Onespan Inc. (then VASCO Data Security International, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 4, 2017. Financial amounts below are in millions of U.S. dollars unless stated otherwise. The filing reports the company as a single operating segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $41.965 | $46.767 | Down 10% |
| Gross profit / margin | $29.912 / 71.3% | $32.104 / 68.6% | Profit down 7%; margin up |
| Operating income / margin | $0.302 / 0.7% | $3.115 / 6.7% | Down 90% |
| Net income | $0.573 | $2.199 | Down 74% |
| Diluted earnings per share | $0.01 | $0.06 | Down |
| Cash from operating activities | $1.707 | $3.149 | Down 46% |
Product and license revenue fell to $31.561 million from $38.731 million, while services and other revenue rose to $10.404 million from $8.036 million. The filing’s geographic table gives 2017 revenue as $41.966 million, one thousand dollars above the statement of operations; the text does not explain the difference.
Sales and marketing expense increased 6% to $13.702 million and research and development increased 5% to $5.856 million; general and administrative expense declined 5% to $7.853 million. Average headcount was 10% higher year over year. The estimated 2017 annual tax rate before discrete items is 42%, versus a 28% estimate for 2016; the filing attributes the higher rate primarily to valuation allowances on losses, especially in Canada.
Liquidity, cash flow and balance sheet
- Cash and equivalents were $56.278 million and short-term investments were $89.698 million at March 31, 2017, together $145.976 million. The company reported no debt or restricted cash.
- Working capital was $142.431 million, up $3.232 million from year-end 2016. Current assets totaled $209.398 million and current liabilities $66.967 million.
- Operating cash flow was $1.707 million. Investing activities provided $5.127 million, mainly reflecting net maturities of short-term investments; financing activities used $0.154 million. Cash increased $6.933 million to $56.278 million.
- Management said financial resources were adequate for operating needs over the next 12 months. $32.065 million of cash and short-term investments were held outside the U.S.; $31.781 million was not subject to repatriation restrictions but could incur taxes upon repatriation.
Material changes and management commentary
- Revenue declined 10%. EMEA revenue was down 10%, with management citing lower Rabobank revenue; Rabobank was less than 1% of total revenue versus 7% a year earlier. Americas revenue increased 61%, primarily due to non-hardware products including eSignLive. APAC revenue decreased 39%, primarily due to lower hardware revenue.
- Gross margin improved as hardware, including lower-margin card readers, represented a smaller share of revenue. Non-hardware products were 52% of revenue versus 36% a year earlier. Management estimated currency movements reduced revenue by about $0.795 million and operating expenses by about $0.645 million year over year.
- Management cautioned that revenue can be volatile because order timing and shipments affect quarterly results, and said longer-term performance is more informative than a single-quarter comparison. No full-year revenue or earnings guidance is provided.
- The company revised the reported Q1 2016 comparative figures to correct previously disclosed immaterial errors. The filing says cost of goods sold increased by $1.824 million, with corresponding changes to gross profit and operating expenses.
Risks, contingencies and unusual items
- Controls: Disclosure controls and procedures were deemed ineffective as of March 31, 2017 because of a material weakness in internal control over financial reporting related to the acquisition and integration of Silanis Technology. Management was implementing a remediation plan and expected completion in 2017.
- Legal matters: OFAC had not responded to the company’s voluntary disclosure concerning possible distributor diversion of products to Iran. The company had accrued $0.9 million for a potential penalty; the amount and outcome remained uncertain. BIS had issued a no-action letter.
- A securities class action remained pending; defendants moved to dismiss on March 31, 2017. Related derivative actions were stayed, while one related action had been dismissed with prejudice as to the named plaintiff’s individual claims.
- A Japanese patent infringement suit involving a reseller and end customers concerned CRONTO technology. The company had indemnification obligations and said an adverse outcome restricting use or sales could materially affect business and results.
- Management identified cyber incidents affecting hosted services that process customer information as a potential material business risk. Other cited risks include economic and banking conditions in Europe, currency fluctuations, competition, changing technology, customer concentration, and eSignLive integration and synergy execution.
Important facts for investors to verify
- Whether the revenue decline—especially in APAC hardware and the Rabobank comparison—is temporary or indicative of demand trends.
- Progress in restoring operating profitability as expenses and headcount remain elevated relative to revenue.
- Whether the 42% estimated annual tax rate and foreign tax asset valuation allowances change as geographic earnings develop.
- Remediation and testing of the material weakness in internal controls, including any effects on future reporting.
- Resolution of the OFAC review, securities and derivative litigation, and the CRONTO-related patent case, including potential financial exposure.
- The eventual effect and transition method for adopting the new revenue recognition standard, which the company expected to adopt in Q1 2018.