OneSpan Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; unaudited fourth-quarter results are also summarized below. Financial amounts are in U.S. dollars.
Business context
OneSpan provides identity, authentication, anti-fraud, digital signing and transaction-management solutions, including hardware, software licenses and cloud subscriptions. Financial institutions are its primary market. The company reports one operating segment and is pursuing growth in software and recurring services while expecting traditional hardware sales to decline over the long term.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $254.6 million | $212.3 million |
| Gross profit / margin | $172.6 million / 68% | $147.5 million / 69% |
| Operating income | $15.3 million | $0.02 million |
| Net income | $8.8 million | $3.8 million |
| Diluted earnings per share | $0.22 | $0.10 |
| Cash from operating activities | $18.2 million | $1.2 million |
- Revenue increased 20%. Product and license revenue rose 20% to $184.2 million; services and other revenue increased 19% to $70.4 million.
- By region, EMEA revenue rose 42% to $147.0 million, Americas revenue rose 12% to $61.6 million, and Asia-Pacific revenue fell 15% to $46.0 million. EMEA represented 58% of 2019 revenue, versus 49% in 2018.
- Operating expenses increased 7% to $157.3 million. Research and development rose 32% to $42.5 million, mainly reflecting headcount associated with Dealflo; sales and marketing declined 4% to $61.5 million.
- The reported gross margin declined one percentage point. Management estimated stronger U.S. dollar exchange rates reduced 2019 revenue by approximately $7.5 million; it estimated 2019 gross margin would have been about three percentage points higher at 2018 exchange rates.
- Income tax expense was $6.7 million, versus a $0.3 million benefit in 2018. The 2019 effective tax rate was 43%; the increase reflected higher pretax income and an accrual for uncertain tax positions.
Fourth-quarter results
Unaudited Q4 2019 revenue was $71.0 million, versus $64.8 million in Q4 2018. Operating income was $5.9 million, versus $4.1 million; net income was $5.1 million, versus $4.0 million. Diluted EPS was $0.13, versus $0.10. Q4 2019 revenue and operating income were below Q3 2019, when revenue was $79.7 million and operating income was $17.1 million.
Liquidity, debt and cash flow
- At year-end, cash and cash equivalents were $84.3 million and short-term investments were $25.5 million. Working capital was $137.5 million, up 15% from 2018.
- The company reported no outstanding debt. It had $13.9 million in operating lease liabilities at year-end.
- Operating cash flow was $18.2 million; investing activities used $9.9 million, including $7.5 million of property and equipment additions; financing activities used $0.6 million.
- Management stated that financial resources were adequate for operating needs over the next twelve months. Of $64.1 million of cash held by foreign subsidiaries, $63.5 million was not subject to repatriation restrictions but could incur taxes upon repatriation.
- Contractual obligations totaled $55.8 million, including $16.5 million of operating lease obligations, $28.5 million of purchase obligations and $10.7 million of taxes payable.
Material changes, outlook and risks
- Growth was broad across product/license and services revenue, but regional performance diverged: EMEA expanded sharply while Asia-Pacific contracted. Hardware products remained a significant revenue source; management expects hardware sales to decline over the long term.
- Management’s stated priorities include expanding fraud prevention and identity-verification offerings, growing Secure Agreement Automation and recurring revenue, increasing customer and channel sales, and pursuing strategic acquisitions. The filing provides no specific numerical revenue or earnings guidance.
- Foreign exchange remains a material exposure: about 76% of revenue was generated outside the U.S.; the company does not currently use forward exchange contracts. Top 10 customers contributed 29% of 2019 revenue.
- Other key risks include intense competition, cybersecurity incidents and service outages, reliance on AWS and other vendors, hardware supply concentration in China, tariffs on some hardware products, long financial-sector sales cycles, execution of the software-focused transformation, and potential impairment of acquired goodwill or intangibles. Goodwill was $94.6 million; no goodwill impairment was recorded in 2019.
- The Belgian tax audit was settled in late 2019, with payment made in January 2020. Unrecognized tax benefits were $2.9 million at year-end; management estimated these would decrease by about $2.7 million in the next 12 months. The StrikeForce patent case was dismissed with prejudice in April 2019 and was considered closed. The filing states that other disclosed legal loss ranges generally could not be estimated.
- A material weakness in internal control identified in 2018 was reported as remediated in 2019. Management and KPMG concluded internal control over financial reporting was effective as of year-end; KPMG gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether revenue growth can continue and increasingly come from subscriptions and services, particularly given the expected long-term decline in hardware sales.
- Whether the strong EMEA results are sustainable and whether Asia-Pacific revenue stabilizes.
- How much reported performance and gross margin remain exposed to currency movements, customer concentration and product mix.
- Whether higher R&D investment and the broader software strategy produce durable growth and improved profitability.
- Future tax expense, cash conversion, acquisition-related asset values and progress in maintaining effective internal controls.