OneSpan Inc. (NASDAQ:OSPN) Q1 2024 Earnings Call Transcript May 3, 2024

OneSpan Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. Thank you for standing by. Welcome to OneSpan's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host Joe Maxa, Vice President Investor Relations. Please go ahead.

Joe Maxa: Thank you, operator. Hello everyone and thank you for joining the OneSpan first quarter 2024 earnings conference call. This call is being webcast and can be accessed on the Investor Relations' section of OneSpan's website at investors.onespan.com. Joining me on the call today is Victor Limongelli, our Interim Chief Executive Officer; and Jorge Martell, our Chief Financial Officer. This afternoon, after market close, OneSpan issued a press release announcing results for our first quarter 2024. 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 outlook for full year 2024 and other long-term financial targets, are forward-looking statements.

These statements involve risks and uncertainties and are based on current assumptions. 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 risks and uncertainties. Also 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 for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor presentation available on our website.

In addition, please note that the date of this conference call is May 2nd, 2024. Any forward-looking statements and related assumptions are made as of this date. Except as required by law, we undertake no obligation to update these statements as a result of new information or future events or for any other reason. I will now turn the call over to Victor.

Victor Limongelli: Thank you, Joe and good afternoon everyone. Thank you for joining us today. I want to start out by congratulating the entire OneSpan team for delivering another solid quarter, which exceeded our internal revenue and adjusted EBITDA expectations. Revenue grew 13% year-over-year to $65 million and adjusted EBITDA was $20 million or 31% of revenue. ARR growth also exceeded our internal expectations, it grew 9% year-over-year to $155 million and offset the headwinds we discussed on our last earnings call related to expired contracts of sunsetted products. Q1 was my first full quarter leading OneSpan and I continue to be impressed with the team's work ethic and dedication to operational rigor. For example, one of the major factors in the Q1 outperformance was that our renewals team did a great job closing several delayed renewals earlier than expected, which increased Q1 revenue by a few million dollars.

And our APAC team did excellent work delivering its strongest quarter in terms of year-over-year growth in more than three years. In addition to the impact from delayed renewals closing in Q1, our first quarter top line outperformance was largely driven by expansion contracts from existing security customers, who continue to place high value on our industry-leading anti-fraud solutions, designed to mitigate potential hacking attacks. Profitability outperformance was driven by strong revenue, favorable product mix, and increased operating leverage, resulting from the right-sizing of our cost structure over the last several quarters. We also generated $27 million in cash from operations and ended the quarter with $64 million in cash. Our two business units, Security Solutions and Digital Agreements, both had strong quarters with solid year-over-year revenue growth and significantly improved profitability.

Revenue growth in Security was primarily driven by strong increases in software licenses, including approximately $3 million from the past-due renewals just discussed that we had originally expected to close in Q2. We also saw several annual contracts renew with multi-year term lines, resulting in about $2 million of additional revenue as compared to our forecast. And we had solid double-digit ACV growth in Security, driven in part by increased demand for our cloud-based authentication solution, OCA including a new 7-figure ACV contract and the expansion of a 2-year contract to the mid-7 figures with new ACV of nearly $1 million. DIGIPASS hardware revenue declined as expected. Last quarter, we discussed a few orders that had shipped in Q4 to the tune of approximately $2 million that were originally scheduled to ship in the first quarter of 2024.

Revenue growth in Digital Agreements was primarily driven by expansion of cloud subscriptions from existing customers. Our profitability and cash flow generation improved significantly in the first quarter as compared to the prior-year period. For the balance of the year, seasonal software and hardware revenue patterns suggest more modest revenue growth and profit margins in Q2 and in the second half. We will continue to focus on operational excellence and on driving efficient revenue growth to help ensure, we achieve our profitability and cash flow commitments. With that, I will turn the call over to Jorge. Jorge?

Jorge Martell: Thank you, Victor, and good afternoon everyone. I'll start by providing an update on our cost reduction activities. Cumulative annualized cost savings to date from our restructuring efforts reached $64.5 million in line with the $64 million to $65 million target range we previously announced, although achieved earlier than our end of 2024 forecast. We now expect total cumulative annualized cost savings to approximate $75 million by the end of 2024. Now, turning to our first quarter results. I'll provide a brief overview of our results and then discuss each business unit in more detail, before providing an update to our 2024 outlook. I will then turn the call back to Victor for closing remarks. ARR grew 9% year-over-year to $155 million.

ARR specific to subscription contracts grew 17% to $128 million and accounted for approximately 83% of total ARR. Net retention rate or NRR was 107%. It was impacted by a few percentage points as expected due to the timing of contract expirations related to sunset products. First quarter 2024 revenue grew 13% to $64.8 million as compared to the same period last year, driven by 9% growth in Security Solutions and 25% growth in Digital Agreements. Subscription revenue grew 34% to $40 million. Security subscriptions grew 34% and digital agreement subscriptions grew 33%. The strong growth in subscription revenue was partially offset by a decline in maintenance revenue which is by design as we transition to SaaS and subscription licenses and a decline in hardware.

First quarter gross margin was 73% compared to 68% in the prior-year quarter, driven primarily by favorable product mix, including record subscription revenue and seasonally low hardware, partially offset by an increase in depreciation of capitalized software costs. First quarter GAAP operating income was $14.1 million compared to an operating loss of $8.1 million in the first quarter of last year. Increases in revenue and gross profit margin and a decrease in operating expenses primarily from lower headcount-related costs were partially offset by an increase in restructuring and other related charges. GAAP net income per share was $0.35 in the first quarter of 2024 compared to a GAAP net loss per share of $0.21 in the same period last year.

Non-GAAP earnings per share, which excludes long-term incentive compensation, amortization, restructuring charges, other non-recurring items and the impact of tax adjustments was $0.43 in the first quarter of 2024. This compares to a non-GAAP loss per share of $0.09 in the first quarter of 2023. First quarter adjusted EBITDA and adjusted EBITDA margin was $19.8 million and 30.5% compared to negative $1.6 million and negative 3% in the same period of last year, respectively. Turning to our Security Solutions business unit, ARR grew 7% year-over-year in the first quarter to $100 million. ARR growth was impacted by approximately 1.5 percentage points due to the transition of identity verification products to our Digital Agreements business unit at the beginning of the quarter.

Subscription ARR grew 16% to $77 million and was partially offset by an expected decline in perpetual maintenance ARR. We are transitioning perpetual-based maintenance contracts to subscription over time. First quarter revenue increased 9% to $50.4 million. Subscription revenue increased 34% to $26.2 million, driven by strong renewals, primarily expansion of licenses from existing customers for on-premise, mobile security, and authentication solutions. The earlier than expected closing of past due renewals and larger-than-expected increase in multi-year term contracts as discussed by Victor resulted in approximately $5 million of revenue upside in the quarter. Maintenance and support revenue declined slightly year-over-year to $10.1 million, with growth from on-premise subscriptions, offset by the expected decline from legacy perpetual contracts.

DIGIPASS hardware token revenue decreased by $2.3 million, or 15% as compared to the same quarter last year. This was primarily a result of a few contracts totaling approximately $2 million that closed earlier than expected and shipped in Q4 of last year instead of the first quarter of this year. Q1 2024 gross profit margin was 74% as compared to 67% in the first quarter of 2023. The increase in margin is primarily attributable to favorable product mix, including strong increase in high-margin subscription revenue and a decrease in lower-margin hardware revenue. As a reminder, Security gross margin is typically highest in the first quarter of the year due to product mix favoring software and can fluctuate on a quarterly basis due to product and customer mix.

Operating income was $25.9 million and operating margin was 51% compared to $15.6 million, and 34% in last year's first quarter. Strong increases in revenue and gross profit margin, combined with reduced operating expenses, primarily attributed to restructuring and other cost reduction activities drove the improved performance. I'll now discuss the financial results for Digital Agreements. ARR grew 14% year-over-year to $55 million. ARR growth benefited by approximately three percentage points due to the relocation of identity verification products to Digital Agreements at the beginning of the quarter. Subscription ARR grew 18% year-over-year to $51 million. Maintenance ARR declined as expected due to sunsetting of our on-premise products. First quarter revenue grew 25% to $14.4 million.

Subscription revenue, consisting primarily of cloud solutions, grew 33% in Q1 2024 to $13.8 million and included an unexpected $0.5 million short-term on-premise contract renewal, which we do not expect to repeat in future quarters. SaaS revenue grew 29% to $13.3 million. Maintenance and support revenue was $0.5 million as compared to $1 million in Q1 of last year. The year-over-year decline is attributed to the sunsetting of our on-premise e-signature solution. First quarter gross profit margin was 69% as compared to 73% in the prior year quarter. The decline in gross margin is mainly related to the following two items that we discussed last quarter. One, we relocated certain costs primarily related to customer support and professional services from sales and marketing expense to cost of revenues.

We did this to better reflect where employees are spending their time. And two depreciation of capitalized software costs have increased now that certain R&D projects are in production. Operating loss was $0.3 million as compared to an operating loss of $6 million in Q1 last year. The improved performance was driven by an increase in revenue and a decrease in operating expenses, primarily attributed to the restructuring and other cost reduction activities and were partially offset by an increase in cost of revenues. Now turning to our balance sheet, we ended the first quarter of 2024 with $63.9 million in cash and cash equivalents compared to $42.5 million at the end of 2023. Due in part to the seasonality in our collections with the first quarter being typically strong, we generated $27 million in cash from operations during the quarter.

We used $3 million in capital expenditures, primarily capitalized software costs and $3 million for restructuring payments. We have no long-term debt. Geographically our revenue mix by region in the first quarter of 2024 was 49% from EMEA, 33% from the Americas and 18% from Asia Pacific. This compares to 48%, 36% and 18% from the same regions in the first quarter of last year respectively. I'll now provide our financial outlook. For the full year 2024, although we are of course pleased with the Q1 outperformance given the time-shifting nature of certain items in Q1 such as the $3 million of delayed renewals closing in Q1 rather than Q2 at this point we are affirming our previously-issued revenue and ARR guidance. We are increasing our adjusted EBITDA guidance to reflect an increase in operating leverage for the year.

More specifically, we expect revenue to be in the range of $238 million to $246 million ARR to end the year in the range of $160 million to $168 million and adjusted EBITDA to be in the range of $51 million to $55 million as compared to our previous guidance range of $47 million to $52 million. With due consideration of seasonality of collections in our business we expect to end the year with more than $70 million of cash absent additional share repurchases. That concludes my remarks. Victor?

Victor Limongelli: Thanks, Jorge. Just to recap, we had an excellent first quarter and I'm very proud of the OneSpan team's performance. Beyond the first quarter however we know that we have more work to do in order to deliver an excellent year. We're going to continue to focus our efforts on delivering value to our customers and thereby creating value for our shareholders. Jorge and I will now be happy to take your questions.

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