Business context and reporting period
This is VASCO Data Security International, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, with unaudited quarterly results including Q4. The filing is not issued under the Onespan name. VASCO designs and sells authentication, digital-signature and access-security products and services, principally to financial institutions. Banking represented 83% of 2014 revenue; EMEA represented 64%.
All financial amounts below are in U.S. dollars; unless stated otherwise, figures are millions. The filing presents annual results and selected Q4 results, not a standalone quarterly 10-K.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $201.5 | $155.0 |
| Gross profit / margin | $127.8 / 63.4% | $99.9 / 64.4% |
| Operating income / margin | $38.1 / 18.9% | $13.7 / 8.8% |
| Continuing-operations net income | $32.6 | $11.0 |
| Net income, including discontinued operations | $33.5 | $11.1 |
| Diluted EPS | $0.85 | $0.28 |
| Cash from operating activities | $38.8 | $10.3 |
- Revenue grew 30%; Banking revenue increased 33% to $168.1 million and Enterprise and Application Security revenue increased 18% to $33.5 million.
- At year-end, cash and equivalents were $72.4 million and short-term investments were $64.9 million, for $137.4 million in combined balances. The company reported no debt, working capital of $161.0 million and a 4.6:1 current ratio.
- Capital expenditures were $1.5 million. Investing cash outflow was $67.8 million, principally reflecting $65.0 million net purchases of short-term investments.
- Q4 revenue was $62.4 million versus $43.3 million in Q4 2013; operating income was $12.7 million versus $4.0 million. Q4 net income was $11.9 million versus $3.2 million, including a $0.9 million discontinued-operations gain in 2014.
Material changes versus the prior comparable period
- Growth was driven by Banking-market hardware and non-hardware sales, including card readers incorporating CrontoSign technology and mobile solutions. Risk IDS, acquired in May 2014, added risk-based authentication capabilities.
- Gross margin declined by about one percentage point. Card readers were 25% of revenue, versus 14% in 2013, and generally carry lower margins; Banking hardware margins also fell.
- Operating income rose faster than revenue as operating costs declined as a share of revenue. Research and development expense fell 9% to $19.5 million, partly reflecting lower headcount and completion of the Australian engineering-site consolidation.
- Foreign-exchange transaction losses increased to $1.4 million from $0.6 million; currency translation produced a $4.5 million comprehensive loss, compared with a $1.9 million gain in 2013.
- The effective tax rate fell to 14% from 22%, largely due to a greater share of earnings in lower-tax Switzerland. The $0.9 million discontinued-operations gain included the DigiNotar settlement.
Outlook, commentary and risks
- Management gave no specific numerical revenue or earnings guidance. It expected 2015 gross margin as a percentage of revenue to be lower than 2014 because year-end backlog included substantial lower-margin card-reader shipments; growth in non-hardware products could partly offset this effect.
- Year-end backlog was approximately $113 million, compared with $42 million a year earlier; management expected substantially all of it to ship in 2015, while cautioning that backlog can change significantly with large orders or shipment changes.
- Management expected to increase headcount in 2015, especially in sales, marketing and research and development, to support newer products and growth initiatives. It described European economic conditions as likely to remain difficult.
- Revenue concentration is significant: the top ten customers generated 46% of 2014 revenue; HSBC contributed 11% and Rabobank 12%. Rabobank’s contribution included a large card-reader order scheduled to ship through Q3 2015. HSBC has no long-term purchase commitment.
- Other key exposures include dependence on a small number of hardware manufacturers and suppliers, inventory and order-timing risk, intense competition and pricing pressure, foreign-currency movements, and potential cybersecurity, product-liability and intellectual-property claims. DPaaS and MYDIGIPASS revenue remained minimal despite management’s expectation of potential growth.
- Contractual obligations totaled $50.8 million, including $40.1 million of purchase obligations, primarily for inventory. Management stated that financial resources were adequate for operating needs over the next twelve months.
- In November 2014, VASCO settled claims relating to DigiNotar for €2.263 million; part of the proceeds was recorded as discontinued-operations income. In January 2015, a trustee notified former DigiNotar directors of a potential claim; management said it believed it had strong defenses and did not expect a material adverse effect.
- KPMG issued an unqualified opinion on the financial statements and internal controls. Management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Whether the large 2014 Banking and card-reader orders, particularly Rabobank shipments, convert to revenue on schedule and at the expected margins.
- Whether customer concentration changes, including HSBC’s purchasing activity and the repeatability of large orders.
- Whether 2015 gross-margin pressure is offset by higher-margin software, maintenance, mobile and cloud-service revenue.
- How the $113 million backlog develops, and whether inventory, purchase commitments or delivery rescheduling create write-down or cash-flow risk.
- Whether the DigiNotar potential claim, tax exposures and foreign-exchange movements result in additional costs or financial impact.
- The filing identifies the CFO’s intention to retire; verify any subsequent succession or management updates.