OneSpan Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. OneSpan provides identity, authentication, security, and digital transaction-management products and services; it reports as one operating segment. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $52.3 million | $55.0 million | $103.1 million | $111.3 million |
| Gross profit / margin | $35.8 million / 68% | $36.7 million / 67% | $71.3 million / 69% | $77.0 million / 69% |
| Operating loss | $(8.9) million | $(1.7) million | $(18.2) million | $(0.9) million |
| Net loss | $(6.7) million | $(2.0) million | $(15.8) million | $(2.0) million |
| Diluted loss per share | $(0.17) | $(0.05) | $(0.40) | $(0.05) |
- Q2 product and license revenue fell 20% to $28.4 million; services and other revenue rose 22% to $23.9 million. Recurring revenue increased 24% in Q2 and 17% year to date, as subscriptions and maintenance/support grew.
- For the first half, operating cash flow was $1.2 million, versus $4.4 million a year earlier. Investing activities used $17.4 million, mainly reflecting purchases of short-term investments; financing activities used $5.1 million, including $2.9 million of share repurchases.
- At June 30, cash and equivalents were $66.5 million and short-term investments were $42.7 million. Working capital was $110.6 million, down from $131.9 million at year-end 2020. Total liabilities were $115.7 million; the filing reports no borrowings. Lease liabilities totaled $13.9 million.
- Management stated that available financial resources should meet operating needs for at least the next 12 months. Cash, cash equivalents, and restricted cash totaled $67.4 million at period-end.
Changes versus the prior comparable period
- Q2 revenue declined 5%; first-half revenue declined 7%. Lower hardware and software-license sales drove the decline, partially offset by subscription and maintenance/support growth.
- Q2 gross margin improved to 68% from 67%, while first-half margin was unchanged at 69%. Management estimated foreign-exchange movements increased revenue by $2.4 million in Q2 and $4.6 million in the first half; absent those currency movements, gross margin would have been about five percentage points lower in both comparisons.
- Operating costs rose 16% in Q2 to $44.7 million and 15% in the first half to $89.4 million. Q2 general and administrative expense increased 39%, primarily from personnel costs and outside professional services. Higher sales and R&D costs also reflected personnel and headcount growth.
- Revenue mix shifted toward services: subscription revenue was $9.8 million in Q2, up from $6.1 million. Hardware revenue declined to $19.5 million from $24.2 million. Americas revenue increased, while EMEA and APAC revenue fell.
Outlook, commentary, risks, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management cited lengthened sales cycles and weaker demand for some security solutions since summer 2020, particularly hardware authentication, as well as delays to some software implementations. It said the pandemic’s duration and business impact remained uncertain.
- Risks discussed include COVID-19-related customer and supply-chain disruption, cybersecurity incidents, competition and pricing pressure, foreign-exchange exposure, activist-stockholder actions, and potential impairment of goodwill or intangible assets. The company reported no cyber incident with a significant business impact in the first half of 2021.
- The company recorded income-tax benefits of $1.1 million for Q2 and $1.6 million for the first half. Its estimated 2021 annual effective tax rate before discrete items was approximately 7%, with the ultimate tax expense dependent on geographic earnings mix.
- Three shareholder-related cases—the securities class action and two derivative actions—were dismissed without prejudice by June 28, 2021. The filing says ordinary-course proceedings continue; it generally could not estimate reasonably possible losses for individual matters.
- Subsequent events: CEO Scott Clements left the company and board effective August 2, 2021; Steven Worth was appointed interim CEO and John Bosshart interim CFO, also effective August 2. Director John Fox announced his resignation effective August 4. The filing says the departures were not related to disagreements with the company.
- The company repurchased 111,000 shares in June at an average $26.17 per share. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recurring-revenue growth can offset continuing weakness in hardware and perpetual software-license sales, and whether sales cycles normalize.
- Whether operating expense growth moderates and cash generation improves after the first-half decline in operating cash flow.
- The composition, accessibility, and currency exposure of cash and investments, including potential taxes on repatriating foreign cash; $55.1 million of cash and equivalents was held outside the U.S.
- Any developments in the dismissed litigation, and the financial or strategic effects of the executive and board transitions.
- COVID-19 impacts, foreign-exchange effects, and the assumptions behind management’s 12-month liquidity assessment.