Business context and reporting period
The supplied filing is VASCO Data Security International, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013; it does not identify Onespan Inc. as the registrant. VASCO designed and sold hardware and software authentication and security products and was developing cloud-based services. Amounts below are in thousands of dollars, except per-share data and percentages.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $35,365 | $32,258 |
| Gross profit / margin | $23,087 / 65.3% | $21,878 / 67.8% |
| Operating income / margin | $2,715 / 7.7% | $2,215 / 6.9% |
| Continuing-operations net income | $2,412 | $1,994 |
| Net income, including discontinued operations | $2,786 | $1,910 |
| Diluted EPS | $0.07 | $0.05 |
| Cash from continuing operations | $420 | $7,998 |
- Revenue increased 10% year over year. Banking revenue rose 19% to $29,440, while Enterprise and Application Security revenue fell 21% to $5,925.
- Gross margin declined 2.5 percentage points, reflecting a greater share of lower-margin Banking sales, more card-reader revenue, and lower non-product costs partly offsetting those pressures.
- Operating costs increased 4% to $20,372. Average headcount rose 5% to 379; stock-based compensation fell to $754 from $1,078.
- Working capital was $130,926 at March 31, 2013. Cash and equivalents were $104,644, down $1,825 from year-end 2012. The company reported no borrowings in the balance sheet; total liabilities were $27,841.
- Cash from continuing operations was substantially lower than in the prior-year quarter, notably with less cash provided by receivables and a $2,424 deferred-compensation payment. Cash was also affected by a $1,481 adverse currency effect. Investing activities provided $87 and continuing-operations financing used $687.
Material changes, outlook, and risks
- EMEA, 62% of revenue, grew 14%; Asia Pacific revenue declined 29%. Management attributed quarterly swings partly to order and shipment timing and noted weaker new-order intake than in the comparable 2012 period, though similar to Q1 2011.
- Management expected its 2013 effective tax rate to be about 17%, compared with 21% in Q1 2012, primarily reflecting the geographic mix of earnings. No revenue or earnings guidance was provided.
- VASCO said it expected its cloud offerings, DIGIPASS as a Service and MYDIGIPASS.COM, to begin contributing revenue in 2013; revenue had been minimal to date. Management saw potential for future growth but also described security incidents affecting these services as a potentially material business risk.
- The company reported $5 million of purchases of end-of-life processors in Q1 and firm commitments for another $7 million during the rest of 2013. It believed resources were adequate for operating needs over the next twelve months, while cautioning that prolonged customer order delays could require cost reductions or other restructuring.
- Foreign currency translation produced a $2,259 comprehensive loss in Q1 2013, versus $2,087 of comprehensive income in Q1 2012. Transaction currency losses were $92, compared with gains of $95.
- Discontinued operations relate to bankrupt Dutch subsidiary DigiNotar B.V. Q1 2013 included $374 of income from discontinued operations; reassessment of estimated claim and balance settlements produced a $485 net-of-tax gain. Claims and counterclaims remain part of the bankruptcy process.
- Other disclosed risks include European economic weakness, customer and product concentration, competition and pricing pressure, rapidly changing security technology, cyberattacks, and currency fluctuations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Confirm that VASCO Data Security International, Inc.—not Onespan Inc.—is the intended issuer and filing.
- Review the sharp year-over-year decline in operating cash flow and the effects of working-capital movements and currency translation.
- Assess whether the lower gross margin and weaker Enterprise and Application Security sales persisted beyond this quarter.
- Track order intake, the promised 2013 contribution from cloud services, and the processor purchase commitments.
- Review the status and potential remaining costs or recoveries from DigiNotar’s bankruptcy and related claims.
- Consider the availability and tax consequences of foreign cash; the filing says most foreign cash was not restricted from repatriation but could incur tax, and was considered permanently invested.