VASCO Data Security International, Inc. — Q3 2015 Form 10-Q
The supplied filing identifies the registrant as VASCO Data Security International, Inc. (not Onespan Inc.). It reports the quarter and nine months ended September 30, 2015; financial amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and reporting period
VASCO designed, developed, marketed and supported hardware and software security products and services, including DIGIPASS authentication solutions. Banking was its largest market, accounting for 88% of revenue in both the quarter and nine-month period. Results were substantially influenced by shipments of Cronto card readers to Rabobank.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $60.0 | $52.6 | $190.6 | $139.1 |
| Gross profit | $36.3 | $35.6 | $112.4 | $92.4 |
| Gross margin | 60.4% | 67.6% | 59.0% | 66.4% |
| Operating income | $13.5 | $13.8 | $45.3 | $25.4 |
| Net income | $11.2 | $11.2 | $38.7 | $21.6 |
| Diluted EPS | $0.28 | $0.28 | $0.97 | $0.55 |
- Q3 revenue increased 14% year over year; nine-month revenue increased 37%. Nine-month operating income rose 78%, while Q3 operating income declined about 3% and net income was essentially flat.
- Gross margin declined 7.2 percentage points in Q3 and 7.4 points year to date. Management attributed the pressure to lower-margin Banking hardware/card-reader sales, unfavorable product mix and the stronger U.S. dollar. Card readers were 35% of Q3 revenue and 40% of nine-month revenue, versus 12% and 17% in 2014.
- Operating cash flow from continuing operations was $47.8 for the first nine months, compared with $30.0 in 2014. Cash and equivalents were $144.0 at September 30; short-term investments were approximately $40.0. Working capital was $204.8 and the current ratio was 5.9 to 1.0.
- VASCO reported no outstanding debt. It held $103.2 of cash and short-term investments outside the U.S.; $102.7 was not subject to repatriation restrictions but could incur taxes if repatriated.
Material changes versus the prior comparable period
- Rabobank-related product deliveries drove much of the growth: revenue from all products sold to Rabobank exceeded 30% of total revenue in both Q3 and the first nine months. Excluding Rabobank, nine-month revenue declined by less than 5% at reported exchange rates; management estimated it would have increased by less than 5% at prior-year exchange rates.
- EMEA revenue increased 29% in Q3 and 57% in the nine-month period, reaching 66% and 70% of total revenue, respectively. U.S. revenue declined 39% in Q3 and 6% year to date.
- Banking revenue grew 19% in Q3 and 45% year to date, while Enterprise and Application Security revenue declined 14% and 2%, respectively. The higher Banking share and hardware mix weighed on gross margin.
- Q3 general and administrative expense increased 56% to $8.5; nine-month expense rose 32% to $21.7. The filing cites increased incentive compensation and professional fees, including legal costs related to the Iran-related investigation and Silanis acquisition diligence.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue or earnings guidance. Management said it expected difficult economic conditions in Europe to continue, while noting that European conditions were not expected to significantly affect the Banking market. Revenue can vary materially with order and shipment timing.
- Management highlighted customer and product concentration, competition and pricing pressure, foreign-exchange exposure, and cybersecurity risks. The U.S. dollar’s strength reduced estimated revenue by $2.5 in Q3 and $7.7 year to date; management estimated that unchanged exchange rates would have lifted gross margin by about 1.6 percentage points in both periods.
- VASCO was investigating possible resale of products by a European distributor to parties in Iran. Sales to that distributor during the relevant review period totaled approximately $3.1. VASCO suspended shipments and made voluntary disclosures to OFAC and BIS. Potential fines, export restrictions or other consequences could be material; the company could not estimate a possible loss or range.
- A putative securities class action and two derivative complaints were disclosed. The company said it believed the securities suit was without merit and intended to defend it; outcomes and potential costs were uncertain. A potential trustee claim relating to the bankrupt DigiNotar subsidiary was also disclosed; the company said it did not expect it to have a material adverse effect.
- After quarter-end, VASCO agreed to acquire Silanis Technology for $85.0, subject to adjustment, and expected to use cash and short-term investments to fund the purchase. Completion and integration, as well as expected synergies and savings, were subject to risks.
- The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. Adoption of the new revenue-recognition standard was still under evaluation.
Important facts for investors to verify
- How much revenue and margin depended on Rabobank shipments, and whether that demand continued after the reported period.
- Whether the lower gross margin persisted as card readers and Banking hardware made up a larger share of sales.
- The outcome of the OFAC/BIS investigation, including any penalties, export restrictions or reputational impact.
- The status, final cost, funding and integration progress of the Silanis acquisition.
- The status and potential financial exposure of the securities and derivative litigation.
- Cash generation, overseas cash availability and any tax cost of repatriation.