OneSpan Inc. Q1 2023 Earnings Call
Cited about our market positioning and growth strategy.
Also feel good about the progress we've made to enable our sales force and onboard new talent to execute our unified go to market strategy.
It is important to note that we are still in the initial phase of our three year plan.
We continue to work hard to align our increased sales capacity with a maturing demand generation engine to execute against our new logo strategy in the second half of the year.
Equally important to our new logo strategy is driving upsell and cross sell opportunities within our existing customer base to this end, we are committed to getting new products into the hands of our sales team to help deliver against our goals in Q1, we launched the first version of one's been notary to test the market and later this quarter, we'll be launching <unk>.
Spend notary more broadly to sell into additional states, where we have been certified.
We also plan to launch DIGIPASS CX or cloud connected device later this quarter initially targeting certain use cases in the banking and health care sectors.
And we're also working to bring secure key vaulting for documents and artifacts to market. This year based on blockchain technology, which was acquired in the first quarter of this year with proven DBA acquisition.
Lastly, we are pleased with the positive customer feedback we have received regarding our new pricing model, which allows us to offer advanced technology and services at the most favorable price per value in the market.
We believe this pricing model will be a key differentiator and generating new logo opportunities over the balance of the year.
Next I'd like to highlight a few customer wins during the quarter.
Our long term on premise esignature customer in North America significantly expanded its business with us by signing an upper six figure annual SaaS contract. This customer evaluated competing solutions and found <unk> to be the most secure and flexible option for its needs.
The largest private bank in India, our current corporate banking customer purchased authentication and mobile security solutions for the retail banking unit in the mid six figure ACB range.
It was a competitive win against multiple firms and highlighted the flexibility of our mobile security solution. This bank has potential will become a much larger customer in the coming years.
And in auto finance customer in Europe expanded their six figure ACB contract and migrated to our identity verification and once <unk> signed solution from the legacy deal flow platform Sunset as last year, and a competitive bidding situation the customer valued our expertise in helping them execute their complex workflows and are out of the box.
The verification service.
Now turning to the macroeconomic environment, we are seeing longer sales cycles and more scrutiny over our investments by our clients in certain regions similar to prior quarters. Specifically, we are seeing more caution around budget spend which may put pressure on our expansion and new logo activity, particularly in the digital agreement market that said, we're also seeing an increase in our sale.
Pipeline and we are monitoring on a regular basis, our lead generation activities conversion rates and sales force productivity.
We are still early in our 2023 investment cycle and continue to make adjustments as necessary to drive sales performance. While also meeting our 2023 profitability targets.
Regarding our exposure to recent bank failures I want to point out that we have minimal exposure to the bank's impacted thus far and we will continue to closely monitor developments across the entire banco sector over months to come.
Now I would like to provide a few comments on generative AI and deep <unk> technology.
I'm sure you've all seen or heard about several recent deep fakes for.
Ample Pope Francis wearing a white puffer jacket, a German newspaper using AI to generate an interview with former Formula One driver of Michael Schumacher and various other documents of content being created by AI algorithms and technology has progressed to a point. Despite its early days, where you literally cannot tell whether what you were seeing or reading.
<unk> is real or fake.
If I'm in a virtual meeting with someone I haven't met before how do I know it is them if.
Im signing of digital documents can I trust it's authenticity.
This is where we come in the industry is coming in our direction.
Our five pillar solution strategy was designed to enable us to secure an entire digital transaction lifecycle by seamlessly weaving together identity verification authentication high assurance virtual collaboration esignature and secure transaction E vaulting for our customers.
I believe in this world of generative AI and deep fakes solutions like ours will increasingly be needed to deliver secure virtual user interactions digital transaction integrity, and secure and trusted digital documents such as videos and other artifacts embedded in blockchain technology.
With that I'll turn the call over to Jorge to review our financials.
Okay.
Thank you, Matt and good afternoon, everybody I am pleased that we reported another good quarter.
With 10% year over year to $141 million.
Specific to subscription contracts grew 19% to $109 million and accounted for approximately 77% of total IRR.
Net retention rate or <unk> was 108%.
<unk> and <unk> were impacted by longer sales cycles timing related to contract renewals.
<unk> lost contracts last year, and our decision to sunset sort of portfolio offerings.
First quarter revenue increased 10% to $57 $6 million.
Subscription revenue grew 29% to $30 million and accounted for more than 50% of total revenue.
Strong growth in security software and SaaS esignature more than offset a declining term esignature, which we began sunsetting last year.
First quarter gross margin was 58% compared to 70% in the prior year quarter and was impacted by an increase in third party costs and lowered DIGIPASS margins.
Operating loss was $8 1 million compared to $9 2 million in the first quarter of last year.
Higher gross profit dollars were largely offset by an increase in operating expenses, resulting from increased investments in sales hires.
Any contract workers and third party marketing with fees among other costs.
These costs were partially offset by an increasing R&D software capitalization costs and a reduction in nonrecurring expenses related to our restructuring plan as compared to the same period last year.
Regarding our cost reduction plan total annualized savings from our phase two were $10 7 million as of March 31, 2023, as a reminder, phase two began in may of last year and will continue through 2025.
With total annualized savings are expected to be in the range of $20 million to $25 million most.
Most of these savings are expected to be reinvested as part of our three year growth plan.
GAAP net loss per share was 21 in the first quarter of 2023 compared to net income per share of <unk> 13 in the first quarter of last year.
non-GAAP loss per share, which excludes long term incentive compensation amortization nonrecurring items, including the impairment of intangible assets restructuring charges and the impact of tax adjustments was <unk> <unk> in the first quarter.
This compares to non-GAAP loss per share of <unk> in Q1 of last year.
First quarter, adjusted EBITDA, and adjusted EBITDA margin was negative $1 6 million and negative 3% as compared to positive point $2 million and positive <unk>, 5% in the same period of last year.
Year over year changes primarily related to the investments we made in the quarter, particularly in our sales and marketing functions, including the increased hiring of quota bearing sellers.
I'll now discuss our first quarter DHL agreements segment results.
<unk> grew 14% year over year to $48 million led by subscription <unk> growth of 17% to $43 million as Matt noted earlier, our strategic decision to sunset our on premise E signature product and move to a cloud first model impact our segment of revenue in the quarter agent.
<unk> revenue decreased 13% to 11 6 million. This decrease was associated with the upfront recognition of two multiyear esignature term contracts totaling more than $3 million in the first quarter of 2022 that didn't repeat this year.
We are no longer sending a new term esignature contracts. We believe this will enable us to be more efficient with our R&D resources and result in more predictable and stable revenue growth in the coming years. It will take a few quarters for this to work through the system. We expect the related revenue variability to be smaller going forward and to be behind us.
Next year.
SaaS subscription revenue grew 25% year over year and accounted for nearly 100% of subscription revenue in the quarter.
We are investing for growth in this part of our portfolio as a key tenet of our strategic growth plan.
First quarter gross margin was 73% compared to 77% in the prior year quarter. The decline in gross margin percentage was largely a result of lower term revenue.
Operating loss was $6 million as compared to operating income of $1 $1 million last year.
The change in profitability is primarily attributed to the reduction in high margin on premise subscription revenue I just discussed reallocation of expenses from our security solutions operating segment, the increase investment in quarter bearing sales people and increases in sales and marketing <unk>.
These factors were partially offset by an increase in software capitalization of costs.
The investments and changes we made this quarter are consistent with our transformation plan to drive topline growth, we anticipate operating leverage improvements as we make progress in the coming quarters.
Turning to our security solutions segment results.
<unk> grew 7% year over year in the first quarter to $93 million.
Subscription <unk> with 20% to $66 million and was partially offset by a decline in perpetual maintenance.
Which we expect this trend to continue.
Revenue increased 18% to $46 1 million.
Crimson revenue grew 69% to $19 6 million, primarily driven by strong term renewals from existing clients for authentication.
Section siding and App shielding solutions.
The growth in subscription revenue in this segment was partially offset by expected declines in perpetual maintenance and support professional services and other which are past silicon revenue and legacy software products that we sunset in 2022.
We believe the electronic component shortages that impacted our DIGIPASS token shipments last year are largely behind us and expect to return to normalized deliberately levels. Beginning later this quarter or early next quarter, we have increased inventory levels and partner with our customers to optimize delivery schedules.
This should enable us to ship the majority of the capacity units that were delayed to this year by the end of the third quarter.
Q1, gross margin was 6% to 7% consistent with the same period of last year.
Product mix favoring subscription revenue was offset by an increase in third party costs and lower than average DIGIPASS margins, which were impacted by electronic component prices increased freight costs and product mix you expect DIGIPASS margins returned to normalized levels for the balance of the year.
Operating income was $15 6 million and operating margin was 34% compared to $7 8 million and 20% in last year's first quarter.
The increase in profitability is primarily attributed to higher revenue and lower operating expenses, including the reallocation of certain expenses to digital agreements and lower amortization as a result of the prior year with deal flow intangible asset impairment.
Turning to our balance sheet. We ended the first quarter of 2023 with $107 million in cash cash equivalents and short term investments compared to $99 million at the end of 2022.
We generated $13 million of cashless cooperations during the quarter, primarily related to improvements in networking capital and we have no long term debt.
Geographically our revenue mix by region in the first quarter of 2023 was 48% for EMEA, 36% from the Americas and 16% from Asia Pacific. This compares to 47%, 33% and 20% for the St Regis in.
The first quarter of last year, respectively.
Now turning to our outlook.
Essential last quarter, we plan for our sales and marketing investments to be more highly weighted in the first half of the year to drive our growth as the year progresses. As we expect will result in increased revenue growth and profitability in the second half of 2023 as compared to the first half of the year.
We're making progress in our transformation and affirm our full year 2023 guidance as follows.
Revenue to be in the range of $230 million to $242 million.
<unk> to be in the range of $157 million to $164 million.
And adjusted EBITDA to be in the range of $3 million to $6 million.
And with that I'll turn the call back to Matt for some closing remarks.
Thank you Laurie new.
New enterprise logo acquisition and expanding within our installed base by cross selling our entire solution portfolio remain our top priorities for 2023.
I am very proud of our team we've made a lot of progress in the transformation plan over the last several months.
<unk>, bringing new products to market doubling the size of our sales force and continuing to implement the marketing infrastructure required to execute our unified go to market strategy. We believe this will result in more predictable revenue growth and synergies over time.
I am confident we are moving from a product company to a problem solving company to become more strategic to our customers and I believe we are well positioned for future success, driven by our talented employees world class products and newly implemented operational rigor.
Alright, and I will now be happy to take your questions.
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Our first question comes from the line of Rudy Kessinger with D. A Davidson.
Your line is now open hey, guys.
Hey, guys. Thank you for taking my questions.
On the security solution subscription you mentioned there were some some large renewal business in there can you quantify how much.
Large renewals license renewals were in there in Q1 and that figure to $19 6 million figure.
Yes, thanks for the question Rudy.
Yeah. So we saw just to maybe take a step back. So we saw good demand for authentication mobile security <unk> solutions in the quarter basically across the board.
The increase in the quarter the strength of the quarter was right to three things. One is the early renewals that we saw in Q4, we started this in Q1.
Second component was renewals with <unk> on this product as I mentioned, and then multi year renewals.
To your renewals into 2020 in Q1 2023, and so you get the benefit of that acceleration. So from a quantification perspective, I think most of the increase that you see is related to these three things to multiyear renewals, probably about 30% to 40% of that of that increased number now one thing to consider though.
Is that when you look at seasonality in Prince of our renewal seasonality Q1 tends to be the highest.
So highly weighted on that renewal.
It's out of the back of your head.
Okay.
Got it fair enough.
The sales force I, certainly could see a doubling of the quota carriers well ahead of schedule.
What is the.
<unk> productivity at today versus where we're fully ramped.
How far do you have to go to get sales productivity up to where you guys targets are.
I think right now were consistent with the plan we've had.
The first was the first year of the three year plan accelerated the hiring of our sales force he brought to them by about six months, our talent acquisition team did a great job frontloading that and now we have to really digest that Rudy So I would say we're hard at work.
Enabling the sales team, making sure that they are certified and with sales cycles somewhere between five to nine months, depending on the region based on the current macroeconomics you should see that kick in according to plan in Q3 and Q4, but we're monitoring it very closely.
That will be our top priority is getting our sellers that we've now got onboard enabled.
Good luck.
Okay, and then last one for me I'm not going to.
Pick your exposure to any of these certain banks failed, but is there maybe.
Maybe two questions one just what percent of your total revenue comes from financial services I imagine the bulk of it but secondly, what percentage of your revenue comes from.
Regional banks credit unions, and smaller type of banks in general are being pressured right now.
Alright, I'll speak to the speak the materiality of it our exposure to the to the banks.
As far as <unk>.
Company wide, our BFS side banking and financial services is over 50% of our revenue our exposure within that sector.
To the regional banks is really immaterial I would say across the board.
We have less than 2% of our exposure to the company from banks that have been impacted.
That's just exposure not realized.
Not realized impact so we're monitoring it closely but dose there right now, but we are fortunate to have it.
Immaterial impact from that end and on the flip side of this we have seen a flight of capital to larger international banks and so we do see an opportunity to benefit from that as some of our larger banking customers actually see increased volumes. So it's a little bit of a put and take right now but.
Most of the overall, it's an immaterial impact to the business.
Certainly in Q1, I would say going forward as well.
Got it that is very helpful color. Thank you I'll jump back in the queue.
Thank you Rudy.
Thank you.
Our next question comes from the line of Nick Mariachi with Craig Hallum. You May proceed.
Hi, This is Nick on for Chad Bennett, Thanks for taking our questions, Matt kind of the flip side of the question.
Hi can you talk about your customer base outside of banking and financial services, maybe the other types of verticals and customer sizes. You are exposure to and also for the product mix looks any different outside of fin serve and banking and just how that kind of diversification has evolved since you joined the company.
Yes, no I appreciate that so if there's one vertical do you want to be strong.
The size of the one okay.
The legacy <unk> and no one's been we've made the reputation partnering with these mission critical banks and certainly prove that our products belong in those types of high value mission critical environments. The company really historically had not made much much attempt.
To break into other verticals, but we certainly see opportunity there.
Pharmaceutical is one that we're doing well in and any organization that has so it's a high assurance applications. We believe certainly our reputation but also our products would support that environment.
Really on the security side of things.
Digital agreement side of things the esignature capability lips everywhere right. So this is really around.
One of my top priorities here, obviously, bolting acquiring new logos and non <unk>.
Customers, but also cross selling esignature into <unk> infrastructure, which we've been effective but I think we have a lot of upside to go and do more than that essentially acquiring.
<unk> customer and our install base is somewhat equivalent of a new logo acquisition although.
Obviously, converting an existing customer is far easier and more cost effective than a pure new logo, but thats, where the enablement comes in for our sales force is really aligning the new sellers are existing sellers in a singular account control model to go after both new logos and our installed base in a more aggressive fashion than we have.
The past so I would say we've made some improvements certainly in targeting non <unk> customers, but much more we can do and that is a core focus of mine going forward.
Got it and then maybe you could expand on the opportunity for your new notary offering just how that fits into the digital agreements portfolio and how youre thinking about that cross sell motion.
And also anything.
You can comment there on early indications from a customer interest and if that can be a lending product for new logos.
Yes, no sure that I'm very excited by the Swift distribute cap the bidding.
End of Q1, we launched our initial foray into the into our one spend notary.
Had limited coverage for states. It is many will know that you have to go state by state by state to get certification based on individual state regulations. We are launching are more generally available.
Version this quarter, but will have coverage for approximately 30 out of the 50 states and we will continue to improve that over time.
Very excited by this for two reasons. One is almost every single company out there has a notary in some shape or form and then two in particular in <unk> given the nature of the applications loans regulated documentations or didn't say theres, an overweighted concentration of notaries in the upper half of the pyramid and the enterprise Deemphasize segment, where we live.
So early days, obviously for the product in the market. We do believe we have a significant opportunity in this multibillion dollar Tam.
It's also important to note that.
Many of the <unk>.
<unk> are doing <unk> on high value documentation and we do them. We do plan on integrating our DIGIPASS CX product cloud based authentication capability to authenticate yourself into a virtual node recession to bring additional layers of security to that notary notary environment.
Particularly when remote notary is being done on unknown unknown users. So I think it's a perfect example, it's really leveraging our virtual.
Actual room infrastructure that we've talked about in the past and is a perfect example of bringing together the security and the digital agreement workflows into a virtual environment. So very bullish on it but still early days for sure.
Great. Thanks for taking the questions.
Sure. Thank you Nick.
Thank you.
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I would like to pass the conference over to Matt Moynahan for closing remarks.
Great. Thank you very much. Thank you everyone for joining our call today and I. Appreciate you taking time out of your day to speak with US and look forward to sharing our progress with you next quarter and in the quarters to come.
You for your time and look forward to our follow on conversations.
That concludes today's call.
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