Onespan Inc. (then VASCO Data Security International, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing identifies the registrant as VASCO Data Security International, Inc.; the supplied filing does not use the Onespan name. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and financial performance
VASCO designed and sold hardware and software security and authentication products, including DIGIPASS, and offered cloud-based authentication services. Banking was its largest target market; EMEA was its largest geographic region.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $65.4 | $47.7 | $130.5 | $86.5 |
| Gross profit | $38.5 | $31.0 | $76.2 | $56.8 |
| Gross margin | 58.9% | 65.1% | 58.4% | 65.7% |
| Operating income | $15.8 | $7.6 | $31.8 | $11.5 |
| Net income | $13.9 | $6.9 | $27.5 | $10.4 |
| Diluted EPS | $0.35 | $0.17 | $0.69 | $0.26 |
| Operating cash flow | Not separately reported | Not separately reported | $19.8 | $27.1 |
Revenue grew 37% in Q2 and 51% for the first half. Net income from continuing operations was $13.9 million in Q2 and $27.5 million for the half. Operating expenses fell 3% in Q2 and 2% for the half, while operating income rose substantially. The reported effective tax rate was 14% for 2015, versus 13% in Q2 2014 and 15% for the first half of 2014.
Liquidity, debt and cash flow
- At June 30, cash and equivalents were $82.1 million and short-term investments were $74.9 million; combined, $157.0 million. The filing reported no debt or restricted cash.
- Working capital was $191.9 million and the current ratio was 5.9 to 1.0. Management said resources were adequate for operating needs over the next 12 months.
- First-half operating cash flow was $19.8 million, down from $27.1 million a year earlier. The company attributed the cash-flow pattern in part to working-capital movements, including a $12.4 million increase in accounts receivable.
- Cash and equivalents increased $9.7 million from year-end 2014. First-half investing cash use was $10.8 million, principally reflecting net purchases of short-term investments.
Material changes and management commentary
- Rabobank card-reader shipments using Cronto technology were the principal growth driver. Rabobank-related sales exceeded 30% of total revenue in both Q2 and the first half; revenue from other customers decreased by less than 10% in Q2 and increased by less than 5% for the half.
- Banking revenue rose 43% in Q2 and 61% for the half; Enterprise and Application Security revenue rose 4% in both periods. Banking reached 88% of revenue in each 2015 period, versus 85% in Q2 2014 and 83% in the first half of 2014.
- Card readers were 38% of Q2 revenue and 42% of first-half revenue, versus 19% and 20% in the comparable 2014 periods. Management said competitive pricing on card readers, product mix, reduced non-hardware revenue share and foreign exchange reduced gross margin. It estimated margins would have been about 1.5 percentage points higher in Q2 and 1.6 points higher for the half at prior-year exchange rates.
- EMEA supplied 70% of Q2 revenue and 71% of first-half revenue. Management noted that European economic uncertainty could constrain Enterprise and Application Security growth, while describing the banking market as relatively stable. It cautioned that revenue can be uneven because of order and shipment timing.
- The U.S. dollar’s strengthening against the euro reduced reported revenue and operating expenses. About 96% of revenue was generated outside the United States, while management estimated 83% of Q2 revenue and 79% of first-half revenue was denominated in U.S. dollars.
Outlook, risks, contingencies and unusual items
- No numerical revenue or earnings guidance was provided. Management said growth could be uneven and cited demand, competition, technology change, customer concentration, currency movements and European economic conditions as risks.
- An internal investigation was underway into whether products sold to a European distributor were resold in Iran, potentially to sanctioned parties. VASCO stopped shipments to the distributor and submitted precautionary voluntary disclosures to OFAC and BIS. Related sales to the distributor during the period under review were approximately $3.1 million. Potential penalties could include fines, export restrictions or referral for further investigation; the company could not estimate a loss or range of loss.
- A putative securities class action was filed on July 28, 2015, after quarter-end, against the company and certain officers. The company said it considered the suit without merit and intended to defend it vigorously.
- A potential claim by the DigiNotar bankruptcy trustee against former DigiNotar directors remained unresolved. The company said it believed it had strong defenses and did not expect a material adverse effect. DigiNotar-related discontinued operations generated a $14,000 Q2 loss and a $37,000 first-half loss.
- Management identified heightened cyber risk for cloud and hosted services that process authentication transactions, and expected security-related costs could rise. The filing also noted that the new revenue-recognition standard was under evaluation; its impact and adoption method had not been determined.
Important facts for investors to verify
- Whether Rabobank shipments are repeatable, and how customer concentration and order timing affect future revenue.
- Whether card-reader pricing and product mix continue to pressure gross margins.
- The outcome and timing of the OFAC/BIS review, and any resulting financial, export or reputational consequences.
- The status and potential cost of the securities class action and DigiNotar-related matters.
- Whether operating cash flow improves as receivables and other working-capital balances change, and how currency movements affect reported results.