OneSpan Inc. — Q1 2021 Form 10-Q
Business context and period: OneSpan develops identity, security and digital transaction solutions, including hardware authentication products, software licenses, subscriptions, maintenance and professional services. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $50.8 | $56.4 | Down 10% |
| Gross profit / margin | $35.5 / 70% | $40.3 / 71% | Profit down 12%; margin down 1 point |
| Operating income (loss) | $(9.3) | $0.8 | Turned to loss |
| Net income (loss) | $(9.2) | $0.004 | Turned to loss |
| Operating cash flow | $3.6 | $(2.4) | Improved by $5.9 |
| Cash and equivalents at period end | $70.8 | $88.4 at Dec. 31, 2020 | Down $17.6 |
| Short-term investments at period end | $44.4 | $26.9 at Dec. 31, 2020 | Up $17.5 |
| Working capital | $122.2 | $131.9 at Dec. 31, 2020 | Down $9.7 |
Cash, cash equivalents and short-term investments totaled approximately $115.2 million at March 31, 2021. The filing reports no borrowings; it does report lease liabilities, including $11.7 million long-term and $14.4 million total lease liabilities. Management said available financial resources were adequate for operating needs over the next 12 months. Cash used in investing was $18.4 million, mainly reflecting purchases and maturities of short-term investments; financing cash use was $2.1 million, primarily taxes withheld on restricted stock issuances.
Material changes and management commentary
- Product and license revenue fell 26% to $28.4 million, including software license revenue down 42% to $10.8 million and hardware revenue down 10% to $17.7 million. Management attributed weakness to pre-pandemic software demand in Q1 2020 and lower hardware demand as customers shift to electronic solutions.
- Services and other revenue rose 23% to $22.3 million. Subscription revenue increased 47% to $8.4 million; maintenance, support and other revenue rose 14% to $12.5 million. Recurring revenue increased 12% to $28.2 million.
- Regional revenue decreased 20% in EMEA to $27.0 million and 30% in APAC to $7.3 million, while Americas revenue rose 34% to $16.5 million, driven by subscriptions.
- Operating costs increased 13% to $44.7 million. Sales and marketing rose 24% and research and development rose 23%, primarily reflecting higher personnel costs and investment; average headcount increased in both functions. General and administrative costs were up 2%. Lower amortization partly offset these increases.
- Gross margin was 70% versus 71%; lower product and license margins, largely due to mix, were partly offset by higher services margins. Management estimated currency changes increased revenue by about $2.2 million and, absent those changes, Q1 2021 gross margin would have been approximately 4.3 percentage points lower.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance was provided. Management expects to invest in sales resources and future solutions and said it believes the company is positioned for long-term growth, while cautioning that pandemic duration and effects cannot be reliably estimated.
- COVID-19-related risks include weaker demand, longer sales cycles, delayed software implementations, pressure for discounts or extended payment terms, customer financial distress and potential supply-chain disruption. The company said pandemic effects had particularly affected hardware authentication demand and project timing.
- The company revised Q1 2020 comparative financial statements for immaterial errors involving certain term-based software license contracts and related services. As revised, prior-period revenue was reduced by $0.122 million and net income by $0.094 million, to $0.004 million. Management concluded the errors were not material to previously issued periods.
- The Q1 2021 net loss included a $0.5 million income tax benefit; the company noted that losses in some jurisdictions did not generate tax benefits. Its estimated annual effective tax rate before discrete items was approximately 6%, based on an expected full-year pretax loss.
- A securities class action was dismissed without prejudice on April 28, 2021. A related derivative action remained stayed, and a second derivative complaint filed April 2, 2021 had not yet been served, according to the filing. Management stated it could not estimate reasonably possible losses for proceedings unless otherwise indicated.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level and no material change in internal control over financial reporting occurred during the quarter. The filing nevertheless describes the prior-period financial statement revisions.
Most important facts for investors to verify
- Whether the steep decline in software license and hardware sales is stabilizing, and whether recurring subscription and maintenance growth can offset it.
- Whether elevated sales and R&D spending and headcount translate into improved growth and operating profitability.
- Cash generation, investment maturities and the trend in working capital, alongside lease obligations and cash held outside the United States.
- COVID-19 impacts on demand, implementation timing, hardware supply and customer payment behavior, as well as currency exposure.
- Developments in the related shareholder litigation and any future reporting or control implications from the immaterial prior-period revisions.