VASCO Data Security International, Inc. (identified in request as OneSpan Inc.) — Q3 2014 Form 10-Q
Business and period: The filing is for the quarter ended September 30, 2014, and identifies the registrant as VASCO Data Security International, Inc. VASCO designs and sells hardware and software security and authentication products and services. Financial amounts below are in millions of U.S. dollars unless noted. The interim statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $52.633 | $39.156 | $139.111 | $111.782 |
| Gross profit / margin | $35.595 / 67.6% | $25.054 / 64.0% | $92.412 / 66.4% | $72.025 / 64.4% |
| Operating income / margin | $13.842 / 26.3% | $5.031 / 12.8% | $25.379 / 18.2% | $9.671 / 8.6% |
| Net income from continuing operations | $11.209 | $3.369 | $21.628 | $7.631 |
| Total net income | $11.163 | $3.322 | $21.560 | $7.917 |
| Diluted EPS | $0.28 | $0.08 | $0.55 | $0.20 |
- Growth drivers and mix: Revenue rose 34% in Q3 and 24% in the first nine months. Banking revenue grew 37% and 25%, respectively; Enterprise and Application Security revenue rose 23% and 21%. Banking represented 84% of Q3 revenue and 83% year to date. EMEA supplied 58% of Q3 and 61% of nine-month revenue.
- Cash flow and liquidity: Nine-month operating cash flow from continuing operations was $30.037 million, versus $6.474 million a year earlier. Cash and equivalents were $80.985 million; short-term investments were $44.924 million, for combined balances of $125.909 million. Working capital was $148.172 million. Cash declined $17.622 million during the nine months, largely alongside $44.924 million net purchases of short-term investments. Management said resources were adequate for operating needs over the next 12 months.
- Debt and balance sheet: The balance sheet lists no borrowings or debt; total liabilities were $45.150 million and stockholders’ equity was $195.164 million at September 30, 2014. Inventory was $31.430 million, up from $25.653 million at December 31, 2013.
Changes versus prior period
- Operating income more than doubled in Q3 and increased substantially year to date, with revenue growth and higher gross margins while operating costs rose more slowly than revenue.
- Gross margin improvement reflected product-margin gains, higher non-hardware revenue mix and lower non-product costs in the year-to-date comparison. Card readers carry materially lower margins than other hardware and increased as a share of year-to-date sales.
- The effective tax rate was 13% for Q3 and 14% year to date, versus 29% and 23% in the comparable 2013 periods. The company attributed the lower rate mainly to earnings mix in lower-tax foreign jurisdictions.
- Foreign-exchange transaction losses were $1.208 million in Q3 and $1.109 million year to date; translation adjustments reduced comprehensive income by $2.858 million and $2.695 million, respectively.
Outlook, risks and unusual items
- Management expected the cloud-based DIGIPASS as a Service and MYDIGIPASS offerings to begin making a small contribution in 2014 and described their longer-term growth potential as significant; revenues from these services had been minimal to date. The filing provides no numerical earnings or revenue guidance.
- Management cited global and European banking conditions, customer and order timing, competition and pricing, reliance on banking and a limited set of products, suppliers and key customers, technology change, and currency movements as risks. Approximately 92% of Q3 revenue was generated outside the U.S. Management warned that a cyber incident affecting its hosted authentication services could materially harm future business and reputation; security costs may rise.
- DigiNotar litigation: A Dutch court ruled in VASCO’s favor on July 30, 2014. The sellers were ordered to pay €1.4 million plus interest, already recorded as contingent consideration, and an additional €2.708 million plus interest for alleged breaches of representations and warranties. Further proceedings were possible and the case could settle for less; collection was not assured. Any excess recovery was to be recorded in discontinued operations.
- The filing reports the 2011 bankruptcy of DigiNotar as discontinued operations; the company recorded a $0.046 million Q3 loss and a $0.068 million nine-month loss from discontinued operations in 2014.
- VASCO was evaluating the impact and transition method for the new revenue-recognition standard, then expected to apply in 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Confirm the issuer identity: this filing names VASCO Data Security International, Inc., while the request names OneSpan Inc.
- Assess whether growth is sustainable given the concentration in banking and EMEA, and the variability of large order timing.
- Track operating cash generation, inventory growth and the allocation of cash to short-term investments.
- Verify the status, collectability and accounting treatment of the DigiNotar court award.
- Monitor foreign-exchange exposure, hosted-service cybersecurity risks and the eventual impact of the revenue-recognition standard.