OneSpan Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. OneSpan, formerly VASCO Data Security International, changed its name in May 2018 as part of a strategy shift toward broader digital identity, security, and transaction solutions. Financial amounts below are in U.S. dollars.
Business context and financial performance
OneSpan sells authentication, anti-fraud, identity verification, e-signature, and digital transaction solutions to financial institutions, enterprises, and government customers. Revenue comes from hardware and software licenses, subscriptions, maintenance, support, and professional services. The company acquired Dealflo in May 2018, adding identity verification and financial automation capabilities.
| Metric | FY 2018 | FY 2017 | Change or context |
|---|---|---|---|
| Revenue | $212.3 million | $193.3 million | Up 10% |
| Product and license revenue | $153.0 million | $147.3 million | Up 4% |
| Services and other revenue | $59.3 million | $46.0 million | Up 29% |
| Gross profit / gross margin | $147.5 million / 69% | $134.5 million / 70% | Gross profit up 10%; margin down 1 percentage point |
| Operating income | $24,000 | $6.2 million | Near breakeven as operating costs rose 15% |
| Net income (loss) | $3.8 million | $(22.4) million | 2017 loss primarily reflected tax-reform-related tax expense |
| Diluted EPS | $0.10 | $(0.56) | |
| Cash from operations | $1.2 million | $17.6 million | Down substantially |
| Cash and equivalents / short-term investments | $76.7 million / $22.8 million | $78.7 million / $79.7 million | Combined balance fell, primarily due to Dealflo purchase |
| Working capital | $119.6 million | $161.8 million | Down $42.2 million |
| Debt | No outstanding debt | No outstanding debt | At both year-end dates |
Material changes and comparability
- Growth was led by services and other revenue, including SaaS and maintenance; software license revenue also increased. Regional revenue rose 11% in EMEA, 4% in the Americas, and 14% in Asia Pacific.
- Operating expenses increased to $147.4 million from $128.3 million. Research and development spending rose 39% to $32.2 million, driven partly by Dealflo and increased cloud and staffing costs.
- OneSpan adopted ASC 606 on January 1, 2018 using the modified retrospective method. It recorded an $11.9 million net-of-tax increase to opening accumulated income; ASC 606 increased 2018 revenue by $3.4 million. The filing’s presentation excluding ASC 606 shows 2018 revenue of $208.9 million and a net loss of $0.9 million. Prior-year figures remain under the previous revenue rules, limiting direct comparability.
- The Dealflo acquisition consideration was $53.9 million, net of acquired cash; the company paid $53.1 million for the remaining 99% interest. Dealflo contributed $4.0 million of revenue and a $4.1 million net loss after acquisition during 2018.
- Foreign exchange movements were a headwind: management estimated that currency changes reduced reported 2018 revenue by approximately $4.1 million. A $1.2 million foreign-government research subsidy contributed to other income.
Cash, liquidity, outlook, and risks
- Operating cash flow was $1.2 million, versus $17.6 million in 2017. The filing cites working-capital movements, including higher receivables, contract assets, and inventory, among the cash-flow factors. Investing cash flow was $0.2 million provided, including the Dealflo acquisition and investment maturities.
- Management stated that financial resources were adequate for operating needs over the next 12 months. No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales, research and development, infrastructure, and growth initiatives.
- Operating lease commitments totaled $22.6 million; purchase obligations totaled $34.3 million, including inventory and cloud-hosting commitments. The company expected adoption of lease accounting in 2019 to have a material financial-statement impact.
- Control weakness: Management concluded internal control over financial reporting was ineffective at year-end 2018 because of a material weakness involving insufficient trained accounting resources, ineffective risk assessment, and inadequate process-level controls, including controls affected by ASC 606 adoption. The auditor issued an adverse opinion on internal control, while providing an unqualified opinion on the financial statements. Management expected remediation during 2019, including added accounting resources, training, improved controls, and a new ERP system.
- Key business risks include cyberattacks and cloud-service interruptions, intense competition and pricing pressure, dependence on financial institutions and a limited set of products, foreign currency and international exposure, supplier concentration in hardware manufacturing, acquisition integration, and potential goodwill or intangible-asset impairment. The top 10 customers represented 24% of revenue; EMEA generated 49%.
- The OFAC/BIS export matter was closed in 2018 with no penalties, and the related $0.9 million accrual was reversed. Several related investor and derivative cases were concluded. A separate StrikeForce patent case remained unresolved in the filing; proceedings were stayed pending related litigation, and the company said it intended to defend itself.
Important facts for investors to verify
- How much of reported revenue growth and profitability reflects ASC 606 timing effects, and how comparable are the 2018 and 2017 results?
- Whether management remediated the material weakness on schedule and whether controls over revenue recognition and financial reporting operate effectively.
- Whether operating cash generation improves, given the 2018 decline and growth in receivables and contract assets.
- Dealflo’s subsequent revenue, profitability, integration progress, and the assumptions supporting acquisition goodwill and intangible assets.
- Exposure to currency movements, customer concentration, supplier continuity, cloud providers, and the remaining patent litigation.