OneSpan Inc. Q3 FY2024 earnings call

• Reported solid profitable quarter with adjusted EBITDA of $17 million (30% of revenue) and both business units profitable. - Digital Agreements was profitable on a fully burdened basis, Security was highly profitable. - Subscription revenue grew 29% (60% of total revenue), total software and services revenue grew 10% (78% of revenue). - ARR grew 9% in line with full year guidance range. - Completed multiyear cost reduction initiatives with $18 million YTD annualized cost savings, exceeding year-end 2024 goal. - Third quarter gross margin 73.9% vs 69.1% prior year, driven by favorable product mix.

Digital Agreements: Revenue grew 18% to $15.4 million, subscription revenue grew 27% to $15 million, ARR grew 16% to $60 million. Security: Revenue declined 11% to $40.8 million, software and services grew 6%, subscription revenue grew 29% to $33.6 million, ARR grew 6% to $104 million. Subscription revenue accounted for 60% of total revenue, software and services accounted for 78% of revenue. Adjusted EBITDA was $17 million or 30% of revenue, with both business units profitable. Digital Agreements was profitable on a fully burdened basis, and Security was highly profitable. Subscription revenue grew 29% and accounted for 60% of total revenue. Total software and services revenue grew 10% and accounted for 78% of revenue.

• Full year 2024 revenue expected in range of $238 million to $242 million (narrowed from previous range), partially offset by stronger subscription revenues. - Affirmed ARR guidance of $166 million to $170 million. - Significantly increased adjusted EBITDA guidance to $65 million to $67 million due to stronger operating leverage from cost savings. - Hardware revenues expected to decline modestly in 2025.

• Risks related to forward-looking statements, where actual results could differ materially from expectations. - Risks discussed in the company’s SEC filings regarding uncertainties and factors that could affect actual results.

Q: Can you give an update on the ecosystem and building it out?

A: We are working through partners to extend reach, have started signing up partners, new channel leader in Europe, impact not yet in reported numbers but expected to develop in future.

Q: How is the overall macro environment and hardware business going forward?

A: In retail consumer banking in Europe and Asia-Pac, more mobile authentication; corporate banking still amenable to hardware. Our solution enables same back-end for hardware and software. Hardware offering helps software offering.

Q: Thoughts on sustaining margins and reaccelerating top line growth?

A: Aim to reach Rule of 40 through combination of operating income, leverage, and growth. Looking to grow faster via partner channel, new offerings, existing customer relationships. Progress from here on margins will be harder but can make additional progress.

Q: Cost cutting progress and impact on gross margin?

A: Cost cutting executed well, some savings came earlier than expected. Gross margin likely to be in low-70s in 2024, benefiting from hardware mix and process improvements.

Q: What drove security solutions subscription jump and future outlook?

A: Demand for authentication and mobile application products cross-sold to existing customers, including conversions from perpetual to term licenses with price upside. Security subscription revenue to exceed hardware revenue in 2024, contributing to operating leverage.