Mitek Systems, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also provides unaudited fourth-quarter results. Mitek develops mobile image-capture, check-deposit, and digital identity-verification software for financial institutions and other businesses.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $84.6 million | $63.6 million |
| Gross profit / gross margin | $72.3 million / 85.5% | $54.9 million / 86.3% |
| Operating income (loss) / margin | ($4.6 million) / (5.4%) | ($7.8 million) / (12.3%) |
| Net income (loss) / diluted EPS | ($0.7 million) / ($0.02) | ($11.8 million) / ($0.33) |
| Cash from operating activities | $14.3 million | $5.6 million |
- Revenue increased 33%. Service and other revenue rose 65% to $37.7 million, primarily from transaction SaaS growth and maintenance; software and hardware revenue increased 15% to $46.8 million.
- Deposits revenue was $57.0 million, about 67% of total revenue; identity-verification revenue was $27.6 million, about 33%. International sales represented approximately 31% of revenue, up from 27%.
- Operating loss narrowed despite $3.1 million of restructuring costs and $7.6 million in acquisition-related expenses. The annual tax benefit was $3.3 million, versus a $3.1 million provision in FY2018.
- Fourth-quarter revenue was $25.0 million; operating income was $4.5 million and net income was $3.3 million. This was the only profitable quarter of FY2019.
- Cash and cash equivalents were $16.7 million; investments were $18.1 million, for combined cash and investments of $34.8 million. Working capital was $34.1 million, versus $17.2 million a year earlier.
- Total assets were $135.9 million and stockholders’ equity was $107.3 million. No borrowings were outstanding on the $10 million revolving credit facility. Other borrowings were $0.6 million, primarily interest-free loans assumed with the ICAR acquisition.
- Operating cash flow improved to $14.3 million; investing activities used $10.5 million and financing activities provided $4.4 million. The filing reports no off-balance-sheet arrangements.
Material changes and business developments
- Growth reflected higher Mobile Deposit sales, transaction SaaS activity, and A2iA products and maintenance. Legacy on-premise identity-product revenue declined as those products were phased out.
- Service and other revenue increased to 45% of total revenue from 36%; software and hardware revenue declined to 55% from 64% of the mix. Gross margin decreased modestly to 85.5% from 86.3%.
- In June 2019, Mitek restructured A2iA’s Paris operations, discontinued certain non-core offerings, and reduced staffing. It recorded $3.1 million in restructuring costs; $1.5 million remained accrued at year-end.
- Two customers generated $22.8 million, or 27% of FY2019 revenue; the largest represented 17%. Mitek serves more than 6,500 financial institutions and reports that all top 10 U.S. retail banks use its technology.
Outlook, risks, contingencies, and unusual items
- Mitek expects FY2020 research and development expense to increase as product development continues. The filing provides no specific revenue or earnings guidance; management says available resources and expected operating cash flows should meet working-capital and capital-expenditure needs for at least the next 12 months.
- Key business risks include intense competition, dependence on a limited range of technologies, declining check use, long sales and implementation cycles, customer and channel-partner concentration, cybersecurity and data-privacy exposure, and foreign-exchange fluctuations.
- Patent litigation is a significant uncertainty. On November 6, 2019, a jury awarded USAA $200 million against Wells Fargo for willful infringement in a case concerning remote-deposit systems that partly use Mitek technology through a partner. The verdict was subject to post-trial motions and appeal; Mitek was not a defendant in that case. Mitek filed a declaratory-judgment action against USAA on November 1, 2019, seeking a ruling that its products do not infringe specified patents. The outcome and potential effects on customer use are uncertain.
- Other legal matters include an ongoing €0.8 million claim against ICAR, for which Mitek says it is entitled to indemnification under the acquisition agreement, and Mitek’s collection/non-infringement action against delinquent customer UrbanFT. Mitek reported $0.8 million of FY2019 legal fees related to third-party customer claims and said it did not believe it was currently obligated to indemnify customers for certain other patent allegations.
- The board concluded its strategic-alternatives review in May 2019 without an acceptable purchase offer and chose to continue executing its business strategy. Acquisitions of ICAR and A2iA also carry integration and benefit-realization risks.
- Mitek adopted ASC 606 using the modified retrospective method; reported FY2019 revenue was $2.5 million higher than it would have been without adoption. It expected to recognize operating-lease liabilities of approximately $7.9–$8.4 million upon adopting the new lease standard on October 1, 2019.
Important facts for investors to verify
- Track whether SaaS and identity-verification growth offsets declining legacy identity products and any longer-term reduction in check usage.
- Review customer concentration, channel-partner renewal timing, and the sustainability of the FY2019 cash-flow improvement.
- Monitor the USAA/Wells Fargo appeals and Mitek’s declaratory action for potential customer, product, indemnification, and legal-cost consequences.
- Assess whether the A2iA restructuring delivers expected savings and whether acquisition integration and contingent payments affect future results.
- Check future profitability, R&D spending, stock-based compensation, and share-count growth; Mitek remained loss-making for FY2019 despite improved results.