Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparable periods ended June 30, 2013. Amounts are in U.S. dollars. Mitek develops and sells mobile imaging software, including Mobile Deposit, primarily through channel partners and directly to enterprise customers.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2014 (year-over-year change) | $4.66 million (+20%) | $13.61 million (+31%) |
| Software revenue, 2014 (year-over-year change) | $3.18 million (+18%) | $9.47 million (+27%) |
| Maintenance and services revenue, 2014 (year-over-year change) | $1.48 million (+25%) | $4.14 million (+39%) |
| Gross margin, approximate | 87% vs. 88% | 88% vs. 88% |
| Operating loss, 2014 (prior year) | $(1.65) million ($(2.06) million) | $(5.34) million ($(5.82) million) |
| Net loss, 2014 (prior year) | $(1.63) million ($(2.05) million) | $(5.29) million ($(5.80) million) |
| Net loss per share, basic and diluted | $(0.05) vs. $(0.08) | $(0.17) vs. $(0.22) |
| Cash flow from operations | Not separately presented for the quarter | $(2.31) million vs. $1.62 million provided |
Quarterly revenue growth reflected higher Mobile Deposit license sales, including larger licenses and renewal timing, along with more maintenance contracts and professional-services work. Nine-month operating costs rose 17%, slower than revenue, but selling and marketing and general and administrative expenses increased; litigation-related legal fees contributed to higher G&A. R&D expense declined. Approximate gross margins are calculated from reported revenue and cost of revenue.
Liquidity, balance sheet, and cash flow
- At June 30, cash and cash equivalents were $9.14 million and investments were $17.22 million, totaling $26.36 million, down $2.67 million from September 30, 2013. Working capital was $21.13 million, compared with $25.36 million.
- Operating cash use was $2.31 million for the nine months. Investing activities used $11.89 million, largely reflecting net purchases of investments; financing provided $0.04 million. Cash declined by $14.15 million, while the investment portfolio increased substantially.
- Total liabilities were $7.97 million, including deferred revenue and other liabilities. The balance sheet reports no conventional borrowings; it does include capital lease obligations, but the filing text does not provide a clear outstanding debt balance.
- Management said cash and expected operating cash generation should meet working-capital needs for the next 12 months. The filing provides no numerical revenue or earnings guidance.
Material changes, outlook, and risks
- Revenue growth was strong, but revenue recognition can be lumpy: license sales and renewals depend on partner purchasing and timing, and channel partners have no minimum purchase commitments. One customer represented 29% of nine-month revenue; three customers together represented 46% of quarterly revenue.
- As of June 30, 2,571 financial institutions had agreements to deploy Mobile Deposit and 2,143 had launched it. Implementation cycles typically take at least three to six months. Mitek cited competition, reliance on mobile imaging technology, execution and product-development needs, and potentially lengthy implementations as risks.
- The company reported 20 issued patents and 23 patent applications pending. In the USAA litigation, the court dismissed Mitek’s patent-infringement claims on July 29, 2014; Mitek’s defamation and Lanham Act claims were expected to go to trial September 8, 2014. Mitek said it believed USAA’s claims lacked merit and did not expect them to materially affect financial results. Other litigation included Mitek’s patent-infringement action against Top Image Systems.
- Deferred tax assets remained subject to a 100% valuation allowance because of sustained losses. Stock-based compensation was $2.67 million for the nine months, and $7.21 million of unrecognized compensation expense remained. No software development costs were capitalized in the periods presented.
- The company reported no material change in risk factors from its 2013 Form 10-K and no material change in internal control over financial reporting. Its investment securities were available-for-sale and classified as Level 2; management said a 100-basis-point interest-rate change would not materially affect fair value.
Important facts for investors to verify
- Whether license timing, customer concentration, and implementation backlogs persist, and how much revenue becomes recurring maintenance and services revenue.
- Operating cash consumption and liquidity trends, including the conversion of short-term investments to cash and progress toward management’s 12-month liquidity expectation.
- Developments and potential costs or outcomes in the USAA and Top Image Systems disputes, especially given the post-quarter USAA court ruling.
- Sales and marketing, G&A, and stock-based compensation trends relative to revenue growth, and whether operating losses continue to narrow.