OneSpan Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparative results are for the three and nine months ended September 30, 2020. Unaudited interim statements. OneSpan provides digital identity, authentication, security and transaction-management solutions and reports as one operating segment.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $52.3 million | $51.4 million | $155.3 million | $162.8 million |
| Gross profit | $37.4 million | $36.0 million | $108.7 million | $113.0 million |
| Gross margin | 72% | 70% | 70% | 69% |
| Operating loss | $2.0 million | $2.4 million | $20.2 million | $3.2 million |
| Net loss | $1.0 million | $1.7 million | $16.8 million | $3.7 million |
| Net loss per diluted share | $0.02 | $0.04 | $0.42 | $0.09 |
Q3 revenue increased 2% year over year; nine-month revenue decreased 5%. Recurring revenue rose 38% in Q3 and 24% year to date, while hardware revenue fell 17% and 16%, respectively. Nine-month operating costs increased to $128.8 million from $116.2 million, including higher sales and marketing, R&D and general and administrative expenses.
Cash flow and liquidity: Operating cash flow was negative $4.4 million for the first nine months, compared with positive $7.4 million a year earlier. Investing cash use was $14.3 million and financing cash use was $10.3 million. Cash and equivalents were $58.6 million and short-term investments were $39.2 million at September 30, 2021, versus $88.4 million and $26.9 million, respectively, at year-end 2020. Working capital was $104.9 million, down from $131.9 million. Management said resources were adequate for operating needs over the next 12 months. The filing reports no borrowings; lease liabilities totaled $13.2 million, including $10.6 million long term.
Material changes and management commentary
- Product and license revenue declined as hardware and perpetual-license sales weakened; management attributed some hardware weakness to global shipping and supply-chain delays.
- Subscription revenue grew 37% in Q3 and 47% for the first nine months. Management linked recurring-revenue growth to its strategy to expand renewable contracts.
- Q3 gross margin improved with a mix shift toward term-based software and subscriptions and away from hardware. Management estimated currency movements increased revenue by $0.3 million in Q3 and $4.8 million year to date; absent those currency effects, gross margin would have been about 3 percentage points lower in both periods.
- Nine-month operating expenses also reflected increased headcount, strategic-action-plan consulting and professional fees related to the second-quarter proxy contest. Foreign-exchange changes increased operating expenses by an estimated $3.0 million year over year.
- The company repurchased $7.5 million of common stock in the first nine months. In August, it reported 231,068 shares purchased at an average $19.72 per share; the filing states these were not purchases under the publicly announced program. A separate program authorized up to $50 million through June 10, 2022.
- Effective October 1, 2021, interim CEO Steven Worth was to receive supplemental compensation of $50,000 per month or portion of a month served; the agreement was entered into October 29.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance was provided. Management said it could not predict the duration or ultimate business impact of COVID-19 and did not consider the interim results necessarily indicative of full-year results.
- Management described continued lengthened sales cycles and reduced demand for some security solutions, particularly hardware authentication, as well as delays in software implementations. Risks include further supply-chain disruption, customer spending delays, discounting, extended payment terms and customer financial distress.
- Other stated risks include cybersecurity incidents, competition and price pressure, technology changes, reliance on third parties, foreign-currency exposure and uncertainty in international markets. The company reported no cyber incident in the first nine months of 2021 with a significant business impact.
- The securities class action and two related derivative cases were dismissed without prejudice in 2021. The company said it did not expect the disclosed matters to have a material adverse effect overall, but noted that an unfavorable resolution could affect an individual interim period. The filing generally could not estimate reasonably possible losses for individual proceedings.
- Disclosure controls and procedures were assessed as effective at quarter end; no material change to internal control over financial reporting was reported.
Important facts for investors to verify
- Whether subscription and other recurring-revenue growth can continue to offset lower hardware and perpetual-license revenue.
- Whether shipping constraints, COVID-related customer delays and weaker demand persist, and how they affect revenue and cash generation.
- Drivers of the substantially greater year-to-date operating loss and negative operating cash flow, including expense growth and working-capital movements.
- Cash and investment availability, including the location of cash: $45.7 million was held by foreign subsidiaries, of which $44.6 million was not subject to repatriation restrictions but could incur taxes on repatriation.
- Developments in the dismissed-without-prejudice litigation and the remaining amount available under the share-repurchase authorization.