities include deferred revenue and other operating liabilities.
- Nine-month operating cash flow was $7.19m. Investing activities used $7.22m, primarily reflecting net investment purchases of $6.86m and $0.36m of capital expenditures. Financing activities provided $0.38m, principally from stock-option exercises.
- Management said available cash and expected operating cash generation should meet working-capital needs for the next 12 months. The company reported no off-balance-sheet arrangements.
Changes, outlook and risks
- Q3 general and administrative expense rose 54% to $3.36m, including $0.8m of CFO-transition costs; management cited these costs as a significant contributor to lower quarterly net income. The nine-month period also included $0.8m of CFO-transition costs.
- Sales, research and development, and general and administrative costs increased with higher headcount and business activity. Stock-based compensation expense was $3.95m for the nine months, up from $3.11m.
- No specific revenue or earnings guidance was provided. Management identified continued mobile banking adoption and expansion of identity-verification products into additional markets as growth opportunities, while noting competition, technology changes, and dependence on demand for mobile applications as risks.
- Revenue was concentrated: two customers accounted for 28% and 15% of Q3 revenue; two accounted for 25% and 11% of nine-month revenue. Management noted that license purchases and renewals by channel partners can make revenue timing uneven.
- The company maintained a 100% valuation allowance against net deferred tax assets; federal and state net operating loss carryforwards begin expiring in fiscal 2018. The filing says realization is uncertain.
- In the RMII patent litigation, the PTAB found all asserted claims in four patents unpatentable. Litigation was stayed; Mitek sought judgment or dismissal, and RMII sought dismissal without prejudice. Mitek said it believed the claims were without merit and did not expect a material adverse effect. Other ordinary-course matters were not expected to be material.
- Marketable securities had fair value of $33.6m and maturities of approximately one to 17 months. Management stated a hypothetical 100-basis-point rate change would not materially affect their fair value. Foreign-currency movements, particularly the euro and pound, remain a risk.
Important facts for investors to verify
- Whether revenue growth—especially Mobile Verify SaaS and license renewals—continues, given customer concentration and variable channel-partner timing.
- Whether operating expense growth and CFO-transition costs moderate, and how they affect operating income and margins.
- Whether operating cash flow remains strong after considering non-cash stock compensation and acquisition-related share amortization.
- Developments in the RMII litigation and any other legal contingencies, as well as progress in realizing deferred tax assets.
- Future share dilution and compensation expense, including outstanding performance-based RSUs and unrecognized stock-based compensation.