Business context and reporting period
VASCO Data Security International, Inc. (the registrant named in this filing; the request identifies Onespan Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. VASCO develops and sells hardware and software security and authentication products and services. All dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 or prior period |
|---|---|---|
| Revenue | $65.135 | $38.823 |
| Gross profit / margin | $37.674 / 57.8% | $25.796 / 66.4% |
| Operating income / margin | $16.077 / 24.7% | $3.891 / 10.0% |
| Net income from continuing operations | $13.657 | $3.526 |
| Total net income | $13.634; diluted EPS $0.34 | $3.510; diluted EPS $0.09 |
| Cash from continuing operations | $12.287 | $11.327 |
| Cash and equivalents | $74.207 | $72.441 at Dec. 31, 2014 |
| Short-term investments | $74.879 | $64.940 at Dec. 31, 2014 |
| Current assets / current liabilities | $217.365 / $42.505 | $206.226 / $45.197 at Dec. 31, 2014 |
Revenue rose 68% year over year. Banking revenue increased 83% to $57.270 million and represented 88% of sales; Enterprise and Application Security revenue rose 5% to $7.865 million. EMEA generated 73% of revenue. The company reported a 14% expected effective tax rate for 2015, versus 19% in Q1 2014. It had no outstanding debt, reported working capital of $174.860 million and a current ratio of 5.1 to 1.0 at quarter-end. Cash and short-term investments totaled $149.086 million.
Material changes versus the prior comparable period
- Revenue growth was driven in part by delivery of Cronto-enabled card readers to Rabobank; Rabobank sales exceeded 30% of Q1 revenue. Management said sales to all other customers combined grew more than 15% year over year.
- Operating income increased substantially, while gross margin fell 8.6 percentage points. Management attributed the margin decline to lower-margin banking card readers, unfavorable product and market mix, a lower share of non-hardware sales, and currency effects.
- Card readers were 45% of revenue, compared with 21% a year earlier. The company noted card-reader margins are generally 25–35 percentage points below other hardware margins.
- Operating expenses declined 1% to $21.597 million. Average headcount fell 5% to 375; stock-based and long-term incentive expense increased to $1.159 million from $0.642 million.
- Cash from operations increased to $12.287 million. Investing cash outflow was $10.277 million, reflecting $39.871 million of short-term investment purchases and $29.931 million of maturities, among other items.
- Currency movements weighed on results: the stronger U.S. dollar reduced estimated revenue by $2.701 million and operating expenses by $2.143 million. Foreign-currency transaction loss was $0.617 million versus a $0.159 million gain; translation adjustment reduced comprehensive income by $3.544 million.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management said it expects difficult economic conditions in Europe in 2015, but did not expect them to significantly affect the Banking market; it cautioned that Europe is a major market and that business can be volatile from quarter to quarter because of transaction timing.
- Management expects adequate financial resources to meet operating needs for the next 12 months. The Rabobank reader order was scheduled for completion in Q3 2015; its contribution makes customer and shipment concentration important to monitor.
- Risks cited include customer and product concentration, competitive pricing, dependence on banking and European markets, foreign-exchange exposure, evolving technology and cybersecurity threats. The company warned that an incident affecting its newer hosted authentication services could materially harm growth and reputation; it reported no significant revenue from those offerings at the time.
- In January 2015, VASCO received notice of a potential trustee claim against former and current DigiNotar directors. VASCO said it believed it had strong defenses, indemnified three directors, notified its D&O insurer, and did not expect a material adverse effect. DigiNotar-related discontinued operations recorded a $0.023 million loss in the quarter.
- VASCO was evaluating the impact and adoption method for the new revenue standard, ASU 2014-09, effective for the company in 2017. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the filing is the intended company and period: it is filed by VASCO Data Security International, Inc. for Q1 2015.
- How much of reported growth depends on Rabobank shipments and whether the order completes on schedule, given its contribution of more than 30% of quarterly revenue.
- Whether lower gross margins persist as card-reader sales and Banking-market mix remain high, and whether non-hardware revenue recovers as a share of sales.
- How currency movements, particularly the euro, affect revenue, expenses, cash held abroad and reported comprehensive income.
- Developments in the DigiNotar trustee matter, and any material changes to the company’s cybersecurity exposure, tax position or revenue-recognition estimates.