Mitek Systems (MITK)

Investment Analysis Clubs Saul’s Investing Discussions
#1

Thank you to Seeking Alpha for your transcripts:

http://seekingalpha.com/article/3654706-mitek-systems-mitk-c…

Jim DeBello comments

Our outstanding results included record revenue, record net income and record earnings per share on both the GAAP and non-GAAP basis. We had a strong fiscal 2015 and we think fiscal 2016 is going to be even better.

With the successful acquisition of ID Checker, we’re now providing the enterprise customer with unparalleled choice between a cloud or on premise offering and increasing our recurring revenue mix. We’re addressing a huge opportunity estimated at $3.8 billion. Our deep experience in serving over 60 million consumers today strongly suggests that our dominance in mobile deposit can be replicated in the multi-billion dollar ID Capture and verification markets where our successful launch of groundbreaking products already confirms our strategic direction and unique game-changing capabilities.

No one else can read an imperceptible code on a US driver’s License to instantly verify a photo ID, a tremendous differentiator. No one else can capture an identity document through the mobile browser.

Through the addition of ID Checker into our PhotoVerify family of products we’ve already implemented our solution with one of the largest payment processing companies in the United States to provide ID verification.

We plan to sign 10 marquee Fortune 500 customers in the financial services, healthcare and telecom verticals this year.

Mobile deposit has been broadly adopted by the top banks in the world including all of the top 10 US retail banks and it continues to grow among both consumers in and financial institutions that serve them and we haven’t lost a single customer.

Only one in 7 Americans has deposited a check using a mobile device in the past year.

The Chairman and CEO of Bank of America stated that mobile is one tenth the cost relative to the processing of financial centers and more convenient for customers.

Market share: 5% of the approximately 19 billion checks deposited in the U.S. each year representing a significant opportunity for growth.
Mobile Multi-Check Capture is aimed squarely and addressing the untapped commercial mobile deposit market and represents the most significant enhancements we’ve made to our mobile deposit product since its introduction. Of the 19 billion checks deposited annually 2/3rd of them are commercial checks.

. Mitek up 14.8% on FQ4 beat, strong FY16 guidance
Nov 6 2015, 09:19 ET | About: Mitek Systems Inc. (MITK) | By: Eric Jhonsa, SA News Editor
Mitek (NASDAQ:MITK) followed up on its FQ4 beat by guiding on its earnings call (transcript) for FY16 (ends Sep. '16) revenue of $31M-$33M, above a 3-analyst $27.8M consensus. Due to seasonality, FQ1 revenue is expected to be “more consistent” with FQ3’s $6.4M than FQ4’s $7.9M; consensus is at $6.6M.
Another 400 banks were signed up for Mitek’s core Mobile Deposit platform in FQ4, bringing the total to more than 4,500 out of an available ~8,000. Mitek argues plenty of growth is still possible, given Mobile Deposit still accounts for less than 5% of the 19B annual check deposits seen in the U.S. A facial recognition solution (called Photo Verify) was recently launched.
Software revenue rose 42% Y/Y in FQ4 to $5.45M; services revenue rose 42% to $2.41M. Excluding M&A-related expenses (stemming from the IDChecker deal), GAAP operating costs/expenses fell 2% to $5.5M.

1Q 2Q 3Q 4Q FY
2012 (0.02) (0.09) (0.05) (0.09) (0.21)
2013 (0.03) (0.06) (0.05) (0.02) (0.16)
2014 0.00 0.00 0.00 0.06 0.06
2015 0.05 0.05 0.07 0.09 0.26

Earnings growth: 0.26/0.06 = 430% (ID Checker acquisition closed end of quarter so it did not add much in sales)

Earnings released Nov 5, 2015****As of today, Dec 25

PE 3.44/0.26 = 13.2 ***********PE 4.11/0.26 = 15.8

1YPEG 13.2/430 = .031 ********1YPEG 15.8/430 = .037

2012-2014 They spent heavily on a lawsuit protecting their IP with USAA, settled out of court with Mitek patents being affirmed.

Interesting company and tech, they do invest in R&D.

Starting to grow by bolt on acquisition. (ID Checker)

Jim DeBello came from Qualcomm.

Latest Insider Sales:
Sally Thornton, Director (81) Passed away in June, 2015
John Thornton, COB (82) I am assuming to settle her estate has sold 1,107,791 of her shares.

Nov 19th after positive earnings run up, End of day close $5.27
(9) Indirect ownership sales from 11-24-15 thru 12-9-15, $5.00-$5.25, Sell price range,
Shares held originally 1,312,984, now down to 205,193 held today.

Concern:
Checks will go away someday, still early in adoption phase?

They are diversifying, the Mobile remote deposit business gets their foot in a lot of doors with new products. R&D is so very important!

First time post of research on a company, I believe the figures are correct. Please verify yourself.

Been following for several years, bought/sold/ and now have bought a small position again. Earnings are finally starting to hit the bottom line.

Any feedback appreciated!

Best

VC

7 Likes
#2

Very interesting - photo verify or verify by cam is becoming more important in general over the internet from secure ID processing to internet dating! Verify by cam was one of the most important features my ex GF programmed for her brother’s internet sites last year.
Ant

#3

Concern:
Checks will go away someday, still early in adoption phase?

I can verify that, yes checks are going away.
Our gift shop use to be;
10% cards
30% checks
60% cash

Now

65% cards
30-35% cash
0% checks - people don’t even ask anymore

JT

7 Likes
#4

VC, thanks for bringing this to the attention of the board. I decided to take a look at Mitek for my “free choice” over on the Analysis Board. Here’s a cross-post of that:

The Business

Mitek (MITK) is a small tech company that licenses software to banks, insurance companies, wireless providers, and other large enterprises that allow them to leverage their customers’ mobile device cameras to deposit checks, verify their identity, and automatically pre-fill form data (especially application forms) using a photo of a customer’s driver’s license, passport, or other form of ID. Their intellectual property is protected by 22 patents granted, with another 21 patent applications pending.

If you’ve ever deposited a check using your mobile phone (by snapping a picture of the front and back of the check), you’ve probably used Mitek’s technology: they’re used by half of U.S. banks, including all of the top ten banks. Mobile check deposit has been their primary business, and continues to drive significant growth: regardless of what you think about the future of physical checks, only 5% of those checks are deposited using mobile devices today. And 2/3 of all checks are deposited by small businesses, where checks continue to serve an outsized role.

Mobile deposits are a win/win: much more convenient for customers, but also much cheaper for banks to process compared to in-branch and ATM deposits (1/10th the cost in some cases). So banks are enthusiastic about the technology and continue to push customers to use it, which in turn benefits Mitek.

Mitek sees the small-medium business (SMB) space as a huge source of potential growth, and has recently released technology for capturing multiple checks at once to make the process more compelling for these businesses.

But mobile deposit is only one aspect of their business. They also offer technology that can verify that a driver’s license is authentic, and pull the data from it, optionally using it to pre-fill forms on a mobile device (like bank or insurance application forms), saving a potential customer from having to type it all in on a tiny keyboard. Banks have seen account enrollment applications in their mobile channel jump from less than 10% of all applications just 24 months ago to 40% of applications today. Abandonment rates can be very high, especially if the potential customer has to go through a manual process to verify their identity. Financial institutions are required by law to Know Your Customer (KYC), so Mitek’s automatic identity verification and authentication technology is important for minimizing the hassles for potential customers while ensuring institutions are fulfilling their regulatory obligations. Even better, it will auto-fill many of the application form fields from the data found on the license (the company refers to this as Photo Fill).

To bolster its Identity Verification business, Mitek acquired IDChecker in June, 2015. Based in the Netherlands, IDChecker supports verification and authentication of over 3500 different types of passports, international driver’s license and identity cards from nearly every country in the world.

Identity verification provides a huge avenue of future growth, not only as it can be cross-sold to existing banking customers, but because it’s important to many other industries as well. For example, a top insurance company receives 40,000 applications per day in their mobile channel, and was seeing a huge rate of abandonment despite spending millions of dollars on advertising because it was so inconvenient to type in all of the required information. After adding Mitek’s Photo Fill, allowing applicants to quickly snap a pic of their driver’s license, the insurance company saw a significant uplift in mobile completions that resulted in a substantial addition of new customers and revenue.

IDChecker also had facial recognition technology, and Mitek is now beginning to roll that out for 2-factor authentication: in addition to providing a password during login, users can snap a quick selfie to verify their identity for an added layer of security in case their password was stolen (users tend to use the same password at multiple sites). That can be much more convenient than other forms of 2-factor authentication, such as waiting for an email or text message with one-time codes (or installing a special app that generates them) and then having to type them in to the banking app.

Financials

Mitek’s fiscal year ends in September. As of the end of FY 2015, the company had about $26.7M in cash and short-term investments, and no debt. Revenue growth was 32% YoY. The company is profitable on both a GAAP and non-GAAP basis, and has been profitable on a non-GAAP basis for 6 quarters. Approximately 30% of revenues are recurring, primarily from maintenance and service contracts sold along with licenses.

                                       MITK
           Price: $4.11          1YPEG: 0.05          Adjusted P/E: 16          

                        Adjusted Earnings - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.     Adj. EPS     TTM EPS      YoY TTM Growth      Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015          $0.09       $0.26              333.3%                          |
| Q3 2015          $0.07       $0.23                                              |
| Q2 2015          $0.05       $0.16                                              |
| Q1 2015          $0.05       $0.11                                              |
| Q4 2014          $0.06       $0.06                                              |
| Q3 2014          $0.00                                                          |
| Q2 2014          $0.00                                                          |
| Q1 2014          $0.00                                                          |
+---------------------------------------------------------------------------------+

                             Revenue - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.      Revenue    TTM Revenue     YoY TTM Growth    Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015         $7.90M         $25.4M              32.7%                        |
| Q3 2015         $6.44M         $23.0M                                           |
| Q2 2015         $5.67M         $21.3M                                           |
| Q1 2015         $5.39M         $20.1M                                           |
| Q4 2014         $5.54M         $19.1M                                           |
| Q3 2014         $4.66M                                                          |
| Q2 2014         $4.48M                                                          |
| Q1 2014         $4.46M                                                          |
+---------------------------------------------------------------------------------+

Insiders own about 11% of the company as a group, and the Chairman of the Board owns about 3%.

Primary Risks

  • There is increasing competition in the space, but that’s offset somewhat by the company’s IP protection and patent portfolio. However, that portfolio has to be defended, which has led to the next risk: litigation.

  • The company has been embroiled in lawsuits since at least 2012, either defending its IP or defending against claims of infringement, and probably will be for years to come. This is expensive and a distraction. The company recently began excluding litigation costs from its non-GAAP results, but at this point they seem likely to be an ongoing cost of business.

  • Mitek is expanding its cloud offerings, which should be a long-term benefit to the company, but it brings increased risk of a security breach and the risk of consumers’ confidential financial information being compromised or stolen.

  • Ongoing integration risk with IDChecker, especially as it’s a foreign company.

Ratings

Mitek is already the first-mover and top dog in mobile deposits, and yet the entire industry has only captured 5% of physical check deposits, leading to lots of room for growth even if physical checks themselves are in decline.

But I think the big future opportunity is in Identity Verification, both domestically and internationally. The company will be heavily investing in FY 2016 to expand its direct sales force as it looks to cross-sell its Identity Verification services (and fledgling 2-factor Authentication services) and enter new vertical markets. The company estimates its Total Addressable Market to be $3.8 billion, meaning there is tremendous runway for growth and plenty of room for multiple winners to boot. But given the heavy investment next year, it’s possible that investors will need to be patient waiting for future earnings growth. Fortunately, the market seems to be pricing that in, leaving today’s valuation on an adjusted P/E basis at a very reasonable 16.

My hypothetical real-money portfolio rating: 4 stars (out of 5 possible).

My CAPS call: thumbs up (outperforms the market over the next 2-4 years).

Neil
(No position)

23 Likes
#5

Thanks VC and Neil.

Another positive is the low level of Wall Street interest, probably because of the small market cap.

This stock has all the hallmarks of a potential multi-bagger and I have opened a small position.

Ian

#6

Happy and profitable New year to all!

Thanks Neil for your post that brings the attention of the board to the potential of the Mitek’s Identity Verification business. It’s seems very interesting.

I think I’ll try a bit of this one too :wink:

Congratulations to Saul for the incredible success of one the best boards in the fooldom, which he set for all of us to learn from his wisdom and experience!

This year I’ve achieved, after the “semester horribilis”, a return of 12% of my entire portfolio!!!

Thank you for all the contributions.

Maria

Just one more thing:

http://finance.yahoo.com/news/mitek-announces-2016-predictio……

“Mitek Announces 2016 Predictions for the Mobile Industry”

“Over the past year we’ve seen many advances in the mobile industry that will drive major transformations in areas such as mobile commerce, account opening, fraud detection and identity verification in 2016,” said James B. DeBello, president and CEO, Mitek. “We expect 2016 to be a year that technology delivers the user verification required for the mobile channel to operate safely and efficiently, while creating easy to use and engaging processes for end users at the same time. The value of this will be evident to both consumers and businesses in the months ahead."

1 Like
#7

I highly recommend doing your own due diligence before starting a position.

There are a few things worth considering. First, I mentioned that 2016 is going to be an investment year for the company. To put that in perspective, FY2015 non-GAAP net income was $8.1M. Management didn’t provide specific 2016 earnings estimates, but they did say that they expect revenue of $31M-$33M and “non GAAP profit margin for fiscal 2016 to be at least 20% for the year”, which would put net income around $6.5M near the midpoint of revenue. They do say “at least”, so one would hope it’ll be higher, but I think the point is that I wouldn’t expect to see any earnings growth until FY2017.

Second, that’s on a non-GAAP basis, and I think it’s important to understand how they’re calculating that number. If you go through the quarterly press releases for FY2015 and start adding up their non-GAAP EPS, you’ll find that it doesn’t tally with the non-GAAP EPS they report for the full year in the Q4 release. The reason is because in fiscal Q3 the company changed how they calculate non-GAAP, and started adding back their litigation expenses (prior to that it was just stock-based compensation). Given that they’ve been embroiled in lawsuits since 2012 and the trial date for a current suit is set for 2017, litigation seems like an ongoing cost of business to me rather than a “one-time” event. So just be aware of that. They’re also now adding back acquisition-related costs for IDChecker.

And finally, I think the 1YPEG needs to be taken with a huge grain of salt: it’s inflated because they’re coming off such small numbers. In fact, if the company hadn’t decided to back out litigation expenses, the 1YPEG wouldn’t be calculable.

Now having said all of that, I do think the company is interesting for someone who’s willing to be patient and basically accept that the stock could be “dead money” (or worse) for the next year. As I mentioned in my writeup, I think that’s one big reason it’s possible to get it at an adjusted P/E of 16 (and 23% off its highs at the end of November). Investors today clearly need to be buying with a multi-year timeframe.

A few other random notes:

  • If you read the annual report, you’ll discover that 25% of their revenue comes from a “single customer”. But that customer is one of their channel partners that is selling licenses on to end customers, and those end customers can do business with multiple channel partners. So the company doesn’t believe it would be harmed if that channel partner disappeared – its end customers would just buy from a different partner.

  • The business is seasonal, in part because of the bulk purchases by those channel partners. Fiscal Q1 (which just ended Dec 31) is weakest, with subsequent quarters getting stronger and peaking in fiscal Q4. So we’ve just come off the company’s strongest quarter and the next earnings release will be for their weakest quarter.

  • Right now about 30% of their revenues are recurring, coming from maintenance and service contracts. But they’re beginning to offer cloud services as well (acquired with IDChecker) on a subscription model, which could be an opportunity to increase recurring revenues. End-customers will have a choice between on-site or cloud. I generally see this as a positive step, but it does also presents a new set of security challenges and risks for Mitek.

  • Only 5% of revenue is international. Use of physical checks are primarily a North American phenomenon (along with the U.K. apparently). I believe management said that the entire international market is about the same size as the U.S. market, and they’re not focusing on it beyond partnering up in a few places. But I do think there is likely an opportunity for international expansion of their Identity services, and IDChecker might help with that given that it’s based on the Netherlands. But right now the company is obviously focused on building up its domestic Identity Verification sales teams and gaining solid traction, taking advantage of cross-selling opportunities and breaking into new verticals.

  • The CEO, James DeBello, has been in the job since 2003, and has been a director since 1996. He’s 56 years old.

  • They have a small local auditor, Mayer Hoffman McCann P.C. Those guys were also the auditor for the city of Bell, CA, which suffered from rampant financial abuses. Here’s one article on that I found: http://www.timesheraldonline.com/general-news/20110113/benic…

  • Their restated articles of incorporation have a poison pill that makes a takeover hard unless the board agrees with it, and it also indemnifies board members against just about anything, including criminal behavior if the board member didn’t think it was illegal at the time. So as a shareholder, you’re going to have to accept that you could be taken for a ride with basically no recourse.

Anyway, those are just a few things from my own look at the company. Again, I highly recommend doing your own due diligence and making sure you’re comfortable with everything.

Neil
(No position)

14 Likes
#8

Hi Neil, I started out being interested in Mitek, but the more I read of your concerns, the more cautious I became. I’m referring to:

  1. Suddenly deciding to add back all their continuing and ongoing legal expenses to adjusted net income, thus portraying adjusted earnings as more than they are.

  2. Lot’s of expenses during the next year, and no growth to negative growth in 2016.

Adjusted net in 2015 of 8.1 million. Adjusted net in 2016 predicted to be at least 20% of $31 to $33 million (which comes to 6.2 to 6.6 million). If they beat the midpoint by a full 25% that is 1.25 times 6.4 = 8.0 which is barely flat with 2015. And that’s beating their estimate by 25%. Who knows? They may beat even that, and handily, but who knows?

  1. Their reliance on an external auditor who is not only tiny, but was associated with a big scandal apparently.

  2. Checks fading out. that’s still their bread and butter as I understand it.

  3. Their poison pill.

I am more and more hesitant.

Saul

4 Likes
#9

but the more I read of your concerns, the more cautious I became.

I agree, Saul, except on the decline of physical checks: they only have 5% of the market, so plenty of room for growth, and really I think an investment would be about the Identity Verification services. But yes, I’d be cautious.

Neil

#10

Sure, this is not a perfect investment.

Window dressing of non-GAAP, insider sales, litigation, an investment year ahead. All these are valid concerns.

But there are some very strong positives.

The millennial generation are mobile-centric. Banks, insurance companies and others are experiencing high rates of abandonment from prospective customers that do not like filling in forms on mobile devices.

Mitek’s ID software provides a solution to a problem that is causing a lot of hurt. Better than that, they already have established relationships with their target customers.

And they can build this market without raising development capital, because their mobile deposit product is providing a steady, growing stream of cash flow to finance R&D and development of the market.

The total addressable market is huge compared to their current revenue. They are a business that has proven that they can execute, and they have no debt.

I like risk/reward scenarios where the upside is huge. The downside is mitigated by the mobile deposit business.

On that basis I can justify a small position.

Ian

5 Likes
#11

Nevercontent

Thank you for the feedback, it is probably still a little early, but like I said the ball is rolling finally.

Recent press release on a new product offering available December 2015.

https://www.miteksystems.com/press-releases/mitek-announces-…

Cachet Financial is one of Miteks channel partners. (Sells Mitek product)

http://www.cachetfinancial.com/news/press-releases/cachet-to…

San Diego Private Bank will upgrade their merchant capture solution currently with Jack Henry’s Goldleaf to Cachet’s omni-channel Select Business™ Merchant Capture. The bank’s growing base of merchants will transition to Cachet’s advanced RDC platform by second quarter of 2016. The bank will also offer Cachet’s Select Mobile™ Deposit solution to its mobile banking users via integration with the bank’s mobile banking provider, Q2.

Key take away: Jack Henry’s is the Gorilla in check scanning for businesses.

Scanner connected to a computer.

Mitek’s new product is just released, first customer win and you steel it from the Gorilla.

Better mobile tech will win out! 2/3 of checks processed are B2B.

Now, is someone connected to Mitek a customer at San Diego Private Bank, I would put the odds of that being true pretty high.

I think this will be the first of many wins going forward?

Time will tell.

VC

1 Like