Mitek Systems, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Mitek develops mobile identity verification and check-deposit software using artificial intelligence and machine learning. Its products include Mobile Deposit, Mobile Verify and Mobile Fill. The company reported more than 6,100 financial-services organizations with agreements to deploy its technology. Results include ICAR Vision Systems, acquired October 16, 2017, which expanded identity-verification and desktop-capture capabilities.
Financial performance and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $14.3 | $11.4 | $26.4 | $20.7 |
| Gross margin | 88.0% | 92.7% | 87.4% | 91.7% |
| Operating income (loss) | $(1.3) | $1.2 | $(3.6) | $0.6 |
| Net income (loss) | $(1.2) | $1.2 | $(6.9) | $0.6 |
| Diluted EPS | $(0.03) | $0.03 | $(0.20) | $0.02 |
- Q2 revenue rose 25%; SaaS, maintenance and consulting grew 52% to $5.5 million, while software and hardware grew 13% to $8.8 million. For the half-year, revenue increased 28%, with SaaS, maintenance and consulting up 51%.
- Operating expenses increased faster than revenue. Q2 cost of revenue rose 107%, and selling and marketing, R&D, G&A and acquisition-related costs also increased. Management attributed expense growth to staffing, ICAR-related costs, higher Mobile Verify transaction volumes, hosting and royalties, and acquired-intangible amortization.
- Six-month operating cash flow was $3.6 million, versus $4.4 million a year earlier. Investing activities provided $9.2 million, primarily reflecting net investment maturities and sales; the company also spent $1.7 million on capital expenditures and $3.0 million net on ICAR.
- At March 31, cash and cash equivalents were $25.2 million and investments were approximately $20.1 million, totaling $45.3 million. Working capital was $41.2 million. The balance sheet reported no borrowings; total liabilities were $18.6 million.
- Stock-based compensation was $3.9 million for the six months, compared with $2.3 million in the prior-year period. Accrued acquisition-related contingent consideration was $3.7 million at March 31.
Material changes and unusual items
- ICAR acquisition consideration included $3.0 million cash, net of cash acquired, and 584,291 shares valued at $5.6 million. Additional cash payments of up to approximately $5.3 million depend on specified milestones. Purchase-price allocations remained preliminary.
- The six-month income tax expense was $3.7 million, including $4.4 million of expense related to the Tax Cuts and Jobs Act; this materially contributed to the reported net loss. The company also recorded an $8.3 million cumulative-effect increase to retained earnings upon adopting stock-compensation guidance.
- Gross margin fell year over year, reflecting higher costs of revenue. Revenue mix shifted toward SaaS, maintenance and consulting, which represented 39% of Q2 revenue versus 32% a year earlier.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management said cash and expected operating cash generation should meet working-capital needs for the 12 months following filing.
- On May 3, 2018, after quarter-end, Mitek and a subsidiary arranged a secured $10 million revolving credit facility, maturing May 3, 2019. The facility carries a floating rate with a 4.5% floor and includes liquidity and adjusted quick-ratio covenants when drawn.
- Customer concentration is notable: two customers generated 41% of Q2 revenue; one customer generated 22% of six-month revenue. Management also cautioned that license renewals can cause revenue fluctuations and that the business remains exposed to competition and concentration in its core technologies.
- The company indemnified bank and distributor defendants in the RMII patent litigation. The cases were dismissed with prejudice in September 2017; Mitek’s motion for attorneys’ fees and expenses remained pending. Other ordinary-course claims were not expected by management to have a material aggregate effect.
- Management reported effective disclosure controls as of March 31, 2018, but its internal-control assessment did not include ICAR, which was still being integrated. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether growth in SaaS and identity-verification revenue can sustain margins as transaction, hosting and personnel costs rise.
- The nature and duration of the $4.4 million Tax Act-related expense and the company’s future effective tax rate.
- ICAR’s contribution to revenue and profitability, final purchase-price allocations, and the likelihood and amount of milestone payments.
- Exposure to major customers and the timing of channel-partner license renewals.
- Revolver covenant calculations, collateral terms and any future borrowing; the facility was entered into after the reporting date.
- Status of the pending attorneys’ fees motion in the RMII matter and continued integration of ICAR’s financial controls.