OneSpan Inc. — Q2 2020 Form 10-Q
Business context and reporting period
OneSpan designs and sells security, authentication, identity, digital transaction, and electronic-signature solutions, including hardware, software licenses, subscriptions, and services. It reports as one operating segment. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars and rounded to millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $55.0 | $56.2 | $111.3 | $103.3 |
| Gross profit | $36.7 | $38.3 | $77.0 | $69.3 |
| Gross margin | 67% | 68% | 69% | 67% |
| Operating loss | $(1.7) | $(2.3) | $(0.9) | $(8.3) |
| Net loss | $(2.0) | $(2.5) | $(2.0) | $(8.6) |
| Net loss per diluted share | $(0.05) | $(0.06) | $(0.05) | $(0.21) |
Q2 product and license revenue was $35.4 million, down 12%, while services and other revenue was $19.6 million, up 22%. For the first half, product and license revenue rose 3% and services and other revenue rose 18%. Management attributed the recurring-revenue growth to subscriptions, term-based licenses, maintenance, and services. Hardware revenue fell $4.9 million in Q2 and $9.4 million in the first half year over year.
At June 30, cash and equivalents were $84.0 million and short-term investments were $26.8 million, together about $110.8 million. Working capital was $131.2 million, versus $136.0 million at December 31, 2019. Current assets were $201.7 million and current liabilities $70.5 million. The balance sheet reports no borrowings; lease liabilities were $14.3 million in total, including $11.7 million long-term. Stockholders’ equity was $257.2 million.
For the six months, operating cash flow was positive $4.4 million, compared with cash used of $22.8 million in 2019. Investing activities used $3.5 million and financing activities used $1.2 million. Cash and equivalents declined by $0.3 million from year-end. Management said available financial resources were adequate for operating needs over the next 12 months.
Material changes versus prior comparable periods
- First-half revenue increased 8%, but Q2 revenue declined 2%, primarily as lower hardware sales offset growth in recurring revenue.
- First-half gross margin improved to 69% from 67%; Q2 margin decreased to 67% from 68%, with lower hardware profitability cited as a factor.
- Operating expenses were nearly flat for the first half. Lower sales and marketing and R&D costs were offset in part by higher general and administrative expense, including personnel, consulting, software tools, and bad-debt expense.
- Operating cash flow improved by $27.2 million year over year, primarily reflecting lower accounts receivable and timing of customer receipts and deferred revenue.
- The company revised previously issued financial statements for errors in accounting for certain software-license and related service contracts. Management deemed the errors immaterial to prior filings; the revisions reduced 2019 first-half revenue by $0.6 million and year-end 2019 total assets by $2.0 million.
Outlook, commentary, risks, and unusual items
- Management reported no material adverse COVID-19 impact through June 30, but said it began experiencing softer demand during summer 2020 amid global economic uncertainty. It warned hardware revenue for 2020 could be substantially below 2019, reflecting prior-year European regulatory-related demand, pandemic conditions, shifts to digital alternatives, and fewer large projects. The potential overall pandemic impact could be material but could not be reasonably estimated.
- COVID-19 risks include weaker demand, discounts or extended payment terms, customer insolvencies, disrupted hardware supply and shipping, delayed purchases, and operational or staffing constraints. Some hardware fulfillment delays and added costs had occurred; management said most had been resolved.
- The board authorized a share repurchase program of up to $50 million through June 10, 2022. No repurchases under the program had occurred by June 30. Q2 share purchases shown in the filing were shares surrendered for tax withholding, not program repurchases.
- Management estimated 2020 income tax expense at approximately $3.3 million; this is an estimate, not formal earnings guidance. No revenue or earnings guidance is provided in the filing.
- The company is defending and prosecuting litigation concerning the ONESPIN/ONESPAN trademarks in Europe. Management said it could not predict the outcome and believed the proceedings were unlikely to materially harm the company as a whole; a reasonably possible loss estimate was not provided.
- Foreign currency translation reduced equity through a $3.8 million first-half other comprehensive loss. Currency movements were estimated to have reduced revenue by $1.7 million for the first half.
- The allowance for credit losses rose to $3.7 million from $2.5 million at year-end, including a $0.9 million provision; the filing attributes the higher estimate partly to COVID-19-related credit risks. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether recurring-revenue growth can offset further hardware declines, particularly given management’s warning about 2020 hardware revenue.
- Subsequent quarterly revenue, margins, collections, and credit-loss provisions as pandemic conditions and customer demand evolve.
- Cash generation and liquidity, including the effect of working-capital movements and the company’s planned use, if any, of its $50 million repurchase authorization.
- The details and implications of the immaterial contract-accounting revisions, and whether related controls or estimates change.
- Developments in the European trademark litigation and any new estimate or disclosure of potential loss.