Onespan Inc. quarterly report, Q1 FY2014

Business Context and Reporting Period

VASCO Data Security International, Inc. (the registrant named in this filing; the request identifies Onespan Inc.) reported unaudited results for the three months ended March 31, 2014, compared with Q1 2013. VASCO designed and sold hardware and software authentication and access-security products and offered cloud-based authentication services. Amounts below are in millions of U.S. dollars unless stated otherwise.

Financial Performance and Position

MetricQ1 2014Q1 2013 or prior date
Revenue$38.823$35.365
Gross profit / margin$25.796 / 66.4%$23.087 / 65.3%
Operating income / margin$3.891 / 10.0%$2.715 / 7.7%
Continuing-operations net income$3.526$2.412
Net income, including discontinued operations$3.510$2.786
Diluted EPS$0.09$0.07
Operating cash flow, continuing operations$11.327$0.420
Cash and equivalents at period end$109.492$98.607 at Dec. 31, 2013
Working capital$127.739$124.539 at Dec. 31, 2013
Total liabilities$37.617$37.599 at Dec. 31, 2013

Revenue increased 10%; gross profit rose 12%, and operating income increased 43%. Gross margin improved by about 1.1 percentage points. Net income from continuing operations rose about 46%; total net income was up about 26%, partly because Q1 2013 included income from discontinued operations. The filing presents no borrowings as a separate balance-sheet line; cash substantially exceeded reported liabilities.

Cash increased $10.885 during the quarter. Operating cash flow benefited significantly from a $7.082 reduction in receivables. Investing activities used $0.404, principally for property and equipment; financing activities used $0.037. Management said resources were adequate for operating needs over the next 12 months. No material change in market risk was reported.

Material Changes Versus Prior Comparable Period

  • Revenue growth reflected increases of 6% in Banking and 27% in Enterprise and Application Security. Banking represented 81% of revenue; Enterprise and Application Security represented 19%.
  • EMEA revenue rose 22% to $26.757 million and accounted for 69% of revenue. Asia Pacific revenue increased 39%; U.S. revenue declined 25%, and revenue from Other Countries declined 42%.
  • Non-hardware revenue was approximately 30% of total, versus 29%. The higher mix of Enterprise and Application Security and non-hardware offerings supported gross-margin improvement; increased card-reader sales and competitive pricing partly offset it. Card readers were 21% of revenue, up from 16%.
  • Operating expenses rose 8%, including $1.026 million of incremental Cronto acquisition-related operating and amortization costs. Purchased-intangible amortization increased $0.679 million.
  • The effective tax rate was 19%, versus 17%, and management expected a 19% rate for 2014. Other income was $0.438 million versus $0.149 million, including foreign-exchange transaction gains of $0.159 million compared with losses of $0.092 million.
  • Q1 2014 included a $0.016 million loss from discontinued operations, versus $0.374 million income in Q1 2013. The prior-year result included a gain related to reassessed DigiNotar claims and balances.

Outlook, Commentary, Risks, and Contingencies

  • Management expected DPS/MDP cloud authentication services to make a small contribution in 2014 and described significant longer-term growth potential; revenues from the platform had been minimal to date.
  • Management characterized the business as transactional, with quarter-to-quarter results affected by order and shipment timing, and cautioned that longer-term trends better reflect business strength. It viewed European conditions as stabilizing and improving but warned that a downturn could materially affect results.
  • Key risks include reliance on the European banking market, a concentrated product and customer base, competition and pricing pressure, rapid technology change, evolving regulation, and foreign-exchange exposure. Approximately 94% of Q1 2014 revenue and 82% of operating expenses were generated outside the United States. Currency movements increased reported revenue by an estimated $0.253 million and operating expenses by $0.310 million versus Q1 2013.
  • Management said a cybersecurity incident affecting its cloud services could materially harm future growth, finances, or reputation. It reported regular security reviews and noted that it did not carry cyber-incident insurance at the time.
  • DigiNotar B.V. remained in bankruptcy and discontinued operations. A Dutch court was scheduled to rule on VASCO and other parties’ claims on May 7, 2014, but the timing and outcome were uncertain. Q1 2014 discontinued-operations costs primarily reflected legal and third-party expenses.
  • Of $53.278 million of cash held outside the United States, $52.583 million was not subject to repatriation restrictions but could incur taxes upon repatriation. The company treated approximately $54.313 million of unremitted foreign earnings as permanently invested.

Important Facts for Investors to Verify

  • Confirm the issuer and reporting-entity identity: this 10-Q is filed by VASCO Data Security International, Inc., not under the Onespan name specified in the request.
  • Assess whether revenue growth and cash generation are repeatable, given management’s warning about transaction timing and the quarter’s substantial receivables-related cash inflow.
  • Track geographic and market concentration, particularly EMEA and Banking, along with card-reader mix and related margin pressure.
  • Monitor DPS/MDP adoption and revenue contribution against management’s 2014 outlook, and evaluate cybersecurity controls and exposure.
  • Follow the DigiNotar proceedings, potential claims and recoveries, and related legal costs; the filing did not establish the eventual outcome.
  • Review foreign-cash tax and repatriation implications, foreign-exchange exposure, and the assumptions supporting the expected 19% tax rate.