OneSpan Inc (OSPN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the VASCO Data Security International, Inc. Q3 Fiscal 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Joe Maxa, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining the VASCO Data Security Third Quarter 2017 Earnings Conference Call. My name is Joe Maxa, and I am the Director of Investor Relations. This call is being broadcast over the Internet and can be accessed on the Investor Relations section of VASCO's website at ir.vasco.com.

With me on the call today and speaking first will be Scott Clements, VASCO's Chief Executive Officer. Also on the call is Mark Hoyt, our Chief Financial Officer.

This afternoon, after market close, VASCO issued a press release announcing results for our third quarter 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 have tried to identify these statements by using words such as believes, anticipates, plans, expects, projects and similar words, and these statements involve risks and uncertainties and are based on current expectations.

Consequently, actual results could differ materially from these 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 risks 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 reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release that can be found on the Investor Relations section of our website at ir.vasco.com.

In addition, please note that the date of this conference call is October 26, 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 Scott.

Joe, thank you very much, and I also want to welcome you to the VASCO team. And thanks to everyone for joining us on our third quarter 2017 earnings conference call.

In Q3, VASCO returned to growth, driven by record revenue from our nonhardware offerings, along with a positive contribution from our hardware. The operating disciplines implemented by our leadership team are improving the predictability and the performance of our business as we execute our strategic plan to grow our software and services revenue while stabilizing our hardware business.

Total revenue for the quarter grew 17% to $51 million, driven by 42% growth in nonhardware to over $24 million and 1% growth in hardware. Our operating margin, excluding amortization of purchased intangible assets was 14%. Mark will provide additional details on the third quarter during his financial review.

For the first 9 months of 2017, total revenue was $139 million, representing a decline of 4% over the first 9 months of 2016. This reflects the anticipated decline in hardware revenue during the first half of 2017, which was largely offset by strong growth in our software revenue. DIGIPASS for Apps was up approximately 45% and e-SignLive was up more than 50% on a year-to-date basis.

Overall, nonhardware accounted for 48% of our revenue compared to 34% in the first 9 months of 2016. While we will see variations in our hardware to nonhardware mix, we expect the long-term shift towards software and services will continue. Our growth in software and services benefited our gross margin percentage, which was up nearly 300 basis points year-to-date. We expect our blended gross margin to remain in the 70% range, subject to the normal variations based on solution mix.

Our cash balance at the end of September increased to $159 million and we have no debt. We are actively pursuing strategic acquisition opportunities, and we'll continue to invest in building out our trusted identity strategy.

A few noteworthy highlights for the third quarter include the following. We recorded 2 additional 7-figure e-SignLive deals with top 25 North American banks, covering a range of e-signature applications at thousands of branches. We also recorded a 7-figure Cronto hardware deal in the European banking sector.

And as part of our trusted identity strategy, VASCO launched the developer sandbox, allowing customers to test and integrate web and mobile applications with our adaptive authentication service, which secures transactions both by analyzing broad and disparate data acquired through user actions and events.

With that, I'll turn the call over to Mark Hoyt, our Chief Financial Officer, to provide details about the quarter and the first 9 months of 2017 before I come back to discuss our outlook. Mark?

Thanks, Scott, and welcome to this side of the Polycom, Joe. As Scott mentioned, revenue for the third quarter of 2017 was $51.1 million, an increase of 17% from the third quarter of 2016, and for the first 9 months, decreased 4% to $138.8 million from $144.7 million in the same period last year. Third quarter services and other revenue grew 35% to $12.7 million, while product and license revenue grew 12% to $38.4 million.

The increased proportion of revenue from software licenses led to an increase in the gross margin to 72%, up from 69% during the third quarter of 2016. Gross margin for the first 9 months of 2017 was 71% compared to 68% for the comparable period last year.

Net income was $2.8 million or $0.07 per fully diluted share for the first -- for the third quarter and $3.4 million or $0.09 per fully diluted share for the first 9 months of 2017. Earnings before interest, taxes, depreciation and amortization or EBITDA was $7.6 million for the third quarter and was $13.3 million for the first 9 months of 2017.

Operating income as a percentage of revenue, excluding the amortization of purchased intangible assets, was 14.3% in the third quarter of 2017 compared to 7.1% last year and 8.4% for the first 9 months of 2017, down from 9.7% for the comparable period last year.

Comparing the third quarter 2017 to the same period in 2016, you will note an increase in the share of our revenue from the Americas, which is largely a result of the growing e-SignLive software sales in North America, along with strong growth of our security product line sales in Latin America.

For the third quarter of 2017, 45% of our revenue came from EMEA, 28% from the Americas and 27% from Asia Pacific compared to 52%, 19% and 29%, respectively, in the third quarter of last year. Deferred revenue as of September 30, 2017, totaled $38.8 million, an increase of $2.4 million or 7% from $36.4 million at December 31, 2016, and an increase of 2% from $38.1 million as of the end of the second quarter this year.

As I've mentioned on previous quarterly calls, there are several factors that impact VASCO's deferred revenue. As -- our operating expenses for the third quarter of 2017 were $31.5 million, an increase of 8% from the third quarter of 2016.

The total headcount at VASCO was 596 as of September 30, 2017, compared to 623 employees as of June 30, 2017, and 615 people as of September 30th last year. The sequential decline in headcount was primarily due to the exit of a nonstrategic product line. The split of -- amongst our teams at the end of the third quarter 2017 was 312 in sales and marketing, 192 in research and development and 92 in general and administrative.

The company reported its income tax expense of $2.6 million for the third quarter of 2017 compared to $800,000 for the third quarter of 2016. The effective tax rate was 48% for Q3. And let me remind everyone that the effective tax rate at VASCO can be volatile depending on the geographic split of our profits.

As of September 30, 2017, our net cash balance, including short-term investments in commercial paper was $158.7 million, an increase of $2.5 million or 2% from June 30, 2017, and an increase of $17.2 million or 12% from $141.5 million at the end of Q3 2016. And finally, the company continues to have no outstanding debt.

I will now turn the meeting back to Scott.

Thanks very much, Mark. Recently, VASCO sponsored the 2017 Faces of Fraud Survey conducted by ISMG, the world's largest media organization devoted solely to information security and risk management. The results of this survey confirmed that banking customers face a complex environment with a myriad of anti-fraud solutions that are difficult to implement and to use.

VASCO's trusted identity solutions will address these customers challenges by bringing to market an easy-to-implement platform that helps prevent fraud by enabling trust in identities, devices and transactions as part of a compelling user experience for their customers.

So let me update you on our 2017 guidance. Driven by our strong Q3 results and our growing opportunity pipeline, we're increasing our full year 2017 guidance as follows. First, we expect revenues to now be in the range of $185 million to $190 million versus our previous guidance of $180 million to $190 million. Operating income as a percentage of revenue, excluding the amortization of purchased intangible assets, is projected to be in the range of 6% to 9% versus our prior guidance of 1% to 5%.

In closing, we're confident in our ability to drive value for our stakeholders. We're growing our software and services revenue, and our hardware business is stabilizing. We continue to invest in our future and believe our trusted identity strategy will enable our customers to reduce fraud and securely pursue new growth opportunities in today's digital world.

With that, Mark and I will be happy to take your questions. Operator, please proceed with the Q&A period.

(Operator Instructions) And our first question comes from the line of Saliq Khan from Imperial Capital.

Just a couple of questions for you. Certainly, a really good quarter. And you talked about e-SignLive and the growth you're seeing in North America. Can you dissect a couple of things for us, the first being is what type of growth is e-SignLive seeing today and how do I think about that going into '18? And from a vertical perspective, where are you finding the most type of opportunities for e-SignLive? And are there competitors that you're just thinking about that might be crowding into your space?

Well, maybe let's try to answer those in reverse order, Saliq. I think we certainly do see competition in the e-signature space. But the fundamental demand for e-signature is growing quite fast, somewhere in 30%, 40%, 45% range. And we're growing -- in the recent couple of quarters, we're actually growing in excess of the rate of the market growth. So I think, we feel good about this business and about our position with this business. A lot of the opportunities we're seeing are in banking and insurance and some related in adjacent industries. We are starting to see uptake in e-SignLive globally as well in Latin America, in Europe and in Asia. Those are, of course, still much smaller than the part of the business in North America, but we are seeing some global activity related to e-SignLive. So I think, overall, we feel very good about that. I think the year-to-date growth that we have for e-SignLive is north of 50%. And so we expect solid and strong growth to continue in e-SignLive in the coming quarters.

Got it. The other thing I was thinking about is gross margin improved, and I anticipate it will continue to improve as you become more software oriented. Are you having conversations though with some of the customers or potential customers where you may be giving them a price break in order to bring them on board because of the competition that's out there right now? Or has that not been a point of conversation just yet?

I don't think there's an overall pattern with that, Saliq. Of course, we have to be competitive in every project and it is the case. And it's always the case, I think, that software products have a price compression over time. And so to be in the software business, you have to continually add features and reinvent and target new customer sets. I think we're trying hard to do all of those things. And so I think the main driver of our margins going forward will really be 2 things. It will be the grow -- overall, the growth trend in our software and our services, which are higher than the average. And then second of all, there will be a quarter-to-quarter variation in mix. We had a good quarter in hardware this quarter. And then we had some large perpetual deals in the software space too, which also were helpful to our margins in the quarter. So Mark, I don't know if you want to add any color to that.

No, just a little bit, that we did have a very good quarter from a gross margin perspective at 72%. I do think that going forward, as Scott mentioned, that margin will be tempered a bit as we see the mix of our hardware and software offerings. So I would say that our normal range of being closer to 70% is probably realistic for the next couple of quarters. But longer term, we do expect to see appreciation as software continues to grow.

(inaudible) As the mix continues to shift, how does your channel strategy shift as well? Or do you not need to be -- do you have to change that at all going forward?

I'm sorry, Saliq, I didn't hear the first part of your question, I heard the latter part. But could you just say that one more time?

Right. So as the mix overall between hardware and software changes, how does that impact your go-to-market strategy?

Well, I think there are a couple of things that are worth commenting on there. I think we have started to do some things to broaden out our indirect distribution in Europe. We're working with a distributor we worked in the past. We doubled the number of countries that we're addressing through that distributor. And so I would expect us to have a more varied distribution model going forward as we segment the market in some new ways. I think that's probably the most important point. But as our software solutions evolve, we are going to have to continue to be sensitive to this. I think the other thing that's happening is, we are working hard to make sure that our direct sales model is being updated to reflect our new solution capabilities. We have made significant investments, and we'll continue to make significant investments in sales training to prepare our people to sell the new solutions. And in cases where the right opportunity is there, as necessary, we will and we have brought in new talent to support the sales of software solutions in our customer base. So I think -- we really think that we have to continue to invest in our direct model. But we also do have significant opportunities, particularly as our product portfolio gets more diverse, to have a more diverse channel structure.

Just one last one on my end as well, which was, any highlights, any insight that you can give us from the types of conversations that you had at Money 2020?

The answer to that is no because we've been here preparing for the earnings release. But our teams have been at Money 2020, and we will certainly be getting the download from them at the end of this week and into next week. So I'm sorry, but we're unfortunately not very up to speed on that topic quite yet.

(Operator Instructions) Our next question comes from the line of Catharine Trebnick of Dougherty & Company.

This is Bailey Lund on for Catharine today. Wanted to congrats you guys on the quarter and the addition of Joe Maxa to your team.

We're very fortunate to have him.

What would you say your split is between software and hardware revenue?

Mark?

Let's see. This quarter, we were at -- it was at 53%, right? Hold on a second. Yes, we're at 53% hardware this quarter and 47%, down slightly from 55% last quarter. So pretty much in line. We're still seeing the long-term trend that our nonhardware business, which is a split of our services, our software and our maintenance continue to grow as a portion of the overall revenue.

Okay. And to follow that, I know you guys mentioned in previous quarters of a 50-50 split. How near in the future would you say you are to obtaining that, if you're still trying to obtain that?

Yes, it's a little hard to say because we do have large deals in hardware and sometimes with perpetual software contracts that swing this back and forth. But I think our present view is that somewhere in the course of 2018, we're probably going to hit a crossover. You may or may not recall that we actually went minority hardware in the first quarter of 2016 -- I'm sorry, 2017, for example. That's moved back a little bit the other way the last couple of quarters as our hardware business has done a little bit better. But I think, as Mark said, the trend is pretty clear. And I think it will be somewhere in the course of 2018, although it's hard to be more precise on that right now.

Maybe a part of the issue is, like Scott said, we get large hardware orders that continue to come in. So we would not -- I would not want to see the split go 50-50 at the expense of hardware declining faster. So it's a good problem to have.

Okay. And then for modeling purposes, how should we think about the stabilization of revenue in hardware looking ahead?

I think the guidance that we're giving and our thoughts are that over time, we will continue to see this shift that will come from good growth in or faster growth in software and services than hardware for one reason. Secondarily, we do think over time, we will continue to see some decline in hardware over the cycle. It will be more like mid-single digit, low to mid-single-digit type rates of decline in hardware. Again, just to reiterate though, there are going to be quarters like this one, where we see hardware actually up, so -- but I think the trend line is going to be something like that. And I think it's important to note that, that's a significantly different place than we were a couple of quarters ago. I have mentioned in prior calls that the decline in our hardware was a combination of 2 factors, one of which was the secular trend of gradual decline in hardware and the other was the cyclical decline we saw from a number of very large orders that happened in the 2015 and early 2016 time frame. We are -- really have lapped those cyclical effects now. And we're really looking more at the lower level of movement up and down around a gradually declining trend line.

Okay. And then last question. In terms of software, are you looking at consistent growth?

Are -- is your question, are we trying for that or expecting it or...

Expecting more.

Yes, I think we do expect us to see a fairly consistent pattern. There -- we have seen a pretty consistent pattern. I think over the next few quarters, we do expect to continue to see strong double-digit growth on our software offerings. We are going to be launching new software offerings. The normal life cycle of software is that it grows very fast for a while and then not -- maybe not quite as fast and you have to deliver new software offerings to kind of fill that gap. And that's exactly where -- what we're investing in and what we're doing. And I think you'll see us add to that mix through acquisition and using our balance sheet to increase the balance of software in the company. We are continuing to invest in our hardware business, albeit at a somewhat slower rate than in the past because there is still a demand for innovation and new flavors of hardware authentication in Asia and Europe. So we feel really good about the hardware business as a stabilizer and the overall revenue stream as we really accelerate the growth in the software part of the company.

Our next question comes from the line of Joel Fishbein of BTIG.

Congrats on a fantastic quarter and returning to growth. I just have a couple of questions.

Thanks, Joel. We're very happy about that. We've worked very hard to get here.

I know you have, and it's great news. The interesting -- the penetration in the U.S. is just fantastic in these top 25 banks. How many have you closed so far? It's only -- it's over 3 now, I believe, right, for e-SignLive, and it just looks like there's some good momentum there. Can you give us just an update on that?

Yes, I don't -- I actually don't know the exact number because what happens is we -- some of these are very large deployments across the entire footprint of branches and some of them are smaller applications that occur and -- say, the treasury department in a bank. I think we do find that it's important to get in the door and get your foot in there because once you do that, almost inevitably, there is an expanded number of opportunities. I would say that, just kind of doing some quick mental math, it's probably somewhere in the neighborhood of, we're participating in, around maybe 10 of the top 25 in one way or another. It just is a rough idea. And we think we have opportunities, obviously, beyond that, in the top 25, but also in the many hundreds of other banking institutions that exists around the world. And we're only beginning to tap the opportunity in -- certainly, in Europe and in Asia and Latin America. We think we've got good opportunity in those markets as well. I think that's one of the reasons that e-SignLive and VASCO came together. Because of VASCO's coverage in these markets around the world, we can really take advantage of that and expand our share of wallet globally, not just in North America.

That's great. And then the second question is just around GDPR. Obviously, the deadline is sometime next year. I know it's a little bit early still, but wanted to just get your update there and see how you feel you're positioned from a solution perspective to deal with that and help your customers deal with that.

We have been doing a lot of work around interacting with customers and doing webcasts and so on around these regulatory issues that are happening in Europe in particular. The interesting thing is that, it's in the first instance, European focus. But what we find is it does have an influence so well beyond Europe because so many of the banks that operate in Europe are global banks and they have to be concerned about these things, just like the banks do in Europe. We've been, I think, really focused a lot on PSD2, payment services directed to in our marketing and our promotional activities that has generated the largest amount of customer interest, I think, we've ever had in a marketing program. And we're doing -- beginning to do the same things around GDPR. I think for our business, PSD2 is probably a bigger issue right now than GDPR. But GDPR is really starting to get in -- get a lot more attention because people are realizing that data is coming and they're, in many cases, not very well prepared for it yet.

(Operator Instructions) And at this time, we do not have anyone else registered for any questions. Please continue with your presentation or closing remarks.

I think that's probably it. I want to thank all of you who were able to join the call today and those of you who listen on the recorded call later on, thank you for listening to that. We appreciate your interest. We're excited about the future of VASCO. We think the third quarter is an important step forward for the company. And we are going to do our best to continue to bring this kind of progress to our shareholders. Thanks very much and have a good rest of your day.

Thank you, 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.