OneSpan Inc. (formerly VASCO Data Security International, Inc.) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing was signed August 3, 2018. OneSpan changed its name on May 30, 2018, reflecting a shift in strategy and solution offering. The company provides digital identity, authentication, security, e-signature and transaction-management products and services; it reports as one operating segment.
Financial performance and liquidity
Amounts below are in USD millions, except per-share data and percentages. Prior-year comparisons are reported under the previous revenue-accounting standards, so they are not fully comparable with 2018.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $49.6 | $45.7 | $95.0 | $87.7 |
| Gross profit | $36.0 | $32.0 | $70.7 | $62.0 |
| Gross margin | 73% | 70% | 74% | 71% |
| Operating income (loss) | $(2.6) | $(0.4) | $(1.0) | $(0.1) |
| Net income (loss) | $(1.0) | $0.1 | $0.8 | $0.7 |
| Diluted earnings (loss) per share | $(0.03) | $0.00 | $0.02 | $0.02 |
| Cash from operating activities | Not separately stated | Not separately stated | $(0.6) | $12.0 |
- Q2 revenue increased 8%; services and other revenue rose 30%, while product and license revenue rose 1%. For the first half, revenue increased 8%, with services and other up 23% and product and license up 4%. Growth in subscriptions and maintenance supported the service increase; OneSpan Sign contributed to software-license growth.
- Gross margin improved year over year, primarily due to a greater share of subscription and maintenance revenue. However, operating expenses increased 19% in Q2 and 15% for the first half, outpacing revenue growth. Higher spending included R&D cloud-test costs, headcount, rebranding, acquisition-related professional fees, and acquired-intangible amortization.
- Q2 net loss included a $1.2 million foreign-government subsidy recorded in other income. The filing also reports $1.1 million of Dealflo acquisition costs and $0.3 million of office lease-exit costs; intangible-asset impairment related to rebranding was approximately $0.5 million in the first half.
- First-half operating cash flow was negative $0.6 million versus positive $12.0 million a year earlier. Management cited lower working capital; cash movements included a $4.3 million increase in contract assets and $5.9 million of income-tax payments. Investing cash flow was positive $23.9 million, including $80.0 million of investment maturities and $53.1 million paid for Dealflo.
- At June 30, cash and equivalents were $101.4 million, with no short-term investments and no debt. Working capital was $115.9 million, down from $161.8 million at year-end 2017, mainly reflecting the Dealflo cash purchase. Cash and short-term investments totaled $158.4 million at year-end 2017. Management said resources were adequate for operating needs over the next 12 months.
Material changes and accounting items
- On May 30, 2018, OneSpan acquired the remaining 99% of Dealflo, raising ownership from 1% to 100%. Consideration was $53.9 million, including $53.1 million cash paid and the $0.8 million fair value of the previous stake. Preliminary purchase accounting recorded $39.9 million of goodwill and $16.1 million of identifiable intangibles; key valuation items remained subject to finalization. Post-acquisition results included $0.6 million of revenue and a $0.8 million loss.
- OneSpan adopted ASC Topic 606 in January 2018 using the modified retrospective method. Adoption increased opening accumulated income by $11.9 million, net of tax. Its reported revenue impact was a decrease of $0.7 million for Q2 and an increase of $2.5 million for the first half; prior-year figures were not restated. The standard changed term-license timing and commission-cost accounting.
- Cash and equivalents increased from $78.7 million at December 31, 2017, while short-term investments of $79.7 million at year-end were liquidated or matured during the period. Foreign-currency translation reduced comprehensive income by $3.3 million in Q2 and $2.0 million in the first half.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management expects operating expenses and investment in sales, R&D, infrastructure and property and equipment to rise as the business grows, and cautions that order and shipment timing makes quarterly revenue comparisons volatile.
- Management estimated a 49% 2018 annual tax rate before discrete items, above the 21% U.S. statutory rate, primarily because of expected Dealflo losses requiring a valuation allowance and non-deductible acquisition costs. The ultimate rate depends on the geographic mix of earnings. Certain Tax Cuts and Jobs Act accounting remained provisional.
- Risks highlighted include currency movements, economic conditions—particularly in European banking and finance—competition, changing technology and customer requirements, patent claims, supplier and customer concentration, and successful integration of Dealflo and realization of expected synergies. The company also warned that a cyber incident affecting hosted or cloud products could cause substantial business, financial and reputational harm; it reported no significant-impact cyber incident in the first half of 2018.
- Legal matters include a securities class action and related derivative cases, patent litigation, and a potential OFAC penalty. OneSpan had accrued $0.9 million for the potential OFAC penalty; no penalty may be assessed, and the ultimate amount could differ. The company said it believed the probability of material adverse outcomes from the described proceedings was remote overall, while noting an individual matter could affect a particular interim period.
Investor verification priorities
- Assess revenue growth and margins alongside the ASC 606 accounting change; verify the effect of term-license recognition and the unadjusted 2017 comparisons.
- Track operating cash generation, working capital, contract-asset growth, deferred revenue and the timing of customer collections.
- Review final Dealflo purchase-price allocation, acquired-business performance, integration costs and whether anticipated synergies materialize.
- Evaluate the sustainability of earnings excluding the $1.2 million subsidy and other acquisition, rebranding and lease-exit items, as well as the high estimated tax rate.
- Monitor litigation and the $0.9 million OFAC accrual, foreign-exchange exposure, and cybersecurity risks as cloud and hosted offerings expand.