Business context and reporting period
VASCO Data Security International, Inc. (the issuer named in this filing; the request identifies Onespan Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. VASCO develops hardware and software security products and authentication services. Unless otherwise stated, amounts below are in U.S. dollars, millions.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $37.3 | $46.6 | $72.6 | $78.9 |
| Gross profit / margin | $23.9 / 64.1% | $29.5 / 63.1% | $47.0 / 64.7% | $51.3 / 65.0% |
| Operating income / margin | $1.9 / 5.2% | $9.0 / 19.3% | $4.6 / 6.4% | $11.2 / 14.2% |
| Net income | $1.8 | $7.2 | $4.6 | $9.1 |
| Diluted earnings per share | $0.05 | $0.18 | $0.12 | $0.23 |
- Operating cash flow from continuing operations was $1.6 million for the first half of 2013, versus $2.7 million a year earlier. Investing cash outflow was $19.5 million, mainly for the Cronto acquisition. Cash declined by $20.8 million to $85.6 million from year-end 2012.
- At June 30, cash was $85.6 million, working capital was $112.5 million, total assets were $189.6 million, and total liabilities were $30.4 million. The balance sheet reports no debt balance; it does not provide a separate debt discussion.
- Inventory increased to $25.5 million from $18.7 million at year-end, including a substantial rise in component parts. VASCO reported purchasing about $9.9 million of end-of-life processors during the first half and firm commitments for another $1.3 million for the rest of 2013.
Material changes versus the prior comparable period
- Q2 revenue fell 20%; first-half revenue fell 8%. Q2 Banking revenue declined 21%, and Enterprise and Application Security revenue declined 18%. For the first half, those markets declined 5% and 19%, respectively.
- EMEA accounted for 65% of Q2 revenue and 64% of first-half revenue. Asia Pacific revenue decreased 24% in Q2 and 26% for the first half. U.S. revenue was largely unchanged.
- Despite a slightly higher Q2 gross margin, operating income fell sharply as lower revenue was accompanied by operating costs rising 7% in Q2 and 6% in the first half. Average headcount increased, while lower incentive-plan costs partly offset expense growth.
- VASCO acquired all of Cronto Limited on May 20, 2013. Cash paid at closing was approximately $19.5 million, with a subsequent purchase-price adjustment; recognized consideration was $20.2 million. The deal added $9.2 million of goodwill and $13.2 million of intangible assets, and includes up to €2.0 million of contingent consideration tied to orders through May 20, 2015.
- Cash decreased primarily due to the acquisition and processor purchases. Foreign-currency translation reduced first-half comprehensive income by $2.3 million; management said exchange-rate changes did not significantly affect revenue or operating expenses in the period.
Outlook, commentary, risks and unusual items
- Management expected DPS/MDPC, its cloud-based authentication platform, to begin contributing to revenue in 2014; it reported minimal service-platform revenue to date. Management also planned to focus on non-hardware sales, which it expected to represent a growing share of revenue.
- Management believed financial resources were adequate for operating needs over the next 12 months. It expected a 2013 effective tax rate below 2012’s rate; the first-half rate was 17%, versus 21% in the prior-year period.
- Risks highlighted include European economic and banking conditions, dependence on banking customers and a relatively small number of products, customer and supplier concentration, competition and pricing, technology change, cyberattacks, and foreign-exchange movements. Management noted a cyber incident involving cloud services could materially harm future growth and reputation.
- DigiNotar B.V. remains in bankruptcy and discontinued operations. Q2 2013 included a $0.04 million after-tax loss; first-half discontinued operations showed $0.33 million of income, reflecting a change in estimated settlement costs. The filing notes claims and counterclaims in the Netherlands, without quantifying possible outcomes.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material change in market risk during the period.
Important facts for investors to verify
- Whether the substantial revenue declines continued after Q2, particularly in Banking and Enterprise and Application Security and in EMEA and Asia Pacific.
- Cronto’s subsequent contribution, integration costs and synergies, and whether the order-based earnout becomes payable.
- Inventory recoverability and execution of the remaining end-of-life processor purchase commitments.
- Actual launch, adoption and monetization of DPS/MDPC, including the 2014 contribution expectation.
- Potential financial exposure from DigiNotar bankruptcy claims and counterclaims, and the recoverability of discontinued-operation assets.
- Cash availability and potential repatriation taxes: $61.8 million was held outside the U.S., of which $61.3 million was not subject to significant repatriation restrictions but could incur taxes if repatriated.