Q2 2024 OneSpan Inc Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the OneSpan Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you'll need to press star one on your telephone, and you'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations.

Speaker Change: Good day and thank you for standing by. Welcome to the Q2 2024 OneSpan Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Speaker Change: To ask a question during that session, you'll need to press star 1 1 on your telephone And you'll then hear an automated message advising that your hand is raised

Joe Maxa: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations. Please go ahead.

Joe Maxa: Thank you, operator. Good afternoon, everyone, and welcome to the OneSpan second quarter 2024 earnings conference call. This call is being webcast and can be accessed on the investor relations section of OneSpan's website at investors.onespan.com. In addition, the company plans to file a separate Form 8K this afternoon, announcing the appointment of Victor Limongelli as president and CEO. Victor has been the company's interim CEO since January 4, 20

Joe Maxa: Thank you, Operator. Good afternoon, everyone, and welcome to the OneSpan Second Quarter 2024 Earnings Conference Call. This call is being webcast and can be accessed on the Investor Relations section of OneSpan's website at investors.onespan.com.

Speaker Change: This afternoon, after market close, OneSpan issued a press release and filed a Form 8K with the SEC announcing results for our second quarter 2024.

Speaker Change: In addition, the company plans to file a separate Form 8K this afternoon, announcing the appointment of Victor Limongelli as president and CEO . Victor has been the company's interim CEO since January 4, 2024.

Joe Maxa: To access a copy of the press release, Form 8Ks, and other investor information, please visit our website. Victor Limongelli and our CFO, Jorge Martell, will join me on today's call. Please note that statements made during this conference call that relate to future plans, events, or performance, including the outlook for full year 2024 and other long-term financial targets, are forward-looking statements. These statements involve risks and uncertainties and are based on current assumptions.

Speaker Change: To access a copy of the press release, Form 8Ks, and other investor information, please visit our website.

Speaker Change: Victor Limongelli and our CFO Jorge Martell will join me on today's call.

Speaker Change: Following prepared comments, we will open the call for questions.

Joe Maxa: 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 filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. 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 and in the investor presentation available on our website.

Speaker Change: Please note that statements made during this conference call that relate to future plans, events, or performance, including the outlook for full year 2024 and other long-term financial targets, are forward-looking statements.

Speaker Change: These statements involve risks and uncertainties and are based on current assumptions.

Speaker Change: Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements.

Speaker Change: I direct your attention to today's press release and the company's filings with the U.S. Securities and Exchange Commission for discussion of such risks and uncertainties.

Speaker Change: 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.

Speaker Change: 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 and in the investor presentation available on our website.

Joe Maxa: In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is August 1st, 2024. Any forward-looking statements and related assumptions are made as of this date. I will now turn the call over to Victor.

Speaker Change: In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated.

Speaker Change: The date of this conference call is August 1st, 2024. Any forward-looking statements and related assumptions are made as of this date.

Speaker Change: 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.

Speaker Change: I will now turn the call over to Victor.

Victor Limongelli: Thank you, Joe, and thanks, everyone, for joining the call today.

Victor Limongelli: Over the last seven months, I've gotten to know the OneSpan team, and it's been a real pleasure to work side-by-side with them as we've improved OneSpan's operational performance.

Victor Limongelli: I'm looking forward to further improvement. I'm excited to keep the momentum going, and I'm honored that the board felt the same way in making my role permanent. As you know, we've made significant progress this year, underscored by a strong second quarter, which included 9% revenue growth, 15% ARR growth, and adjusted EBITDA of $16 million, or 27% of revenue. We also generated $2 million in cash from operations in the second quarter, a tremendous improvement as compared to the prior year period when we used $20 million in cash. And we ended the quarter with $64 million in cash on hand.

Victor Limongelli: I'm looking forward to further improvements, I'm excited to keep the momentum going, and I'm honored that the board felt the same way in making my role permanent.

Speaker Change: As you know, we've made significant progress this year, underscored by a strong second quarter, which included 9% revenue growth, 15% ARR growth, and adjusted EBITDA of $16 million, or 27% of revenue.

Speaker Change: We also generated two million dollars in cash from operations in the second quarter, a tremendous improvement as compared to the prior year period when we used twenty million dollars in cash.

Speaker Change: And we ended the quarter with $64 million in cash on hand.

Victor Limongelli: Our focus on operational excellence and accountability throughout the company is driving profitable growth. Over the past few years, we've continued to grow our software business, and in the first half of 2024, we reached a point where software and services are approximately three quarters of total revenue. In comparison, if you look at our business three years ago, the split was approximately 64% software and 36% hardware.

Speaker Change: Our focus on operational excellence and accountability throughout the company is driving profitable growth. Over the past few years, we've continued to grow our software business.

Speaker Change: And in the first half of 2024, we've reached a point where software and services is approximately three-quarters of total revenue, and hardware is about one-quarter of revenue.

Speaker Change: In comparison, if you look at our business three years ago, the split was approximately 64% software, 36% hardware.

Victor Limongelli: Our sales team has done a great job of transitioning the company to more higher-margin software revenue. In particular, our sales team executed very well during the second quarter, with bookings coming in ahead of our internal plan. As you might imagine, I'm very pleased with the team's performance.

Speaker Change: Our sales team has done a great job in transitioning the company to more higher margin software revenue.

Speaker Change: In particular, our sales team executed very well during the second quarter with bookings coming in ahead of our internal plan. The sales team has been working hard to stay close to customers so that we can continue to improve our performance in response to customer feedback.

Speaker Change: As you might imagine, I'm very pleased with the team's performance.

Speaker Change: In addition to the strong performance by the sales team, our renewals team has made strides in closing maintenance renewals in a timely fashion.

Victor Limongelli: Year-to-date, our on-time renewal rate has improved compared to 2023, and the rate of renewals closed within 30 days of the due date has also improved year-over-year. Our R&D team has continued to make improvements to our SAS offerings, and we expect to see improved operational efficiency reflected in increased gross margins as we move through the remainder of the year. Looking ahead, our R&D team and security is, I think it's fair to say, re-energized and is working on enhancements and new products, such as FIO hardware tokens.

Speaker Change: Year-to-date, our on-time renewal rate has improved compared to 2023, and the rate of renewals closed within 30 days of the due date also improved year-over-year.

Speaker Change: That is good progress and a testament to the good work of our renewals team.

Speaker Change: Our R&D team has continued to make improvements to our SaaS offerings, and we expect to see improved operational efficiency reflected in increased gross margins as we move through the remainder of the year.

Speaker Change: Looking ahead, our R&D team and security is, I think it's fair to say, re-energized and is working on enhancements and new products such as FIDO hardware tokens.

Speaker Change: Turning to our two business units, I'm thrilled with the second quarter delivered by our team in the digital agreements business.

Speaker Change: Digital agreements grew strongly and became profitable, excluding one-time costs, which Jorge will discuss in more detail.

Jorge Martell: In digital agreements, we have substantially completed our transition to a SAS model.

Victor Limongelli: Our strong second quarter revenue and ARR growth rates were driven primarily by expansion contracts and, to a lesser extent, new logos. In our security business unit, we saw strong subscription revenue growth, and overall revenue growth was on par with our low to mid single-digit growth rate expectation for 2024. It also continued to be a strongly profitable business.

Jorge Martell: Our strong second quarter revenue and ARR growth rates were driven primarily by expansion contracts and, to a lesser extent, new logos.

Jorge Martell: In our security business unit, we saw strong subscription revenue growth. And overall revenue growth was on par with our low to mid single digit growth rate expectation for 2024.

Victor Limongelli: Our goal is to have both business units deliver growth and profitability, and we are well on our way to achieving that goal. I am, of course, thrilled with the strong ARR growth and our improved profitability and cash flow, as well as the strong sales quarter the team delivered. It would be too much to say the team closed every opportunity, but there were certainly deals that closed in Q2 that might have been expected to occur in Q3.

Jorge Martell: It also continued to be a strongly profitable business.

Jorge Martell: Our goal is to have both business units deliver growth and profitability, and we are well on our way to achieving that goal.

Jorge Martell: I am, of course, thrilled with the strong ARR growth and our improved profitability and cash flow, as well as the strong sales quarter the team delivered.

Jorge Martell: It would be too much to say the team closed every opportunity, but there were certainly deals that closed in Q2 that might have been expected to occur in Q3.

Victor Limongelli: That is great, of course, in that we'd rather have the deals close earlier, but it does make Q3 more challenging. In addition, the third quarter, in terms of seasonality, is typically not a particularly strong bookings quarter. Given that context, coupled with a strong first half performance,

Jorge Martell: That is great, of course, in that we'd rather have the deals close earlier, but it does make Q3 more challenging.

Jorge Martell: In addition, the third quarter in terms of seasonality is typically not a particularly strong bookings quarter for us.

Jorge Martell: Given that context.

Victor Limongelli: For the balance of the year, we expect our subscription revenue to be up double digits over the prior year. In addition, given our current visibility into our hardware pipeline and Anticipated Customer Hardware Delivery Schedule. That said, we expect both business units to be profitable in both the third and fourth quarters. As a result, we now expect our full-year adjusted EBITDA to be higher than previously forecast. Finally, I'd like to note that the board plans to undertake, by year-end, a review of our cash generation and capital needs, balancing those factors with a desire to return capital to Sherrill. Overall, we remain committed to operational excellence and to driving efficient revenue growth to help ensure we achieve our annual profitability and cash flow commitment. With that, I will turn the call over to Jorge. Warren

Jorge Martell: coupled with a strong first half performance.

Jorge Martell: For the balance of the year, we expect our subscription revenue to be up double digits over the prior year.

Speaker Change: While we expect maintenance revenue to decline somewhat, largely due to the end of life of the deal flow product, as well as perpetual to term conversions.

Speaker Change: In addition, given our current visibility into our hardware pipeline,

Speaker Change: and Anticipated Customer Hardware Delivery Schedules.

Speaker Change: We anticipate a decline in hardware revenues in the second half as compared to the prior year.

Speaker Change: That said, we expect both business units to be profitable in both the third and fourth quarters, so we now expect our full-year adjusted EBITDA to be higher than previously forecast.

Speaker Change: Finally, I'd like to note that the board plans to undertake, by year-end, a review of our cash generation and capital needs, balancing those factors with a desire to return capital to shareholders.

Speaker Change: NASA Jet Propulsion Laboratory, California Institute of Technology

Speaker Change: Overall, we remain committed to operational excellence and to driving efficient revenue growth to help ensure we achieve our annual profitability and cash flow commitments.

Jorge Martell: Thank you, Victor, and good afternoon, everyone. I'll start by providing a brief update on our cost reduction activity. We realized $8.5 million in annualized cost savings from our restructuring efforts in the second quarter of 2024. Cumulative annualized savings total $73.5 million. We believe we are on track to achieve our goal of $75 million in accumulated annualized cost savings by the end of this year.

Speaker Change: With that, I will turn the call over to Jorge. Jorge?

Jorge Martell: Thank you, Victor, and good afternoon, everyone.

Jorge Martell: I'll start by providing a brief update on our cost reduction activities.

Jorge Martell: We realized $8.5 million in annualized cost savings from our restructuring efforts in the second quarter of 2024.

Jorge Martell: Cumulative annualized savings totaled $73.5 million.

Jorge Martell: We believe we are on track to achieve our goal of $75 million in accumulative annualized cost savings by the end of this year.

Jorge Martell: Now turning to our second quarter results, ARR grew 15% to $165 million, and our net retention rate was 112%, up from 107% last quarter. During the quarter, we saw a strong increase in digital agreements, new ACV, and strong increases in contract expansions from existing customers in both business units. Second quarter 2024 revenue grew 9% to $60.9 million as compared to the same period last year, driven by 4% growth in security solutions and 30% growth in digital equity.

Jorge Martell: Now turning to our second quarter results.

Jorge Martell: ARR grew 15% to $165 million, and our net retention rate was 112%, up from 107% last quarter.

Jorge Martell: During the quarter, we saw a strong increase in digital agreements, new ACV, and strong increases in contract expansions from existing customers in both business units.

Jorge Martell: Second quarter 2024 revenue grew 9% to $60.9 million as compared to the same period last year.

Jorge Martell: driven by 4% growth in security solutions and 30% growth in digital agreements.

Jorge Martell: Subscription revenue grew 29% to $29.6 million, including 19% growth from security solutions and 41% growth from digital. The strong growth in subscription revenue was partially offset by a modest decline in maintenance revenue, which is by design as we transitioned to a SaaS and subscription license model. Hardware revenue was flat year over year.

Jorge Martell: Subscription revenue grew 29% to $29.6 million, including 19% growth from security solutions and 41% growth from digital agreements.

Jorge Martell: A strong growth in subscription revenue was partially offset by a modest decline in maintenance revenue, which is by design, as we transition to a SaaS and subscription license model.

Jorge Martell: Hardware revenue was flat year-over-year.

Jorge Martell: Second quarter growth margin was 66.2% compared to 61.5% in the prior year quarter. Gross margins were impacted by 2.4 percentage points in Q2 2024 and by 2.8 percentage points in Q2 2023 due to one-time costs. Excluding these one-time costs, the increase in growth margin was primarily driven by favorable product mix due to growth in subscription revenue, partially offset by an increase in depreciation of capitalized software costs. Second quarter gap operating income was $7.6 million compared to an operating loss of $17.8 million in the second quarter of last year.

Jorge Martell: Second quarter growth margin was 66.2% compared to 61.5% in the prior year quarter.

Jorge Martell: Gross margins were impacted by 2.4 percentage points in Q2 2024 and by 2.8 percentage points in Q2 2023 due to one-time costs.

Jorge Martell: Excluding these one-time costs, the increase in growth margin was primarily driven by favorable product mix due to growth in subscription revenue, partially offset by an increase in depreciation of capitalized software costs.

Jorge Martell: Second quarter gap operating income was $7.6 million compared to an operating loss of $17.8 million in the second quarter of last year.

Jorge Martell: Increases in revenue and gross profit margin, combined with a decrease in operating expenses, primarily from lower headcount-related costs and lower resource stream costs, led to the improved performance. Gap net income per share was 17 cents in the second quarter of 2024 compared to a gap net loss per share of 44 cents in the same period last year. Non-GAAP earnings per share was $0.31 in the second quarter of 2024.

Jorge Martell: Increases in revenue and gross profit margin, combined with a decrease in operating expenses, primarily from lower headcount-related costs and lower resourcing costs, led to improved performance.

Jorge Martell: Gap net income per share was 17 cents in the second quarter of 2024 compared to a gap net loss per share of 44 cents in the same period last year.

Jorge Martell: non-GAAP earnings per share was $0.31 in the second quarter of 2024. This compares to a non-GAAP loss per share of $0.18 in the second quarter of 2023.

Jorge Martell: This compares to a non-GAAP loss per share of $0.18 in the second quarter of 2023. Second quarter adjusted EBITDA and adjusted EBITDA margin were 16.1 million and 26 and a half percent, respectively, turning to our security solutions business unit. ARR grew 9% in the second quarter to $105 million. However, revenue growth was negatively impacted by approximately one and a half percentage points due to the relocation of identity verification products to our digital agreements business unit at the beginning of this year.

Jorge Martell: Second quarter adjusted EBITDA and adjusted EBITDA margin was $16.1 million and 26.5%, compared to negative $3.8 million and negative 7% in the same period of last year, respectively.

Jorge Martell: Turning to our Security Solutions Business Unit.

Jorge Martell: ARR grew 9% in the second quarter to $105 million.

Jorge Martell: AR growth was negatively impacted by approximately one and a half percentage points due to the relocation of identity verification products to our digital agreements business unit at the beginning of this year.

Jorge Martell: Second quarter revenue increased 4% to $45.5 million. Subscription revenue increased 19% to $14.9 million, driven primarily by the expansion of licenses from existing customers for authentication solutions. Maintenance and support revenue declined by less than $1 million year-over-year to $9.7 million with growth from on-premise subscriptions, offset by the expected decline from legacy perpetual contracts. DigiPath's hardware token revenue was basically flat with the prior year at $19.7 million. Q2 2024 gross profit margin was 67% as compared to 59% in the second quarter of 2023. The increase in margin is primarily attributable to favorable product and customer.

Jorge Martell: Second quarter revenue increased 4% to $45.5 million.

Jorge Martell: Subscription revenue increased 19% to $14.9 million, driven primarily by expansion of licenses from existing customers for authentication solutions.

Jorge Martell: Maintenance and support revenue declined by less than $1 million year-over-year to $9.7 million with growth from on-premise subscriptions, offset by the expected decline from legacy perpetual contracts.

Speaker Change: DigiPath's hardware token revenue was basically flat with the prior year at $19.7 million.

Jorge Martell: Q2 2024 gross profit margin was 67% as compared to 59% in the second quarter of 2023.

Jorge Martell: The increase in margin is primarily attributable to favorable product and customer mix.

Jorge Martell: In addition, Q2 2023 growth margin was impacted by approximately 3.5 percentage points related to an inventory write-off charge.

Jorge Martell: In addition, the Q2 2023 growth margin was impacted by approximately three and a half percentage points related to an inventory write-off charge. Operating income was $20.7 million, and operating margin was 46 percent, compared to 8.5 million and 19% in last year's second quarter, increases in revenue and gross profit margin combined with reduced operating expenses, primarily attributed to restructuring and other cost reduction activities throughout the majority of the improved performance. Turning to our financial results for our digital agreements business, ARR grew 25% to 61%. ARR growth benefited by approximately 3 percentage points due to the relocation of identity verification products to digital agreements at the beginning of this year.

Jorge Martell: Operating income was $20.7 million, and operating margin was 46%, compared to $8.5 million and 19% in last year's second quarter.

Jorge Martell: Increases in revenue and gross profit margin combined with reduced operating expenses primarily attributed to restructuring and other cost reduction activities drove the majority of the improved performance.

Jorge Martell: Second quarter gross profit margin was 63% as compared to 72% in the prior year quarter. During the quarter, we made a decision to discontinue R&D investments in our trust-built blockchain product. Excluding one-time costs related to this decision, digital agreements Q2 2024 gross margin would have been 10 percentage points higher. The operating loss was 0.2 million as compared to an operating loss of 7.1 million in Q2 last year. The improved performance was driven by an increase in revenue and a decrease in operating costs, primarily attributed to restructuring and other cost reduction activities and was partially offset by an increase in cost of revenue, excluding one-time costs of approximately $1.8 million for the digital agreement. Second quarter 2024 operating income would have been possible.

Jorge Martell: Turning to our financial results for our digital agreements business.

Jorge Martell: ARR grew 25% to $61 million.

Jorge Martell: ARR growth benefited by approximately 3 percentage points due to the relocation of identity verification products to digital agreements at the beginning of this year.

Jorge Martell: Second quarter revenue grew 30% to $15.5 million, driven primarily by both new contracts and expansion of renewal contracts, and to a much lesser extent, the relocation of identity verification products.

Jorge Martell: Subscription revenue, consisting of 100% cloud-based solutions in both Q2 2024 and in the prior year quarter, grew 41% to $14.8 million.

Jorge Martell: Second quarter gross profit margin was 63% as compared to 72% in the prior year quarter.

Jorge Martell: During the quarter, we made a decision to discontinue R&D investments in our Trust Vault blockchain product.

Jorge Martell: Excluding one-time costs related to this decision, digital agreements Q2 2024 gross margin would have been 10 percentage points higher. Operating loss was $0.2 million as compared to an operating loss of $7.1 million in Q2 last year.

Jorge Martell: The improved performance was driven by an increase in revenue and a decrease in operating expenses.

Jorge Martell: primarily attributed to restructuring and other cost reduction activities and was partially upset by an increase in cost of revenues.

Speaker Change: Excluding one-time costs of approximately $1.8 million, Digital Agreement's second quarter 2024 operating income would have been positive.

Jorge Martell: Now turn to our balance sheet. We ended the second quarter of 2024 with $64.3 million in cash and cash equipment, compared to $42.5 million at the end of 2020. We generated $2 million in cash from operations during the quarter and used $2 million in capital expenditures, primarily capitalizing software costs. We have no long-term debt. Geographically, our revenue by region in the second quarter of 2024 was 41% from EMEA, 35% from the Americas, and 24% from Asia Pacific. This compares to 48 percent, 33 percent, and 19 percent from the same regions in the second quarter of last year, respectively.

Speaker Change: Now turn into our balance sheet.

Speaker Change: We ended the second quarter of 2024 with $64.3 million in cash and cash equivalents.

Jorge Martell: compared to $42.5 million at the end of 2023.

Speaker Change: We generated $2 million in cash from operations during the quarter and used $2 million in capital expenditures, primarily capitalized software costs.

Speaker Change: We have no long-term debt. Geographically, our revenue mixed by region in the second quarter of 2024 was 41% from EMEA, 35% from the Americas, and 24% from Asia-Pacific.

Speaker Change: This compares to 48%, 33%, and 19% from the same regions in the second quarter of last year, respectively.

Jorge Martell: I will now provide our financial outlook. ARR to end the year in the range of $166 million to $170 million, as compared to a previous guidance range of $160 million to $168 million, and adjusted EBITDA to be in the range of 55 to 59 million dollars, as compared to our previous guidance range of 51 to 55 million dollars. Without share repurchases, we continue to expect to end the year with more than $70 million of cash. That concludes my remarks. Victor? Thanks, Jorge.

Speaker Change: I will now provide our financial outlook.

Speaker Change: For the full year 2024, we are reaffirming our previously issued revenue guidance. We are increasing our ARR guidance to reflect its year-to-date strength, partially offset by some second-half contraction related to previously sunset products.

Speaker Change: And we are increasing our adjusted EBITDA guidance to reflect an increase in operating leverage.

Speaker Change: More specifically, we expect revenue to be in the range of $238 million to $246 million.

Speaker Change: ARR to end the year in the range of $166 million to $170 million, as compared to a previous guidance range of $160 million to $168 million.

Speaker Change: and adjusted EBITDA to be in the range of 55 to 59 million dollars as compared to our previous guidance range of 51 to 55 million dollars.

Speaker Change: Absent share repurchases, we continue to expect to end the year with more than $70 million of cash.

Speaker Change: That concludes my remarks. Victor? Thanks, Jorge.

Victor Limongelli: We had an excellent second quarter and first half of 2024. Looking at the second half of the year, we know that we have more work to do in order to deliver an excellent year.

Victor Limongelli: I'm excited and proud to be leading the OneSpan team, and we're going to continue to focus our efforts on delivering value to our customers and, thereby, creating value for our shareholders. Jorge and I will now be happy to take your questions.

Victor Limongelli: I'm excited and proud to be leading the OneSpan team, and we're going to continue to focus our efforts on delivering value to our customers, and thereby creating value for our shareholders.

Speaker Change: Jorge and I will now be happy to take your questions.

Operator: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile our Q&A list. Our first question comes from Gray Powell on BTIG. Your line is now open.

Speaker Change: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced.

Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster.

Speaker Change: Our first question comes in line of Gray Powell with BTIG. Your line is now open.

Gray Powell: Okay, thank you very much and congratulations on the good set of results. Thank you. Yeah, absolutely. So maybe, Victor, to start off, I mean, you've been at OneSpan as CEO for seven months now. You posted two good reports. Do you see anything major that needs to be changed, or are there any areas where you want to maybe increase your focus and level of investments?

Speaker Change: Okay, thank you very much and congratulations on the good set of results.

Victor Limongelli: Yeah.

Speaker Change: Thank you.

Speaker Change: Yeah, absolutely. So maybe, Victor, to start off, I mean, you've been at OneSpan at CEO for seven months now, you posted two good reports. Do you see anything major that needs to be changed, or are there any areas where you want to maybe increase your focus and level of investments?

Victor Limongelli: Yeah, let me talk about those results. I'm really happy with our AR growth and the overall strength in our software business. My background, my history, 20 plus years have been on the software side, so I didn't know hardware.

Speaker Change: Yeah, let me let me talk about those results. I'm really happy with our AR growth and the overall strength in our software business

Speaker Change: mine

Victor Limongelli: background, my history, 20 plus years has been on the software side, so I didn't know hardware and that's a newer business for me, but I have to say I like that business as well. It's a very good margin business and we have these long

Victor Limongelli: And that's a new business for me. But I have to say, I like that business as well. It's a very good margin business, and we have these long relationships with customers for many years. Um, and we are. It's not a smooth, ratable business like SAS is, but overall, it's a good business, and we are doing some investment there. I've said before that the goal is to have both business units growing and profitable. We've made tremendous strides on that. The security business, I do think, could benefit from some additional investment in product refreshes.

Speaker Change: relationships with customers over many years and we are

Speaker Change: It's not a smooth, rattleable business like SAS is, but overall it's a good business. And we are doing some investment there. I've said before that the goal is to have both business units growing and profitable. We've made tremendous strides on that.

Speaker Change: The security business, I do think, could benefit from some additional investment on product refreshes.

Speaker Change: And we're starting to do that, and we'll continue to do that as we set up our 2025 plan.

Gray Powell: I understand. Okay, that's helpful.

Speaker Change: Understood. Okay, that's helpful. And then, you know, just...

Speaker Change: In general, across software, it's...

Speaker Change: It's been a fairly rough Q2 so far.

Speaker Change: And you kind of alluded to this on the call, or the prepared remarks, but I mean, you just added more net new ARR this quarter than the prior three quarters combined. So, I mean, like, what surprised you the most? What drove the upside? And has anything, you know, changed within the business?

Speaker Change: Well, I think if you look at the results, and we mentioned it, but we had a lot of good results as you commented.

Speaker Change: Well, one thing that really stands out to me is the NRR map.

Speaker Change: Right, if you're at a 112, you know, 110, 112, those types of ranges...

Speaker Change: It's really...

Speaker Change: beneficial to the business, and of course, much, much easier to grow ARR. And the strength there was on both sides of the business. We had strong NRR results on security as well. So that was great. It was a really tremendous job by the team.

Speaker Change: Understood. Okay, great. I will leave it there.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes to the line of Rudy Kessinger with DA Davidson. Your line is now open.

Rudy Kessinger: Okay, great. Thanks for taking my questions, guys. And Victor, congrats on the permanent title. Thank you. Thanks, Rudy. Yeah, I want to just kind of...

Gray Powell: And then, man, just in general across software, it's been a fairly rough Q2 so far. And you kind of alluded to this on the call or in the prepared remarks, but I mean, you just added more net new ARR this quarter than the prior three quarters combined. So, I mean, like, what surprised you the most? What drove the upside? And has anything, you know, changed within the business?

Gray Powell: Understood. Okay, great. I will leave it there.

Speaker Change: Dig in more on kind of Greg's question, 10.3 million of net new ARR, that's more.

Speaker Change: New ARR, well, about equal to this ARR that you added over the last three quarters combined. And your NRR, it's a TTM figure for a TTM NRR to jump five percentage points.

Speaker Change: in one quarter suggests you probably had either a price increase or some pretty massive customer expansion. So could you just unpack

Rudy Kessinger: Our next question comes from the line of Rudy Kessinger with DA Davidson.

Speaker Change: you know, the $10 million of net new ARR and the jump in ARR, and just talk to any, maybe, concentration you had, and maybe some large expansions or pull forwards or what, because the numbers are pretty significant relative to the past several quarters and relative to kind of what's implied in the second half guide.

Rudy Kessinger: Yeah, I want to just kind of... dig in more on Greg's question, 10.3 million net new ARR. That's more new ARR than, well, about equal to the ARR that you added over the last three quarters combined. And your NRR, it's a TTM figure. For a TTM NRR to jump 5 percentage points in one quarter suggests you probably had either a price increase or some pretty massive customer expansion. So could you just unpack, you know, the $10 million of net new ARR and the jump in ARR, and just talk about any maybe concentration you had and maybe some large expansions or pull forwards or what, because the numbers are pretty significant relative to the past several quarters and relative to kind of what's implied in the second half guide?

Speaker Change: Great.

Speaker Change: Yeah, thanks, Rudy. I alluded to this in the prepared remarks a little bit. We closed a ton of business, including some large deals, and it was really a great performance by the sales team. I'll let Jorge dive into any numbers that he wants to address, but...

Victor Limongelli: The bookings performance was really strong by the team in the second quarter.

Speaker Change: The bookings performance was really strong by the team in the second quarter.

Jorge Martell: Yeah, just to add to that, Vic and Rudy, so we did see great expansion. In particular, we saw one deal that was a low seven-figure deal that was more of a cross-sell, and so that's part of the NRR. We saw that on the DA side of the house.

Speaker Change: Yeah, just to add to that, Vic and Rudy, so we did see great expansion. In particular, we saw one...

Speaker Change: One deal that's a low seven-figure deal that was more of a cross-sell, and so that's part of the NRR. We saw that on the DA side of the house.

Jorge Martell: We also saw great expansion in authentication products and back-end software this quarter. We saw similar traction last quarter. This quarter was stronger. But the other thing to consider also, Rudy, is that we did see lower churn and contraction this quarter than we have seen in the past. Partly, NRI was not really a material number. It was about half a million this quarter. Last quarter was a little more meaningful, and so I think we benefited on both sides. We had really great expansion, that cross-sell that I alluded to on the DA side of the house, but we also saw lower churn and contraction, so we benefited all around.

Speaker Change: We also saw great expansion in authentication products or back-end software this quarter. We saw similar...

Speaker Change: traction last quarter. This quarter was was stronger. But the other the other thing to consider also, Rudy, is that

Speaker Change: We did see lower churn and contraction this quarter that we have seen in the past. Partly, you know, end of July was not really a material number. It was about half a million this quarter. Last quarter was a little more meaningful. And so I think we benefited on both sides. We had really great expansion. You know, that crossover that I alluded to in the DA side of the house, but also we saw lower churn and contraction. So we benefited all around.

Speaker Change: Okay, and just a quick follow-up on that, and then I've got another question. A low seven-figure cross-sales, so that was low seven figures of net new ARR from a single cross-sale on the DAP? Correct. Okay, that's helpful. Okay, and then...

Speaker Change: I guess, you know, the guide, the Ibiraguide.

Speaker Change: I understand like in Q1 you have some massive multi-year term licenses, second half it sounds like.

Speaker Change: Your hardware is going to be a bit lower than as it would typically be seasonality-wise. But still, the EBITDA guide in the second half, I think it implies roughly $20 million in the second half versus $36 million in the first half. You're saying...

Speaker Change: gross margins are going to be stronger. Obviously, you've got the cost cuts coming in. Stages of Empire OpEx actually steps up in the second half. So could you just unpack that a bit as well?

Jorge Martell: Yeah, I can chime in here. So I think it's gonna be a little more than the number you sent to us and have adjusted a bit on what we have, Rudy. But, you know, obviously, EBITDA is heavily dependent on revenue. As Victor said, we expect to review the clients in the hardware business based on the visibility we have today. And that's primarily related to scheduled customer deliveries, right? So we obviously recognize revenue when we do the deliveries.

Rudy Kessinger: Yeah, I can chime in here. So I think it's gonna be a little more than the number you sent to us and have adjusted a bit of what we have, Rudy. But, you know, obviously EBITDA is heavily depending on revenue. As Victor said, we expect year-on-year declines on the hardware business based on visibility we have today. And that's primarily related to the scheduled customer deliveries, right? So we obviously recognize revenue when we do the deliveries. So as we mentioned, it's a lumpy business because of that. We have lead times for production.

Jorge Martell: So, as we mentioned, it's a lumpy business because of that. You have lead times for production, and then lead times for deliveries, and then coordinating those with our customer base, right? So it's a whole, you know; it takes a lot of effort to do that on a consistent basis. So because of the revenue, so a little uncertainty on the hardware side is what we've been cautious about our EBITDA guide, you know; we raised it according to our numbers and our forecast. You know, we hope to be more of the high end of that range. And we'll continue to update you guys as we continue to make progress.

Speaker Change: and then lead transfer deliverers, and then coordinating those with our customer base, right? So it's a whole, you know, it takes a lot of effort to do that on a consistent basis.

Rudy Kessinger: So, because of the revenue, sort of like a little uncertainty on the hardware side is what we've been cautious about our EBITDA guide, you know, we erased it according to to our numbers and our forecast.

Rudy Kessinger: You know, we hope to be more of the high end of that range, and we'll continue to update you guys as we continue to make progress.

Rudy Kessinger: Okay, that's helpful. Thank you. Thank you.

Speaker Change: Okay, that's helpful. Thank you.

Rudy Kessinger: Thank you. Thank you. Thank you.

Anja Söderström: comes to the line of Anja Soderstrom with Sudoti. Your line is now open.

Speaker Change: Our last question comes from the line of Anja Soderstrom with Sudoti. Your line is now open.

Anja Söderström: Hi, and thank you for taking our questions and congratulations on the great quarter and the nomination, Victor.

Anja Söderström: Hi, and thank you for taking our questions.

Victor Limongelli: Thank you. Thank you very much.

Rudy Kessinger: Congratulations on the great quarter and the nomination, Victor.

Anja Söderström: For this quarter, you're undertaking a lot of changes within the sales organization and so on. So how much... of this talent is driven by demand versus your changes in execution, do you think?

Victor Limongelli: Thank you. Thank you very much.

Anja Söderström: For this quarter, you're undertaking a lot of changes within the sales organization and and what not so how much?

Speaker Change: of this talent is driven by demand versus your changes in execution, you think?

Victor Limongelli: Well, it's hard to pull that apart. I think the team has executed better. We did see good performance across the board. It was both in security and in the DA business.

Speaker Change: Well it's hard to pull that apart. I think the team has executed better. We did see good performance across the board. It was both in security and in the DA business.

Victor Limongelli: It's hard to say how much of that is due to underlying demand. I don't know if I could give you a precise number on that. I'm really happy with how we're engaging with customers and making sure that we spend time meeting with them face-to-face and seeing what problems we can solve. But I can't, I can't give you a precise number on demand versus supply.

Speaker Change: So...

Speaker Change: It's hard to say how much of that is due to underlying demand. I don't know if I can give you a precise number on that. I'm really happy with how we're engaging with customers and making sure that we're

Speaker Change: spending time meeting with them face-to-face and seeing what problems we can solve for them.

Speaker Change: But I can't give you a precise number on demand versus execution.

Victor Limongelli: Okay, understood. And let me ask you in a better way, maybe, how the macro environment is for you. Do you still see that as challenging? And once you know you're getting the execution up and running and the macroenvironment improving, hopefully, eventually? What are you seeing in terms of your customers? That's a good question, and you know for us, Europe is a huge market, and the European economy hasn't been that great, but it's not like it's in a deep, deep recession either, so I don't like to talk about macro unless it's on the extreme. Right, if the economies are booming, great, that might provide some lift, or if there's a severe recession, obviously, that hurts. I don't think a macro environment.

Speaker Change: Okay, understood. And let me ask you in a better way maybe, how is the macro environment for you?

Speaker Change: do you still see that as challenging and once you know you're getting the execution up and running and the macroenvironment improving hopefully eventually?

Speaker Change: What are they paying in terms of their customers? That's a good question. For us, Europe is a huge market.

Speaker Change: and the European economy hasn't been that great, but it's not like it's in a deep, deep recession either. So I don't like to talk about macro unless it's on the extremes.

Speaker Change: right, if the economies are booming...

Speaker Change: Great, that might provide some lift, or if there's a severe recession, obviously that hurts. I don't think a macro environment.

Speaker Change: is fantastic, but it's also, I mean, we have to be able to execute through economies like this. This isn't.

Speaker Change: I mean, far from the worst economy I've had experience with, having run a public software company through the Great Recession. So, I view it as...

Anja Söderström: Okay, I guess. Does that make sense?

Speaker Change: Okay, I guess.

Speaker Change: Does that make sense?

Speaker Change: Yes, thank you for that, Connor, and in terms of the cost savings, it sounds like you almost reached your target here for the year. And are you still looking for potential further ways, or you've been kind of.

Speaker Change: Fishing it already.

Jorge Martell: Jorge, you want to cover that one? Yeah, yeah. So, you know, we're almost there. Andrea, from a cost savings perspective, you know, a lot of the, as we mentioned before, a lot of this, the incremental 10 that we announced last couple of earnings call impacted DA, and that was related to, again, the mandate that big has, which is having both business units be growing profitably.

Speaker Change: And so now we're there. Now, obviously, there will be incremental in terms of fine tuning, right? You know, could be one or two business units, I think overall corporate as well. So, but I don't think we will.

Speaker Change: So like, you know, putting neon lights on it is just part of running the business, right? We just got to be conscious about and try to improve that and expand operating margins. So I think, to your point, we're almost there. It'll continue to be, but I expect more fine-tuning rather than another sort of like huge number coming out.

Anja Söderström: Okay, and then on the cough side... Victor, you mentioned you would invest in some products to enhance them. Will there be any significant cost increases because of that, or not?

Speaker Change: Martell.

Speaker Change: Okay, and then on the cost side.

Victor Limongelli: Victor, you mentioned you will invest in some products to enhance them. Will there be any significant cost increases because of that?

Speaker Change: We are trying, as Jorge alluded to in the...

Victor Limongelli: his comments. We're trying to keep a close eye on expenses. We haven't done our 2025 planning yet. There may be a small incremental investment in that area, but for the most part, we're trying to direct our team. We have a strong team. We're trying to direct them in the areas that can have the biggest benefit for our customers, rather than just throwing dollars at it. I don't think that's the right

Jorge Martell: his comments, we're trying to keep a close eye on expenses.

Victor Limongelli: We haven't done our 2025 planning yet. There may be a small incremental investment in that area, but for the most part, we're trying to direct our team. We have a strong team. We're trying to direct them in the areas that can have the biggest.

Anja Söderström: Okay, great. Thank you also for me.

Joe Maxa: Thank you. I'm showing no further questions at this time and would now like to turn the call back to Joe Maxa for closing remarks.

Speaker Change: Thank you. I'm showing no further questions at this time and would now like to turn the call back to Joe Maxa for closing remarks.

Joe Maxa: Thank you, everyone. We appreciate your time and look forward to sharing our progress with you again next quarter. Thanks again, and have a nice day.

Joe Maxa: Thank you everyone. We appreciate your time and look forward to sharing our progress with you again next quarter. Thanks again and have a nice day.

Operator: Thank you. This does conclude the program, and you may now disconnect.