Mitek Systems Inc (MITK) is a little known technology company that is involved in the development and sale of mobile imaging solutions. You might best know it for the application linked to most mobile banking software that allows you to deposit a check into your checking, savings, or brokerage account by simply snapping a picture of the front and back of a check.
In March 2011 MITK began its ascent from $3.31 to a peak of a little more than $13.00 in September 2011. This run was mainly a result of the rapid signing of the nation's largest retail banks, as well as dozens of smaller banks, to deploy their mobile check deposit application. At first glance it is sort of puzzling as to why a company with an innovative technology as such, that has been adopted by a total of 564 financial institutions including 28 of the top 50 retail banks in the United States, has experienced a decline of 70%? The answer can be attributed to two main factors; The financial underperformance of the company, and litigation regarding their mobile check deposit technology. When, and if, either of these issues are remedied it is my belief Mitek could be propelled back into Wall Street's good graces and put the stock on track to superior performance in 2013.
In a press release filed by Mitek on April 3, 2012, the company informed investors about the lawsuit:
"On March 29, 2012, United Services Automobile Association (USAA) filed a complaint against Mitek Systems (www.miteksystems.com), a leading mobile imaging software solutions provider. USAA is seeking, among other things, a declaratory judgment that USAA does not infringe certain patents of Mitek relating to Mobile Deposit and that such patents are not enforceable against USAA. USAA is also seeking to prevent Mitek from using USAA's proprietary information.."
This news is what ignited the initial plunge from 11. Justifiably so, investors are worried that Mitek's flagship technology may in fact not be the legal property of Mitek. Following the lawsuit and less than favorable earnings, Mitek's stock price has been under pressure ever since, and has yet to be able to fill that initial gap down on the news of the lawsuit.
The financial underperformance of the company goes deeper than simply "not selling enough product" or "not licensing the technology to enough banks." While Mitek has agreements with 564 financial institutions, the actual launch of the application has been much slower than expected. Meaning, while banks are entering into agreements to use the product, it is taking a significant amount of time to make the technology available to their banking clients. Along with the roll out having a much larger lag time than expected, Mitek is experiencing what they refer to "lumpiness" in their revenue stream. This "lumpiness" seems to be derived from Mitek's current revenue model for the mobile check deposit product. My main concern for the company has been the revenue model that Mitek utilizes for this technology, because it is unlike other intellectual property companies, who license their products through the use of royalties, or flat licensing fees. Mitek is relying on what they are referring to "re-orders" of their mobile check deposits. So banks essentially only need to pay Mitek, when they are running low on their allotted deposits that they have purchased. This revenue model has proven to be nothing short of a complete failure thus far, leaving Mitek with very little reoccurring revenue due to the slower than expected adoption of their technology.
The Turning Point
On Mitek's conference calls a reoccurring complaint by investors has been the lack predictability, or "lumpiness" in the revenue model. Recently the company announced that they have partnered with U.S. Bancorp (USB) for their mobile bill pay technology that is set to launch to consumers in early 2013. The significance of this announcement goes beyond the Mitek getting its newest technology into one of the nation's largest banks. They have adopted a new revenue model for this newest technology.
As stated by the CFO in the latest conference call:
"For these new products, again, we expect the revenue model to be more recurring in nature and include both upfront license fees as well as recurring transactional fees. Over time, we believe that this transition to a higher percentage of recurring revenue will provide an increasing level of predictability for our top line."
As an investor, after hearing this change in approach to the revenue model I am now even more confident in the company's strategy going forward. Transitioning their business model to that of a more traditional IP company should increase the stability of their revenue stream as well as help build investor confidence going forward.
Also, as we have seen in the year 2012, once larger banks start incorporating these new mobile products like mobile check deposit, and mobile photo bill pay, it triggers a waterfall effect within the industry, making it almost an imperative that the banks incorporate the technology to their mobile arsenal. As the CEO of Mitek states, "mobile deposit has become table stakes for financial institutions, which see the mobile channel as the new face of customer engagement. It's actually becoming part of the consumer vocabulary, much like ATMs have in the past." in 2012 Mitek signed up 392 of their 564 financial institutions, including 28 of the top 50 retail banks. This proves the "keeping up with the Jones'" imperative that the banks have when it comes to consumer convenience technology. JP Morgan Chase (JPM) recently started advertising this technology to their mobile banking customers.
While the patent litigation continues to be a looming issue for Mitek, it must be noted that the mobile photo bill pay technology is not part of the patent litigation. Looking at the potential of the mobile photo bill pay opportunity in the coming years, Mitek sees that "Mobile Photo Bill Pay adoption is expected to reach 33% among adult U.S. consumers by 2018, and result in 1.4 billion bills migrating to the MPBP channel." In my opinion if Mitek is able to see similar adoption and implementation patterns with mobile photo bill pay as they saw with mobile check deposit, we won't even need to see the patent litigation end before we can see an opportunity for significant price appreciation in the stock of Mitek. I think it is reasonable to assume that once major banks start adopting this technology, Mitek's stock can return to levels that it was trading before the patent litigation began in the $9.00-$11.00 dollar range. Additionally if the lawsuit can be settled in favorable terms to Mitek much higher prices can be realized.