Business context and reporting period
VASCO Data Security International, Inc. (the registrant named in this filing; metadata identifies Onespan Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. It designs and sells hardware and software security and authentication products and services, including DIGIPASS and its cloud-based DIGIPASS as a Service (DPS). Unless noted otherwise, financial amounts below are in $ millions; the statements present amounts in thousands.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $32.258 | $36.065 | Down 11% |
| Gross profit / margin | $21.878 / 67.8% | $22.627 / 62.7% | Profit down 3%; margin up 5.1 pts |
| Operating income / margin | $2.215 / 6.9% | $4.188 / 11.6% | Down 47% |
| Continuing-operations net income | $1.994 | $3.647 | Down 45% |
| Net income, including discontinued operations | $1.910 | $2.500 | Down 24% |
| Basic / diluted EPS | $0.05 / $0.05 | $0.07 / $0.06 | Lower |
| Cash from continuing operations | $7.998 | $11.521 | Down 31% |
| Cash and equivalents, quarter-end | $93.377 | $86.022 | Up from Q1 2011; up $8.880 from Dec. 31, 2011 |
| EBITDA from continuing operations (non-GAAP) | $3.386 | $5.413 | Down 37% |
Higher gross margin reflected a greater mix of Enterprise and Application Security and non-hardware revenue, plus lower non-product costs, including freight. Operating costs increased 7% to $19.663 million, notably as R&D expense rose 23% and stock-based compensation increased to $1.078 million from $0.567 million. The effective tax rate was 21% in both periods.
At March 31, current assets were $144.141 million and current liabilities $31.446 million, yielding reported working capital of $112.695 million. The balance sheet lists no borrowings; total liabilities were $31.840 million. Cash included $75.252 million held outside the U.S.; $74.392 million was not subject to repatriation restrictions but could incur tax upon repatriation. Management said resources were sufficient for operating needs over the next 12 months.
Material changes versus the prior period
- Banking revenue fell 18% to $24.740 million, while Enterprise and Application Security revenue rose 29% to $7.518 million. Banking remained 77% of revenue, versus 84% a year earlier.
- EMEA revenue decreased 26% to $19.377 million and represented 60% of total revenue. Asia Pacific revenue increased to $6.552 million from $2.470 million; U.S. revenue rose to $2.926 million from $2.282 million.
- Management attributed the Banking and EMEA declines mainly to the timing of large orders and shipments, not a measurable deterioration in the economic environment. It reported stronger new-order intake than in the comparable 2011 period, while noting the opening backlog was lower.
- Operating cash flow declined, despite a $9.323 million cash inflow from accounts receivable. Inventory increased $3.534 million and deferred revenue declined $0.602 million, using cash.
- Cash increased partly due to $1.412 million of favorable exchange-rate effects. Translation adjustments added $2.087 million to other comprehensive income.
Outlook, risks, and unusual items
- No specific revenue or earnings forecast was provided. Management expected the 2012 effective tax rate to be about 21%, while cautioning that the rate could vary with the geographic mix of earnings.
- Management expected DPS to contribute limited revenue in 2012, though it sees potential for significant longer-term growth. It also expected Enterprise and Application Security revenue to increase in coming quarters if economic recovery continued.
- Management said quarterly results may vary substantially with the timing of large orders and rollouts. It considered the Banking-market decline temporary and reported a strong pipeline, but acknowledged that prolonged order delays could pressure revenue and cash receipts and require restructuring.
- Key risks include European banking and sovereign-debt uncertainty, customer concentration in banking, competition and pricing, dependence on products and suppliers, currency movements, and evolving cybersecurity threats. A cyber incident affecting cloud-based services could cause significant financial and reputational harm; the company said it did not then carry cyber-incident insurance.
- DigiNotar B.V., a Dutch subsidiary declared bankrupt in 2011, remained in discontinued operations. Q1 2012 included an $0.084 million loss on disposal; related assets were $2.554 million and liabilities $1.349 million. The FTC informed the company in March 2012 that its investigation of DigiNotar hacking incidents was complete and had not alleged wrongdoing by VASCO.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether stronger Banking-market orders convert into shipments and offset the decline in EMEA and total revenue.
- Whether Enterprise and Application Security growth and gross-margin improvement persist as the revenue mix changes.
- Whether lower operating cash flow, increased inventory, and working-capital movements affect cash generation in subsequent quarters.
- Potential tax consequences if foreign earnings are repatriated, and the sensitivity of the effective tax rate to geographic earnings mix.
- Remaining recoverability and obligations associated with discontinued DigiNotar operations, and the continued security and adoption of DPS.