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No. of Recommendations: 16
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
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