OneSpan Inc. — Q2 2019 Form 10-Q
Business context and period. OneSpan develops digital identity, security, authentication, fraud-mitigation and transaction-management solutions, sold through product and licensing offerings and cloud-based and other services. This unaudited report covers the quarter and six months ended June 30, 2019; amounts below are USD millions unless stated otherwise. OneSpan reports one operating segment.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $56.2 | $49.6 | $103.8 | $95.0 |
| Gross profit / margin | $38.4 / 68% | $36.0 / 73% | $69.9 / 67% | $70.7 / 74% |
| Operating income (loss) | $(2.2) | $(2.6) | $(7.7) | $(1.0) |
| Net income (loss) | $(2.5) | $(1.0) | $(8.1) | $0.8 |
| Diluted EPS | $(0.06) | $(0.03) | $(0.20) | $0.02 |
- Revenue mix and change: Q2 product and license revenue was $40.1 million (+15%); services and other was $16.1 million (+11%). For the first half, those categories were $72.0 million (+5%) and $31.9 million (+20%), respectively. Subscription and maintenance revenue contributed to services growth.
- Margins and costs: Gross margin declined year over year in both periods. Management attributed the decline to lower product/license and services margins, including higher hardware-token costs and cloud infrastructure costs. First-half operating costs rose 8%, with R&D expense up 63%, primarily due to higher employee headcount.
- Cash flow: First-half operating cash use was $22.8 million versus $0.6 million in 2018, reflecting the net loss, timing of receivables and higher inventory purchases. Investing cash use was $4.3 million versus $23.9 million provided in 2018; the prior-year period included substantial investment maturities and the Dealflo acquisition.
- Liquidity and obligations: At June 30, cash and equivalents were $49.1 million and short-term investments $26.3 million, totaling $75.4 million; working capital was $119.8 million. Total liabilities were $102.4 million. The filing does not report conventional borrowings; it reports operating lease liabilities of $10.1 million. Management said resources were adequate for operating needs over the next 12 months.
- Balance sheet: Total assets were $347.2 million and stockholders’ equity $244.8 million. Accounts receivable was $68.2 million, up from $59.6 million at year-end; inventory was $20.2 million, up from $14.4 million.
Material changes and management commentary
- Q2 revenue growth was led by EMEA, up 58% to $33.8 million; Americas revenue rose 9% to $14.4 million, while APAC declined 46% to $8.0 million. For the first half, EMEA grew 49%, while Americas declined 7% and APAC declined 33%. Management cited lower APAC hardware sales in Q2 and weaker hardware, software and maintenance revenue for the half.
- Foreign exchange reduced revenue by an estimated $1.7 million in Q2 and $3.9 million in the first half. Management estimated that, at prior-year exchange rates, gross margin would have been about 2.9 percentage points higher in Q2 and 3.7 points higher for the half.
- R&D expense increased alongside average R&D headcount growth of 31% in Q2 and 36% for the half. Sales and marketing expense declined modestly; general and administrative expense also fell, partly because 2018 included Dealflo acquisition costs.
- Management described order and shipment timing as a source of revenue volatility and said longer-term trends are more informative than quarter-to-quarter comparisons. No specific financial guidance or numerical full-year outlook is provided in the filing.
Risks, contingencies and unusual items
- Controls: Disclosure controls and procedures were deemed ineffective at June 30, 2019 because of a previously identified material weakness in internal control over financial reporting. Management was implementing remediation and expected completion during fiscal 2019. The company also completed implementation of a new global ERP system during the first half.
- Tax: The estimated annual tax rate before discrete items was approximately 93%, which management attributed primarily to forecast losses in jurisdictions where tax benefits cannot be recognized because of valuation allowances and to the geographic mix of earnings.
- Cybersecurity and market exposure: Management warned that an incident affecting cloud solutions could materially harm growth, finances and reputation. Other cited risks include market acceptance and competition, technology change, acquisition integration, global execution, intellectual-property claims, and economic conditions—particularly in European banking and finance. Foreign-currency movements may also affect results.
- Acquisition and accounting items: Dealflo generated $2.0 million of Q2 revenue and a $1.6 million net loss; first-half amounts were $3.9 million and a $3.0 million net loss. Final acquisition measurement-period adjustments increased goodwill by $1.1 million, with no material income-statement effect. Adoption of lease accounting recorded right-of-use assets and lease liabilities; it had no retained-earnings impact.
- Prior-period comparisons: Other income was lower in 2019 partly because 2018 included a $1.2 million government subsidy. 2018 also included $0.5 million of rebranding-related intangible impairment, contributing to lower comparative amortization/impairment expense in 2019. No goodwill impairment was recorded in either first-half period.
- Legal: The company reported that the StrikeForce patent case was dismissed with prejudice on April 16, 2019 and considered closed. Management said other ordinary-course matters were not expected to have a material adverse effect overall; individual loss estimates were generally not clear or estimable in the filing.
Important facts for investors to verify
- Whether revenue growth—especially the strong EMEA contribution—can persist while APAC remains weak and regional revenue mix shifts.
- Whether gross margins recover from the first-half decline, including the effects of product mix, hardware costs, cloud infrastructure spending and currency.
- Whether receivables, inventory and collections improve sufficiently to reduce operating cash use.
- Progress and completion of the material-weakness remediation, and the effectiveness of controls following the ERP implementation.
- The assumptions behind the approximately 93% estimated annual tax rate and the company’s ability to realize tax benefits from loss carryforwards.
- Cloud-security exposure, lease obligations, and any developments in legal matters or other contingencies.