OneSpan Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. OneSpan provides identity, security, authentication, fraud-prevention and digital transaction solutions. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenue | $56.5 million | $47.6 million; up 19% |
| Gross profit / margin | $40.4 million / 72% | $31.6 million / 66% |
| Operating income (loss) | $0.9 million | $(5.5) million |
| Net income (loss) | $0.1 million | $(5.7) million |
| Cash from operating activities | $(2.4) million | $(3.7) million |
| Cash and cash equivalents at period end | $79.6 million | $84.3 million at Dec. 31, 2019 |
| Short-term investments at period end | $25.7 million | $25.5 million at Dec. 31, 2019 |
| Working capital | $139.3 million | $137.5 million at Dec. 31, 2019 |
Revenue comprised $38.3 million of product and license revenue, up 20%, and $18.2 million of services and other revenue, up 16%. Recurring revenue—subscription, term-based licenses, and maintenance, support and other—increased $10.0 million, or 62%. Software-license growth more than offset lower hardware sales. EMEA revenue rose 32% to $33.7 million; Americas declined 3% to $12.3 million; APAC rose 12% to $10.4 million.
Operating expenses increased 6% to $39.5 million. General and administrative expense rose 24% to $12.3 million, primarily on personnel and stock compensation, consulting, software tools and higher bad-debt expense. Research and development expense declined 5% to $10.0 million. Diluted earnings per share were $0.00, rounded, versus a loss of $0.14.
Cash, cash equivalents and restricted cash totaled $80.5 million at March 31. The company reported no borrowings in the supplied filing text; it reported operating lease liabilities of $15.5 million. Cash used in investing activities was $1.7 million and cash used in financing activities was $0.3 million.
Material changes and notable items
- Gross margin expanded six percentage points, reflecting improved product and license margins and higher services margins. Management estimated foreign-exchange movements reduced revenue by about $1.1 million; absent currency changes, gross margin would have been about two percentage points higher.
- Operating results improved from a Q1 2019 loss to modest operating and net income. The filing attributes revenue growth mainly to recurring revenue and stronger software sales; management cautions that quarterly results are affected by order and shipment timing.
- Foreign-currency translation produced a $4.3 million other comprehensive loss, versus $0.9 million of income in Q1 2019. Goodwill fell $3.1 million during the quarter due to currency translation; no goodwill or intangible-asset impairment was recorded.
- Adoption of the expected-credit-loss standard (ASC 326) on January 1, 2020 reduced opening accumulated income by $0.3 million. The allowance for credit losses rose to $3.2 million, including a $0.4 million quarterly provision; the company cited expected adverse COVID-19 effects on credit-loss estimates.
- The estimated 2020 annual tax rate before discrete items was approximately 96%, largely reflecting forecast losses in jurisdictions where tax benefits are not recognized. Q1 income-tax expense was $0.7 million.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management said it had not experienced a material adverse effect from COVID-19 through March 31 and noted increased adoption of mobile and cloud technologies and higher sales of software used for remote access and banking. It warned that this demand may be temporary and that the pandemic’s duration and financial impact cannot be reasonably estimated and could be material. Potential effects include weaker demand, discount or extended-payment requests, customer failures, delayed purchasing decisions, supply-chain disruption, staffing constraints and reduced ability to deliver on-site services. Initial hardware fulfillment delays and added costs had been primarily resolved, but future disruption remained possible.
Management said financial resources were adequate for operating needs over the next 12 months. Other risks include foreign-exchange exposure, reliance on European financial-sector demand, cybersecurity incidents, competition, and execution of product and growth strategies. OneSpan is in a trademark dispute with German company Onespin solutions GmbH and is pursuing litigation in Europe; management considers a material adverse effect on the company as a whole remote, but cannot predict the outcome. No material changes in market risk were reported, and no material changes in internal control over financial reporting were identified.
Important facts for investors to verify
- Whether the sharp increase in recurring revenue and software-license sales is sustained, and how much Q1 growth reflected timing or pandemic-related demand.
- Whether gross-margin gains persist after accounting for product mix, hardware costs and foreign-exchange movements.
- COVID-19 effects on customer purchasing, payment behavior, credit losses, hardware supply and service delivery; monitor receivables and the credit-loss allowance.
- Cash generation and liquidity trends, including the company’s lease obligations and the absence of borrowing detail beyond what is disclosed in this filing.
- The unusually high estimated annual tax rate and the potential effect of jurisdictional earnings mix and valuation allowances.
- Developments in the Onespin trademark litigation and any other contingencies; the filing states that a reasonably possible loss estimate cannot be made for matters where no estimate is provided.