mikkelwilliam
Published on the Value Lab 31/7/22
Mitek Systems (NASDAQ:MITK) is a nice company for the current economic environment. While a strong earnings season from tech and general upbeat sentiment in the markets after the last rate hike contribute to a good market mood, in June we had a bit of chaos. A company like Mitek which focuses on very underserved markets and key secular issues around digitisation looked to be able to stand any macro environment. Indeed, there has been no evidence of slowing down this quarter in key markets, and all metrics look to be on the up. Overall, a clear buy.
A Bit on MITK Q2
The recent Q2 earnings call has a couple of nuggets that investors should focus on. Firstly, the check products continue to grow despite checks being in secular decline. Protection against fraud even in this shrinking use case benefits from adoption trends as digitisation there persists. The ID and verification markets have been growing in the 60% area, and this is driving the overall 24% YoY revenue growth. These markets have been buoyed by the inclusion of recent acquisition HooYu in the last quarter, however:
HooYu is not profitable, but has FY revenues of $10 million, growing faster than MITK’s identity business, so expect at least 20% in inorganic growth in the identity segment for the coming quarters post consolidation. The acquisition should help delivery, and we see the logic of paying a big tag in order to capitalise on a very opportune moment in history.
Valkyrie Trading Society, Last MITK Article
In other words, the small direct contribution of HooYu can’t even remotely account for ID and verification revenue growth, which was 2.5 million quarterly as of last quarter’s run-rate figures. Revenues have grown by more than twice that, so the other 60% of the ID and verification growth (ca. $4 million), which provided organically and incrementally more than the 17% YoY growth provided by identity last quarter, have come from general organic growth. Synergies on the demand side already seem to be coming into action with a more comprehensive offering. Indeed, some new use cases driving real dollars were mentioned.
So, I would say it’s a combination of both the contribution from HooYu, but also these new use cases the developer conference, the in-game kind of purchasing opportunity those are all big Mobile Verify opportunities for us. So, we had the benefit of some pretty good Mobile Verify performance as well as the HooYu performance.
Frank Teruel, CFO of MITK
These come off the back of the combination of the HooYu offering and MITK’s ID and verification offerings into a new end-to-end solution called MiVIP which is a low-code system for companies to implement their own ID and other JYC verification systems. With growing focus on undocumented immigration in the UK, ID and verification systems have become suddenly in demand in that geography as well.
Conclusions
The company still trades at 3x sales despite its growth profile and these high rates. USAA litigation overhang still matters for the business. It would be foolish to ignore it, but as discussed in our previous articles, they don’t account for the current declines, and the company trades dramatically below fair value despite targeting generational issues like deepfakes through liveness detection and identity fraud, America’s fastest growing crime in the increasingly digital world.
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