Mitek surging

For anyone still in MITK (I am), they’re the small, mobile check deposit and ID verification company, they reported record revenue and profitability for the most recent quarter.

They seem to have had a lot of good things happening recently. About 3 weeks ago they reported over $1 trillion deposited through their Mobile Deposit platform on about 1.5 billion processed transactions. They were granted a new Mobile ID Verification patent.

Stock price action has been on a tear recently, up 50% in a month and a half, and 38% in the past month!

I haven’t been able to read the call transcript yet, but am hoping to do that this weekend.

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I listened to the conference call. The 10-Q is not on the Mitek website, but I will make some comments about the previous 10-Q. There were four analysts on the call. All were pleased with the 2Q results and seemed satisfied with the answers and I guess the share price on Friday reflected that.

As a very brief overview, Mitek has a legacy mobile check deposit business and a newer mobile ID verification business. R&D activity exists for both businesses as enhancements such as multiple check deposit features for businesses which would have a large number of checks to deposit each day. However, the mobile ID verification has more innovation. The deposit business is slower growth and provides cash for expanding the size and capability of ID verification. Unlike Synchronos, Mitek is keeping a firm grip on that business. Indeed, in answering one question they stated that they saw a weakening of competition because of their dominant position of being used by 5,600 banks and 80 million bank customers and this deters new entrants to that side of the business. Gross margin on the deposit business is 98%. Mobile ID gross margin is 80%.

The other division of the business is between “on premises” versus SAAS. A further distinction, I think in the deposit side, is contracts with transaction minimum versus pay-as-you-go, with 60% majority having no minimum (legacy customers) but with room for switching to minimum transaction. The investment thesis has a couple of legs. Whereas the number of banks using their mobile deposit will not grow, the number of banks’ customers using mobile deposit will grow (perhaps a counter trend with online, credit card transactions). But the growth focus is on mobile ID verification where income increased 41% Y-o-Y and number of transactions increasing 50% (according to my notes). The core market for mobile ID is financial services but also health, travel and “shared something or other”. As far as mobile ID competition is concerned they feel they have a moat in that they have 80 million MySnap users and the shear volume of identifications combined with their AI and machine learning R&D head start. They commented that all the various demanders of ID verification are continually changing the the parameters (document churn), etc., and the machine learning allows the software to upgrade itself to better detect fraudulent identification attempts.

Anyway, they identified three secular trends for their business: 1) increasing needs for identity verification through regulation (money laundering) and fraud detection, 2) increasing use of mobile devices, 3) the trend to SAAS. Oh, and four, at the margins, increasing demand for these outside of U.S. and Europe (i.e., AP and Africa) and big percentage of income from U.S.

For 2017 they see revenue $43 to $45 million (this is a SMALL company), increase of 24 to 30% with 90% of bookings in SAAS. They like the recurring revenue. The deposit business will be 60 to 64%, ID 30 to 35% and 5% “non-core”. One wonders why such a small company with moat to core business and strong position in new ID verification business…, why it has not been snapped up. Pocket change for at least 2000 companies listed on U.S. exchanges. But, please don’t. Saul, please no leveraged buyout.

The reasons not to own Mitek (among others) is negative FCF. How do they manage that with 80% and 98% gross margin? Well (back to Q1 10-Q) revenue increase was 25%, Sales expenses increased 56% to 41% of revenue; R&D increased 44% to 26% of revenue; G&A increased 7% to 24% of revenue. It was my belief that these expenses would grow significantly less than revenue in future quarters that led me to hold and add to Mitek while selling Silver Spring Networks. I must admit that “upon further review”, I could not find compelling reason for that belief. They did mention “sales channels” outside of their own. A question was whether they had maybe 25 mobile ID customers. Answer was “More”. They had 12 ID sales reps and had “way triple digits” mobile ID customers. But those are the percentages that I will look for in the 10-Q. Meanwhile, in the spirit of preferring to be lucky to being good, my MITK holdings have prospered even if I can’t verify my reasons for adding and holding

Oh, for those glassdoor enthusiasts, a 3.4 rating: 63% recommend to a friend, 74% CEO approval.

End of ramblings. Maybe Foodles will do a proper job of reviewing the 10-Q (hint)

KC, who is deciding whether to add to this puppy (just 2% now).

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