OneSpan Inc. (NASDAQ: OSPN) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. OneSpan provides identity, authentication, anti-fraud, digital-signature and transaction-management solutions, with financial institutions as its primary market.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $215.7 million | $253.5 million |
| Gross profit / margin | $152.3 million / 71% | $171.5 million / 68% |
| Operating income (loss) | $(5.3) million | $14.2 million |
| Net income (loss) | $(5.5) million | $7.9 million |
| Diluted EPS | $(0.14) | $0.20 |
| Cash from operations | $14.9 million | $18.2 million |
- Revenue fell 15%. Hardware revenue declined 36% to $81.8 million; software-license revenue declined 9% to $51.1 million. Subscription revenue rose 25% to $27.8 million, while maintenance, support and other revenue rose 17% to $49.2 million.
- Recurring revenue, as defined by the company, increased 26% to $101.0 million. EMEA revenue declined 20% to $117.1 million; the Americas declined 14% to $53.2 million; APAC was down 1% to $45.4 million.
- Gross margin expanded to 71% from 68%, principally on improved product-and-license margins. Operating costs were essentially flat at $157.5 million; general and administrative costs increased 6%.
- Cash and equivalents were $88.4 million and short-term investments were $26.9 million at year-end. Working capital was $131.9 million. The company reported no debt outstanding and said available resources were adequate for operating needs over the next 12 months.
- Investing activities used $4.7 million and financing activities used $7.1 million. The company repurchased $5.0 million of shares in 2020 under a $50 million authorization. Operating lease liabilities totaled $15.3 million; contractual obligations totaled $46.3 million.
- Fourth-quarter revenue was $52.9 million, operating loss was $2.0 million and net loss was $1.8 million. In Q4 2019, revenue was $70.5 million, operating income $5.4 million and net income $4.6 million.
Material changes and management commentary
- Management attributed weaker results to COVID-19-related economic uncertainty, longer sales cycles, reduced hardware demand and delays in some software implementations. Hardware demand also eased after elevated 2019 sales associated with the PSD2 regulatory deadline, while customers increasingly adopted mobile and cloud alternatives.
- Management reported increased demand in 2020 for some remote-access and e-signature software, but cautioned that this may be temporary. Its strategy emphasizes expanding software and recurring revenue and developing digital identity and fraud-prevention offerings.
- Management expects markets for authentication, fraud mitigation, agreement automation and e-signature to grow over time, but provided no quantified financial guidance. It said pandemic effects and their potential future impact could not be reliably estimated.
- Foreign currency movements increased 2020 revenue by an estimated $2.0 million; management estimated gross margin would have been about one percentage point lower without the favorable currency effect. Approximately 88% of revenue was generated outside the U.S.
Risks, contingencies and unusual items
- Key risks include ongoing pandemic-related demand uncertainty, intense competition and pricing pressure, dependence on hardware and a limited number of customers, long sales cycles, and reliance on suppliers and manufacturing concentrated in China. The top 10 customers generated 21% of 2020 revenue.
- Cybersecurity incidents, cloud-provider disruption, data-protection regulation, foreign-exchange fluctuations and execution of the shift toward software and recurring revenue could adversely affect results.
- Previously issued 2019 and 2018 statements were revised for errors involving certain term-license contracts and related maintenance. The company concluded the errors were immaterial; revised prior-period revenue and earnings were lower. KPMG issued an unqualified opinion on the financial statements and internal controls, and management reported controls effective at year-end.
- A securities class action and related derivative action filed in 2020 allege misleading statements concerning internal controls and financial reporting. The company intends to defend the claims; the filing does not provide an estimable loss range. A separate trademark dispute was settled in Q4 2020 for an amount described as immaterial.
- The company recorded a $2.3 million credit-loss provision in 2020, citing pandemic-related factors. No goodwill impairment was recorded.
Important facts for investors to verify
- Whether recurring software growth can offset continuing declines in hardware and perpetual-license sales.
- How sales cycles, customer budgets and implementation timing evolve as pandemic-related uncertainty changes.
- Cash conversion, working-capital trends, credit-loss allowances and the effect of customer concentration.
- Progress on reducing China supply-chain exposure and the cost and effectiveness of the planned EU manufacturing initiative.
- Developments in the securities and derivative litigation, and any future changes to reported results or internal-control assessments.
- Future share repurchases under the remaining authorization and any material changes to liquidity, obligations or outlook.