Mitek Systems, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2016. Dollar amounts below are in millions unless otherwise noted. Mitek develops mobile capture and identity-verification software, including Mobile Deposit, Mobile Fill and Mobile Verify. Results include IDchecker, acquired in June 2015.
Financial results and liquidity
- Q3 revenue: $9.11, up 41% year over year. Software revenue was $5.76 (+23%) and services revenue was $3.35 (+90%); management attributed services growth primarily to IDchecker SaaS revenue.
- Q3 earnings: Gross profit was $8.31, or approximately 91% gross margin, versus $5.85 and 91% a year earlier. Operating income was $0.69 (approximately 7.6% margin), versus $0.31; net income was $0.74, or $0.02 per diluted share, versus $0.92, or $0.03 per diluted share. The prior-year quarter included a $0.58 tax benefit.
- Nine-month results: Revenue was $25.03, up 43%; software revenue rose 29% and services 77%. Operating income was $0.98 versus $0.93; net income was $1.00 versus $1.57, or $0.03 versus $0.05 per diluted share. The comparison reflects a prior-year $0.58 tax benefit; 2016 recorded $0.10 of tax expense.
- Cash flow: Operating cash flow was $5.29 for the nine months, versus $4.19. Investing cash outflow was $4.54, largely reflecting net investment purchases; financing cash inflow was $1.58, mainly stock-option exercises. Cash and cash equivalents ended at $5.01, versus $2.75 at September 30, 2015.
- Balance sheet: Cash and investments totaled $33.23, including $19.91 of short-term and $8.31 of long-term investments. Working capital was $23.0, compared with $24.0 at fiscal year-end; current assets were $30.98 and current liabilities $8.01. Total liabilities were $8.97. No material borrowings are disclosed; cash-flow statements show small capital-lease payments.
- Share-based compensation: Expense was $3.11 for nine months, versus $2.50. Unrecognized compensation expense was $8.4 at June 30, 2016.
Changes, outlook and risks
- Revenue growth reflected increased sales of Mobile Deposit, Mobile Fill and Mobile Verify, as well as IDchecker-related services. Selling and marketing expense rose 79% in Q3 and 76% for nine months; research and development expense rose 43% and 40%, respectively. Q3 operating income improved, while nine-month net income declined partly because the prior-year period included the tax benefit.
- Management gave no numerical revenue or earnings guidance. It stated that cash and expected operating cash generation should meet working-capital needs for the next 12 months.
- Management highlighted competition, potential changes in demand or pricing, product concentration, and timing of channel-partner license renewals. Two customers represented 41% of Q3 revenue; one represented 18% of nine-month revenue. International sales were 11% of Q3 revenue and 10% year to date.
- The company maintains a full valuation allowance against deferred tax assets. It also disclosed foreign-currency exposure, particularly to the euro, and stated that a hypothetical 100-basis-point interest-rate move would not materially affect investment fair value.
- Legal matter: Patent-review decisions in June and July 2016 invalidated all claims of the remaining three RMII patents asserted against Mitek. Mitek said it intended to seek dismissal with prejudice. Separately, the patent board declined to institute RMII’s challenge to a Mitek patent. Mitek stated it did not expect the litigation to materially affect results or financial condition.
- Disclosure controls were deemed effective. Management’s internal-control assessment excluded IDchecker while integration continued; IDchecker represented approximately 16% of assets and 15% of nine-month revenue.
Important facts for investors to verify
- Whether revenue growth and services contribution persist, given channel-renewal timing and customer concentration.
- Whether rising sales and marketing, R&D and acquisition-related costs translate into sustained operating-margin improvement.
- The outcome and financial implications of the RMII litigation, including the contemplated dismissal, and the status of Mitek’s indemnity obligations to bank and distributor defendants.
- IDchecker integration progress and the scope and timing of its inclusion in internal-control assessments.
- Future share-based compensation and dilution, including potential IDchecker earnout shares of up to $1.0 million subject to performance targets.