OneSpan Q1 2024 Earnings Call Transcript

There are 8 speakers on the call.

Operator

Good day. Thank you for standing by. Welcome to OneSpan's First Quarter 20 24 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

Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Joe Maxow, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan First Quarter 20 24 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 Lamangeli, our Interim Chief Executive Officer and Jorge Martel, our Chief Financial Officer.

Speaker 1

This afternoon, after market close, OneSpin issued a press release announcing results for our Q1 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.

Speaker 1

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.

Speaker 1

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 2, 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.

Speaker 2

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 $65,000,000 and adjusted EBITDA was $20,000,000 or 31 percent of revenue. ARR growth also exceeded our internal expectations.

Speaker 2

It grew 9% year over year to $155,000,000 and offset the headwinds we discussed on our last earnings call related to expired contracts of sunsetted products. Q1 was my 1st full quarter leading One Stand 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 $1,000,000 And our APAC team did excellent work delivering its strongest quarter in terms of year over year growth in more than 3 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 rightsizing of our cost structure over the last several quarters.

Speaker 2

We also generated $27,000,000 in cash from operations and ended the quarter with $64,000,000 in cash. Our 2 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 $3,000,000 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 lengths, resulting in about $2,000,000 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-seven figures with new ACV of nearly $1,000,000 DigiPass hardware revenue declined as expected.

Speaker 2

Last quarter we discussed a few orders that had shift in Q4 to the tune of approximately $2,000,000 that were originally scheduled to ship in the Q1 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 Q1 as compared to the prior year period. For the balance

Speaker 3

of the year,

Speaker 2

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?

Speaker 3

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 $64,500,000 in line with the $64,000,000 to $65,000,000 target range we previously announced, although achieved earlier than our end of 2024 forecast. We now expect total cumulative annualized cost savings to approximate $75,000,000 by the end of 2024. Now turning to our Q1 results.

Speaker 3

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 $155,000,000 ARR specific to subscription contracts grew 17% to $128,000,000 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.

Speaker 3

1st quarter 2024 revenue grew 13% to 64,800,000 dollars 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 $40,000,000 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. 1st 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. 1st quarter GAAP operating income was $14,100,000 compared to an operating loss of $8,100,000 in the Q1 of last year.

Speaker 3

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 Q1 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 Q1 of 2024. This compares to a non GAAP loss per share of $0.09 in the Q1 of 2023. First quarter adjusted EBITDA and adjusted EBITDA margin was $19,800,000 30.5 percent compared to negative $1,600,000 and negative 3% in the same period of last year, respectively.

Speaker 3

Turning to our Security Solutions business unit. ARR grew 7% year over year in the Q1 to $100,000,000 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 $77,000,000 and was partially offset by an expected decline in perpetual maintenance ARR. We are transitioning perpetual based maintenance contracts to a subscription over time. 1st quarter revenue increased 9% to 50,400,000 dollars Subscription revenue increased 34 percent to $26,200,000 driven by strong renewals, primarily expansion of licenses from existing customers for on premise mobile security and authentication solutions.

Speaker 3

The earlier than expected closing of past due renewals and large than expected increase in multi year term contracts, as discussed by Victor, resulted in approximately $5,000,000 of revenue upside in the quarter. Maintenance and support revenue declined slightly year over year to $10,100,000 with growth from on premise subscriptions, offset by the expected decline from legacy perpetual contracts. Digipass hardware token revenue decreased by $2,300,000 or 15% as compared to the same quarter last year. This was primarily a result of a few contracts totaling approximately $2,000,000 that closed earlier than expected and shipped in Q4 of last year instead of the Q1 of this year. Q1 twenty twenty four gross profit margin was 74 percent as compared to 67% in the Q1 of 2023.

Speaker 3

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 Q1 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 $25,900,000 and operating margin was 51% compared to 15,600,000 percent in last year's Q1. 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.

Speaker 3

ARR grew 14% year over year to $55,000,000 ARR growth benefited by approximately 3 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 $51,000,000 Maintenance ARR declined as expected to the sunsetting of our on premise products. 1st quarter revenue grew 25 percent to $14,400,000 Subscription revenue, consistent primarily of cloud solutions, grew 33% in Q1 2024 to $13,800,000 and included an unexpected $500,000 short term on premise contract renewal, which we do not expect to repeat in future quarters. SaaS revenue grew 29% to $13,300,000 Maintenance and support revenue was $500,000 as compared to $1,000,000 in Q1 of last year. The year over year decline is attributed to the sunsetting of our on premise e signature solution.

Speaker 3

1st 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. 1, 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 2, depreciation of capitalized software costs have increased now that certain R and D projects are in production.

Speaker 3

Operating loss was 300,000 as compared to an operating loss of $6,000,000 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 Q1 of 2024 with $63,900,000 in cash and cash equivalents compared to $42,500,000 at the end of 2023. Due in part to the seasonality in our collections with the Q1 being typically strong, we generated $27,000,000 in cash from operations during the quarter.

Speaker 3

We used $3,000,000 in capital expenditures, primarily capitalized software costs and $3,000,000 for restructuring payments. We have no long term debt. Geographically, our revenue mix by region in the Q1 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 Q1 of last year, respectively. I'll now provide our financial outlook.

Speaker 3

For the full year 2024, although we are of course pleased with the Q1 outperformance given the time shifted nature of certain items in Q1, such as the $3,000,000 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 $238,000,000 to $246,000,000 ARR to end the year in the range of $160,000,000 to $168,000,000 and adjusted EBITDA to be in the range of 51 $1,000,000 to $55,000,000 as compared to our previous guidance range of $47,000,000 to $52,000,000 With due consideration of seasonality of collections in our business, we expect to end the year with more than $70,000,000 of cash absent additional share repurchases. That concludes my remarks. Victor?

Speaker 2

Thanks, Jorge. Just to recap, we had an excellent Q1 and I'm very proud of the OneSpan team's performance. Beyond the Q1, 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.

Operator

Thank you. First question coming from the line of Trevor Rambo with BTIG. Your line is open.

Speaker 4

Hi guys. This is Trevor on for Gray. Congrats on a great quarter all around. So first one for me, now that we're about 4 months into the year, how do you guys feel about your visibility on your pipeline for both the next quarter and the second half of the year? And I was wondering if you could touch on any linearity that you saw throughout Q1 as well?

Speaker 2

Thanks, Trevor. What was the last part of the question? Could you repeat that?

Speaker 4

Yes. Just wondering if you could touch on any linearity you saw throughout Q1 or if there's any like one time items you saw besides some of the things you mentioned on the call?

Speaker 2

Well, we did mention a few things that were more of one time nature. The big one in Q1 was the delayed renewals that came in Q1 that made up a significant chunk of the one time performance in Q1. For the rest of the year, I mean, we have a pretty good view into Q2. As you might imagine, we're sitting here on May 2, almost halfway through the quarter. And we've continued to see good performance in many regions.

Speaker 2

I mentioned the APAC team by name in my remarks about the Q1 and they're continuing to

Speaker 3

do well in the Q2.

Speaker 2

Obviously, as you get later out in the year, things get a little fuzzier when you're talking about Q4, a pipeline for say Q4. And that's part of the reason why we wanted to keep the revenue guidance where it was because it's just a lot of our revenue as you know comes in later in the year and it's a little too early to get too certain about Q4 revenue. Jorge, I don't know if you have anything you want to add on that.

Speaker 3

Yes. No, I think the only thing I would add is, it takes 4 quarters to make a year, Trevor. And so we got a solid Q1. We're proud about what the team executed on. But yes, we have a number of key renewals with potential add ons that we're looking at.

Speaker 3

But it's still a little bit too early. We want to see a little more movement. And once that transpired one way or the other, obviously, we'll be looking into either changing guidance, etcetera, but that's going to happen later in the year.

Speaker 2

Hey, Trevor, let me just comment also. I know you asked specifically about pipeline and revenue, but I will say when it comes to the cost structure of the business, we have a pretty good sense of it for later in the year. And that was partly the reason why we were why we increased the adjusted EBITDA guidance for the year.

Speaker 4

Yes. Awesome. That makes a lot of sense. Thanks for the color there. And maybe just one more.

Speaker 4

I know you mentioned last quarter that you had strong visibility into your large customers and some visibility into the mid market. I was wondering if you could touch on that aspect of the business and kind of seeing how that compares to some of your commentary and what you saw last quarter?

Speaker 2

Sure. I think we definitely saw some good large deals last quarter and we continue to have some good opportunities in that area in the Q2. So I think quite naturally the larger the opportunity, the more attention and focus it gets not just from the

Speaker 3

salesperson, but also all the way up

Speaker 2

the chain for the sales management up to and including Jorge and myself. Mid market, we do have decent visibility there once you get to the smaller deals, probably a little bit less. So I don't think that that's I don't think Q2 is too different than Q1 in that regard.

Speaker 4

Great. Thanks. That's it for me. Congrats again on a great quarter, guys.

Speaker 2

Thank you.

Speaker 3

Thanks, Trevor.

Operator

Thank you. And our next question coming from the line of Chad Bennett with Craig Hallum. Your line is open.

Speaker 5

Great. Thanks for taking my questions. So obviously, a few one time items that benefited the Q1 here. And I think the rest of the year is pretty straightforward from a guide standpoint. But I'm just curious, just in terms of digital agreements versus security solutions, just kind of the relative growth rate for the rest of the year of those two segments and if you've kind of have any different view the growth rates of the 2 businesses for the remainder of the year?

Speaker 2

Yes. Thanks, Chad. I mean, part of the Q1 numbers or part of that is due to the shift of the IDB business. We put it into the digital agreements segment from Jorge, I don't know if you can comment on exactly what percentage of that growth came from that shift?

Speaker 3

Yes. It was bidding mostly from a revenue perspective, it was about $300,000 From an ARR perspective, it's 1,500,000 dollars Chad. So not too much from that standpoint. And one thing to add is, so if I may, Vic, so on the digital agreement side of the house, so that you have to also take into account. It is a land and expand sort of like approach, right?

Speaker 3

And so we normally land the customer 1 or 2 use cases and then from that, that expands. And so the timing is critical, right? Once you land at particularly enterprises and the land expands is across the top of the pyramid, also the bottom of the pyramid. And so the timing of that could be is always critical. What you would expect to see is gradual increases, particularly in SaaS.

Speaker 3

Now that the on prem is basically in the rearview mirror, we still have some dynamics there as we explained. But taking that aside, you would expect to continue to see growth there, not exponentially, but gradual growth on the SaaS component with that expansion. Obviously, we have new customers, but again those are not in the 1,000,000 of dollars. Some are, but obviously not often as we hope, but it's more than land and expand. On the security side, you will see in the security software, most of that growth is going to continue to be from expansions.

Speaker 3

We do have new customers, new logos in there. And but that doesn't move or it's not going to be as dramatic because of scale there, right? We service 60% of the top 100 banks. So it's a more mature market as well. And then on the hardware side of the business, you have to take into account the secular decline a little bit in some regions like APAC and EMEA to a certain extent, right, where the dynamic is shifting a little bit off of hardware into software.

Speaker 3

We try to capitalize from that as best we can. And so what I would expect is security to be in the low single digit growth, whereas on the DA side of the house, a little bit more like mid to high single digits. That will be sort of like the expectations. But again, we want to have more visibility into the second quarter not second quarter, second half rather to be able to give you more precise. But again, we don't guide on a per quarter basis.

Speaker 3

So just keep that in mind.

Speaker 5

No, that's great color. Thank you, Jorge. So maybe follow-up just on I mean, you guys are ahead of plan on cost savings and actually exceeding plan, it sounds like on cost savings by call it $10,000,000 from where we started. And I know you upped EBITDA incrementally Is there are there any other types of investments we're making why kind of that incremental $10,000,000 wouldn't just kind of drop down to that EBITDA guide. And obviously, we'll want to be conservative and do better.

Speaker 5

I appreciate that. But just curious your thoughts there.

Speaker 2

Well, Jorge, I'll let you touch on this, but let me just comment. The $10,000,000 is not that's the annualized number. So some of those cost savings are going to be coming later in the year as we they're already identified, but as we move through the year, so it won't all of that won't hit in

Speaker 5

2024. Got it.

Speaker 3

Yes. And I would say just from a product perspective, Chad, so obviously we've been selective at what investments we deploy from an R and D perspective, things like that. We mentioned last quarter about FX, bioproducts, etcetera, more towards the or 100% towards the workforce authentication market, right? And so obviously, it's still early, it's still premature, but it's just one example of investments that we are working on.

Speaker 5

Got it. Thanks so much. I appreciate it. Nice job on the quarter.

Speaker 3

Thank you. Thanks, Chad.

Operator

Thank you. And our next question coming from the line of Angela Sundstrom with Sidoti. Your line is open.

Speaker 6

Hi, thank you for my for taking my questions and congrats on the good quarter here. Just to clarify, the gross margin this quarter was helped by the lower volume on hardware, right? So that should be coming down as you see more higher hardware revenue in the coming quarters?

Speaker 3

That's correct.

Speaker 6

Okay. Thank you. And then in terms of sort of the macro environment and your customers proneness to take on more subscription costs and whatnot. Are you seeing that changing at all, the sentiment among your customers?

Speaker 4

Well, I think let me to

Speaker 2

talk about the macro, I don't think and I think we talked about this last quarter. It's not the greatest macro environment ever, but it's not terrible either from our perspective. So we've had good results in some regions. Probably the European environment has been a little bit less strong than some of the other regions for us so far. But all in all, it's decent, tolerable, I guess, I would say.

Speaker 6

Okay. Thank you. And is there any way you're sort of lecturing the land and expand approach, how that is trending?

Speaker 2

Well, we do report NRR. We report that quarterly. And so that in terms of things that we're sharing with the public that would probably be the most pertinent data point.

Speaker 6

Okay. And there's some sun setting and stuff that's clouding that right now, right?

Speaker 2

A little bit, yes. So, Rory, I don't know if you want to comment on that. I think it was $107,000,000 if I'm remembering correctly in

Speaker 3

that That's right, Dick. That's right. Yes. So and if you remember last quarter we had 110%, and we mentioned 2 percentage points, 3 percentage points of that was clouded with the conversion from on prem in our e signature solution to the cloud. Clients were there in migration.

Speaker 3

They bought both solutions. Now that they're completed those migrations in Q1, we guided towards it's going to be about 3% lower, right, once the on prem version of those that completed migration dropped and that's exactly what happened. So it sort of behaved the way we expected. I think the end of life will have a little bit more with respect to I think Q3 there's more deal flow. I think that's going to materialize in that quarter on the security side.

Speaker 3

But I think when you take those one offs, you would expect that sort of like $107,000,000 $106,000,000 so like go through. But obviously, as I said, all this caution, we don't guide on a quarterly basis. So just keep that in mind.

Speaker 6

Okay. Thank you. That was all from me.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Rudy Kessinger with D. A. Davidson. Your line is open.

Speaker 7

Hey, great. Thanks for taking my questions. Jorge, I want to double click on some things. I'm not sure I caught it all. Just on the outperformance in the quarter, there was a I believe you said a couple of million of benefit from renewals that pushed from last quarter.

Speaker 7

And then what was the benefit from multi year terms? Were those renewals or were those new deals like the multi years?

Speaker 3

Yes. Hey, Rui, thanks for the question. So what benefit is so just to go back through this. So there were $3,000,000 of delayed renewals that closed earlier than we expected this quarter. So that's $3,000,000 on the software terms subscription revenue.

Speaker 3

There's also a couple of $1,000,000 about $2,000,000 of increased multi year deals that closed this quarter that we were not forecasting. And again, that's part of the operational rigor the team is going through. They're incentivized to close multiyear deals and so we benefited from that standpoint this quarter. And we always have in any given quarter a number of conversions also really from perpetual to term. And so we that also benefited this quarter.

Speaker 3

But so you're looking at about 5,000,000 dollars a little more than that in terms of those three items. Again, I caution the conversion. We always have a number of conversions but yes, those are the most notable things, Rudy.

Speaker 7

Okay. That's helpful. And then I guess just I heard you guys call it the strength in APAC, but APAC is less than 20% of revenue. So if you look at the U. S, the rest of the world, how is bookings performance in those regions in the quarter that led to expectations?

Speaker 2

Yes. Thanks for the question, Rudy. I mean, from a public statement standpoint, we're not giving detailed geographical performance. I was calling out APAC because the team has performed very well there. And I did mention that the macro environment in Europe, I think, was a little bit weaker.

Speaker 2

So you can probably read into that what you will. But overall, I think performance in North America feels the macro environment in North America feels pretty decent. So we're continuing to work on execution and we're looking to have, of course, every region and both business units performing well.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Joe Maxa for any closing remarks.

Speaker 1

Thank you, everyone. We appreciate your time today and look forward to sharing our progress with you again next quarter. Thanks again and have a nice day.

Earnings Conference Call
OneSpan Q1 2024
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