Business context and reporting period
VASCO Data Security International, Inc. (the registrant named in the filing; the request identifies Onespan Inc.) designs and sells hardware and software for authentication and secure digital transactions. This unaudited Form 10-Q covers the three months ended March 31, 2016; financial amounts below are in thousands of U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q1 2016 | Q1 2015 or comparator |
|---|---|---|
| Revenue | $46,767 | $65,135 |
| Gross profit / margin | $33,928 / 72.5% | $37,674 / 57.8% |
| Operating income / margin | $3,115 / 6.7% | $16,077 / 24.7% |
| Net income | $2,199 | $13,634 |
| Diluted EPS | $0.06 | $0.34 |
| Cash from continuing operations | $3,149 | $12,287 |
- Revenue fell 28%; gross profit declined 10%. Gross margin improved chiefly because lower-margin card-reader sales were a smaller share of revenue, while higher-margin non-hardware and Enterprise and Application Security sales grew.
- Operating costs rose 43% to $30,813, reflecting Silanis-related costs, higher compensation and increased headcount; amortization of acquired intangibles also increased.
- Revenue by market: Banking declined 36% to $36,666; Enterprise and Application Security grew 28% to $10,101. Non-hardware revenue rose 36% and represented 36% of revenue versus 19% a year earlier.
- Cash and equivalents were $70,321 at March 31, 2016, down from $78,522 at year-end; short-term investments were $54,878, up from $44,961. Working capital was $132,741, up 4% from year-end. The company reported no debt.
- Operating cash flow was $3,149 versus $12,287. The cash-flow statement shows a $7,749 use from accounts receivable, partly offset by a $6,611 source from deferred revenue. Net cash declined $8,201 during the quarter.
- Total assets were $310,294 and total liabilities $58,107 at March 31, 2016. The filing reports an effective tax rate of 39% for Q1, affected by discrete acquisition-related and deferred-tax items.
Material changes versus the prior comparable period
- The revenue decline primarily reflected a large 2015 deployment of Cronto card readers to Rabobank. Rabobank-related revenue exceeded 7% of total revenue in Q1 2016, versus 30% in Q1 2015. Excluding Rabobank, revenue increased 2% (an estimated 4% at unchanged exchange rates).
- EMEA revenue fell 53% to $22,378; it represented 48% of revenue, compared with 73% a year earlier. Asia Pacific revenue increased 44% to $16,258.
- VASCO acquired Silanis Technology in November 2015 for an aggregate purchase price of $75,000. Its preliminary purchase allocation remained subject to revision. A $9,146 measurement-period adjustment reduced goodwill and the valuation allowance; the change contributed $311 to Q1 income tax expense.
- Foreign-currency transaction results improved to a gain of $199 from a loss of $617. Translation adjustments produced other comprehensive income of $815, versus a loss of $3,544.
Outlook, commentary, risks and unusual items
- Management said financial resources were adequate for operating needs over the next 12 months. The filing gives no revenue or earnings guidance. It estimated a 28% 2016 annual tax rate before discrete items and 31% including specified discrete items.
- Management described order timing and shipment volumes as important sources of quarterly revenue volatility. It cited European economic uncertainty, currency movements, competition and dependence on certain products, suppliers and key customers as risks.
- Management cautioned that successful Silanis integration and expected revenue synergies and cost savings were uncertain. Silanis represented 32% of consolidated assets and 5% of Q1 revenue; management was documenting and testing its internal controls for inclusion in the 2016 annual assessment.
- The company accrued $900 for potential OFAC penalties related to products that a European distributor may have resold to parties in Iran. BIS issued a no-action letter; OFAC had not responded to the company’s disclosure by the filing date. Management said any final settlement was not expected to materially harm the business, but the amount could differ from the accrual.
- A putative securities class action and derivative litigation remained pending; a related derivative action had been stayed, and another was dismissed with prejudice as to the named plaintiff’s individual claims. The company said it believed the securities suit lacked merit and intended to defend it.
- The company adopted ASU 2016-09 prospectively; it reduced Q1 tax expense by $91 and shifted $91 of cash-flow classification from financing to operating activities. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth excluding Rabobank persists, and how order timing and customer concentration affect future quarters.
- Whether Silanis integration delivers anticipated benefits, and the final purchase-price allocation and related tax effects.
- The outcome of the OFAC review, potential penalty exposure, and developments in securities and derivative litigation.
- Cash conversion, especially accounts receivable growth and the contribution of deferred revenue to operating cash flow.
- Whether the reported margin improvement is sustainable as product, market and geographic sales mix changes.