Mitek Systems, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparative period is the three months ended December 31, 2010. Mitek develops mobile imaging and intelligent character-recognition software, including Mobile Deposit.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $3.52 million | $1.40 million |
| Software revenue | $2.89 million | $0.94 million |
| Maintenance and professional services revenue | $0.63 million | $0.46 million |
| Gross profit / margin | $3.22 million / approximately 91% | $1.20 million / approximately 85% |
| Operating income (loss) | $24,000 | ($416,000) |
| Net income (loss) | $26,000 | ($801,000) |
| Operating cash flow | $1.16 million | $732 |
Revenue rose 151%, primarily from Mobile Deposit software-license sales. Cost of revenue was 9% of sales versus 15%, which management attributed to a greater mix of higher-margin mobile products. Operating expenses rose substantially: selling and marketing to $851,000, research and development to $1.18 million, and general and administrative to $1.16 million. Stock-based compensation was $502,000, compared with $234,000. Basic and diluted earnings per share each rounded to $0.00.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $6.71 million; short-term investments were $10.83 million. Combined cash and investments were $17.54 million, versus $16.26 million at September 30, 2011.
- Working capital was $18.45 million, compared with $17.34 million at September 30, 2011. Current assets were $20.90 million and current liabilities $2.46 million.
- No borrowings were outstanding under the $400,000 secured credit facility; the company reported compliance with its financial covenants. The facility was available through January 31, 2013, subject to its terms.
- Operating cash flow was $1.16 million; investing activities used $263,000, and financing activities provided $158,000. Cash increased by $1.06 million during the quarter.
- Management stated that cash, investments, and expected operating cash generation should meet working-capital needs for the next 12 months.
Business developments, outlook, and risks
- As of December 31, 2011, 250 financial institutions had signed Mobile Deposit agreements, including eight of the ten largest U.S. banks; 56 had completed implementation and launched the product.
- Management cited mobile banking adoption as a growth driver but gave no specific revenue or earnings guidance. It said continued growth depends on developing additional applications, attracting strategic alliances, and successful customer implementations.
- Implementation commonly takes at least three to six months and may take longer. Delays or non-completion could adversely affect results. License revenue can be uneven because of the timing of channel-partner purchases and renewals.
- Customer concentration increased: customers generating over 10% of revenue represented approximately 70% of quarterly sales, compared with 55% a year earlier. One direct customer accounted for 26%; three channel partners accounted for 16%, 15%, and 13%. International revenue fell to approximately 2% from 49%.
- Management highlighted competition, product and technology concentration, pricing and demand pressures, and execution risk in expanding into new markets. It said no material risk-factor changes had occurred since the 2011 Form 10-K.
- The company reported no legal matters believed likely to have a material adverse effect. It maintained a 100% valuation allowance against approximately $5.86 million of deferred tax assets, principally related to loss carryforwards, citing uncertainty over realization.
- The San Diego office lease expires in December 2012; fiscal 2012 base rent was approximately $26,000 per month. The company also entered into a $95,000 capital lease for equipment during the quarter.
Investor verification points
- Check whether the sharp revenue increase and high-margin software mix persist, given the quarter’s license-renewal timing and customer concentration.
- Track implementation progress: 56 of 250 Mobile Deposit customers had launched as of quarter-end.
- Monitor expense growth, especially research and development, selling and marketing, legal costs, and stock-based compensation, against revenue growth.
- Review liquidity and investment balances, credit-facility covenant compliance, and the effect of the upcoming office-lease expiry.
- Assess potential dilution: the quarter’s diluted weighted-average share count was 27.82 million versus 24.39 million basic; 4.39 million options were outstanding at quarter-end.