Onespan Inc. (named VASCO Data Security International, Inc. in this filing) — Q1 2018 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. Unless noted, amounts below are in U.S. dollars and millions. The filing describes a single operating segment focused on identity, authentication, anti-fraud, digital transaction management and e-signature products and services.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $45.4 | $42.0 |
| Gross profit / margin | $34.7 / 76% | $29.9 / 71% |
| Operating income / margin | $1.6 / 4% | $0.3 / 1% |
| Net income | $1.8 | $0.6 |
| Diluted EPS | $0.04 | $0.01 |
| Cash from operations | $9.7 | $1.7 |
- Revenue grew 8% year over year. Product and license revenue rose 6% to $33.5 million; services and other revenue rose 15% to $11.9 million.
- Gross margin improved five percentage points, with management citing a higher mix of software solutions and lower product costs as hardware revenue declined.
- Operating expenses rose 12% to $33.0 million. General and administrative expense increased 37% to $10.8 million, primarily reflecting headcount, professional fees and facilities costs; professional fees included investment in internal systems.
- Cash and equivalents were $126.5 million and short-term investments were $40.0 million. The company reported no debt or restricted cash. Current assets were $228.3 million and current liabilities $57.4 million.
- Investing activities provided $37.7 million, including $40.0 million of investment maturities; capital expenditures were $2.3 million. Operating cash flow less capital expenditures was approximately $7.4 million.
- Management said financial resources were adequate for operating needs over the next 12 months. Cash held by foreign subsidiaries was $83.5 million and may be subject to tax upon repatriation.
Material changes and comparability
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Prior-year results were not restated, so reported period comparisons use different revenue-recognition rules.
- ASC 606 increased Q1 2018 reported revenue by $3.1 million. Without the new standard, Q1 revenue would have been $42.3 million, operating loss $2.3 million and net loss $1.1 million, versus reported revenue of $45.4 million and net income of $1.8 million.
- Adoption reduced opening accumulated income by $12.4 million, net of tax. The filing also reports a separate $0.5 million net-of-tax opening increase from adoption of the equity-investment measurement standard.
- Currency movements were also a notable factor: management estimated the weaker U.S. dollar increased Q1 revenue by approximately $1.9 million and operating expenses by approximately $1.6 million versus Q1 2017.
- Revenue by region: Americas increased 31% to $15.9 million; EMEA was essentially flat at $18.4 million; APAC declined 3% to $11.1 million.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management expects continued investment in sales resources, research and development, and infrastructure; operating costs may rise as the business grows.
- Management identifies demand, competition, pricing, technology changes, cybersecurity threats, customer concentration, suppliers, foreign exchange and economic conditions—particularly in European banking—as risks. It cautions that results for an interim period are not necessarily indicative of the full year.
- Cyber incidents affecting cloud and hosted services could materially impair growth, cause monetary losses or reputational harm. The company reported no significant business-impacting cyber incident in Q1 2018.
- The estimated 2018 annual tax rate before discrete items was 26%; tax accounting for the 2017 U.S. tax law remained provisional under SAB 118.
- An unresolved OFAC review concerns possible downstream resale of products to Iran. The company had accrued $0.9 million for potential penalties; the final amount, if any, could be higher or lower. BIS had issued a no-action letter.
- Other litigation includes a securities class action, related derivative matters, and patent claims. The company said it intended to defend the claims; certain outcomes and potential losses could not be estimated. A DigiNotar-related settlement entered in March 2018 was stated to be immaterial after third-party and insurance payments.
Investor facts to verify
- Assess underlying growth and profitability after separating ASC 606’s $3.1 million revenue benefit and the estimated $1.9 million currency benefit; prior-year figures were not restated.
- Review the durability and cash-conversion impact of term-license growth, including contract assets of $12.4 million and remaining performance obligations of $18.9 million disclosed under ASC 606.
- Monitor the increase in general and administrative costs and the company’s planned spending on systems, sales and product development.
- Track the unresolved OFAC review, the $0.9 million accrual and the status of the disclosed litigation.
- Consider foreign-currency exposure, the tax consequences of repatriating foreign cash and the future balance-sheet effects of lease accounting, which the company expected to adopt in 2019.