Mitek Systems, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparative period ended December 31, 2018. Amounts below are in U.S. dollars. Financial statement amounts are generally shown in millions unless noted.
Business context
Mitek develops mobile image-capture and digital identity-verification software, including Mobile Deposit and Mobile Verify. It serves more than 6,500 financial-services organizations and marketplace and fintech brands. Revenue comes mainly from software and hardware licenses, transactional SaaS, maintenance, and professional services.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $22.1m | $17.7m | +25% |
| Gross profit / gross margin | $19.1m / 86.7% | $14.8m / 83.7% | Margin +3.0 percentage points |
| Operating income (loss) | $0.3m | $(4.6)m | Improved |
| Net income (loss) | $0.6m | $(3.2)m | Improved |
| Diluted earnings (loss) per share | $0.01 | $(0.08) | Improved |
| Cash from operating activities | $5.2m | $2.3m | +$2.9m |
Software and hardware revenue rose 15% to $11.5m; services and other revenue rose 37% to $10.6m. Deposits revenue was $14.7m versus $11.9m, and identity-verification revenue was $7.4m versus $5.8m. Management attributed growth to Mobile Deposit and ID_CLOUD sales, Mobile Verify SaaS growth, and related maintenance and professional services. SaaS revenue from Mobile Verify increased $1.7m, or 39%.
Operating expenses were $21.8m, down from $22.2m. Cost of revenue was 13% of revenue versus 16%; selling and marketing was 33% versus 41%; research and development was 21% versus 25%; general and administrative was 24% versus 33%; acquisition-related costs were 7% versus 10%. Other income was $0.3m. The tax provision was $0.04m, compared with a $1.4m tax benefit in the prior-year quarter.
Cash and cash equivalents were $14.8m at December 31, 2019; short- and long-term investments totaled $25.1m, for combined cash and investments of $39.9m. Working capital was $30.9m, versus $34.1m at September 30, 2019. Operating cash flow was $5.2m; investing cash outflow was $7.2m, primarily reflecting net investment purchases; financing cash flow was approximately neutral. The company had $0.5m outstanding under interest-free Spanish government loans and no borrowings under its $10m revolving facility. The filing reports no off-balance-sheet arrangements.
Material changes and unusual items
- Revenue growth and lower operating costs moved the company from a prior-year operating and net loss to modest operating and net income.
- Services and other revenue increased faster than software and hardware revenue, shifting the revenue mix toward services.
- Mitek adopted the lease accounting standard on October 1, 2019, recognizing $8.2m of lease liabilities and $6.8m of right-of-use assets. At quarter-end, lease liabilities were $8.0m; adoption did not materially affect the income statement or cash flows.
- Goodwill increased to $34.2m, including an $0.8m correction of a prior acquisition-related asset classification that the company said was not material to previously reported statements, and a foreign-currency effect.
- The board authorized a share repurchase program of up to $10m through December 16, 2020. No shares had been repurchased by December 31, 2019.
- After quarter-end, on January 14, 2020, performance conditions for 1.7m senior executive performance RSUs were not met; the awards were cancelled.
Outlook, risks, and contingencies
No numerical revenue or earnings guidance is provided. Management expects demand for deposits and identity-verification products to benefit from digital transactions, online lending, regulatory requirements, and adoption of digital services. It said existing cash and expected operating cash generation should meet working-capital needs for the next 12 months from the filing date.
Risks highlighted include competition, technology change, fraud and cyberattacks, long sales and implementation cycles, and revenue timing tied to license renewals and purchases. Two customers represented 37% of quarterly revenue (20% and 17%), compared with 31% in the prior-year quarter. International sales were about 25% of revenue, down from 35%.
Legal matters include USAA patent litigation against Wells Fargo, a customer using Mitek technology through a partner. Juries awarded USAA $200m and $102m in separate Wells Fargo cases; the verdicts remained subject to post-trial motions and appeal, and the company said it was monitoring potential effects on customers and product use. Mitek filed its own declaratory-judgment action concerning four USAA patents and said it would oppose USAA’s motions to dismiss and transfer. Mitek was not a defendant in the Wells Fargo cases. The filing does not quantify a probable loss or liability for Mitek from these matters. A separate €0.8m ($0.9m) claim against ICAR is ongoing; the acquisition agreement provides for indemnification subject to its terms. Mitek also cited potential customer-indemnification demands related to other patent allegations, while stating it did not then believe it was obligated to indemnify customers in those matters.
Management reported disclosure controls were effective and stated there were no material changes in risk factors from the prior annual report. The company’s assessment of goodwill impairment may be affected by its share price; it cautioned that a future impairment charge cannot be ruled out.
Important facts for investors to verify
- Whether the 25% revenue growth and improved margins persist, particularly given license-renewal timing and the increased services mix.
- Customer concentration, including the identities and renewal or purchasing patterns of the two customers contributing 37% of revenue.
- Developments in the USAA litigation, potential customer indemnification exposure, and any effect on Wells Fargo or other customers’ use of Mitek products.
- Cash generation and liquidity after investment purchases, planned repurchases, lease obligations, and the revolving facility’s September 30, 2020 maturity.
- Progress and costs from the A2iA restructuring, and the effect of the post-quarter cancellation of performance RSUs.