Mitek Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. Mitek provides mobile image capture and digital identity verification software, including Mobile Deposit and Mobile Verify.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $25.4 | $21.9 | $70.7 | $59.6 |
| Operating income (loss) | $1.4 | $(2.9) | $2.8 | $(9.1) |
| Net income (loss) | $1.3 | $(0.1) | $2.8 | $(4.0) |
| Diluted EPS | $0.03 | $(0.00) | $0.07 | $(0.10) |
| Gross margin | 86.2% | 85.5% | 86.4% | 84.8% |
| Operating margin | 5.6% | (13.3%) | 4.0% | (15.3%) |
Margins are calculated from reported revenue and costs. Q3 software and hardware revenue was $13.2 million and services and other revenue was $12.2 million. For the nine-month period, those categories were $36.2 million and $34.5 million, respectively.
Cash flow and liquidity: Operating cash flow for the nine months was $17.4 million, versus $7.9 million a year earlier; capital expenditures were $0.5 million. Cash and cash equivalents were $18.9 million at June 30, and investments totaled $33.2 million, for combined cash and investments of $52.2 million. Working capital was $44.8 million. Mitek reported no borrowings under its $10 million revolving facility. Other borrowings were $0.7 million, and operating lease liabilities were $7.3 million.
Changes versus prior period
- Q3 revenue increased 16%; nine-month revenue increased 19%. Growth was led by services and other revenue, up 22% in Q3 and 27% year to date.
- Management attributed growth to Mobile Deposit and CheckReader sales and Mobile Verify transactional SaaS. Legacy on-premise identity software revenue declined as those products are phased out.
- Both periods returned to operating and net profitability. Comparisons benefited from the absence of the $3.2 million Q3 2019 restructuring charge; nine-month 2020 also included a $0.1 million restructuring-cost reversal, compared with $3.2 million of costs in 2019.
- Nine-month operating cash flow more than doubled year over year. The company’s cash and investments increased 50% from September 30, 2019, mainly reflecting operating cash generation and investment purchases/maturities.
Outlook, risks, contingencies and notable items
- Outlook: No quantified revenue or earnings guidance is provided. Management said current cash and expected operating cash generation should meet working-capital needs for the 12 months following the filing. It sees possible acceleration in digital technology adoption from COVID-19, but cannot predict the pandemic’s overall effect.
- COVID-19: Employees shifted to remote work; travel and in-person events were curtailed, and sales, implementation and support activities moved remotely. Management warned that customer disruption, lower technology spending, delayed sales and implementation, and reduced productivity could adversely affect results.
- Litigation: Mitek is monitoring USAA patent litigation against Wells Fargo involving remote deposit systems. Juries awarded USAA $200 million and $102 million in separate cases against Wells Fargo; the awards were subject to post-trial motions and appeal. Mitek was not a defendant in those cases, but filed a declaratory-judgment action concerning four patents and submitted four patent-review petitions. Mitek said it could not reasonably estimate any potential loss and accrued no liability; it incurred $2.0 million of related legal fees in the first nine months.
- Other legal matters: A €0.8 million claim against acquired subsidiary ICAR is subject to an acquisition agreement indemnity, and no liability was accrued. Mitek’s customer UrbanFT asserted infringement of two patents in ongoing litigation; the company likewise reported no estimable loss or accrual.
- Concentration and operating risks: Two customers accounted for 15% and 11% of Q3 revenue. One customer accounted for 15% of nine-month revenue. License renewals and purchases can fluctuate with channel-partner timing; sales and implementation cycles may be lengthy, and competition, product concentration, foreign exchange and customer spending are risks.
- Capital and accounting: Mitek repurchased approximately 137,000 shares for $1.0 million under a program authorizing up to $10 million through December 16, 2020. Adoption of lease accounting added $8.2 million of lease liabilities and $6.8 million of right-of-use assets at October 1, 2019. No goodwill or intangible-asset impairment was recorded in the nine months.
Key facts for investors to verify
- Whether Mobile Verify and other services growth continues to offset declining legacy identity software revenue.
- How COVID-19 affects customer renewals, transaction volumes, sales cycles and implementation timing.
- Developments in the USAA-related patent proceedings, including the declaratory-judgment case and patent-review petitions, and any resulting exposure or legal costs.
- Customer and channel-partner concentration, including renewal timing and receivables from significant customers.
- Cash generation and liquidity after lease obligations, share repurchases, litigation costs and the September 30, 2020 maturity of the revolving facility.