Q3 2021 OneSpan Inc Earnings Call
Coded.
I would now like to hand, the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining the <unk> third quarter 2021 earnings Conference call. This call is being webcast and can be accessed on the Investor Relations section of one spans website at investors that one span dot com joining me on the call today are Steven worth one spans interim chief Exec.
The officer and Jan Kees Van Carlin, our interim Chief Financial Officer.
This afternoon after market close once been issued a press release announcing results for our third quarter 2021 to access a copy of the press release and other investor information, including a presentation, reflecting our third quarter financial results. Please visit our web site.
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.
These statements involve risks and uncertainties and are based on current assumptions.
Consequently, actual results could differ materially from the expectations expressed in these forward looking statements.
I direct your attention to today's press release and the company's Form 10-K.
<unk> 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 in the earnings press release.
In addition, please note that the date of this call is November 2021, any forward looking statements and related assumptions are made as of this state.
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 Steven.
Thanks, very much Joe and good afternoon, everyone. Thank you for joining us on today's call before we get into our third quarter results I'd like to welcome Jan Kees by the dollar and she wants bell.
Keith joined the company as interim CFO and Treasurer last month, he brings a wealth of accounting finance and consulting experience, including 15 years and Chief Financial Officer roles, where he was instrumental in implementing significant cost saving efforts, we believe Jan Kees skill set matches our needs.
Well as we look to streamline and optimize our operations in the coming months.
Our board would also like to share an update on the CEO search which began after the departure of our former CEO in August.
Search has emphasized relevant skill sets, including demonstrated leadership and growth strategies operational efficiencies and transformational activities.
That process continues to advance of the board, who will share more information as the process unfolds.
Now I'd like to provide you with an update on our strategic action plan progress over the last three months, we have been hard at work evaluating our product portfolio.
Markets, we serve are investments in our operations in order to identify ways to best leverage our strengths and enhance our growth profile reduce costs and drive improved performance.
We have made significant progress in formulating our action plan by leveraging a combination of internal experts board members industry analysts and MTI, a leading global business transformation consulting firm.
We are working diligently to identify and take action on initial cost reduction opportunities and we'll provide a range of expected savings before year end we.
We are also making progress on forming an action plan to accelerate our recurring revenue growth. We will give you more details on the strategic action plan in the coming months and we expect to host an investor day in early Q2.
We have great confidence in the markets, we serve where our products are uniquely positioned to win and provides us opportunities to generate additional growth.
Our core offerings are performing well and we believe we have significant opportunity to increase long term recurring revenue growth, we will focus on our fastest growing product categories, where we can capitalize on our competitive position and expand our market served for.
For example, we've had extremely attractive growth in E signature subscription revenue. This year as we are well positioned in that market.
With that I will turn to our third quarter results, which demonstrated our ability to execute through a management transition our internal review and hardware supply chain issues, which <unk> will discuss in a few minutes.
We had a strong quarter of recurring revenue growth driven by both our E signature and mobile security solutions for the quarter recurring revenue grew 38% year over year with esignature subscription revenue growing 45% and mobile security term license revenue growing even.
Faster.
We believe demand for these solutions will continue well into the future based on our internal forecast, our customer feedback and industry analysts.
<unk> for our mobile security solutions is driven by the increasing need to improve the user experience and mitigate the risk of fraud <unk>.
Mobile banking and other remote financial services applications have been widely adopted around the globe.
You had a recent study found 70% of the top 400 mobile finance related apps had security vulnerabilities.
Our market, leading mobile security solutions are having success in part because they are designed to improve the user experience and mitigate that risk of fraud.
Demand for E signatures accelerated during the pandemic.
It has moderated recently yet remained strong our volumes continued to increase and indications suggest that this will continue in the coming years based on growing opportunities in our current use cases in new use cases and in new geographies for example, our investments.
Esignature add on offerings, such as virtual room and identity verification are gaining traction.
Virtual room provides businesses with the ability to conduct remote mediated transactions that combined digital and human interaction to improve the customer experience. Two recent examples include.
Our customer serving the legal community that launched a product providing a complete digital process for verifying the identity of individuals'. They are using our virtual room because it provides a secure encrypted online video conference service, where the lawyers and business professionals are able to meet virtue.
Italy and electronically sign documents with verified participants.
A second example is a banking customer of ours that is launching a closing room product.
Supported by our technology to drive their commercial real estate business.
This will allow lenders and borrowers to meet virtually to complete a mortgage transaction using E signatures and virtual room, replacing the more costly and time consuming in person meetings that utilized paper based processes. The bank intends to expand this offering to other high value.
Didn't use cases.
We also won several contracts that utilize our recently integrated identity verification and E signature capabilities. Some of the use cases include remote bank account openings title insurance agreements and automobile financing.
I'll now pass the call over to Jan Kees to take you through our financial results and then I'll come back to provide additional comments one with an update on our outlet for opening the call to questions.
Yes.
Thank you Stephen I am excited to be here at ones and look forward to contributing to the team as we think the next steps in our strategic transformation jumping into the quarterly results.
Recurring revenue at the end of Q3 was $119 million.
Representing a growth rate of 24%.
<unk> to the prior year period.
Specific to subscription and term based contracts, which accounts for approximately two thirds of our total.
Increased more than 40%.
All of these net expansion rates with DBM, which we define as the year over year growth.
They are from existing customers was 115% in the third quarter.
As mentioned last quarter. It was impacted in part by a handful of E signature based anthemic related customer contracts, which declined in size year over year. Following a reduction in north American federal government programs related to the cares Act now turning to recurring revenues subscriber.
<unk> revenue grew 37% year over year to $10 million.
Primarily driven by strength in the Esignature solutions and an increased contribution from cloud application.
Software license revenue more than tripled the heating them.
Mobile security and service software accounted for the majority of the year over year growth at.
Maintenance revenue grew 3% to 13.
We are expecting modest full year 2021 maintenance revenue growth as our business model continues to transition towards subscription and term based software licenses.
Total recurring revenue increased 38% year over year to a record 31 million in the third quarter of 2021 and accounted for 89%.
Our software and services revenue.
In the year ago quarter recurring revenue accounted for 74% of software and services revenue.
Total software and services revenue grew 16% to 34 million.
Hardware revenue was impacted by shipping issues within our supply chain.
And declined 17% to $18 million during the quarter.
We have been practically addressing our supply chain and recently brought a new European manufacturer.
<unk> two <unk> during the quarter.
We currently expect hardware revenue to improve sequentially in the fourth quarter.
Total company revenue increased 2% to $52 million.
Gross margin in the third quarter of 2021 was 17, 2%.
Compared to 70% in the third quarter of 2020.
The increase in gross margin is primarily attributed to product mix with software and services accounting for 66% of total revenue as compared to 58% in the year ago quarter and favorable product mix within the hardware adjusted EBITDA or adjusted earnings before interest taxes depreciation.
<unk> amortization long term incentive compensation and nonrecurring items was $2 million in the third quarter of 2021.
This compares to $3 million in the third quarter of 2020.
Our GAAP loss per share was <unk> <unk> in the third quarter of 2021 compared to <unk> <unk> per share in the third quarter of 2020.
Non-GAAP earnings per share, which excludes long term incentive compensation amortization nonrecurring items and the impact of tax adjustments was <unk> quarter of 2021 compared to <unk> in the same quarter last year.
We ended the third quarter with $98 million in cash cash equivalents and short term investments as compared to $150 million at the end of 2020 and 190 million at the end of last quarter.
During the quarter, we used $4 6 million to repurchase approximately 231000 shares of common stock.
Geographically, we continued to benefit from strong revenue growth in the Americas region.
Which grew 43% year over year in the quarter.
We also had modest growth in the Asia Pac region.
EMEA, our largest market, we continued to see headwinds related to our transition to recurring software revenue models.
Which was exacerbated this quarter by the hardware supply chain issues mentioned previously.
Year to date, the Americas region grew 33% and accounted for 33% of revenue.
Asia Pac declined 15% and accounted for 20% of revenue.
In EMEA declined 17% and accounted for 48% of revenue.
I will now turn the meeting back to Steve.
Thanks Jan Kees.
As you can see from our strong third quarter results demand for our solutions is robust and we expect this to carry through into the fourth quarter.
Such we are updating our guidance to raise the midpoint of our expectations.
For the full year 2021, we currently expect total revenue to be in the range of $209 million to $213 million as compared to our prior guidance range of $205 million to 215 million.
Recurring revenue to be in the range of $118 million to $120 million as compared to our prior guidance range of $115 million to 120.
Our growth to be in the range of 18% to 20% as compared to our prior guidance range of 17% to 20%.
And adjusted EBITDA to be in the range of negative $6 million to negative $8 million as compared to our prior guidance of negative $12 million to negative $15 million.
We are happy with our teams execution in the third quarter and are committed to continue delivering solid business performance, while we progressed in forming our action plan to enhance long term shareholder value.
And with that Jan Kees and I will be happy to take your questions operator.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
If you change your mind, Please press star followed by <unk>.
When preparing to ask a question patients show, you'll find something you take lightly.
Knowing that that is stuff that I spoke one.
Our first question comes from Katherine truck mix, we're calling US security Catherine. Please go ahead.
Oh, Hi, nice quarter.
Kind of perplexed are.
As to why you didn't give their first phase of cost cutting.
As part of the Gulf Forwardness give any can you give me a background of why you're waiting until the end of the year.
Well. It is November so we are pretty close I would say, we're working on would be.
The deep dive analysis of which items to talk to you about first.
Because some items are independents and the nature of.
Just playing good business decisions and other items are directly connected to our final strategic decisions and so.
There are a few layers of complexity that we're going to work through in the next.
30 to 60 days.
Okay and then the follow up question is you know.
No.
Is the IRR year back to 18% to 20% grow them.
The components of that are you seen as the better growth drivers.
But certainly E signature and mobile security are the real growth drivers there.
They account for approximately two thirds of our recurring revenue.
And then the balance is really that maintenance piece, that's largely driven by or perpetual license sales and maintenance piece is a you know a drag if you will on the overall growth rate.
Alright, Thanks, I appreciate the time.
Yeah.
Sure. Thank you.
Our next question comes from Gray Powell from BT Archie Great. Please go ahead.
Great. Thanks for taking the question and congratulations on the good numbers.
So yeah.
Yeah, absolutely so net net.
Net new additions in Q3 doubled off of the pace of Q2 was there any sort of like catch up in delayed deal activity in Q3 from Q2, and then I'm just trying to think through how should we think about seasonality into Q4.
Yeah. Thanks.
Yeah, I would say.
Not in our subscription business in our term license business that can be a little bit.
I'm here in subscription and there are some situations where at the end of the quarter you've got the team's still working on renewals that can bleed into the beginning of the next quarter.
And there was a little bit of that in Q3 this year, but overall we've got.
So there is individual large term deals that may skew things also the term license duration okay.
Kim can move the numbers around a bit.
So we will continue to have a little bit of that.
That type of volatility.
A term license.
Okay, Great and then actually kind of lead to my next question.
So on the on the reported revenue side, there's always a few moving parts just I mean, how should we think about the shift from perpetual license.
And multi year term.
Impacting headline revenue growth like like do you feel like you're at the tail end of this transition and I know, it's early to ask about 2022 outlook.
But should we expect the headwinds that we've seen you know on the perpetual license side. This year start to abate next year.
Yeah with respect to the transition from perpetual buying patterns term.
We have.
I wouldn't say, we're at the end of the journey, but we can we can start to see that finish line.
You will see that that decrease.
Has that it will be significant in 2021 over 2020.
We should get to what a number by the end of the year that is small enough that you won't see as much.
Of that transition.
Moving to occur in 2022.
And we will get to a spot where it's going to be driven more on a case by case basis, we have.
Large important historic customers are preferred purchase that.
The conversations that we have with them about it will end up.
Determining whether the number stays where it's at the end of the year goes forward.
<unk>.
And then.
I would say in terms of overall term contracts.
We have picked back up.
A little bit longer contract contract duration, and that's partly driven by.
M D.
<unk> needs and wants of our customers and partly driven by a little bit more flexibility than we've given to our sales team to entertain multiyear contracts, where it makes sense in a particular opportunity.
I suspect that we will.
Can you to have that same philosophy going into next year.
Got it okay. So it sounds like I mean, I thought in the past that you were trending towards one year term license deals. It sounds like there was sort of a tick back up in Q3.
Is that basically what you just said it's correct.
Okay perfect. Thank you very much.
We now have a question from just sort of shrunk.
Please go ahead.
Hey, Thank you for taking my question and congratulations on the good numbers.
First off I'm. Just curious you were talking you were talking about the revenue mix impacting that the gross margin and you noted that the favorable product mix within hardware can you just elaborate on that and Uh huh.
Product mix looks like him and the margin profile for that.
Sure so within the overall mix, we had more of the overall revenue coming from software and services. So that was a driver to overall higher margins.
By a small but meaningful amount and then within the hardware products. We also had a <unk>.
Mix shifts.
This this quarter, we had them.
Some higher sales with some higher.
March and hardware Skus.
Part of that was driven by the transportation supply chain issues mentioned, where.
Some products.
End of.
The quarter did not make it through the court process.
And those products just happens to be skus with lower margins. So.
We are happy to report that the containers didnt make it off the books.
Oh were processed in our with the customers now, but that was something that we haven't because of the quarter.
Okay. Thank you and that's a ton of them.
Two market strategy I mean, I know you're looking at that all strategic overview now but has anything changed there.
Sure.
Four miles off the market.
Yeah.
So we have made a number of changes starting.
Last summer when our new Chief revenue officer took over.
Those are largely behind the scenes.
And nonpublic I guess I would say, but that continues to evolve and we are deep right now in the process of planning our 2022 go to market strategy.
Sales compensation budgeting all of those things are going on right now so I think we'll have more changes to see.
Sure.
Okay. Thank you and just the last one for Don.
Yeah increase the mid point of your guidance range.
It looks like it's got to have that for the full yeah, you'll have a pretty strong fourth quarter. What gives you confidence in that than what they've seen that pipeline.
What kind of visibility do you have.
We're confident in where.
Where we put our guidance and we will have a solid quarter.
You can infer.
Those guidance numbers.
The.
Just keep it up.
Q4 will be a little bit different than Q3, due to seasonality and the normal factors.
Yeah, we were very apartment should be able to report to you that our justice overstock can it be.
As negative as projected earlier.
Okay, Great that was all for me. Thank you.
Okay.
As a reminder to ask any further question. Please press star followed by one on your telephone keypad.
Our next question comes from breathing thing off with D. A Davidson your line is now 810.
Hey, guys. Thanks for taking my question and congrats on a good quarter.
I guess I'm curious as I look at the guide and then kind of back into what it implies for Q4.
It looks like recurring revenue is only expected to increase by about a quarter of a million sequentially. In Q4 for Q3, just just one of the factors that went into that as his term expected to decline sequentially or just what's driving that.
I think you may have understated as it is.
When we're looking at are.
For license revenue a lot of that is driven off the prior year quarter not the previous sequential quarter due to the.
Contract duration dynamics.
So that's.
I'll start and see what's up for renewal and then what comes from being add ons and growth from the existing customers and then finally any of the new business. So that's that's the thought process that we go through it.
Yeah.
Got it helpful. And then you mentioned a couple of new virtual room customers I think last quarter. You had signed your first virtual room customer set a couple of pilot. So it's good to see you.
You might be converting some of those you've got some new customers, but you also said last quarter.
You thought you were done and probably get about four times the pricing on a virtual room customer versus just the standard E signature customer did you see that hold with a couple of customers that you signed this quarter with virtual events.
Yeah, I think that is generally correct I don't have.
All of the exact pricing on those particular deals.
In my head, but yeah, it's we're looking at.
A premium for that product, which is good and we do have a few of those customers came off of trials.
[noise] converted and that's some of the examples we gave you on the call here.
And then just lastly on hardware are you able to quantify kind of what the.
Headwind is in the quarter. It was in the quarter and is it do you expect most of that has to be made up in Q4 or do you think the supply chain issues could potentially linger and dampen things still in Q4.
I'll, let our young case to take that.
Okay I think.
It's a little bit of a headwind.
For Q4, but nothing really there's a little bit of that variability.
In the.
From quarter to quarter.
Yeah.
Yeah, Yeah, one to 2 million I would say is what got stuck on the boat and arrive so that should help us.
Okay got confirmation of expenses.
Got it that's helpful.
With me I'll jump back in the queue.
We currently have nice to ask a question. So I'll now hand back to the management team for any closing remarks.
Nothing further here, but just to say thank you to all of our one span our customers and employees around the world and of course, our investors that.
We work for every day.
Anything else. Please follow up with Joe Maxa, and we can arrange a call or if he can answer your questions directly to them and we look forward to the next time, we're together.
This concludes today's call. Thank you for joining and I Hope you have a lovely rest of your day you may now disconnect your lines.
Yeah.
Yeah.