OneSpan Inc (OSPN) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the VASCO Q2 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, July 27, 2017.

I will now turn the conference over to John Gunn, VASCO's Chief Marketing Officer. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining the VASCO Second Quarter 2017 Earnings Conference Call. My name is John Gunn, and I'm the Chief Marketing Officer. This call is being broadcast over the Internet and can be accessed on the Investor Relations section of the VASCO website at ir.vasco.com.

With me on the call today and speaking first will be Ken Hunt, VASCO's Chairman, Founder and Chief Executive Officer. Also on the call are Scott Clements, President and Chief Operating Officer; and Mark Hoyt, our Chief Financial Officer.

This afternoon, after market close, VASCO issued a press release announcing results for the second quarter and first half of 2017. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions.

Please note that statements made during this conference call that relate to future plans, events or performance, including the guidance for full year 2017, are forward-looking statements. We've tried to identify these statements by using words such as believes, anticipates, plans, expects, projects and similar words. And these statements involve risk and uncertainties and are based on current expectations.

Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to today's press release and the company's filings with the U.S. Securities and Exchange Commission for a discussion of such risk and uncertainties in this regard.

Please note that certain financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from a related GAAP financial measure. We have provided an explanation and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure in the earnings press release that can be found on the Investor Relations section of our website.

In addition, please note that the date of this conference call is July 27, and any forward-looking statements and related assumptions are made as of this date. Except as expressly required by the Federal Securities Laws, we undertake no obligation to update these statements as a result of new information or future events or for any other reason.

At this time, I will turn the call over to Ken.

Thank you, John, and thanks to everyone for joining us on our Second Quarter 2017 earnings conference call. Before I address the results for the quarter, I want to take a moment to discuss the news that we announced today, that our President and Chief Operating Officer, Scott Clements, will be succeeding me as Chief Executive Officer, effective tomorrow, July 28. The board and I have been preparing for this transition for some time, and we have tremendous confidence in Scott's ability to manage a seamless transition and lead VASCO going forward. Since he joined VASCO in 2015, Scott has proven to be a truly outstanding leader with a keen understanding of our business and a strong vision for the company's future growth. He has been instrumental in shaping and executing our strategy over the past 2 years. Under his leadership, I know the company is well-positioned to continue our transition to a more diverse portfolio, including our innovative hardware products and a growing emphasis on cloud-based and mobile security and business enablement solutions and services. We will continue to identify and capitalize on new opportunities to bring new solutions to market and deliver value to our customers and our shareholders.

I will continue to serve as Chairman of the Board and support the company in any way I can. VASCO has been a tremendous part of my life, and I am truly grateful for the support we have received from all of our customers, employees and partners over the years.

I am also incredibly proud of the remarkable people I've been lucky to work with over the last 20 years. Together, we have achieved a great deal and built a vibrant company. I know that VASCO is on the right path with the right leadership team. Our success in executing against our strategic goals such as the strong year-over-year gains in our software solutions provides clear evidence of this. And the profit generating capacity of our company remains strong with our gross margins remaining above 70%, about 3% above the second quarter of last year, as strong software sales enhanced our overall profitability. We continue to take action to align our resources with growth opportunities and enhance our ability to develop innovative solutions that identify and mitigate online and mobile threats. Our new trusted identity solutions enable the orchestration of multiple antifraud capabilities in a more unified manner while easing implementation and administration. We're confident that these investments will enable us to deliver growth and value going forward.

Before I turn the call back to Scott, I want to express my sincere appreciation to all of you for your interest in and support of VASCO. It has been a great pleasure working with all of you over the years.

With that, I'll turn the call back over to Scott. Scott?

Ken, thank you very much. And hello to everyone on the call here today. First, I want to express my gratitude to the board for the confidence they've shown in me. And I especially want to thank Ken for all he has done for this company and for helping me to develop a deep understanding of VASCO's strengths, the market and our customers' evolving needs. I'm honored to step into the CEO role and continue to lead our talented team at this pivotal time in the company's history. I'm determined to capitalize on our position as an industry leader, return our company to positive growth and deliver increased value for customers, shareholders and our employees.

As Ken mentioned, the results for the second quarter demonstrated continued progress in executing our strategic plan to grow our software and services offerings and offset declines in our still important hardware business.

I'll summarize financial results for the first half of 2017, and then later, I'll discuss our guidance for the second half of the year. For the first 6 months of 2017, total revenue was $87.7 million, representing a decline of 13% over the first half of 2016, reflecting the anticipated decline in hardware sales. This is partially offset by strong growth in our software solutions with DIGIPASS for Apps revenue growing more than 50% during the first half and e-SignLive growth of more than 40%. During the first 6 months of 2017, nearly half of our revenue came from nonhardware solutions compared to just 31% in the first half of 2016. While we will see variations in our hardware to nonhardware mix, we do expect the long-term shift towards software and services will continue. And the profit generating capacity of VASCO remains strong, with year-to-date gross margins up nearly 300 basis points over the previous year. As software solutions continue to account for an increasing proportion of our revenue, we expect our gross margins will remain in the current range subject to the normal variations based on solution mix.

Operating income in the first half was essentially breakeven with an operating loss of $100,000, as we invest in returning the company to positive revenue growth.

Our cash balance at the end of June increased to $156 million, and we're actively pursuing strategic acquisition opportunities and will increase our organic investments to accelerate further development of our trusted identity strategy. Mark will provide details on the second quarter specifically during his financial review.

Some noteworthy business highlights for the second quarter include the following. e-SignLive completed deployment of its e-signature solution in more than 5,000 branches of Chase Bank across the U.S., demonstrating our solutions unique combination of functionality, security and scalability that's demanded by the financial services industry. We continue to expand e-SignLive's growth opportunities by integrating with popular cloud-based services. During the quarter, we announced the launch of e-SignLive for Salesforce CPQ, Salesforce's popular solution used to configure products, price orders and generate quotes. e-SignLive for Salesforce CPQ is available on the Salesforce AppExchange.

During the quarter, we continued to strengthen our fast-growing DIGIPASS for Apps offering with the introduction of overlay detection as a new feature of RASP, Runtime Application Self-Protection. This advanced feature helps protect mobile applications from increasingly common mobile app overlay attacks such as the Android Marcher malware.

We also continue to see important contributions from our hardware business during the quarter with wins such as the 7-figure deal in Germany for our CRONTO technology and a solid pipeline of opportunities for the second half.

Finally, we're making important early progress in our trusted identity strategy with an increasing number of wins for our IDENTIKEY Risk Manager antifraud solution with adaptive authentication. We're drawing on the in-house cloud expertise gained through our acquisition of e-SignLive to develop the cloud-based elements of IDENTIKEY Risk Manager and our trusted identity solutions. We will have important announcements of new trusted identity solution elements during the second half of 2017.

I'd now like to turn the call over to Mark Hoyt, our Chief Financial Officer, to provide details about the quarter and the first half of 2017 before I come back to discuss our outlook. Mark?

Thanks, Scott. Okay. First off, revenue for the second quarter of 2017 was $45.7 million, a decrease of 16% from the second quarter of 2016. In line with the first quarter performance, VASCO saw year-over-year increases in services and other revenue, which includes software-as-a-service, maintenance and support and professional services. This change in revenue mix led to an increase in the gross margin up to 70% from 67% during the second quarter of 2016. Nonhardware as a percentage of revenue for the second quarter 2017 was 45% compared to 28% for the same period in 2016. Comparing the second quarter of 2017 to the same period in 2016, you will note an increase in the share of our revenue from the Americas and a corresponding decrease in Asia. This is largely a result of our growing e-SignLive software sales in North America and large deals in Japan in the second quarter of last year.

For the second quarter of 2017, 48% of our revenue came from EMEA, 25% from the Americas and 27% from Asia Pac compared to 45%, 16% and 39%, respectively, in the second quarter of 2016. And even though a majority of the VASCO's revenue continues to be generated outside the U.S., in the second quarter of 2017, approximately 63% of our revenue was denominated in U.S. dollars, 31% in euros and 6% in other currencies. The split of currencies really had no significant change from last quarter. The impact of foreign exchange on VASCO for the second quarter of 2017 was a 1% decrease in revenue. This is partially offset by a corresponding 1% decrease in our operating expense.

Deferred revenue, as of June 30, 2017, totaled $38 million, an increase of approximately $2 million or 5% from $36 million at the end of last year. And this $38 million is in line with the end of Q1. Note, the portion of deferred revenue that we recognized beyond 12 months has grown to be $7.5 million by the end of Q2. And that portion is now being reflected on the balance sheet in other long-term liabilities. So to clarify that's how we arrive at $38 million in deferred revenue, we add the $7.5 million in long-term deferred revenue to the current deferred revenue of $30.6 million to arrive at $38 million.

Our operating expenses for the second quarter of 2017 were $32 million, a decrease of 2% from the second quarter of 2016. The decrease in operating expenses is in line with our internal expectations. OpEx for the first 6 months of 2017 were $62 million, flat for the comparable period in 2016.

Total headcount of VASCO was 623 great employees as of the end of June 30, 2017 compared to 615 as of Q2 2016 and 613 at the end of last year. The operating loss for the second quarter of 2017 was $400,000, a decrease of $3.8 million from $3.4 million operating income in the second quarter of 2016. For the first 6 months of 2017, we had an operating loss of $99,000, a decrease of $6.6 million from the same period last year. Operating income as a percent of revenue or operating margin was a negative 1% for the second quarter of 2017 and 0% for the first 6 months, down from 6% for both comparable periods in 2016. Operating income as a percentage of revenue, excluding the amortization of purchased intangible assets, was 4% for the second quarter and 5% for the first 6 months of 2017 compared to 10% and 11%, respectively, for the same periods last year.

The company reported an income tax expense of $200,000 for the second quarter of 2017 compared to $1 million for the second quarter of last year. The effective tax rate is 65% for Q2 with discrete items. And let me remind everyone that, VASCO's profit is smaller this year and the effective tax rate is especially volatile with that small level profits depending on the geographic split of our earnings.

As of June 30, 2017, our net cash balance, including short-term investments in commercial paper, was $156 million, an increase of $20 million or 15% from $136 million at June 30, 2016, an increase of 8% from December 31, 2016. Note this large -- or this increase in cash is largely due to differences in our -- normal differences in our working capital balances. And finally, the company continues to have no outstanding debt.

I will now turn the meeting back to Scott.

Mark, thanks very much. As we look at the second half of 2017, we're confident in our opportunity pipeline and in the positive changes we're making in the organization and that the growth in our software solutions will remain strong. Accordingly, we are reaffirming our guidance for the year. Revenue for the full year 2017 is expected to be in the range of $180 million to $190 million. And of course, this implies that we expect to return to positive top line growth in the second half of 2017. Operating income as a percentage of revenue, excluding amortization of purchased intangible assets, is projected to be in the range of 1% to 5%.

In closing, last quarter you heard me discuss the bold vision we have for VASCO's future. A future built on providing trust to the identities, devices and transactions that form the digital world for our clients and their customers. Everyday, our customers are facing an unprecedented set of fraud and compliance challenges from diverse and volatile attacks by professional hackers that are becoming increasingly aggressive in their tactics. We've long helped to solve this pressing business challenge, significantly reducing losses to fraud. Our trusted identity strategy will not only provide enhanced adaptive security, but also enable our customers to securely pursue the new growth opportunities in the digital world.

Once again, I really would like to thank Ken and the board for the opportunity to lead this fine organization. I'm confident that we have the talent and the resources to capitalize on new growth opportunities that lay ahead of us.

With that, I and the rest of the team will be happy to take your questions. Operator?

(Operator Instructions) And our first question comes from the line of Joe Maxa with Dougherty & Company.

First, I want to say congratulations, Scott. Also...

Thanks very much, Joe.

Then congratulate, Ken, too. You have a little more time I hope on your hands.

Thanks, Joe.

So I just want to talk a little bit about -- well, first, I want to mention this Chase Bank that's a great reference customer. Could you tell us a little bit how long that took to implement? Or is that just something recent? Or is it took over a period of time to implement these -- what you say is several thousand banks?

Yes, it actually went pretty fast, Joe, over the last, I think, 2 to 3 quarters, roughly, maybe closer, maybe a little bit into 4 quarters, but it was really a pretty rapid deployment and really a pretty trouble-free deployment. So I think we really feel good about that. We think it's a great example of how large organizations can adopt e-SignLive and deploy it in a secure and scalable way and really deliver a lot of value. So you're right. It's a really important customer for us and a great reference project.

And will that help lead into DIGIPASS for Apps? You think you guys -- they -- potential for them to use that type of product as well or other products that you offer?

Well, I think, certainly, any time we're able to get into a key customer with one of our products, we think that increases our opportunity with some of our other solutions. And we are seeing certainly, in -- I know in Europe and in a few other places a significant increase in the number of opportunities we're getting in our traditional DIGIPASS customers for e-SignLive. That has taken a little bit of time, but we really are starting to see this -- the number of opportunities there grow. And so I think that is an example, Joe, of how we will see this play out. When we win with one, we have an opportunity to win with others.

Yes, I wanted to ask along that line as far as percent of sales on e-SignLive U.S. versus Europe or other international locations. I'm assuming, it's still predominantly U.S.

Yes, yes, it is -- it's dominantly U.S., that's correct.

Okay.

Joe, this is Ken. It's interesting the number of logos, the number of companies that e-SignLive brought to the partnership, they were pretty much all different than the current VASCO customers. And so -- and in the case of JPMorgan Chase, it was a competitive win for them a few years ago. And then as Scott was mentioning, the rollout was done over about 4, 5 quarters recently. So that gives us great optimism that we can trade customers.

The pipeline you talk about on hardware, obviously, it sounds like a nice win over in Germany. But how would you look at that in the back half of the year as far as expectations, I mean, as far as Q3, Q4 type when they may roll out?

Yes. I would put it this way. Joe, you may recall from the first quarter conference call, I talked about the impact on our hardware business being a combination of a -- of the cyclical -- a set of cyclical impacts and a set of -- or any longer-term secular trend. The secular trend is going to play out over coming quarters. I think, the cyclical impact that we've seen is diminishing quite a lot now. And so I don't -- we're not suggesting here that we're going to see a robust growth or anything in the hardware business. I think over the coming quarters, we'll continue to see some decline there, but it will be at a -- generally at a much lower rate than we've seen over the last several quarters. It will be a little bit volatile. The -- we still do win big projects that can move the performance of the hardware business up and down, but the general trend will continue to be, I think, down over the quarters, but at a much more measured rate than what we have had overcome in the last few quarters.

So as you look at the back half, I mean, typically Q4 has been seasonally strong, and I'm assuming that's what you would expect, again, this year. How would you think of Q3, as you look at Q2, because historically, Q3 has been softer? At least, if you want to talk about the hardware side versus -- or overall revenue, whatever you want to take a stab at?

Mark, do you want to take that one?

Joe, it's Mark. For the second half of the year, as Scott mentioned, we do expect an upturn to get to our guidance range. And I think, as I look at the split between Q3 and Q4, we do see the traditional split between the quarters as far as timing goes. So I would expect Q3 to be in line with -- closer to in line with Q2 with some growth in Q4.

And you mentioned, gross margin do you think can maintain in this -- in the current levels. Would you expect that to maintain around that 70% plus or minus going forward? Or will you see that drift lower as well over time?

No. I think, it'll be pretty close to the 70% range. The split obviously varies from quarter-to-quarter, but we're getting close to the 50-50 split between hardware and nonhardware. And our margins are going to be in the low-70s range, it looks like.

Okay. And then I did notice the tick-up in sales and marketing in the quarter, primarily. I mean, all OpEx lines sequentially were up, but that one stood out a little bit more. Is there anything unusual or -- in that number, first? And then, second, is this a base rate we should be looking at? Should we be growing overall OpEx from these levels? Or was that a high point?

No. We normally see a tick-up in our OpEx from Q1 to Q2, we saw last year as well. And we have seen some increase in the comp for the sales and marketing line as we continue to spread the word about VASCO. I would expect that OpEx will continue along the same rates we're seeing now. I mean, there's going to be some additional -- incremental spending as we're looking at on R&D and product development, product management as we put more money into our growing products.

Okay. And you would typically get a Q3 pullback with summer vacations and those types of accruals?

Yes, but not a significant amount. I don't see a significant amount of the pullback.

(Operator Instructions) Our next question comes from the line of Saliq Khan with Imperial Capital.

This is Megan on for Saliq. So which software solutions are we adopting most by your customers and your customers' end users? And do you envision that -- any changes in that mix?

The -- Megan. The -- really the 2 key drivers for our software growth are DIGIPASS for Apps, our mobile device -- set of mobile device SDKs and our e-SignLive business, and we do have some other products. Our IRM, IDENTIKEY Risk Manager product is starting to see some traction in the marketplace, but it's relatively small compared to DIGIPASS for Apps and e-SignLive. So I don't think -- I think, we expect to see those 2 product lines. And ultimately, those 3 product lines show significant -- continued significant growth. I don't think that means in the short term any significant shift in the mix or the character of our software revenues.

Okay. And so although, that U.S. market has been somewhat slow to adopt to cyber and authentication solutions, we continue to see consolidation among the vendors. What verticals do you find with vendors seeing that could benefit VASCO?

From an M&A point of view or just from a market entries point of view.

Yes, both.

Yes. So I think we are predominantly a company that participates in the financial services vertical. We do a meaningful amount of business certainly in the enterprise space -- broadly in the enterprise space. Our focus in the short-term is going to really continue to be in financial services and those smaller parts of the enterprise market that we participate in. There is a tremendous amount of change going on in financial services, a lot of demand for new security services like the ones that we offer, particularly the newer software offerings. And then, our ability to tie those software offerings together into new types of services that enable their opportunity to grow their banking businesses. So we see a lot of opportunity continued in financial services. We will look for acquisitions that are based on certain types of technology and particularly when those align with our primary interest in financial services.

Okay. And one last question. As operational efficiency becomes more important, how are you measuring ROI of each incremental new hire?

We don't really measure ROI at the hire level. As we hire an individual person, what we do and what we're increasingly trying to do is really measure related to investments that we make in new solutions and new products or the ultimately the entry of new markets as you mentioned in your previous question. And then, the new -- the addition of new employees and that really factors into the costs that we assume for these new opportunities with new solutions or new markets.

(Operator Instructions) We do have another question. It's coming from the line of [Anthony Galo]. (inaudible) There are no further questions at this time. I'll turn the call back to the presenters.

All right. Thank you very much, operator. Those of you who were able to join us on the call today, we truly appreciate your interest in VASCO. We feel very good about where we're headed as a company. We have a fantastic leadership team here, and we're very grateful to the legacy that Ken has left us. Although, he's going to continue to be involved, he has created a great company, and we're all benefiting from that. So Ken, thank you, again, very much. And we look forward to speaking with all of you at the end of the third quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.