OneSpan Inc. (OSPN) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. OneSpan provides digital agreement, identity verification, authentication, e-signature, and secure transaction solutions. Its reportable segments are Digital Agreements and Security Solutions. Figures below are in millions of U.S. dollars except per-share data and percentages.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $55.7 | $52.8 | $113.3 | $105.2 |
| Gross profit / margin | $34.3 / 62% | $35.5 / 67% | $73.6 / 65% | $72.2 / 69% |
| Operating loss | $(17.8) | $(8.2) | $(25.9) | $(17.5) |
| Net loss | $(17.8) | $(9.4) | $(26.1) | $(4.1) |
| Adjusted EBITDA (non-GAAP) | $(3.8) | $(1.5) | $(5.5) | $(1.3) |
| Diluted loss per share | $(0.44) | $(0.23) | $(0.65) | $(0.10) |
- Q2 revenue increased 6%; first-half revenue rose 8%. Subscription revenue grew to $23.0 million in Q2 from $19.8 million; hardware revenue was $19.6 million versus $18.8 million.
- Q2 operating costs increased 19% to $52.1 million. Sales and marketing rose to $19.7 million from $14.9 million, while research and development declined to $10.1 million from $12.0 million. First-half operating costs increased 11% to $99.5 million.
- Cash used in operating activities was $6.4 million in the first half, compared with $11.3 million in the prior-year period. Cash used in investing activities was $6.0 million; cash used in financing activities was $1.5 million. Cash, cash equivalents, and restricted cash declined $13.3 million during the half.
- At June 30, cash and cash equivalents were $83.1 million, with no short-term investments reported on the balance sheet. Working capital was $62.6 million. Total assets were $298.6 million, total liabilities $112.0 million, and stockholders’ equity $186.6 million. The balance sheet reports no borrowings; lease liabilities are reported separately.
- Deferred revenue, current and long-term combined, was $57.3 million, down from $70.9 million at year-end 2022, primarily reflecting timing of annual renewals. Management said it believes available financial resources are adequate for operating needs over the next 12 months.
Material changes and segment performance
- Digital Agreements: Q2 revenue increased 13% to $11.9 million, primarily from higher cloud subscriptions, but first-half revenue declined 1% to $23.4 million. Segment operating loss was $7.1 million in Q2 and $13.2 million in the first half. Management said sales pipeline development, demand generation, and sales-force productivity were taking longer than planned.
- Security Solutions: Q2 revenue increased 4% to $43.9 million; first-half revenue increased 10% to $89.9 million, helped by term subscriptions and hardware. Segment operating income was $8.5 million in Q2 and $24.2 million in the first half. The company cautioned that first-half results benefited from the timing of certain contract renewals.
- Consolidated gross margin fell five percentage points in Q2 and four percentage points in the first half. The company cited product and customer mix, higher hardware and freight costs, and $1.6 million of inventory impairments tied to discontinuing Digipass CX investments.
- Q2 net loss widened year over year. First-half comparison is also affected by a $14.8 million gain on the sale of the Promon investment in the 2022 period.
- ARR, a company-defined operating metric, was $144.4 million at June 30, up 8% year over year. Net retention rate was 106%, compared with 116% a year earlier.
Outlook, management commentary, risks, and unusual items
- Management said it expects the original strategic plan’s revenue growth levels to take longer to achieve, citing uncertain macroeconomic conditions, longer sales cycles, customer price sensitivity, a more mature and competitive e-signature market, and more aggressive competitor pricing.
- On August 3, 2023, after quarter-end, the Board approved additional cost-reduction actions intended to improve operational efficiency and adjusted EBITDA while maintaining long-term growth potential. The company preliminarily estimated $15–$20 million of restructuring charges, mostly workforce-related. Workforce actions are expected to be substantially complete by mid-2024; vendor actions are planned through the end of 2025. These are forward-looking estimates, not reported-period results.
- Existing restructuring charges were $5.8 million in Q2 and $6.6 million in the first half. Actions included eliminating approximately 140 positions, vacating the Chicago office, and discontinuing Digipass CX investment. The company expects additional restructuring costs under its existing plan through 2025.
- The February 2023 ProvenDB asset acquisition cost $2.0 million, including $1.8 million paid at closing and $0.2 million held back. Purchase-price allocation remained preliminary at June 30; the company said the acquisition’s financial impact was not material.
- Legal matters are described as ordinary-course proceedings. The company recorded $1.5 million for loss contingencies and said it does not expect the matters to have a material adverse effect; outcomes remain uncertain. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- Principal risks include execution and unintended effects of restructuring, retaining and attracting customers and employees, product development and competition, cybersecurity, macroeconomic conditions, supply-chain and component issues, foreign-exchange exposure, and potential asset impairment. The filing reported no material changes in market risk and no other material changes to previously disclosed risk factors beyond those relating to the cost-reduction actions.
Important facts for investors to verify
- Whether Digital Agreements growth improves despite management’s reported delays in sales pipeline, demand generation, and sales productivity.
- Whether the announced $15–$20 million cost-reduction program achieves expected savings without materially harming growth, customer service, or product development.
- Whether gross margins recover as inventory impairments, hardware costs, freight costs, and product mix evolve.
- Whether ARR and retention trends remain consistent with recognized revenue, renewals, and future cash generation.
- How operating cash use, working capital, and deferred revenue develop; the filing reports negative operating cash flow for the first half.
- Final ProvenDB purchase-price allocation, restructuring cash payments and charges, and the resolution of recorded legal contingencies.