OneSpan Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; dollar amounts below are in millions unless noted.
Business context
OneSpan provides digital agreement, identity verification, authentication, transaction-signing and related security products, delivered through cloud and on-premises offerings. In May 2022, it announced a three-year transformation plan and began reporting two segments: Digital Agreements, targeted for accelerated growth, and Security Solutions, managed primarily for cash flow.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $52.8 | $52.3 | $105.2 | $103.1 |
| Gross profit / margin | $35.5 / 67% | $34.8 / 67% | $72.2 / 69% | $69.1 / 67% |
| Operating loss | $(8.2) | $(8.9) | $(17.5) | $(18.2) |
| Net loss | $(9.4) | $(6.7) | $(4.1) | $(15.8) |
| Net loss per share, diluted | $(0.23) | $(0.17) | $(0.10) | $(0.40) |
| Operating cash flow | Not separately presented for Q2 | $(11.3) | $1.2 |
- Revenue grew 1% in Q2 and 2% for the first half. Subscription revenue rose $11.0 million in the first half, offset by lower professional services and other, hardware, and maintenance revenue.
- First-half Digital Agreements revenue increased 21% to $23.8 million; Security Solutions revenue decreased 2% to $81.5 million. Q2 segment revenue was $10.5 million and $42.3 million, respectively.
- Q2 Digital Agreements operating income was $0.1 million versus a $0.8 million loss a year earlier; Security Solutions operating income was $8.6 million, down from $10.0 million. Corporate costs and amortization left the consolidated company with an operating loss.
- First-half net loss improved year over year mainly because of the $14.8 million gain on the sale of the Promon investment, not because of operating profitability. The sale generated $18.9 million in proceeds.
- Cash and equivalents were $77.6 million and short-term investments $20.2 million at June 30, versus $63.4 million and $35.1 million at year-end. Working capital was $91.5 million, down from $98.0 million. Management said available resources were adequate for the next 12 months.
- No conventional borrowings are listed on the balance sheet. Lease liabilities totaled $11.3 million, including $9.2 million long-term. Total liabilities were $107.6 million.
Material changes and unusual items
- Foreign exchange movements, especially the euro, reduced revenue by an estimated $3.2 million in Q2 and $4.8 million in the first half year over year; they also reduced operating expenses by $2.0 million and $3.1 million, respectively. The company expected a continued, more moderate impact.
- Operating cash flow was negative $11.3 million in the first half, while investing cash flow was positive $32.6 million, including the Promon sale. Financing cash use was $6.4 million, including $5.7 million of share repurchases.
- Restructuring actions included headcount reductions, with $5.3 million of related costs in the first half and $3.1 million accrued at June 30. A second phase of headcount actions is planned through 2025.
- The company revised prior-period expense classifications for hardware production and distribution costs. The reclassification increased reported product cost of goods sold and reduced sales and marketing expense; it did not affect revenue or net income, and management deemed the prior errors immaterial.
- Management reported no goodwill or intangible-asset impairment. The May 2022 goodwill test found no impairment indication.
Outlook, risks and contingencies
The transformation plan aims to accelerate Digital Agreements growth, expand enterprise sales and distribution, build a transaction cloud platform, and improve efficiencies and profitability. OneSpan gave no numerical financial guidance in the provided filing text. Management expected sales and marketing and research and development spending to rise to support the plan.
Risks highlighted include execution and hiring challenges, customer acquisition and retention assumptions, platform-development delays, component shortages and shipping delays affecting Digipass devices, inflation, recession, political instability, foreign-exchange movements, competition, cybersecurity threats, and possible impairment charges. The company reported no legal matter it believed likely to have a material adverse effect; it said loss estimates for certain proceedings could not be made. Disclosure controls were considered effective as of June 30, 2022.
Key facts for investors to verify
- Whether subscription growth, particularly in Digital Agreements, can offset declining hardware, maintenance and professional-services revenue.
- Whether the transformation plan can deliver growth and margin expansion while operating cash flow remains negative.
- The recurring cash-generation profile of Security Solutions amid foreign-exchange impacts and component and shipping constraints.
- The effects of restructuring costs, planned sales and R&D investment, and the new share-repurchase authorization of up to $50 million through May 11, 2024.
- How much of the first-half improvement in net loss depends on the nonrecurring Promon sale gain, and how deferred revenue and collections affect future cash flow.