Mitek Systems, Inc. — Q2 FY2016 Form 10-Q
Period: Quarter and six months ended March 31, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars.
Business context
Mitek develops mobile capture and identity-verification software for financial institutions and other enterprises. Its products include Mobile Deposit, Mobile Fill and Mobile Verify. The company reported one operating segment. The June 2015 IDchecker acquisition expanded identity-verification and SaaS offerings; its results are included in the current period.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $8.522 million, up 50% from $5.672 million | $15.926 million, up 44% from $11.062 million |
| Software revenue | $5.557 million, up 39% | $10.286 million, up 33% |
| Services revenue | $2.965 million, up 77% | $5.640 million, up 70% |
| Operating income | $0.631 million, versus $0.486 million | $0.289 million, versus $0.620 million |
| Net income | $0.582 million, versus $0.508 million; diluted EPS $0.02 | $0.260 million, versus $0.654 million; diluted EPS $0.01 |
| Operating margin | 7.4%, versus 8.6% | 1.8%, versus 5.6% |
Quarterly gross margin was approximately 91.5%, compared with 90.2% a year earlier; six-month gross margin was approximately 89.6%, compared with 90.5%. Quarterly revenue growth reflected higher software licenses, including Mobile Deposit, Mobile Fill and Mobile Verify, and increased services revenue, partly from IDchecker SaaS. For the six-month period, higher operating expenses—especially selling and marketing and acquisition-related costs—more than offset revenue growth, reducing operating and net income.
Cash, liquidity and capital
- Cash and cash equivalents were $13.226 million at March 31, 2016; investments totaled $18.688 million. Combined cash and investments were approximately $31.9 million, versus $26.7 million at September 30, 2015.
- Working capital was $24.1 million, compared with $24.0 million at September 30, 2015. Management said existing cash and expected operating cash generation should cover working-capital needs for the next 12 months.
- Six-month operating cash flow was $5.189 million, versus $2.530 million. Investing activities provided $5.016 million, primarily reflecting net investment maturities and sales; financing provided $0.302 million, largely from option exercises.
- Total liabilities were $8.650 million. The balance sheet lists no material borrowing balance; capital-lease principal payments were $11,000 during the six months. No off-balance-sheet arrangements were reported.
Material developments, outlook and risks
- Mitek reported more than 5,000 financial institutions licensing its technology, including all of the top 10 and nearly all of the top 50 U.S. retail banks. It had 25 issued patents and 18 applications pending.
- IDchecker-related costs included $1.084 million of acquisition-related expenses for the six months, including acquisition compensation amortization, acquired-intangible amortization and professional fees. Potential additional earnout shares of up to $1.0 million depend on IDchecker performance through September 30, 2016.
- No quantified revenue or earnings guidance was provided. Management’s stated priorities included sustaining growth, expanding mobile identity-verification adoption and leveraging its financial-institution customer base.
- Management warned that competition, changing demand for mobile applications, adverse publicity and technology obsolescence could pressure revenue or margins; product concentration increases exposure to those risks. Revenue also fluctuates with channel-partner license purchases and renewals. Two customers each represented over 10% of revenue in the reported periods.
- Patent litigation with Rothschild Mobile Imaging Innovations remained stayed pending patent-review proceedings. A decision on three challenged RMII patents was expected by the end of July 2016; RMII also petitioned to review a Mitek check-deposit patent. Mitek said it intended to defend its patent and considered RMII’s claims without merit; outcomes remain uncertain.
- Management stated disclosure controls were effective. Its assessment of internal financial controls excluded IDchecker while integration continued; IDchecker represented approximately 14% of six-month revenue and 16% of assets at period-end.
Important facts for investors to verify
- Whether revenue growth, particularly services growth associated with IDchecker, continues while selling and marketing and acquisition-related costs affect profitability.
- Progress against IDchecker earnout targets and the resulting compensation expense or share issuance.
- Developments and potential financial or customer effects of the RMII litigation and related patent-review proceedings.
- Customer concentration, channel renewal timing and the sustainability of Mobile Deposit and identity-verification adoption.
- Integration of IDchecker’s internal controls and the company’s ability to convert reported earnings into operating cash flow.