Mitek

[Oforfive]

Mitek filed their 10-Q. My concern has been sales expense. The good news as that the total of R&D and SG&A as a percent of revenue is trending down—which it ought to as sales increase. Looking at Q over Q, indirect expenses have dropped from 81.7% to 78.0% to 77.5% for ’15, 16, and 17. Turning those 98% and 80% gross margins into earnings.

For those quarters R&D has trended down from 25% to 21%; G&A from 32% to 24%. But oh, the sales expenses. 25.2% to 30.0% to 32.4% of revenue. In other words, this quarter last year, revenue inreased 50% but sales expense increased 79%. This year, sales increased 40% but sales expense increased 45%. I guess there is a positive trend within the trend. Look for the silver lining in the delta of the delta. But why are sales expenses so high?

I wrote to investor relations last week but received no reply. Patience is not one of my virtues, so I wrote again today suggesting that for such a piss ant small company whose investors would likely not fill the parking lot, that they might at least have a canned response. Maybe “we received your inquiry and all got a good laugh”. Next week if no reply I’ll call the company and see if I can get past the switchboard. Maybe all the way up to the mail room (do companies even have mail rooms anymore?)

K—hey, my MITK shares are worth more than that chair you are sitting in so if you want to continue occupying it, give me a response—C

[Oforfive]

In order to avoid explanatory replies, let me amplify on Mitek’s business model and revenue recognition.

From the 10-Q:

Mitek markets and sells its products and services worldwide through internal, direct sales teams located in the U.S. and Europe as well as through channel partners. The Company’s direct sales strategy concentrates on large financial services organizations and medium sized companies. The Company’s partner sales strategy includes channel partners who are financial services technology providers. These partners integrate Mitek’s products into their solutions to meet the needs of their customers. The majority of revenue is derived from software licenses with increasing revenues from software as a service (“SaaS”) contracts.

and:

Revenue from sales of software licenses sold through direct and indirect channels is recognized upon shipment of the related product, if the requirements of FASB ASC Topic 985-605, Software Revenue Recognition (“ASC 985-605”) are met, including evidence of an arrangement, delivery, fixed or determinable fee, collectability and VSOE of the fair value of the undelivered element. If the requirements of ASC 985-605 are not met at the date of shipment, revenue is not recognized until such elements are known or resolved. Revenue from customer support services, or maintenance revenue, includes post-contract support and the rights to unspecified upgrades and enhancements. VSOE of fair value for customer support services is determined by reference to the price the customer pays for such element when sold separately; that is, the renewal rate offered to customers. In those instances, when objective and reliable evidence of fair value exists for the undelivered items but not for the delivered items, the residual method is used to allocate the arrangement consideration

So, maybe, if the sales expense is recognized at the time of sale, and sales are increasing at a fast rate, and if the revenue recognition is delayed either by services not yet rendered or software enhancements needed, then sales expenses might lead revenue recognition. Maybe. And if the internal, direct sales teams are staffing up, this could be evidenced by sales expenses leading sales. Maybe.

But with what appears to be such a dominant position in the market, one would hope that they wouldn’t need to work so hard to make this or next year’s sales. This is the type of information I hoped I would receive from investor relations.

I mean, Mitek Systems, Inc. (“Mitek” or the “Company”) is a global provider of mobile capture and identity verification software solutions for enterprises. Mitek currently serves approximately 5,600 financial services organizations and leading brands across the globe.. I believe they added 100 last year so how much do you spend to add 2%? I know, they are trying to dominate the mobile identity market which is newer, but wouldn’t the customers be mostly their existing mobile deposit customers?

KC