OneSpan Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. OneSpan provides identity and authentication security, e-signature, and related digital-agreement solutions. Its two reportable segments are Digital Agreements and Security Solutions.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $57.6 million | $52.4 million | Up 10%; foreign exchange reduced 2023 revenue by approximately $1.3 million. |
| Gross profit / margin | $39.3 million / 68% | $36.7 million / 70% | Gross profit up 7%; margin down 2 percentage points, primarily from product and customer mix and higher freight costs. |
| Operating loss | $(8.1) million | $(9.2) million | Improved by $1.1 million. |
| Net income (loss) | $(8.4) million | $5.2 million | Prior-year earnings included a $14.8 million gain on sale of the Promon investment. |
| Diluted EPS | $(0.21) | $0.13 | 2023 diluted shares exclude anti-dilutive equivalents. |
| Adjusted EBITDA (non-GAAP) | $(1.6) million | $0.2 million | Declined amid higher sales and marketing investment, executive compensation and FX headwinds. |
| Operating cash flow | $13.2 million | $3.7 million | 2023 cash generation benefited from lower receivables; lower deferred revenue and higher inventory were offsets. |
Revenue and segments
- Digital Agreements: Revenue was $11.6 million, down 13%; operating loss was $6.0 million versus operating income of $1.1 million. Lower on-premises subscription revenue, including non-renewals and the sunsetting of an on-premises e-signature product, was partly offset by cloud subscription expansion. Gross margin fell to 73% from 77%.
- Security Solutions: Revenue was $46.1 million, up approximately 18%; operating income rose to $15.6 million from $7.7 million. Growth was driven by on-premises term subscriptions and existing-customer expansion. Hardware volumes and maintenance revenue partly offset growth. Management noted Q1 benefited from the timing of certain renewals and expects comparatively more modest segment revenue growth for the remainder of 2023. Gross margin was 67% in both periods.
- Revenue by category included $30.0 million subscription, $11.2 million maintenance and support, $1.6 million professional services and other, and $14.9 million hardware products. Total subscription revenue increased from $23.3 million in Q1 2022.
- Revenue by region: EMEA $27.8 million, Americas $20.5 million, and APAC $9.3 million. APAC declined 10% year over year.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $106.5 million at March 31, 2023, versus $96.2 million at year-end 2022; restricted cash was $1.0 million. Working capital was $79.3 million, down from $87.6 million at year-end.
- Cash, cash equivalents and restricted cash increased $10.2 million during the quarter. Investing activities used $2.5 million, including $3.1 million of property and equipment additions and the ProvenDB acquisition, partly offset by investment maturities. Financing activities used $1.1 million, mainly for taxes on stock issuances.
- Total liabilities were $118.0 million. The balance sheet does not show conventional borrowings; lease liabilities totaled $10.2 million, including $8.1 million long-term. Management believes available financial resources are adequate for operating needs over the next 12 months.
- Cash and cash equivalents held outside the U.S. totaled $64.2 million; $63.6 million was not subject to repatriation restrictions, though it may be subject to tax upon repatriation.
Strategy, outlook and risks
- The company is pursuing a three-year transformation plan launched January 1, 2023, targeting faster Digital Agreements growth, a stronger enterprise go-to-market approach, operating efficiencies, margin expansion and higher profitability. Security Solutions is intended to be managed for cash flow.
- Management reported ARR of $141.3 million at March 31, up 10% year over year, and net retention rate of 108%, down from 115%. ARR is a company-defined operating metric, not a revenue forecast.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expects sales and marketing investment to rise to support the transformation and product development; it also expects additional restructuring costs through 2025.
- Macroeconomic uncertainty, customer spending scrutiny and longer sales cycles remain concerns. Other cited risks include execution of the transformation, customer retention and concentration, competition, cybersecurity, product reliability, supply-chain and component constraints, foreign exchange, and acquisition execution.
- Q1 operating expense comparisons include increased sales and marketing costs and stock-based and incentive compensation ($3.9 million versus $1.2 million). R&D expense declined partly because $2.8 million of costs were capitalized for the cloud platform and Digital Agreements products. Segment expense allocations changed in 2023, limiting direct segment operating-income comparability.
- OneSpan acquired substantially all ProvenDB assets for $2.0 million, including $1.8 million paid at closing and $0.2 million held back. Purchase accounting remained preliminary. Legal contingencies included a $1.6 million accrual within a probable loss range of $1.6 million to $2.0 million; management did not expect legal matters to materially affect results or financial condition.
Important facts for investors to verify
- Whether Digital Agreements cloud growth can offset declining on-premises revenue and its operating loss, considering the 2023 segment cost-allocation change.
- Whether Security Solutions’ Q1 growth, which benefited from renewal timing, persists despite management’s more modest growth outlook for the rest of 2023.
- Trends in ARR, net retention, deferred revenue and customer renewals, along with the impact of longer sales cycles.
- Whether investment in sales, marketing and the cloud platform delivers revenue growth and margin improvement while adjusted EBITDA is negative.
- Cash conversion and working-capital trends, hardware and freight cost pressures, restructuring payments, and final purchase-price allocation for ProvenDB.