Q1 2021 OneSpan Inc Earnings Call
[music].
Good day and welcome to the one span first quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question.
You May press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Joe Maxa, Vice President of Investor Relations. Please go ahead Sir.
Thank you operator, Hello, everyone and thank you for joining the one standard first quarter 2021 earnings conference call.
This call is being webcast and can be accessed on the Investor Relations section of <unk> website at investors day, one span dot com.
Joining me on the call today are Scott Clements, one standard Chief Executive Officer, and Mark Hoyt, Our Chief Financial Officer.
This afternoon after market close once been issued a press release announcing the results for our first quarter 2021.
To access a copy of the press release and other investor information, including a presentation, reflecting our first quarter 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 and these forward looking statements.
I direct your attention to today's press release and the company's annual report on form 10-K filed with the U S Securities and Exchange Commission for a discussion of such risks and uncertainties.
Please note that 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 and the earnings press release.
In addition, please note that the date of this call is may 4th 2021.
Any forward looking statements and related assumptions are made as of the states.
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 and good afternoon, everyone. Thanks for joining us on the call here today.
During the first quarter of 2021, our annual recurring revenue a R. R increased 29% year over year.
And our our specific to subscription and term based contracts grew in excess of 50%.
In addition of record 87% of our software and services bookings and revenues were recurring.
We've made tremendous progress and our shift to recurring software revenue and we expect it to be materially complete with this transition by the end of 2020 one.
Subscription revenue grew 47% driven primarily by strong demand for E signature solutions.
Term license revenue declined from last Q1's pre pandemic record quarter.
But Q1 2021 was the third highest term license revenue quarter, and our history and just shy of Q4 2000 Twenty's total.
Mark will provide more detail on these revenue items during his financial review and a few minutes.
Profitability was impacted in the quarter by planned growth investment several one time expenses and higher vacation accruals, which we expect to return to normal levels in future quarters as employees returned to more typical vacation pattern.
Now I will turn to business highlights from the first quarter.
During Q1, we won the largest multimillion dollar esignature subscription contract and our history.
Displacing a major competitor at a leading provider of digital lending solutions.
And just a few weeks ago, we launched the one stand signed virtual war room, which enables financial institutions and other organizations to safely and securely collaborate with their customers via video conference and live interactive co browsing and order to review and E sign high value agreements and retail bank.
<unk> corporate banking and wealth management, as well as insurance and automobile finance and use cases to name a few.
And sort of customers being the patched together multiple apps and tools. The virtual room is in and out of the box solution that is unique to the market combining video conferencing E signature identity, proofing, and the and audit trails and recording options.
It can be completely white labeled and put the spotlight on our customers' brand, which is particularly important for BDC consumer facing transactions.
We have initial interest from many top north American banks that are already using our E signature solution and pricing for the virtual room service will be at a significant premium compared to pricing for only esignature solutions.
We're also integrating our newest identity verification capabilities into one stand side.
Which combined with our virtual room technology will deliver remote online <unk> capabilities. We expect these expanded offerings to be available to customers starting in Q2 and Q3 of this year.
And Gartner September 2020 market guide covering issues, such as identity verification and identity Proofing services. They stated that quote by 2020, 375% of organizations will be using a single vendor with strong identity orchestration capabilities and connections to many other third party.
And for identity proofing and affirmation.
Which is an increase from fewer than 15% today.
We are preparing one stand to benefit from this trend and the coming years.
Next I want to comment on the recent consumer study from I'd say group, which found that 47% of all U S. Citizens were victims of some type of identity theft, and 2019 and 2020.
There was also a substantial increase and new account opening fraud as criminal groups looked to launder funds stolen from the emergency government unemployment and stimulus programs.
And 2021 and the decline and opportunities for stimulus fraud is expected to drive hackers back sort of traditional banking fraud with a focus on account takeovers.
And which we believe will increase demand for our anti fraud solutions.
We believe we're well positioned to respond to these fraud attacks through our complementary portfolio of mobile cloud and hardware solutions.
Turning to hardware for a moment as many of you are aware of we are realigning and streamlining operations to match lower revenue levels and maintain gross margins.
Today actually 19 of our top 20 customers use some combination of our hardware and software authentication solutions.
All of which contribute to our profit while maintenance revenue and ongoing upsell and cross selling opportunities.
I also want to provide you with some color on the progress, we're making and adjacent regulated verticals within the government and health care sectors that require a high level of security.
Our entry into these verticals and still early but we are gaining traction bookings were up more than 40% and the 12 months ended March 31, and our pipeline was up approximately 70% at the beginning of this quarter.
Before I turn the call over to Mark to go through our financials I'd like to discuss a couple of recent announcements from one span.
First during the quarter Garry Capers was appointed to our board of directors.
Gary joined four other current independent and highly qualified directors, who have been added to the board over the last two years.
Gary has significant been tech and SaaS experience. He as division President of cloud solutions at Deluxe Corporation, where he has full financial and operational responsibility for the company's SaaS and cloud solutions that are primarily targeted at the end markets and the financial services industry.
Second as we announced on April 23rd our CFO, Mark Hoyt is leaving one stand to become the CFO at a private company.
Mark has been an important contributor to one spans transformation as we shifted to an emphasis on recurring software and services revenue.
Expanded our disclosure of relevant financial metrics.
And rebuilt our information systems architecture.
On behalf of one span and I'd like to congratulate Mark and his new role and wish him the greatest of success.
We are fortunate to have a very strong finance and accounting team that will provide continuity during the interim period, we've already begun our search process for our next CFO and are seeking highly qualified candidates with deep cloud based software solutions experience to help continue the transformation of our company.
Mark will now take you through our financials and then I'll come back to provide additional comments along with an update on our outlook before opening the call to questions.
Mark.
Thank you for the kind of where it's Scott.
Before I get into the results I want to acknowledge that it has been a privilege to serve as part of the <unk> team.
And I want to thank all of my colleagues on the support and collaboration over the years.
We've made tremendous progress in transforming the company and I'm confident that one staying is well positioned to continue that progress.
Turning to the quarterly results annual recurring revenue at the end of Q1 was $108 million.
Representing the growth rate of 29% in line with our 25% to 30% target growth rate for the quarter.
Our dollar based and the expansion rate, which we define as the year over year grows and the E. R. R from existing customers was 119% in the first quarter.
Turning to recurring revenue.
For the first quarter subscription revenue grew 47% to $8 million.
This included strong growth and E signature and an increased contribution from cloud authentication.
Term based software license revenue declined 13% to $8 million.
Compared to an unusually strong first quarter of 2020, but benefited from strong pre pandemic demand and had an average contract duration approximately 60% longer than the average contract duration and the first quarter of 2021.
This impacted our term license revenue and the quarter, which was still our third highest term based software license revenue quarter ever.
Maintenance revenue grew 14% year over year to $13 million.
We expect maintenance growth to moderate over the balance of 2021, as we continue transitioning our business model towards subscription and term based software licenses.
In total recurring revenue increased 12% of the $29 million.
Recurring revenue accounted for a record 87% of software and services revenue in Q1 compared to 71% in the first quarter of 2020.
And ahead of our expectation to achieve 85% this year.
And the first quarter total software and services revenue declined 10% to $33 million impacted by our shift to recurring revenue on.
Revenue declined 10% to $18 million and total revenue declined 10% the $51 million.
Gross margin and the first quarter of 2020, one was 70% compared to 71% and the first quarter of 2020.
The difference and gross margin is primarily attributed to product mix.
Operating expenses for the first quarter of 2021 were higher than expected and $45 million the.
The increase in operating expenses resulted from planned the growth investment several one time expenses and significantly higher vacation accruals as employees delayed vacations due to the pandemic.
Adjusted EBITDA or adjusted earnings before interest taxes, depreciation and amortization long term incentive compensation and non recurring items was negative $5 million from the first quarter of 2021 and.
This compares to $5 million positive in the first quarter of 2020.
GAAP loss per share was 23, and the first quarter of 2021 compared to GAAP earnings per share of zero cents in the first quarter of 2020.
Non-GAAP earnings per share, which excludes long term incentive compensation amortization non.
And I'm recurring items and the impact of tax adjustments.
It was negative 16, and the first quarter of 2021 compared to eight <unk> in the first quarter of last year.
We ended the first quarter was $115 million of cash cash equivalents and short term investments consistent with the end of 2020.
Cash generated from operations during the quarter was $4 million.
Geographically our revenue mix for the first quarter included 53% from EMEA, 33% from the Americas and 14% from the Asia Pacific region.
This compares to 60%, 22% and 19% in the same regions last Q1, respectively.
I will now turn the meeting back to Scott.
Thanks, Mark the.
Before we open it up to questions I'd like to provide a bit of perspective on the current market landscape.
Mobile economy is improving but it is still uneven and North America profitability at large banking institutions improve substantially and new account opening trends are improving as we expected.
And Europe travel restrictions on the physical Lockdowns continue but with the expected improvements and vaccine distribution, we should start to see sequential improvement going forward the.
Asia Pacific Region also had a soft first quarter, but as in other regions, we expect improvement as the year progresses.
And the outlook for Esignature remains strong around the world with continued demand for Digitization services and today's economic environment.
At this time, we are reaffirming our FY 'twenty, one objectives and full year guidance consisting of the following total revenue of $215 million to $225 million recurring revenue to be and the range of $120 million to $125 million.
And our our growth of 22% to 26%.
And adjusted EBITDA to be approximately breakeven.
And the second quarter of 2020, one, we expect a or our growth of 25% to 30% and for our recurring revenue to increase sequentially and year over year, while perpetual license and hardware revenues decline as we continue to shift to of recurring model.
We expect profitability to improve and the second quarter on higher revenue with increasing contributions from software and services.
The second half of 2021 revenue is expected to exceed the first half revenue led by continued growth and recurring software and services and.
And as previously indicated we expect hardware revenues to decline and the mid single digit range for the full year.
We also continue to expect $15 million to $20 million of revenue headwind, resulting from our transition to a recurring revenue for the full year of 2021, and then and we expect to see acceleration and software and services revenue growth in 2020, two with increasing bottom line profitability.
Our core value propositions and security productivity positive digital user experience and regulatory compliance remain solid.
Our transformation from a hardware centric technology business to of modern cloud based software and solutions company is well underway and is driving positive results.
Along with this transition our board has evolved with the addition of significant expertise and experience matched with the businesses changing risks and opportunities.
Our goal over the next two to three years and should drive increased revenue growth as the recurring revenue transition wraps up and we expand our solution portfolio, along with increased profitability and greater shareholder value creation.
And the coming months, we will be identifying opportunities for structural cost reductions that we expect to improve profitability and the 2020, two 2020 three time frame and.
And we plan to refresh our multiyear financial goals and update you. Further later this year.
Before we open the call to questions I, just want to remind everyone that this call is to discuss our Q1 results and outlook.
We won't be taking questions about our annual meeting of election, but I encourage those of you who are interested the visit www dot one span value dot com for our proxy materials.
Of that Mark and I will 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 Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing and the keys to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Andrew and the Winski with D. A Davidson. Please go ahead.
Great. Thank you and they'll start with a question on the esignature business. So was there any more details you could provide on the on the record contract that you want and the quarter, maybe the size of the contract of the length of the contract.
Andy Yeah. The I think the I think mark as of three year contracts of correct. No. This was this was of the initial patients from one yes, that's correct and.
Yes.
And.
The total value of the project is I would call it mid single digit millions.
Great. Thank you maybe shifting gears and I know you said you had record demand for term based licenses and in Q1 of.
Of 2020, but it looks like the term based revenue was still down a bit more than hardware. This quarter were you surprised by the magnitude of the decline and was there anything in term based licenses that may have impacted.
That decline other than the the tough comp.
No I don't think so Andy really and when you go back and look at it first of all yeah. It was and the range of what we expected I think and the quarter and if you go back and look at the Q1 of the of last year.
We went from about $500000 of term license revenue out of Q1, and 2019 to something I think it was about $95 million or so on the first quarter last year.
It was.
And order of magnitude increase and the first part of last year that related to some specific large contracts, particularly around mobile security.
And things like that so the and then of course of the other compares sequentially and we had.
A real a very very strong fourth quarter of.
2020, yes, as we usually do have a back end loaded.
So I think as Mark said in his comments it was still of the third highest.
Quarter for us in terms of of term license so.
Yeah, I think we're just bumping up against the couple of real tough comparison.
But the it doesn't really change our outlook for the business or our expectations.
Okay, Great and then maybe just last one from me a real quick is is it possible you know I know you reiterated your hardware guidance for the year of down mid single digits, but you know as the economy starts to reopen and do you think there could be some pent up demand for hardware and and maybe even a pending hardware refresh cycle that might.
Provide a little bit of upside of that guidance.
Well I think you know and.
The first quarter I think came in.
Pretty good I think relative to our expectations, we'll see as we go through the year. We do know there are some.
A few larger opportunities that are out there and whether they really come through and the right kind of timing to impact our revenues this year as a TBD.
You know I think these are larger.
<unk> 10 out of a pretty long cycle right of of manufacturing and delivery and so on and so forth. So.
And and.
And when you go through the cycle as a few months right and you get through the cycle. So because some of these things come and are booked early enough in the year, we could see some.
Better performance out of.
The out of hardware, but I think it's kind of it's too early to call that really is as you know historically this is a little bit of of volatile part of the portfolio.
Our solution category and so we are I think we feel good about the guidance we've given at this point.
And but you know a lot of it has to come late in the year or two of the hardware usually harbors of later you know we have a bigger quarters later on the here. So there's a lot yet to go and I guess and put it that way.
Okay that makes sense. Thanks, a lot guys and best of luck Mark and.
Loads of art.
Thank you Amy.
The next question will come from Gray Powell with the T. I D. Please go ahead.
Okay, great. Thanks for thanks for taking the questions. Yeah, just just a couple of if I can Oh go ahead of it.
And so maybe fun.
Maybe follow up on Andy's question. So I mean, it definitely seems like sentiment and the banking sectors improved a lot. This year do you see that impacting purchase decisions where sales cycles are at your largest customers for for any part of the product portfolio and then just how should we think about that you know that debt recovery playing out over the rest of the year.
Yeah, I think we our expectation is that sequentially.
And sequentially things are going to continue to get better through the year and we have seen some of that in terms of the structure of our sales pipeline.
In terms of more of the sales pipeline is in the later.
Stage gates of the pipeline that we saw early in the early in the first quarter. So things are moving through the pipeline, we have seen certainly in North American banks.
Their profitability has improved quite a lot of as you noted and reversing some of the reserves and put up last year and we have also seen some upticks and new account opening.
Large banks the reported those figures here for the first quarter.
On the other hand, the areas of read there's a couple of areas that remain.
And those are Europe, and certainly we have a very uneven situation in Europe with lots.
Lots of them Lockdowns coming back with the junior anchor and spikes and infection rate I do believe that they are starting to do better at moving forward. The vaccination over the coming few months and that will I believe and have.
The positive effect on on debt to a region of and on our business as we I think are beginning to see here on the U S. At this point.
Japan is a is a hard on the call. There's a there is a slight and infection rates going on and Japan right. Now and then we also have the issues and and.
And Brazil, which are concerning so all of those.
All of those I think are.
And I was just curious and we do expect General agency progress and in those areas over the coming months. So I think we've said really since the fourth quarter of last year that we expected sequentially.
Sequentially better business conditions as we go on across the year I don't see any reason to change that expectation at this point and time.
Understood, Okay, and that's that's really helpful color and.
And then maybe maybe you can kind of help us think about some duration and how that impacts term license and on them and I'm guessing that the answer is really that we can just focus on the metrics, but how should we think about multiyear term license deals.
Within the context of your 2021 guidance and then would it be possible to say like sort of on sort of and you know I think you said that duration was down 60% and Q1 and is there a weighted sort of just give back and apples to apples for like constant duration Q1 term versus last year.
Great.
60% down reflects the term license.
And that we've seen for the last couple of quarters, which we've mentioned the approaches and it's approaching about 12 months its approaching about one year. So last year Q1 was kind of an aberration because we had a couple of large three year deals that brought that average up to about 1.6 years. So we saw that revert back to the median of about one this quarter not unusual.
And.
And that's reflected the one year average duration was reflected in our guidance and and our numbers for 2020, one and it's a one of its and the plan with what our sales.
Sales team is offering to customers and what our customers are asking for is the approachable. One of your deals of course, if we have customers that request three five year deals we feel we're happy to oblige.
But we're seeing a lot of customer traffic headed towards one of your deals that are pretty close to mirroring subscription like on terms.
Thank you and general debt we have.
As a matter of course.
Of course, really and tried to move towards one year.
Terms and in general.
And to really.
And minimize revenue and volatility from one periods of the next and so that's really been as we've gone through the transformation away from perpetual to recurring license models. We wanted to keep it somewhat simple as simple as we could and and then also and get that outcome of.
Improving of reducing the historic revenue volatility that the company has seen so that's really the you know what the goal has been I think as we look into 2020 two we could potentially of fine tune that to some degree and as Mark said, we're not we don't.
The telling customers, who on a multiyear contract and go away, we love them and we will take it but.
And that has been really on purpose that we have moved towards the one year average duration.
And we will see whether we continue on that course, and the quarters ahead, or we start to modulate that of a little bit for right. Now we continue to believe that's the best of course.
Got it okay. That's really helpful. Thank you very much.
And then Greg.
The next question will come from Andres Soto of strong with Sidoti and please go ahead.
Hi, Thank you for taking my question and <unk>.
Just kind of follow up first on Dan that E signature of a contract you mentioned, you said and the total value of what's in the Midscale and millions range.
Comtech too and.
To sort of your average comes back then are you going on after this kind of the deal sorry, how did this come about.
Well I think this was the customer that was actually a customer of the competitor who as you know had a.
Large deployment I guess of E signature of across different use cases, and the company and and and so when they are and when they decided to seek alternatives. We were you know I think well positioned to take advantage of that and when that customer.
So I think our average contract value and the signature has and has come up quite a lot over the last year or so and that was on the purpose. We have focused our direct sales people on.
Pursuing larger contracts there or have the.
And thank the tenancy and the Oregon and the part of the organization to maybe of Chase too many small contracts and so we really did refocus everybody on on.
On larger size contracts and.
I don't I don't recall top of my head Mark on and off you do you know exactly what those numbers are but this there they're not and the millions.
The average is not of the millions just put it that way.
Yes, it's much much smaller, but we do have it's not that we have not net other contracts over a million and we have.
But this one is.
Yeah.
Remarkable I think in terms of the size and then.
And I think and indicative of the progress that we're making and that business of both in terms of our product and also are you on a go.
Go to market model.
Okay that was good color and then and in terms of of the other at virtual and meeting room that you and.
<unk> launched and I would assume there's a good day use case for that and your nascent.
Well are you going after that initially are you just pushing it to your existing customers and finance sorry.
I'm sorry on yeah, I didn't quite hear the other business. What you saw can you just repeat that.
And I just wondering how you had the from a market with that.
Are you trying to keep the upsell existing tomorrow. So are you.
I would assume that's a broad the use case for that's a product that no question that Jay synthesis too.
No question, there are and there's a broad set of opportunities for us of that product.
We banking is definitely a high demand area for it this is the solution.
Has been.
The specific request of many of our customers.
And really help them personalized.
There are relationships with important customers.
You bet and the digital space. So they can they can put of phase two of transaction.
And really our interact on them.
And intimate way I think with our with the customers and.
And you know and higher value type transactions and I and you can when you when you sort of conceptualize the best value proposition I think you can see that it should have the application across.
Many of different use cases, where there is a.
The discussion or negotiation or or and agreement is being put in place and that is of value and requires a strong identity verification component to it so.
I think it's the it's very much of a horizontal solution.
We will I think and the early period here the.
Most of the opportunities will be and banking really just because of where we come from but certainly as you know and we think about government and we think about health care and some of the other spaces that we're interested and.
And certainly should the opportunity on those as well.
Okay. Thank you the color that was helpful.
Alright, Thank you Tanya.
This concludes our question and answer session I would like to turn the conference over to Scott Clements President and CEO for any closing remarks. Please go ahead Sir.
Thank you operator, and thanks to all of you for joining the call today and.
We have.
Yeah.
And I'm very much looking for it and I think sort of the balance of this year and the continued progress as you know, we're making a significant incremental investments and our solutions and our go to market model. This year. So that we can continue the <unk>.
<unk> to recurring revenue and really.
The materially complete the transition this year and start to see that be reflected and the overall growth rates of the company as we move into 2020. Two so thanks again for your attention and I Hope you all have a good evening.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.
[music].