Business Context and Reporting Period
VASCO Data Security International, Inc. (the registrant named in this filing; the request identifies Onespan Inc.) reported unaudited results for the three months ended March 31, 2014, compared with Q1 2013. VASCO designed and sold hardware and software authentication and access-security products and offered cloud-based authentication services. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Revenue | $38.823 | $35.365 |
| Gross profit / margin | $25.796 / 66.4% | $23.087 / 65.3% |
| Operating income / margin | $3.891 / 10.0% | $2.715 / 7.7% |
| Continuing-operations net income | $3.526 | $2.412 |
| Net income, including discontinued operations | $3.510 | $2.786 |
| Diluted EPS | $0.09 | $0.07 |
| Operating cash flow, continuing operations | $11.327 | $0.420 |
| Cash and equivalents at period end | $109.492 | $98.607 at Dec. 31, 2013 |
| Working capital | $127.739 | $124.539 at Dec. 31, 2013 |
| Total liabilities | $37.617 | $37.599 at Dec. 31, 2013 |
Revenue increased 10%; gross profit rose 12%, and operating income increased 43%. Gross margin improved by about 1.1 percentage points. Net income from continuing operations rose about 46%; total net income was up about 26%, partly because Q1 2013 included income from discontinued operations. The filing presents no borrowings as a separate balance-sheet line; cash substantially exceeded reported liabilities.
Cash increased $10.885 during the quarter. Operating cash flow benefited significantly from a $7.082 reduction in receivables. Investing activities used $0.404, principally for property and equipment; financing activities used $0.037. Management said resources were adequate for operating needs over the next 12 months. No material change in market risk was reported.
Material Changes Versus Prior Comparable Period
- Revenue growth reflected increases of 6% in Banking and 27% in Enterprise and Application Security. Banking represented 81% of revenue; Enterprise and Application Security represented 19%.
- EMEA revenue rose 22% to $26.757 million and accounted for 69% of revenue. Asia Pacific revenue increased 39%; U.S. revenue declined 25%, and revenue from Other Countries declined 42%.
- Non-hardware revenue was approximately 30% of total, versus 29%. The higher mix of Enterprise and Application Security and non-hardware offerings supported gross-margin improvement; increased card-reader sales and competitive pricing partly offset it. Card readers were 21% of revenue, up from 16%.
- Operating expenses rose 8%, including $1.026 million of incremental Cronto acquisition-related operating and amortization costs. Purchased-intangible amortization increased $0.679 million.
- The effective tax rate was 19%, versus 17%, and management expected a 19% rate for 2014. Other income was $0.438 million versus $0.149 million, including foreign-exchange transaction gains of $0.159 million compared with losses of $0.092 million.
- Q1 2014 included a $0.016 million loss from discontinued operations, versus $0.374 million income in Q1 2013. The prior-year result included a gain related to reassessed DigiNotar claims and balances.
Outlook, Commentary, Risks, and Contingencies
- Management expected DPS/MDP cloud authentication services to make a small contribution in 2014 and described significant longer-term growth potential; revenues from the platform had been minimal to date.
- Management characterized the business as transactional, with quarter-to-quarter results affected by order and shipment timing, and cautioned that longer-term trends better reflect business strength. It viewed European conditions as stabilizing and improving but warned that a downturn could materially affect results.
- Key risks include reliance on the European banking market, a concentrated product and customer base, competition and pricing pressure, rapid technology change, evolving regulation, and foreign-exchange exposure. Approximately 94% of Q1 2014 revenue and 82% of operating expenses were generated outside the United States. Currency movements increased reported revenue by an estimated $0.253 million and operating expenses by $0.310 million versus Q1 2013.
- Management said a cybersecurity incident affecting its cloud services could materially harm future growth, finances, or reputation. It reported regular security reviews and noted that it did not carry cyber-incident insurance at the time.
- DigiNotar B.V. remained in bankruptcy and discontinued operations. A Dutch court was scheduled to rule on VASCO and other parties’ claims on May 7, 2014, but the timing and outcome were uncertain. Q1 2014 discontinued-operations costs primarily reflected legal and third-party expenses.
- Of $53.278 million of cash held outside the United States, $52.583 million was not subject to repatriation restrictions but could incur taxes upon repatriation. The company treated approximately $54.313 million of unremitted foreign earnings as permanently invested.
Important Facts for Investors to Verify
- Confirm the issuer and reporting-entity identity: this 10-Q is filed by VASCO Data Security International, Inc., not under the Onespan name specified in the request.
- Assess whether revenue growth and cash generation are repeatable, given management’s warning about transaction timing and the quarter’s substantial receivables-related cash inflow.
- Track geographic and market concentration, particularly EMEA and Banking, along with card-reader mix and related margin pressure.
- Monitor DPS/MDP adoption and revenue contribution against management’s 2014 outlook, and evaluate cybersecurity controls and exposure.
- Follow the DigiNotar proceedings, potential claims and recoveries, and related legal costs; the filing did not establish the eventual outcome.
- Review foreign-cash tax and repatriation implications, foreign-exchange exposure, and the assumptions supporting the expected 19% tax rate.