Business context and reporting period
This is VASCO Data Security International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013. The filing describes a business designing, developing, marketing, and supporting hardware and software authentication and information-security products. The request metadata names Onespan Inc.; the registrant named in this 2013 filing is VASCO Data Security International, Inc.
Unless otherwise noted, financial amounts below are in U.S. dollars, in thousands. The filing presents third-quarter and nine-month results against the comparable 2012 periods.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $39,156 | $36,292 | $111,782 | $115,192 |
| Gross profit | $25,054 | $23,855 | $72,025 | $75,184 |
| Operating income | $5,031 | $6,276 | $9,671 | $17,488 |
| Net income from continuing operations | $3,369 | $4,682 | $7,631 | $14,074 |
| Net income, including discontinued operations | $3,322 | $4,509 | $7,917 | $13,581 |
| Cash from continuing operating activities | Not presented by quarter | Not presented by quarter | $6,474 | $13,258 |
- Revenue grew 8% in Q3, driven mainly by 10% growth in banking-market sales. For the first nine months, revenue declined 3%; enterprise and application security sales fell 14%, while banking sales were down less than 1%.
- Gross margin was 64.0% in Q3 versus 65.8% a year earlier, and 64.4% for the nine months versus 65.2%. Management cited lower hardware margins and a smaller enterprise/application-security revenue mix, partly offset by higher non-hardware sales.
- Operating income fell 20% in Q3 and 45% for the nine-month period. Operating costs rose 14% in Q3 and 8% year to date, reflecting higher headcount, Cronto-related costs and amortization, and currency effects.
- At September 30, cash and equivalents were $92,121, down from $106,469 at December 31, 2012. Working capital was $120,117. Current assets were $154,147 and current liabilities $34,031. The company reported no debt balance in the presented balance sheet.
- Nine-month cash from continuing operations was $6,474, compared with $13,258 in 2012. Investing activities used $19,854, including $19,495 for the Cronto purchase; financing activities used $717. Cash declined by $14,348 during the nine months.
- Cash held outside the United States was $69,155; $68,670 was not subject to significant repatriation restrictions, although repatriation may incur taxes. Management said available resources were adequate for operating needs over the next 12 months.
Material changes and unusual items
- On May 20, 2013, VASCO acquired Cronto Limited for initial consideration of €15 million, with an additional balance-related payment. Total consideration allocated in the purchase accounting was $20,166, funded from existing cash. The acquisition added $9,223 of goodwill and $13,257 of identifiable intangible assets.
- The Cronto deal also includes up to €2 million of contingent consideration tied to orders from new customers through May 20, 2015; no contingent amount had been expensed by September 30, 2013.
- Inventories increased to $26,312 from $18,675 at year-end, principally because component parts rose. The cash-flow statement reports a $7,151 use of cash from inventory changes.
- Foreign-currency transaction losses were $648 in Q3 and $740 for the nine months of 2013. Currency translation adjustments added $3,498 to Q3 comprehensive income and $1,231 for the nine-month period.
- Discontinued operations relate to the 2011 bankruptcy of DigiNotar B.V. They contributed a $47 loss in Q3 and $286 of income for the nine months, including a change in estimated costs to settle previously accrued liabilities.
Outlook, management commentary, and risks
- The filing gives no specific revenue or earnings guidance. Management expected the cloud-based DPS/MYDIGIPASS.com offering to begin contributing in 2014, while noting that service-platform revenue had been minimal to date.
- Management said it expected continued difficult economic conditions in Europe in 2013. Europe is the company’s most important market, and banking/finance is its largest target market: banking accounted for 83% of revenue in both the third quarter and first nine months of 2013.
- Management planned to continue emphasizing non-hardware revenue, which represented 28% of revenue in Q3 and in the first nine months, up from approximately 23% in the comparable 2012 periods. It also warned that competitive pricing pressures on card readers were likely to persist.
- Key disclosed risks include integrating and selling Cronto technology; cybersecurity incidents involving cloud services; foreign-exchange movements; economic weakness, particularly in Europe; reliance on banking customers, certain products, suppliers, and key customers; competitive and pricing pressures; and changing technology, regulations, and customer requirements.
- VASCO cautioned that recovery of DigiNotar-related escrow amounts is uncertain and that further costs or claims may arise from the bankruptcy and hacking incidents. Related claims and counterclaims remained part of the Dutch bankruptcy process.
- The expected full-year effective tax rate was revised from 17% to 23%, primarily due to a less favorable geographic mix of earnings. Q3’s effective tax rate was 29%, including the catch-up adjustment.
- Management concluded disclosure controls were effective as of period-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q3 banking-market growth and higher non-hardware sales can offset the nine-month decline in total revenue and continued weakness in enterprise/application security.
- Cronto’s subsequent sales, integration progress, amortization burden, and whether its contingent-consideration targets are met.
- Whether the inventory build converts to sales and cash, given the substantial year-to-date operating-cash-flow decline.
- Developments in the DigiNotar bankruptcy, including escrow recovery, potential claims, and remaining settlement costs.
- Whether the DPS/MYDIGIPASS.com offering begins contributing as expected and how the company manages its stated cybersecurity exposure.
- The effects of currency movements, geographic earnings mix, and the resulting effective tax rate on future reported results.