OneSpan Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless noted. OneSpan provides identity, security, authentication, fraud-mitigation and digital transaction-management products and services. It reports as one operating segment.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and margins.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $52.4 | $50.8 |
| Gross profit / margin | $36.7 / 70% | $34.2 / 67% |
| Operating loss | $(9.2) | $(9.3) |
| Other income (expense), net | $15.6 | $(0.4) |
| Net income (loss) | $5.2 | $(9.2) |
| Diluted earnings (loss) per share | $0.13 | $(0.23) |
| Cash provided by operating activities | $3.7 | $3.6 |
- Revenue increased 3%. Recurring revenue grew $6.3 million, or 22%, while hardware revenue fell $2.3 million, or 13%. Software license revenue increased; subscription revenue rose 20% to $10.1 million.
- Gross margin improved to 70%, reflecting a mix shift toward term-based software and subscriptions and away from hardware. Services and other gross margin declined to 71% from 74% as subscription growth increased cloud infrastructure costs.
- Operating costs rose 5% to $45.9 million. Research and development expense increased 12%, and general and administrative expense increased 19%; sales and marketing expense declined 7%.
- Cash and cash equivalents were $83.6 million and short-term investments were $36.3 million at March 31, 2022. Working capital was $108.3 million. Management said resources were adequate for operating needs over the next 12 months.
- Investing activities provided $17.3 million, principally from the Promon investment sale. Financing activities used $0.6 million. The filing reports lease liabilities but no borrowings; it does not provide a separate debt balance.
Material changes and unusual items
- Net income chiefly reflects a $14.8 million gain from selling OneSpan’s 17% equity interest in Promon AS on January 31, 2022, for $18.9 million. The company plans to continue purchasing and integrating Promon’s RASP technology. The operating loss remained approximately $9.2 million.
- Q1 2022 revenue by region was $24.9 million in EMEA, down 8%; $17.2 million in the Americas, up 4%; and $10.3 million in APAC, up 42%. EMEA’s decline was primarily attributed to lower hardware sales.
- The company revised prior-period expense classifications for certain hardware production and distribution costs, moving costs from sales and marketing to product and license cost of goods sold. It determined the errors were immaterial and said they did not affect previously reported revenue or net income.
- A restructuring plan approved in December 2021 reduced headcount; its first phase was substantially completed in Q1. Severance and related costs were $2.7 million, including $1.6 million accrued at quarter-end. Further details on future phases were expected during Q2 2022.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management said it believes the company is positioned for long-term growth, but cannot estimate the duration or severity of COVID-19 effects.
- Management cited lengthened sales cycles and supply-chain constraints during the quarter; shipping delays contributed to lower hardware revenue. Potential ongoing risks include weaker demand, discount or extended-payment requests, customer bankruptcies, supply disruption and staffing difficulties.
- Approximately 88% of Q1 revenue was generated outside the U.S.; currency movements can affect results. The company estimated exchange-rate changes reduced revenue by about $1.6 million versus the prior-year period and reported $2.0 million of foreign-currency translation loss in other comprehensive income.
- Other disclosed risks include cyber incidents, changing customer requirements, competition, legal and intellectual-property claims, and execution of the company’s strategic plan. No cyber incident with a significant business impact occurred in Q1.
- Management considers the likelihood of a material adverse effect from disclosed legal matters remote; reasonably possible losses for individual proceedings generally could not be estimated. No material change in market risk was reported.
Key facts for investors to verify
- How much future operating performance depends on recurring-revenue growth versus the timing and mix of hardware and software-license sales.
- Whether operating profitability improves, given the continuing operating loss and the substantial one-time Promon gain in reported net income.
- Progress, remaining costs and expected benefits of the multi-year restructuring plan.
- Whether supply constraints, sales-cycle lengthening and foreign-exchange movements continue to affect revenue and margins.
- Potential tax effects of repatriating foreign cash, and developments in legal contingencies and the company’s strategic plan.