Mitek Systems, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2021; fiscal year ends September 30. Mitek provides mobile image capture, identity verification, and related software and services.
Financial results
| Metric | Three months ended March 31, 2021 | Year-over-year change | Six months ended March 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $28.8 million | +24% | $54.7 million | +21% |
| Operating income | $2.4 million | Up from $1.1 million | $3.9 million | Up from $1.4 million |
| Net income | $1.0 million; diluted EPS $0.02 | Net income +12%; EPS unchanged | $3.2 million; diluted EPS $0.07 | Net income +117%; EPS was $0.03 |
| Operating cash flow | Not separately provided for the quarter | $16.1 million | Up from $8.4 million |
Revenue mix: Quarterly software and hardware revenue rose 14% to $13.0 million; services and other revenue rose 34% to $15.8 million. Identity verification services growth, including Mobile Verify transactional SaaS, was a key driver. For the six-month period, services and other increased 32% to $29.4 million, while software and hardware increased 10% to $25.3 million.
Margins: Calculated from reported figures, quarterly gross margin was approximately 86.8%, versus 86.3% a year earlier; operating margin was approximately 8.3%, versus 4.6%. Six-month gross margin was approximately 85.5%, versus 86.5%; operating margin was approximately 7.2%, versus 3.0%. Net margin was approximately 3.5% for the quarter (3.9% prior year) and 5.8% for six months (3.2% prior year). Quarterly net income grew more slowly than revenue, partly alongside new note-related interest expense.
Liquidity and debt: Cash and cash equivalents were $53.9 million; short- and long-term investments totaled $165.6 million, for combined cash and investments of $219.5 million, versus $62.0 million at September 30, 2020. Working capital was $182.6 million. Management said cash and expected operating cash generation should meet working-capital needs for the next 12 months. In February, Mitek issued $155.3 million principal amount of 0.75% senior unsecured convertible notes due 2026, generating approximately $149.7 million net proceeds before hedge and warrant effects. Notes’ carrying value was $117.7 million, reflecting unamortized discount and issuance costs; reported interest expense was $1.3 million for the six-month period. The accounting effective interest rate was 6.71%.
Operating cash flow was $16.1 million; investing activities used $124.7 million, primarily net investment purchases; financing activities provided $142.6 million, primarily from the notes issuance. The company had no off-balance-sheet arrangements reported.
Material changes and notable items
- Revenue growth was led by services and transactional SaaS. Quarterly Mobile Verify transactional SaaS revenue increased $3.1 million, or 50%, year over year; six-month growth was $5.3 million.
- The company entered into note hedge and warrant transactions intended to reduce potential dilution. The notes’ initial conversion price was approximately $20.85 per share; warrants have a $26.53 strike price. Until required share authorization and reservation conditions are met, note conversions must be settled solely in cash.
- Revenue concentration increased: one customer represented 23% of quarterly revenue and 19% of six-month revenue. Management says channel-partner timing can cause period-to-period fluctuations and does not consider itself dependent on a single channel partner.
- International sales were 26% of quarterly revenue and 28% of six-month revenue. Currency translation reduced quarterly other comprehensive income by $2.6 million.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management cited expected growth opportunities in deposits and identity verification, while noting competition, lengthy sales and implementation cycles, product concentration, and timing of license renewals.
- COVID-19 effects remained uncertain. Remote work and reduced travel continued; management noted the pandemic may accelerate digital adoption but could also weaken business and consumer activity.
- Convertible debt adds cash-settlement, refinancing, interest, accounting-volatility, and possible dilution risks. A triggered conversion feature could require cash settlement and potentially reduce reported working capital. Management planned to early adopt ASU 2020-06 in fiscal 2022, beginning October 1, 2021.
- Patent-related exposure includes customer indemnification demands connected with USAA litigation against banks. Mitek was not named as a defendant in those bank cases and said it did not believe it was obligated to indemnify the customers; costs could nevertheless be significant if that position changes. Mitek’s declaratory-judgment case was dismissed on jurisdictional grounds in April 2021, without a decision on the merits. The USAA Wells Fargo cases were dismissed with prejudice after settlement. A separate €0.8 million claim against ICAR is subject to contractual indemnification provisions. Mitek also continues its collection action against UrbanFT.
- Management reported disclosure controls were effective at March 31, 2021 and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether recurring identity-verification and other services growth continues, and how much revenue depends on customer or channel-partner timing.
- Cash generation and liquidity after considering the notes’ cash-settlement provisions, debt carrying value, and any conversion or repurchase obligations.
- Potential dilution from the convertible notes and warrants, including the effect of share-authorization requirements and any future stockholder approval.
- Developments in USAA-related customer claims, the ICAR claim, and the UrbanFT dispute, including any change in expected indemnification or legal costs.
- Effects of COVID-19, competitive pressure, foreign-exchange movements, and investment-portfolio interest-rate or credit risk.