Business context and reporting period
VASCO Data Security International, Inc. (the issuer named in this filing; not Onespan Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2014. It provides hardware and software authentication and security products, primarily to banking customers, and is developing cloud-based services. Financial amounts below are in millions of U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $47.654 | $37.260 | $86.477 | $72.626 |
| Gross profit / margin | $31.021 / 65.1% | $23.882 / 64.1% | $56.817 / 65.7% | $46.970 / 64.7% |
| Operating income / margin | $7.646 / 16.1% | $1.924 / 5.2% | $11.537 / 13.3% | $4.640 / 6.4% |
| Net income | $6.886 | $1.809 | $10.397 | $4.595 |
| Net income from continuing operations | $6.893 | $1.850 | $10.419 | $4.262 |
| Diluted EPS | $0.17 | $0.05 | $0.26 | $0.12 |
- Six-month operating cash flow from continuing operations was $27.065, versus $1.619 a year earlier. Investing cash flow was negative $32.350, including $29.972 used to purchase short-term investments; cash declined $5.265 to $93.342.
- At June 30, cash and short-term investments totaled $123.314; working capital was $135.202. Current assets were $178.767 and current liabilities $43.565. The balance sheet lists no debt borrowings.
- Total assets were $230.192 and stockholders’ equity $186.097. Deferred revenue was $17.108 current and noncurrent combined.
- Effective tax rate was 13% for Q2 and 15% for the first half, compared with 17% in both 2013 periods. Management attributed the lower rate mainly to earnings mix in lower-tax foreign jurisdictions.
Material changes versus prior comparable periods
- Q2 revenue rose 28%; first-half revenue rose 19%. Banking revenue increased 31% in Q2 and 19% in the first half; Enterprise and Application Security revenue grew 14% and 20%, respectively.
- Growth was concentrated outside the U.S.: Asia Pacific revenue rose 93% in Q2 and 71% in the first half. EMEA, the largest region, increased 10% and 16%, respectively; U.S. revenue declined 19% and 22%.
- Gross margin improved by about one percentage point in both comparisons, helped by lower non-product costs and the stronger euro. Operating margin expanded substantially as revenue grew faster than operating costs.
- Operating costs increased 6% in Q2 and 7% for the first half. Higher incentive compensation, Cronto acquisition-related costs, currency effects, and increased acquired-intangible amortization contributed.
- First-half 2013 net income included $0.333 from discontinued operations; first-half 2014 recorded a $0.022 discontinued-operations loss.
Outlook, risks, contingencies and unusual items
- No formal numerical revenue or earnings guidance is provided. Management expected DPS/MDP cloud services to make a small contribution in 2014, while noting revenues from those offerings had been minimal to date.
- Management said financial resources were adequate for operating needs over the next 12 months. It expected authentication demand to benefit from internet use, regulation and security awareness, but described the business as transactional, with revenue varying by timing and size of customer orders.
- Key risks include reliance on banking and Europe, customer and product concentration, competition and pricing pressure, rapidly changing technology, sophisticated cyberattacks, and currency movements. About 95% of revenue and 82% of operating expenses were generated outside the U.S. in the reported periods.
- Management warned that a cyber incident affecting cloud authentication services could materially harm growth, reputation and financial results. It also expected future security-related costs to rise.
- On July 30, 2014, after quarter-end, a Dutch court ruled in VASCO’s favor in the DigiNotar dispute. It upheld a €1.4 million ($1.911 million) award already recorded as contingent consideration and awarded an additional €2.708 million ($3.709 million) plus interest for alleged contractual breaches. Both awards remained appealable for three months; the additional award was not yet recognized as income.
- The company was evaluating ASU 2014-09, the new revenue standard, effective for it in 2017; adoption method and financial-statement impact were not yet determined. Disclosure controls were reported effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether revenue and margin growth persist, particularly given order timing, banking-sector exposure and the concentration of revenue in EMEA.
- Whether growth in Asia Pacific and cloud services can continue and become a meaningful, recurring contribution.
- How currency movements affect reported revenue, costs and margins, and the tax rate as geographic earnings mix changes.
- The final outcome, collectability and accounting treatment of the DigiNotar court awards, including appeals and accrued interest.
- The filing’s issuer identity: this 10-Q is for VASCO Data Security International, Inc.; confirm that it is the intended filing for any Onespan-related review.