VASCO Data Security International, Inc. (now Onespan Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statement amounts below are in millions of dollars unless noted; the filing presents them in thousands. The filing was submitted under the name VASCO Data Security International, Inc.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $45.7 | $54.3 | $87.7 | $101.1 |
| Gross profit / margin | $32.0 / 70.1% | $36.6 / 67.3% | $62.0 / 70.7% | $68.7 / 67.9% |
| Operating income (loss) | $(0.4) | $3.4 | $(0.1) | $6.5 |
| Net income | $0.1 | $2.8 | $0.7 | $5.0 |
| Diluted earnings per share | $0.00 | $0.07 | $0.02 | $0.13 |
- Revenue declined 16% in Q2 and 13% in H1 year over year. Product and license revenue fell to $34.5 million in Q2 and $66.0 million in H1; services and other revenue rose to $11.2 million and $21.6 million, respectively.
- Operating costs were nearly flat year over year, but lower revenue reduced operating results to a Q2 loss and near break-even for H1. Gross margin improved, which management attributed primarily to product mix, including fewer low-margin card readers and a greater contribution from software and higher-margin hardware.
- H1 operating cash flow was $12.0 million, versus $14.9 million a year earlier. Cash and equivalents were $56.4 million and short-term investments $99.8 million at June 30; working capital was $152.4 million. The company reported no debt. Management said resources were adequate for operating needs over the next 12 months.
- Total assets were $329.0 million and stockholders’ equity $260.6 million at June 30. Deferred revenue was $30.6 million current, with an additional $7.5 million included in other long-term liabilities.
Changes, outlook, and risks
- Regional revenue performance diverged: Q2 EMEA revenue declined 10% and Asia Pacific declined 41%, while the Americas increased 31%. Management attributed declines mainly to lower hardware revenue; Americas growth reflected non-hardware offerings, including eSignLive. It cautioned that order and shipment timing makes quarterly comparisons volatile.
- The estimated 2017 annual tax rate before discrete items was 22%; Q2’s effective rate was 65%, affected by low pretax income and the mix of earnings by jurisdiction. No specific revenue or earnings guidance was provided.
- Management identified ongoing risks from economic conditions and banking-sector demand in Europe, currency movements, competition and technology changes, customer concentration, and cybersecurity incidents. It expects continued investment in security.
- Contingencies include an unresolved OFAC review related to potential distributor resales to Iran; the company had accrued $0.9 million for possible penalties and said the ultimate amount could differ. The BIS issued a no-action letter. Patent cases involving CRONTO technology in Japan and a separate U.S. patent suit remain unresolved; the company intends to defend them. A securities class action and a related derivative matter also remain in process; one derivative action was voluntarily dismissed.
- Disclosure controls were deemed ineffective at June 30 because of a previously identified material weakness relating to the Silanis acquisition and integration. Management was executing remediation and expected completion in 2017.
- The company planned to adopt the new revenue recognition standard in Q1 2018 using the cumulative-effect method. Its preliminary assessment indicated term-license revenue may be recognized earlier, upon delivery, and certain sales commissions capitalized; the impact remained under evaluation.
- 2016 comparative cost of goods sold, gross profit, and operating expense figures were revised for previously disclosed immaterial errors.
Investor verification priorities
- Review the drivers and durability of hardware revenue declines, particularly in Asia Pacific and EMEA, against growth in services and eSignLive.
- Check whether cash generation and working capital remain strong as deferred revenue and customer ordering patterns change.
- Track remediation of the material weakness and the company’s implementation assessment for the 2018 revenue standard.
- Monitor resolution and potential financial exposure from the OFAC review, patent litigation, and securities-related cases.
- Assess the gap between the reported quarterly tax rate and management’s annual estimate, including jurisdictional earnings mix.