Q4 2020 OneSpan Inc Earnings Call
Good afternoon, and welcome to the one spend fourth quarter 2020 earnings conference call.
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I would now like to turn the conference over to Joe Maxa V. P of Investor Relations. Please go ahead Sir.
Thank you operator, Hello, everyone and thank you for joining the <unk> fourth quarter and full year 2020 earnings conference call.
This call is being webcast and can be accessed on the Investor Relations section of one spans website at investors day, one span dot com.
Joining me on the call today are Scott Clements once the <unk>, Chief Executive Officer, and Mark Hoyt, Our Chief Financial Officer.
This afternoon after market close one standard issued a press release announcing the results for our fourth quarter and full year 'twenty 'twenty.
To access a copy of the press release and other information.
An updated presentation, reflecting our fourth quarter and full year financial results. 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 2021 are forward looking statements.
These statements use words, such as believes anticipates plans expects projects and similar words and 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.
The 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.
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 for the most directly comparable GAAP financial measures in the earnings press.
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In addition, please note that the date of this conference call is February 23rd 2021 any.
Any forward looking statements and related assumptions are made as of the state.
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.
With that I will turn the call over to Scott.
Thanks, very much Joe good afternoon ever Yep can you hear me.
We can hear you fine thanks, Okay.
Okay, great. Thank you. Thanks, Joe Good afternoon, everybody. Thanks for joining us on the call here today.
Improving demand for mobile security and continued strong growth in E signature solutions resulted in record bookings of recurring revenue contracts and stronger than forecast revenue in the fourth quarter.
The FY 'twenty guidance, we provided last quarter reflected uncertainty given a material slowdown in business in Q3 and early Q4 is our bank is.
The banking customers the dress urgent issues related to the pandemic.
As the quarter progressed, we saw customer engagement return to more normal levels with improved sales closure rates and sales pipeline flow.
Now I'll turn to the outlook for 'twenty 'twenty, one and reasons why I expect it to be a year of further progress toward our goal of becoming a profitable and fast growing recurring revenue centric company.
Yeah.
The first start 2020 year over year or growth of 29% demonstrates that our growth strategies are working.
To give you additional insight into our performance are our specific to subscription and term based contracts grew in excess of 50%.
Second the fourth quarter total bookings were strong on par with the P. S. T. Two driven booking levels for Q3 and Q4 last year.
Bookings on our recurring revenue contracts increased more than 60% sequentially and for the year grew by more than 40%.
Third our transition to recurring revenue streams and high margin solutions and services is progressing faster than planned.
Software and services accounted for a record 69% of total revenues in the quarter and 62% for the year.
Recurring revenue accounted for a record 83% of total software and services revenue in the quarter and 76 per cent for the year.
And for it that's the global economy every crop covers we expect new account openings to trend towards more normal levels compared.
For the last summer and early fall.
As a reminder of because of the pandemic many banks for most banks closed of restricted branch operations around the world, which substantially reduced new account openings and consumer churn.
Key drivers of demand for of hardware and mobile security software offerings.
The branches in many parts of the world remain closed.
We have seen that banks have made significant progress on adjusting their operations for the present circumstances book.
Bookings for both of our hardware and mobile security software had their strongest quarter of the year in Q4.
And finally, the value of our software and services sales pipeline, our opportunity pipeline increased by 40% through the end of 2020.
Now, let me discuss the specific cyber security threat that occurred during the fourth quarter, which highlights the importance of our mobile security solutions.
In December there was a criminal attack the targeted online bank accounts in the U S and Europe.
A network of mobile device emulators to steal millions of dollars the.
Emulator attack enabled hackers to spook thousands of mobile devices automate the process of accessing accounts.
Initiate transactions and intercept the second factors of authentication to successfully steal money.
This underscores the mobile banking attacks are becoming automated and can now increasingly be executed at scale.
Once band solutions are designed to prevent such tax by using a layered approach the mobile banking security, including multifactor authentication methodologies.
Strong device identifiers application shielding and malware detection risks from attacks like this can be mitigated.
Yeah.
Before I turn the call over to Mark I want to provide an update on our hardware product line.
Last quarter I noted that we were assessing the benefits of realigning our authentication token product line and the signed an executive to lead the effort, while streamlining operations the matchboard revenue expectations.
We're making we're making good progress in this area with the initial focus.
On areas, including product line rationalization operational streamlining and targeted innovation designed to maintain market position and sustained profitability of lower revenue levels.
We're also in the early stages of relocating some of our manufacturing from southern China to Europe to reduce risk and time to market.
An increase in Q4 bookings combined with the sequential pipeline increase of 10 per cent gives us confidence that hardware is rate of revenue decline will moderate to somewhere in the single digits in 'twenty and 'twenty one.
We'll continue to update you on this as plans for the hardware business develop.
Yeah.
After Mark takes you through our financials I'll come back and provide some additional comments along with an update on our outlook before opening the call to questions.
Mark.
Thanks Scott.
As Scott mentioned, the fourth quarter of 2020 came in stronger than expected in Q3.
Driven by increased demand across our security and the E signature solution portfolio.
And for the full year 2020, we exceeded the high end of our revenue guidance ranges that we provided in early November.
Annual recurring revenue for our are at the end of Q4 was $104 million.
Setting of growth rate of 29% in line with our 25% of 30% target growth rate for 2020.
We define a R. R as the annualized value of all active recurring product contracts greater than or equal to one year in length.
Our dollar based net expansion rate, which we define as the year over year growth and a R. R from existing customers was 120% in the fourth quarter.
No.
Turning to recurring revenue.
For the fourth quarter subscription revenue grew 39% for $9 million.
<unk> strong growth of esignature modest growth of the identity verification and the.
The increased contribution from cloud authentication.
Term based software license revenue grew 27% to $8 million driven by a strong sequential increase in demand for mobile security solutions.
And maintenance revenue grew 14% year over year to $14 million.
We expect maintenance growth to moderate in 'twenty and 'twenty, one as we continue transitioning our business model towards subscription and term based licenses.
In total recurring revenue increased 24 per cent to a record $30 million in the fourth quarter and 26% to 100 of $2 million for the full year 2020.
Recurring revenue accounted for a record 83% of software and services revenue in Q4, and 76% for the full year 2020.
This compares to 63 per cent in Q4, 2019, and 64 per cent for the full year 2019, respectively.
As you May recall, we recently increased our 2022 recurring revenue target from 75% to 85 per cent of our software and services revenue.
With the with the continued acceleration in our transition to recurring revenue. We now believe we can achieve that 85 per cent target this year.
In the fourth quarter total software and services revenue declined 6% to $37 million.
Hardware revenue declined 49% for $16 million in total revenue declined 25% for $53 million.
As discussed previously we expected a sharp decline in our nonrecurring perpetual software licenses and the hardware driven by our increased focus on recurring revenues of <unk>.
Difficult compare to the year ago quarter.
That was driven by large orders to satisfy the PSD two regulations in 2019 and the impact of the pandemic at our results.
Gross margin in the fourth quarter of 2020 was <unk> 74 per cent compared to 70% in the prior quarter and in the fourth quarter of 2019.
The increase in gross margin is primarily attributed to product mix with software and services contributing a record 69% of total revenue.
Operating expenses for the fourth quarter of 2020 were $41 million, 8% higher than the prior quarter and 6% lower for the.
Fourth quarter of last year, reflecting lower travel and other operating costs.
Adjusted EBITDA or adjusted earnings before interest taxes, depreciation amortization long term incentive compensation and non recurring items was $3 million for the fourth quarter of 2020.
This compares to 3 million last quarter and $13 million in the fourth quarter of 2019.
Adjusted EBITDA margin was 6% in the fourth quarter versus five per cent last quarter and 18% in the year ago quarter.
For the full 2020 year, adjusted EBITDA was $14 million and adjusted EBITDA margin was 7%.
GAAP loss per share was the <unk> in the fourth quarter 2020, compared to GAAP earnings per share of <unk> 11.
In the fourth quarter of 2019.
Non-GAAP earnings per share, which excludes long term incentive comp amortization nonrecurring items and the impact of tax adjustments was three <unk> from the fourth quarter of 2020 compared to 23 in the fourth quarter of last year.
Yeah.
We ended the fourth quarter of the $115 million in cash cash equivalents and short term investments.
Compared to a $110 million at the end of last year.
Cash generated from operations during the quarter end of the year was $7 million and $15 million respectively.
During the fourth quarter.
We repurchased $5 million for 250000 shares of common stock at an average price of $20 per share.
Okay.
Geographically our revenue mix for the fourth quarter included 54 per cent from EMEA 27 per cent from the Americas and 19% for the Asia Pac region.
Approximately the same geographic mix as the year ago quarter.
I will now turn the meeting back to you Scott.
Yeah.
Thanks, Mark I appreciate it.
We made the faster than planned progress in our transition to recurring revenue in 2020, and we plan to continue this transition in 2021 with the goal of essentially completing that shift by the end of this year.
Now, let me focus on our 2021 growth investments.
The decline in our hardware revenues and our recurring revenue transition reduced our overall profitability in 2020 and it will continue to do so this year net.
Nevertheless, our goal is to sustain high rates of subscription and term license growth.
Greater than 40% in 2021, which is key to higher levels of profitability going forward.
And as we exit the pandemic period, we believe it's an opportune time to invest for growth.
After declines in sales and marketing and R&D expenses in 2020 as compared to 2019.
And given the strong growth we've seen in recurring revenue, we're increasing our investments in these areas areas to enable continued strong growth in 2022 and after.
And sales and marketing in preparation for 2021, we expanded our sales team in the second half of 2020.
With the focus on new customer acquisition, and we're carrying this with higher lead generation investment this year.
And R&D will be investing in the core tid platform, just shorten customer time to value increased solution flexibility and simplify integration the third party technologies.
We also plan to enhance our mobile security solutions with improved usability and increased data collection capabilities to deliver next generation authentication and fraud prevention capabilities.
And finally, we'll be adding high value of extensions to our rapidly growing E signature product line.
That we expect to increase the average transaction value.
And that business.
As I have noted previously the profit generating capacity of our business model is fundamentally strong as indicated by our solid gross margins.
As we complete our business model transformation and the rebuild of our internal business systems.
We're increasing our focus on operational productivity and structural cost reduction.
In the coming months, we'll be identifying opportunities for significant cost savings plans, the improved profitability without impairing our growth outlook.
We'll refresh of our multiyear financial goals and update you further on that later this year.
Now I'll summarize guidance for our fiscal year 'twenty 'twenty, one along with some comments around our expectations for the first quarter and the full year.
Yeah.
For the full year of 'twenty 'twenty, one we're providing the following guidance.
Our growth of 22% to 26%.
Recurring revenue to be in the range of $120 million to $125 million.
Total revenue of $215 million to $225 million.
And adjusted EBITDA to be approximately breakeven.
This includes approximately $15 million to $20 million of revenue headwind related to the recurring revenue transition in 2021.
We then expect to see acceleration in total software and services revenue growth in 'twenty 'twenty, two with increasing profitability as we enter the post transition period.
We currently expect the second half of 'twenty 'twenty, one revenue to exceed first half revenue similar to our longer term historical quarterly distribution of revenue.
And we expect decline in hardware revenues to moderate into the mid single digit range. This year.
Gross margins should be approximately flat as higher overall software and services revenue mix is offset by the impact of our transition to recurring revenue.
Yeah.
In the first quarter, we expect our growth to be within our long term target range of 25% to 30%.
Q1 recurring revenue is expected to be higher than our strong Q1 of 2020 of year over year growth rate will be somewhat below our full year guidance range.
We also expect perpetual license and hardware revenue to decline as we continue the shift to recurring revenue model.
So to conclude our core value propositions and security productivity positive digital user experience.
And regulatory compliance remains solid.
And we believe that we will over time.
This the that the pandemic will amplify the value.
Of what we do.
As more of economic activity shifts into the digital share.
Driving long term demand for our security and Esignature solutions.
Overall banks are financially strong.
Kind of effectively manage the adverse impacts from the pandemic and so we expect demand will improve.
As banks return their focus of new account growth.
And respond to emerging cyber threats.
Recent major cyber events like solar winds and the mobile emulator attack show the identity centric security.
It's more important than ever.
With that Mark and I'll be happy to take your questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Katherine <unk> with Colliers. Please go ahead.
Hi, Thanks for taking my question very impressive quarter.
Can you talk a little bit about going for and you had record bookings this quarter, but could you maybe parse a little bit more on the 22 to 26 per cent air growth.
The baby with the record booking debt might be a little bit stronger.
Oh, Hi, Catherine good afternoon, I'll take a crack at that and Mark you can you.
You can add to.
Kevin I think it really comes down to a couple of things where there is still some uncertainty that remains about the pace of the recovery of the economic recovery global and the impact that that has on banks I think we all feel optimistic that its moving in the right direction.
Certainly.
Seems to be a good news the more good news each day and in that area, but.
How are how our air our number turns out of that for the year will.
It depends to some degree on on how that proceeds and the pace with which.
Of that recovery happens also as you go into the back of the year, obviously the compares get tougher.
And so Oh, we want to be aware of that so I don't think its anything.
More than we are.
We want to be sure that we have a good handle on the progression of our bank spending on security and technology as the overall economy recovers and as the pandemic impacts start to lessen.
Alright, thank you.
I'll just add on there Catherine this is mark.
The reminder of the recurring revenue.
It can be driven and lumpy, we get multi year contracts to come in and we did get one of those that came in in Q4. The that did drive up recurring revenue that we won't see necessarily drive up the <unk> as much but overall as Scott said, we want to make sure that we can now use.
These numbers.
Alright, Thank you Allen.
And the next question will come from Gray Powell with B T. I G. Please go ahead.
Great. Thanks for taking the questions and congratulations on the good numbers.
Thanks, Greg.
Ah.
Yeah. So I guess, maybe just sort of a follow up question. So.
You know at recent conferences, you've been talking about how large banking customers pushed out deal in deals of niche in mid 2020.
And now you're starting to see that trend reverse.
I guess, just how quickly does that does that play out and then do you see the recovery.
Maybe shifting from the hardware side more into the software and the recurring side of the business.
And then I guess just like the other part of the question would be I just wanted to make sure I understand your guidance did you say hardware is going to be down you know mid single digits for the full year or would it trend to down mid single digits at some point in the year I just want to make sure I understand that component correctly share.
There's a lot there so I'm I Oh, sorry.
Sorry about that I missed the wanted to get very excited.
Sorry, if I Miss one of just ask it again, so I'll try to go in reverse order here the the guidance or the commentary that we gave on on hardware was really for the full year, we expect the.
Sort of a single digit decline in hardware.
And in 'twenty 'twenty, one so that's a that's a significantly better outcome, obviously from a growth point of view than we are of decline point of view than we saw in 2020.
We have seen.
Jean.
She improvement and in the hardware space I think the the bookings, where we had our strongest booking quarter of the year in the fourth quarter for hardware and the opportunity pipeline is actually higher than it was at this time last year. So we'll we'll see how that plays out over the coming days we spent the.
We put a great deal of effort into really doing it at a very detailed bottoms up forecast on hardware.
And we just wanted to set the you know a reasonable level of expectation for that and you know, we'll do everything we can to do better than that number but I think that's a reasonable expectation for right now.
With respect to the the pacing of the.
Of the recovery I guess in <unk>.
Banking and financial services.
Generally what what are I think our sales teams of perspective is is that we will see.
Increasing or better a better environment as we go through the first half of that as we kind of get to the middle of the year, we would hopefully be in a position of where we'd be seeing a full recovery of the more normal tenor of business and approach to the business that we have seen in the past.
That I think that recovery will affect actually software and services will be.
The bigger beneficiary of that in hardware. So we do come into the year I think with.
Substantially higher sales pipeline of about 40% higher exiting last year and coming into this year.
And and we have a very high expectations for growth of our term license and subscription revenue and in 2020, which are it will be the you know the main drivers of of air our growth, but we'll.
We'll see how that improves as we go through Q1, and Q2 and into the middle of the year, but I think our view right now so by the time, we get to the middle of the year, hopefully, we'll be back to a substantially normal environment with respect to <unk>.
Banks are acquisition of the security technology.
Understood. Okay. Thank you very much.
Sure thing Thanks, Greg.
Once again, if you have a question. Please press Star then one.
And the next question will come from Anja Soderstrom with Sidoti. Please go ahead.
Yeah, Hi, Thank you for taking the question and congratulations.
So first of all of it if you can just elaborate on the investment growth do you need to do the yeah, that's going to keep the margins flat.
It's mainly the you said that more investment into sales from contango or is it all for that you need to invest the infrastructure and Mike that it didn't in 2019 to it that from tiny.
Hi, and thanks for your question good afternoon.
So the the the incremental investment that we're making is really in two areas and it's a it's a little bit different when you know in sales and marketing versus R&D. Both of those two areas in sales and marketing. We are we come into the year essentially fully staffed for what we think we need and.
And sales for 2021.
That's good I think when we came into 2020, we still have some holes in the sales team that we needed to fill as we went through the year, but we really took the effort to.
To fill all of the positions that we think we need it and sales in the second half of 2020, so that we would enter 2021.
The fully fully staffed and ready for 'twenty 'twenty, one and so the the biggest piece of the increase and in selling expense sales and marketing expense in 'twenty and 'twenty. One is related to those people that we have already brought on in the second half of 'twenty 'twenty of full year of their of their costs.
The the second piece is that we are we want to make sure that as we put those people in the field, where we're driving a increased amount of lead activity to those sales are to the sales organization those people on the field.
So we have been.
When spending a great deal of effort I think to really build a very very capable of lead generation process over the last couple of years.
We did see some good results from that and Ah in 2020, and that's what part of what helped to drive our recurring revenue growth in 'twenty and 'twenty and so as we gain confidence in that lead generation activity.
We want to put more against that in 'twenty, and 'twenty and 'twenty 'twenty, one to drive growth not only in 'twenty, one, but also in 2022 and forward and then I think in R&D.
These are really investments to just I would say in general strength in the software and.
Services product lines and I described those some of those in May.
In the in the conference call, we have I think of an opportunity of need to strengthen our mobile security offerings of modernize elements of that in two <unk>.
Really make it a strong element of the data collection that can drive our analytics capabilities, our fraud and the other analytics capabilities and are in the future and then of course, we had a tremendous year in 2020 with the E signature we expect to have another very good year with that.
Product Ah in 2021.
And there's a real opportunity to extend that product into.
Some areas of very high value.
Round, the note amortization and I D verification.
And things like that that can substantially raise the per transaction value of <unk> of that the product line. So these are investments that we think will accelerate our time to market increase our differentiation and allow us to access new opportunities beyond those which we have.
Focused on in the past.
Okay. Thank you and then you alluded to that you were gonna and revisit your longer term guidance later this year.
Would be safe to assume that the sales that we have a kind of revenue share.
Accelerated from 22.
Have a lot of this investments behind us and we would also see the margin expansion into 'twenty two.
Is that how to think about it the way.
Yeah, you're breaking up a little bit on your I don't know if it's on my end or year end, but I I think I got the general Gist of the question.
Yeah, we we believe that.
For several reasons that as we go into 'twenty, two 'twenty three and for that we have.
We have the opportunity to drive.
Higher levels of profitability in the business as we as we grow we remain.
We continue to target.
The 25% to 30%.
The air our growth over over the period through 2022, I think we have a very good shot of achieving that are doing better than that.
But as we if.
If we as we sustain our margins we are.
See the benefits of the investments that we're making this year, we really put the debt that recurring revenue headwind behind us all of those things should help to improve the profitability of the business. As we look ahead in 'twenty, two and 'twenty 'twenty. Three so we are we take that very seriously.
We made of very conscious choice in 'twenty, one to make some of these incremental investments because.
We like the momentum in the business and we think that these are investments that can really continue to build the story and the differentiation of what we offer to our current customers in and hopefully to a lot more new customers as we go forward.
Okay. Thank you and then just one last question in your investor deck or the pre.
Presentation, the fourth quarter on Slide 10, you are talking about the Adjacencies Sunshine and so aside from the tenants.
One of them on 'twenty.
Can you just expand on that a little bit what you mean by that.
Sure.
As you know on Yeah, we had been a really primarily a company that has been focused on banking financial services for most of our the.
Most of our history I think were roughly 75 per cent of our revenue comes from banking and financial services still today.
We believe there are good growth opportunities that remain in exist and and banking and financial services, but we also know that there are.
There's a lot of work being done in progress being made in digitization of of AR in the areas of the digital health care telehealth and in government.
And if you really look at the use cases, there and the the needs and in those spaces.
They look they look in many ways very similar to what we do in banking financial services and so we believe we have the opportunity of targets. Some of these adjacencies with our existing technology without having to make major changes for that technology, and and really expand our total available market and then you know.
Our growth rates as we go into.
In the June 'twenty, two 'twenty three and forward.
Okay and my all for now sort of repositioning some of just for US to go after that or is that something you would have to.
On the route.
We're doing where we do business in both of those areas are already.
And we're looking at the different ways to go to market. There. So in the in the health care space or the Telehealth space. For example, we would probably do a lot of that through through channel partners and OEM partnerships rather than trying to go direct you know of direct sales model in into that market.
And then I think in government of Advair, It will vary a little bit but the the goal that we have for 2021 is to really.
Do some of the work and the validation of those opportunities and determine the approaches that we will use to to drive penetration growth in those markets and and the 22 and for as I said, we we do have a significant amount of government business already I do expect that to grow in 2021.
And and we are working with some partners in the in the health care of the telehealth space already as well in and trying to learn more about that so that we can structure of the right approach.
Okay, great. Thank you that was all for me.
Sure. Thanks Tanya.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Scott Clements for any closing remarks.
Thanks, very much operator again I appreciate the all of you joining the call today.
We had I think of a good finish to the year of 2020 after a tough spot in the middle of the year, we're really.
Really optimistic about the 'twenty 'twenty, one and and a you know the.
The continued shift of our business to recurring revenue.
We've learned a lot and I think we'll be largely done with that transition by the end of 'twenty 'twenty, one and that should really help our both our growth and our profitability.
As we complete that transition of thanks again, everyone have a good day.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation. You may now disconnect bye.
Yeah.
Thank you operator.
Okay.
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