Q2 2021 OneSpan Inc Earnings Call
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Hello, and welcome to the 1 stat and second quarter 2021 earnings conference call.
All participants will be on listen only mode should you need assistance. Please see the harvest specialist, surpassing and Starkey and followed by zero.
After todays presentation, there will be and opportunity to ask questions to ask a question you Press Star then 1 on your touched on phone to withdraw your question. Please press Star then 2.
Please note today's event is being recorded I would now turn the conference over to Joe Maxa, Vice President of Investor Relations. Mr. Maxa. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining the <unk> second quarter 2021 earnings Conference call. This call is being webcast and can be accessed on the Investor Relations section on <unk> website at investors day, 1 span dot com.
This afternoon after market close 1 spin and issued a press release announcing results for our second quarter 2021.
Separate press release also issued after market close today, the company announced several leadership changes, including Steve and Wirth, who has been named interim Chief Executive Officer, and John Bosshardt, who has assumed the role of interim Chief Financial Officer.
To access a copy of these press releases and other investor information, including a presentation, reflecting our second quarter financial results. Please visit our website.
Steven worth and John Bosshardt will both participate and today's call.
Following our prepared comments, 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.
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 these expectations expressed and these forward looking statements and <unk>.
Direct your attention to today's press release, and the Companys form 10-K, and form 10-Q 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 and the earnings press release.
In addition, please.
Please note that the date of this call is August 4th 2021 and.
Any forward looking statements and related assumptions are made as of this date.
Except as required by law.
Undertakes 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 Steven.
Thanks, very much Joe and good afternoon, everyone. Thanks for joining us on the call today.
Before we get into our second quarter results I'd like to address the leadership changes, we announced this afternoon and.
And I'm honored that the board has appointed meat and interim Chief Executive Officer.
Made progress on our transformational journey over the last several years, but we know the results have fallen short of the potential we see and the company.
Accountability is important to our board and together, we believe that progress requires proactive change starting at the highest levels of our leadership team.
And I've had the pleasure of working on 1 standard for 5 years across a number of functions within the company and I see the opportunity we have before us to optimize our strategic execution focused on the products and markets, where we are best positioned to succeed and act with greater urgency as we look to accelerate.
Revenue growth and drive value for shareholders customers and employees.
And I look forward to working closely with our board and our management team as interim CEO and to drive our transformation forward and deliver results that reflect the strength of our solutions.
That team includes our Chief Accounting Officer, John and Bob <unk>, who has assumed the role and try and Chief Financial Officer, I've worked closely with John and kind of cash that his financial expertise relevant experience and straightforward approach will be tremendous assets and that role.
As we look ahead, we have a good deal of work to do in the coming months, but we are approaching it with a sense of opportunity and and appropriate urgency to drive. These results. We will take a fresh look at our overall product portfolio and markets, we serve and other aspects of the company to explore ways to leverage.
Our strengths and to enhance our growth profile.
At the same time, we will evaluate and areas, where we can do better operationally and being more efficient across the organization.
Can expect to hear more about these initiatives next quarter.
In addition to the executive changes, we also announced today that <unk> has assumed the board chair role from John Fox, who has retired effective today.
John was our first independent lead director and our first independent Board Chair and I want to thank John for his contributions to the company over the years I also want to welcome al to his new role Al has significant finance and cloud experience.
And has made contributions to the board since he joined last November and I look forward to working with him and his new role.
And with that I'll now turn to our second quarter results.
We continue to make progress and our transition to a recurring software revenue business during the quarter, we had strong year over year revenue growth and 2 key recurring revenue solutions with both esignature and mobile security growing in excess of 50%.
Annual recurring revenue or <unk> increased 24% year over year, and <unk> specific to subscription and term based contracts increased 40%.
And other highlights for the quarter include a 7 figure recurring bookings contract with 1 of the largest banks and North America that combined multiple ones and solutions, including our mobile security solution.
Solve that thinks unique use case.
We won all first 1 standby and virtual room customers and this new solution has built an esignature web enabled video conferencing and co browsing features that enable our customers and their users to securely collaborate to review and he signed documents.
And this was the launch during the second quarter of 2021, and currently we have a growing number of customers doing trials.
We also completed integrating our newest identity verification capabilities into 1 stance on.
Which combined with our virtual room technology will help deliver remote online <unk> and capabilities in the future. We expect this solution to be available to customers next year and to strengthen our eastern nature awesome.
There are significant opportunities for our newest identity verification and virtual ground and remote online origination solutions. A recent study by Juniper research found that spending on digital identity verification is driven by the need to digitally onboard users will increased 77%.
And from $9.4 billion this year to $16.7 billion and 2026.
Furthermore, this study found that banking and financial services will account for almost 62% of digital identity verification spend by businesses by 2026.
John will now take you through our financial statements and then I'll come back to provide additional comments along with an update on our outlook before opening the call to questions John.
Thank you Stephen I appreciate the company's trust and my take on this role.
Jumping into the quarterly results annual recurring revenue and Q2 was $112 million, representing a growth rate, 24% compared to the prior year period, our dollar based net expansion rate, which we define as the year over year growth.
And from existing customers was 116% from the second quarter. It was impact and car by a handful of esignature based pandemic related customer contracts, which declined and size year over year. Following the reduction of the North American Federal government program related to the cares Act.
Turning to recurring revenue subscription revenue grew 60% $10 million. This includes strong growth and esignature and increase and contribution from cloud authentication.
Term based software license revenue grew 19% to $6 million as Steven noted mobile security revenue grew in excess of 50%. This growth was partially offset by a reduction authentication software revenue. After it posted a record quarter second quarter of 2020, driven by pandemic related demand.
Maintenance revenue grew 8% year over year to $13 million, we expect maintenance revenue growth to moderate over the balance of 2021 as we continue to transition our business model towards subscription and term based software licenses.
Recurring revenue increased 24% to $29 million and the second quarter of 2021 and accounted for a record 88% of software and services revenue.
And a year ago quarter recurring revenue accounted for 76% of software and services revenue.
Total software and service revenue grew 7% to $33 million and was impacted by a shift and recurring revenue hardware revenue declined, 20% and $19 million and total revenue declined 5% to $52 million.
Gross margin and the second quarter, 2021 was 68% compared to 67% and the second quarter 2020.
The difference and gross margin is primarily attributed to product mix within software and services and within hardware during.
During the quarter nonrecurring proxy contest related expenses impacted GAAP operating expenses by approximately $3 million adjusted.
Adjusted EBITDA or adjusted earnings before interest taxes, depreciation and amortization long term incentive compensation and nonrecurring items was a negative $1 million and the second quarter of 2021 and.
This compares with a positive $3 million from the second quarter of 2020.
GAAP loss per share was <unk> 17, and.
The second quarter of 2021 compared to a loss of <unk> <unk> per share and the second quarter of 2020.
Non-GAAP loss per share, which excludes long term incentive compensation and amortization and nonrecurring items and impact of tax adjustments was a negative <unk> <unk> and the second quarter of 2021.
And to non-GAAP earnings per share of <unk>, and the second quarter of last year.
We ended the second quarter with $109 million and cash cash equivalents and short term investments as compared to 115 at the end of 2020 and last quarter.
During the quarter, we used $2.9 million to repurchase 111000 shares of common stock.
Geographically revenue trends were similar to last quarter with growth in North America offset by declines in EMEA Asia Pac and Latin America year to date, the Americas grew 28% and accounted for 33% of revenue and <unk>.
<unk> declined 16% and accounted for 50% of revenue Asia Pac declined 23% and accounted for 17% of revenue I will now turn the meeting back to Steven.
Thanks, John.
We continue to see strong demand for our esignature and mobile security solutions. However, we are seeing slower progress with some of our other solutions and expect increased labor costs gross margin pressure.
And some pandemic researches to pressure our results for the remainder of the year. Therefore, we believe it is prudent to adjust our full year guidance at this time.
We currently expect second half 2021, and revenue to approximately meet or exceed first half 2021 revenue.
We plan to continue investing for growth and currently expect second half adjusted EBITDA to be at or below first half adjusted EBIT.
So for the full year 2021, we expect total revenue to be and the range of $205 million to $215 million as compared to our prior guidance range of $215 million to 225 million.
Recurring revenue to be on the range of $115 million and $2.120 million as.
And as compared to our prior guidance range.
$120 million to $125.
Yes.
Our growth to be and the range of 17% to 20% as compared to our prior guidance range of 22 percentage of 26%.
And adjusted EBITDA to be and the range of negative $12 million negative $15 million as compared to our prior guidance of approximately breakeven.
We want to reiterate that the core demand drivers for many parts of our business remains strong our customers need per mobile security esignature and related solutions and anti fraud solutions continues to be very important.
The continued growth and sophistication of hacking attacks identity theft, and account takeover fraud, and new account fraud, along with the need for remote digital workflows will drive our growth.
We have work to do in the coming months to revise elements of our strategy and operations to better meet the evolving needs of our customers.
Our management team and board are committed to addressing these challenges head on and we will be evaluating our product portfolio and investments optimizing our operations and the markets we serve.
Looking to best leverage our strength and focus our efforts to accelerate the pace of change to drive improved performance.
And with that John and I will be happy to take your questions.
Operator.
Yes. Thank you at this time, we will begin the question and answer session.
Asking a question you May press Star then 1 on you touched on pharma.
If you go on Speaker phone. Please you kept per handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time on El Pas volatile later on some of the roster.
Yes.
And the first question comes from Gray Powell with <unk>.
Alright, thanks for thanks for taking the questions.
Yeah, just a few on my side.
So maybe starting off high level and just how do you feel about the pipeline today and the visibility that you have on demand today versus call. It 6 months ago, and then and then how much would you say that you've de risked.
Guidance.
Well I would say in terms of pipeline things are fairly steady and we have.
A little bit better visibility into the second half of the year as we saw our experience with the first half of the year Kenney Dr. On the initial pandemics teachers and.
And our ability to predict the business I think has improved from overtime.
In terms of.
Yeah.
2022, we're obviously volume to be spending and a lot of time and the next couple of months thinking about our plans for the future.
And as part of that we're going to be.
And to the demand drivers for each of our markets and pipeline and all of these factors.
Got it Okay, and then and then maybe just shifting over to the recurring side.
So it sounds like mobile security and E signature had good quarters.
And it had a good quarter.
You said the use and slower progress on other solutions can you, maybe just drill into that a bit more and just.
What was it.
Net debt surprised you the most that caused the revision to the AAR our outlook for 2021.
Yes.
Projects going on at the company and its 1 of the things we are looking into this year.
We can focus a little bit better on the most successful products and the highest value markets like you said esignature and mobile security and performed well.
Some of our banking security.
And we've invested quite a bit of time and money and over the last few years.
And now and performing as we expected this year and that has affected our results.
Got it okay. Thank you very much.
<unk> else ask questions.
Okay.
Thank you and the next question on Catharine <unk> with Colliers.
Hi, Thanks for taking the question.
And grabbed and other call well you guys were talking can you just reiterate why we're seeing the IRR and come in.
You had really a nice clip going and it seems from.
And now it's come down to the 17% range from previously on <unk> and 'twenty 6.
This review from me why that is.
Well, we have a couple of different things going on and it's kind of a.
A gradual slow and just over the course of the year.
Part of it is related to.
Yeah.
And if we had some tailwind impact last year or E signature and.
A little bit to a lesser extent and banking to the pandemic and for 6 months.
And now we are renewing those contracts and there's a few of those where we've renewed and a lower level of that effects are.
And then we've had on some underperformance and some of our newer cloud based.
And solutions.
And that affects the outlook from here.
Well and on and then please right there on the newer solutions would you say that is.
Some of them too complicated.
Cycles too long.
Good day into a little debt what the factories that are there. So you have got your sales force to being more software oriented and I'm just trying to.
Grafts like some of these newer products aren't tracking better thanks.
Sure.
I would say for the most part we have made.
A lot of strides in terms of the sales force and the approach from the sales training.
On our focus and this review is going to be more on the products themselves. What are the current capabilities of the products, how do they match up against the customer needs and.
And <unk>.
Taking a fresh look at the competition.
And some of those categories, we're competing not only with large established vendors that dependent on these product categories for many years, but we're also compete against startups.
And I have had a tremendous amount of capital investing in them.
Mirrors and so.
The competition is pretty intense.
I would say that the.
Area that we're going to be looking into and it is more related to the products and the market and some less related to the sales force.
Alright. Thanks.
Thank you and then ask.
Question comes from the line, yes, Sean with Sidoti.
Yeah, and I'm, taking my question and the question is ahead.
From a product related debt.
And headwinds.
And market it seems like it's my product related.
And then and my intent competition did I understand that right.
Yes, that's generally correct yes.
Okay and.
And then and.
If you look at the segments and I worked in a little bit.
Better for you that you see much less subscription you've been talking previously about and going into adjacent markets with that and expense and expand to use a case, where the asset is that something you're going to push harder now than our.
And how do you think about that.
I expect that we will no final decisions have been made but and you can see from some of the announcements we made and the roadmap and future E. Signature for example, it's a horizontal solution by nature. So we are already and many target market segments and I expect that that will continue and we've also done.
And more targeted product expansions or enhancements like virtual room.
Connecting with identity verification and next year are getting interest from our online notary. So those are examples of where we've identified specific use cases and the investment makes sense to do that expansion.
On mobile security is a different type of.
Product and a different market, but that also have some horizontal applications as well and we'll be looking at that as part of our process.
Okay. So your sales force has more or less.
And sort of re.
We direct debt today.
And so readiness has not been abandoned and major changes there.
We're needing to ramp there or how should we think about that.
And we spent a lot of time on the sales force from last couple of years and.
That's an example of where we have these water from foundations and we have a great balance sheet and we have a wonderful customer list. We have a long history of strong reputation and a lot of talented people. So really taking advantage of those assets and accelerating the pace of change is our goal.
Okay. Thank you and ourself from me.
Thank you and the next question comes from really have something with da Davidson.
Great. Thanks for taking my questions guys.
I wanted to touch on that and I know you said you signed the first on.
Virtual bring customer and the quarter and I think last quarter you had said.
We anticipated that that would be would see I think you said, a significant premium and pricing relative to the regular eastern Europe segment share contracts is there any more color you can give on kind of where that pricing came in on that first and this 1 and where you are what youre seeing and Tox.
And the ones that are and pilots right now.
And while it's a little early to get interest and others, because the other hand and cold weather and trials are pilots, we're not and cause.
Contracting phase and finishing up numbers on.
We still believe that that is the case, where we have the opportunity to.
Capture.
Somewhere in the range of 4 times on normal Standalone E signature and price point.
Got it.
And then going back and died.
So it looks like you took 5 out of recurrent 5 that are non recurring.
Is that 5 of the nonrecurring and debt primarily hardware do you expect lowest perpetual licenses or any other color you could give them.
Perpetual licenses are selling that approximately.
What we expected at the beginning of the year.
And the transition for existing customers to purchase term versus perpetual.
Is it a continuous process and I think the numbers show that and that will continue into next year.
Hardware is.
<unk>.
We're protecting hardware and should be down on a bit this year, but non large decline and I would say that that product line.
Fairly stable at this point.
Got it and then.
Also I am curious on the guide and EUR and from breakeven to a 12% to 15 EBITDA loss.
And after only taken the revenue down by 10, and and so I'm curious I know you said increased labor costs, but can you could you drill down more on that just what moving.
And what exactly you can drive that call it $3 million to $5 million of extra expense when you.
Adjusted net revenue adjustment.
Yes.
That's a tough number and we have to.
Admit that.
We're not happy about that.
Starting at the beginning of the year and moving on and as our top line has come in and a little bit.
Under where we wanted it to be.
And because of our high gross margins are really hit adjusted EBITDA per and then.
And were lighter on the things that have the highest margin versus our projections and January.
Adjusted EBITDA number and then on top of that and start adding things like increased freight cost and supply chain costs and other things.
On.
And <unk>.
Come to a number that we're not happy with.
We felt that we need to triple B cell path for you.
Got it thats it from me and chest.
Thank you.
And that does conclude the question and session and I Wonder what youre trying to foresee worth for any closing comments.
Thank you and thanks, everyone for joining.
We have a lot of change going on and we have our work cut out for us and we know exactly what we need to do over the next couple of months and we expect to house and further important news for you and we're planning on.
Coming back early November and talk again, if not sooner and thank you for your time.
Thank you. The conference has now concluded thank you for attending today's presentation.
Your lines.