VASCO Data Security International, Inc. (now Onespan Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing is under the name VASCO Data Security International, Inc. Financial amounts below are in U.S. dollars; amounts are in thousands unless stated otherwise.
Business context
VASCO designed, developed, marketed, and supported hardware and software security and authentication products and services, including DIGIPASS and cloud-based offerings. It served banking and enterprise/application security markets. The company acquired eSignLive in November 2015 for $75 million; its results and higher operating costs are included in 2016.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $54,293 | $65,393 | $101,059 | $130,528 |
| Gross profit | $38,525 | $38,498 | $72,453 | $76,172 |
| Gross margin | 71% | 59% | 72% | 58% |
| Operating income | $3,386 | $15,753 | $6,500 | $31,830 |
| Net income | $2,825 | $13,852 | $5,024 | $27,486 |
| Diluted earnings per share | $0.07 | $0.35 | $0.13 | $0.69 |
| Cash provided by operating activities | — | $14,893 | $19,826 |
- Revenue declined 17% in Q2 and 23% in the first half. Management attributed much of the decline to prior-year shipments of Cronto card readers to Rabobank. Excluding eSignLive, revenue from other customers increased 13% in Q2 and 5% year to date.
- Banking revenue fell 26% in Q2 and 31% year to date; Enterprise and Application Security revenue rose 50% and 39%, respectively. The latter market and non-hardware products contributed a higher share of sales.
- Gross margin improved as lower-margin card-reader sales declined and software and Enterprise and Application Security sales made up more of revenue. Operating income fell substantially as operating costs increased.
- Operating costs rose 54% in Q2 and 49% year to date, primarily from eSignLive, higher headcount, incentive compensation, and acquired-intangible amortization. Average headcount was 58% higher in Q2 year over year.
Balance sheet and liquidity
- At June 30, cash and equivalents were $35,578 and short-term investments were $100,172, compared with $78,522 and $44,961, respectively, at December 31, 2015. The shift largely reflects purchases of short-term investments; combined cash and investments increased.
- Working capital was $135,921, up 6% from year-end. The company reported no debt. Management said available financial resources were adequate for operating needs over the next 12 months.
- Operating cash flow was $14,893 for the first half, down from $19,826 a year earlier. Investing activities used $57,108, principally reflecting net purchases of short-term investments.
- $29,509 of cash and investments was held outside the United States; $28,558 was not subject to repatriation restrictions but could incur tax upon repatriation.
Outlook, risks, and unusual items
- The filing gives no specific revenue or earnings guidance. Management described the business as transaction- and shipment-timing sensitive and said regional revenue outside EMEA may be more volatile. It cited continued global uncertainty and Europe’s economic conditions as risks.
- Management estimated a 26% 2016 effective tax rate before discrete items and 29% including discrete items. The first-half effective rate was 32%, compared with 14% in the first half of 2015.
- The eSignLive purchase-price allocation remained preliminary. A $9,146 measurement-period adjustment reduced goodwill; acquired goodwill and intangibles are not tax deductible. Integration, expected synergies, and the realization of acquisition benefits remain risks.
- In the Iran-related export matter, BIS issued a “no action” letter. OFAC had not responded to the company’s voluntary disclosure by the filing date. The company had accrued $900 for potential penalties and stated that the ultimate amount could differ or no penalty could be assessed.
- A securities class action and derivative lawsuits were pending; the company disputed the allegations. Two derivative matters were stayed, and the Seltzer action was dismissed with prejudice as to the named plaintiff’s individual claims.
- Management reported effective disclosure controls. eSignLive was excluded from the prior internal-control assessment; documentation and testing were underway for inclusion in the 2016 annual assessment.
Important facts for investors to verify
- Whether growth in Enterprise and Application Security and non-hardware sales can offset variable banking orders and the Rabobank comparison.
- Whether higher post-acquisition costs and headcount translate into sustainable growth and improved operating profitability.
- The final eSignLive purchase accounting, integration progress, and realization of expected benefits.
- The outcome of the OFAC review and pending securities and derivative litigation, including any changes to recorded contingencies.
- Cash generation, investment liquidity, foreign-currency exposure, and the eventual impact of tax attributes and the higher effective tax rate.