Q3 2024 OneSpan Inc Earnings Call
Okay.
Operator: Good day and thank you for standing by.
Good day, and thank you for standing by.
Operator: Welcome to the OneSpan Q3 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 again.
Welcome to the one span Q3 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 the session you will need to press star one on your telephone you will then hear in our automated message advising your hand is raised.
To withdraw your question. Please press star one again.
Operator: please be advised that today's conference is being recorded.
Be advised that today's conference is being recorded.
Joe Maxa: I would now like to hand the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations. Please go ahead.
Speaker Change: I would now like to hand, the conference over to your first speaker today, Joe Maxwell Vice President of Investor Relations.
Speaker Change: Go ahead.
Joe Maxa: Thank you, operator. Good afternoon, everyone, and welcome to the OneSpan third 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.
Joe Maxwell: Thank you operator, good afternoon, everyone and welcome to the one spend third quarter 2024 earnings Conference call. This call is being webcast and can be accessed on the Investor Relations section of <unk> website at investors <unk> Dot com.
Joe Maxa: Joining me on the call today is Victor Limongelli, our Chief Executive Officer, and Jorge Martell, our Chief Financial Officer. This afternoon, after market close, OneSpan issued a press release announcing results for our third quarter 2024. To access a copy of the press release and other investor information, please visit our website.
Joe Maxwell: Joining me on the call today is Victor Nemanja, Li our Chief Executive Officer, and Jorge Martell, Our Chief Financial Officer.
This afternoon after market close <unk> issued a press release announcing results for our third quarter 2024 to.
Joe Maxwell: To access a copy of the press release and other Investor information. Please visit our web site.
Joe Maxa: Following our prepared comments, we will open the call for questions. Please note that statements made during this conference call that relate to future plans, events, or performance, including the outlook for full year 2024 and other long-term financial targets, are forward-looking statements. 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.
Joe Maxwell: Following our prepared comments, we will open the call for questions.
Joe Maxwell: 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.
Joe Maxwell: These statements involve risks and uncertainties and our <unk>.
Joe Maxwell: Based on current assumptions.
Joe Maxwell: Consequently, actual results could differ materially from the expectations expressed in these forward looking statements.
Joe Maxa: 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 uncertainty.
Joe Maxwell: 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.
Joe Maxa: 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 and in the earnings presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated.
Joe Maxwell: 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.
Joe Maxwell: 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 earnings presentation available on our website.
Joe Maxwell: In addition, please note that all growth rates discussed on this call refer to a year over year basis, unless otherwise indicated.
Joe Maxa: The date of this conference call is October 30th, 2024. Any forward-looking statements and related assumptions are made as of this date. except as required by law, we undertake no obligation to update these statements as a result of new information for future events or for any other reason.
Joe Maxwell: The date of this conference call is October 32024.
Any forward looking statements and related assumptions are made as of this date.
Joe Maxwell: 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.
Victor Limongelli: I will now hand the call over to Victor. Thank you, Joe. Hello, everyone. Thank you for joining us on the call today. I'm thrilled we reported another solid profitable quarter driven by the team's hard work and focus on operational excellence. The adjusted EBITDA was $17 million with 30% of revenue and both business units were profitable. I am particularly pleased that our digital agreement segment, for the first time, was profitable on a fully burdened basis, that is, including corporate allocations, and that our security segment continued to be highly profitable. We had strong double-digit subscription revenue growth in the third quarter.
I will now hand, the call over to Victor.
Victor Nemanja: Thank you Joe.
Victor Nemanja: Hello, everyone. Thank you for joining us on the call today.
Victor Nemanja: I'm thrilled we reported another solid profitable quarter, driven by the team's hard work and focus on operational excellence adjust.
Victor Nemanja: Adjusted EBITDA was $17 million or 30% of revenue in both business units were profitable.
I am, particularly pleased that our digital agreements segment for the first time was profitable on a fully burdened basis that is including corporate allocations and that our security segment continued to be highly profitable.
We had strong double digit subscription revenue growth in the third quarter subscription revenue grew 29% and accounted for 60% of total revenue.
Victor Limongelli: Subscription revenue grew 29% and accounted for 60% of total revenue. Total software and services revenue grew 10% and accounted for 78% of revenue. Overall, revenue declined 4% primarily due to the anticipated decline in hardware that we discussed on the last quarter's call. ARR grew 9% in line with the approximate 7% to 10% guidance range implied by our full year ARR guidance of $166 million to $170 million. As a reminder, we saw ARR growth of 15% last quarter, driven in part by a few large deals that closed earlier than expected. Q3 ARR was impacted sequentially by approximately $2 million from products we've previously sunset.
Victor Nemanja: Total software and services revenue grew 10% and accounted for 78% of revenue.
Overall revenue declined 4%, primarily due to the anticipated decline in hardware that we discussed on last quarter's call.
Victor Nemanja: <unk> grew 9% in line with the approximate 7% to 10% guidance range implied by our full year.
Our guidance of $166 million to $170 million.
Victor Nemanja: As a reminder, we saw a growth of 15% last quarter driven in part by a few large deals that closed earlier than expected.
Victor Nemanja: Q3, <unk> was impacted sequentially by approximately $2 million from products, we previously sunset.
Victor Limongelli: We believe we are on track to achieve our full year 2024 ARR guidance. I want to remind everyone that the products we sunsetted, though they contributed some revenue in ARR, and therefore have some associated top-line and ARR headwinds, were low-growth and low-return-on-investment products. We are already benefiting from increased operating efficiencies and profitability from the sunsetting of these products and believe we are better positioned from a product portfolio perspective to drive increased profitable growth in the coming years. We continue to generate strong cash. We generated $14 million in cash from operations in the third quarter and $43 million year to date, which is a significant improvement from the prior year.
Victor Nemanja: We believe we are on track to achieve our full year 2024, <unk> guidance range.
Victor Nemanja: I want to remind everyone that the products, we sunset, though they contributed some revenue in <unk> and therefore have some associated top line and <unk> headwinds were low growth and low return on investment products.
We're already benefiting from increased operating efficiencies and profitability from the sunsetting of these products and believe we are better positioned from a product portfolio perspective to drive increased profitable growth in the coming years.
Victor Nemanja: We continue to generate strong cash we generated $14 million in cash from operations in the third quarter and $43 million year to date, which is a significant improvement from the prior year.
Victor Limongelli: Last year we used seven million dollars in cash during the third quarter and 14 million dollars in cash through the first nine months. As of September 30th, we had $77 million in cash on hand. And we continue to focus on operational excellence and accountability throughout the company. For example, our sales team continues to focus on transitioning the company to more higher margin software revenue. And they've been working hard to stay close to customers so that we can continue to improve our performance in response to customer feedback. Our renewals team continues to make strides in closing maintenance renewals in a timely fashion.
Victor Nemanja: Last year, we used $7 million in cash during the third quarter and $14 million in cash through the first nine months.
As of September 30, we had $77 million in cash on hand.
Victor Nemanja: And we continue to focus on operational excellence and accountability throughout the company.
Victor Nemanja: For example.
Our sales team continues to focus on transitioning the company to more higher margin software revenue and they have been working hard to stay close to customers. So that we can continue to improve our performance in response to customer feedback.
Victor Nemanja: Our renewals team continues to make strides in closing maintenance renewals in a timely fashion.
Victor Limongelli: Year-to-date, our on-time renewal rate improved several percentage points compared to 2023. And our R&D team is continuing to make improvements to our SAS offerings, which we are starting to see through increased operational efficiencies reflected in higher gross margin. Turning to our two business units, I'm of course thrilled with the profitability delivered by both BU's in the third quarter. In digital agreements, revenue and ARR growth was driven by expansion contracts and, to a lesser extent, new logos. In terms of the seasonality of bookings, we expect Q4 to be stronger than Q3, as it typically is. This will help our end-of-year ARR, but will have limited impact on Q4 revenue.
Victor Nemanja: Year to date, our on time renewal rate improved several percentage points compared to 2023.
Victor Nemanja: And our R&D team is continuing to make improvements to our SaaS offerings, which we are starting to see through increased operational efficiencies reflected in higher gross margins.
Victor Nemanja: Turning to our two business units I'm of course thrilled with profitability delivered by both us and the third quarter.
In digital agreements revenue and <unk> growth was driven by expansion contracts and to a lesser extent new logos in terms of the seasonality of bookings, we expect Q4 to be stronger than Q3 as it typically is this will help our end of year IRR, but will have limited impact on Q4.
Victor Limongelli: In our security business unit, our Q3 subscription revenue and AOR growth was primarily driven by authentication solutions for existing customers. In Q4, we expect another quarter of double-digit subscription revenue growth. However, like last quarter, given our visibility into our hardware pipeline and anticipated customer delivery schedules, we anticipated decline in hardware and total security revenue as compared to the fourth quarter of last year. Over time, a number of banks in EMEA, and to a lesser extent in Asia-Pacific, have adopted mobile purse policies with respect to consumer banking. Looking ahead, although we are not ready to provide fiscal year 25 guidance, our initial view for next year suggests hardware revenues will continue to decline modestly year over year.
Victor Nemanja: Revenue.
And our security business unit, our Q3 subscription revenue and <unk> growth was primarily driven by authentication solutions for existing customers in.
Victor Nemanja: In Q4, we expect another quarter of double digit subscription revenue growth.
Victor Nemanja: However, like last quarter, given our visibility into our hardware pipeline and anticipated customer delivery schedules, we anticipate a decline in hardware and total security revenue as compared to the fourth quarter of last year.
Over time, a number of banks in EMEA and to a lesser extent in Asia Pacific have adopted mobile first policies with respect to consumer banking.
Looking ahead, although we are not ready to provide fiscal year 'twenty five guidance. Our initial view for next year suggests hardware revenues will continue to decline modestly year over year.
Victor Limongelli: Our goal is to have both business units deliver growth and strong profitability, and we are well on our way to achieving that goal. Security growth may be more challenging in the near term, given the context I just provided around hardware, but I believe we are in a strong position long term to drive increased growth and profitability as we focus on driving higher margin software revenue. For the full year 2024, given the dramatic strides we have made in terms of profitability, we expect our adjusted EBITDA to be significantly higher than previously forecast. In addition, we continue to expect strong double-digit growth in subscription revenue.
Victor Nemanja: Our goal is to have both business units delivered growth and strong profitability and we are well on our way to achieving that goal.
Security growth may be more challenging in the near term given the context I just provided around hardware, but I believe we are in a strong position long term to drive increased growth and profitability as we focus on driving higher margin software revenues.
For the full year of 2024, given the dramatic strides we have made in terms of profitability. We expect our adjusted EBITDA to be significantly higher than previously forecast. In addition, we continue to expect strong double digit growth in subscription revenue. However, given our increased visibility to.
Victor Limongelli: However, given our increased visibility to hardware, we now expect our full-year revenue to fall in the lower half of our prior revenue guidance year.
Hardware, we now expect our full year revenue to fall in the lower half of our prior revenue guidance range.
Victor Limongelli: Finally, as I noted last quarter, 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 sharehold.
Finally, as I noted last quarter 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.
Jorge Martell: With that, I will turn the call over to Jorge. Jorge?
With that I will turn the call over to Jorge Jorge.
Jorge Martell: Thank you, Victor, and good afternoon, everyone. Before reviewing our financial results, I want to highlight the substantial completion during the third quarter of our multi-year cost reduction initiative. I'm very pleased with the team's efforts as we work to capture significant cost savings over the last couple of years, which has helped us meaningfully improve our operating profitability. During the third quarter, we realized $3 million in annualized cost savings, bringing our cumulative annualized cost savings to $18 million year-to-date and to approximately $76.5 million dollars dating back to May of 2022, exceeding our year-end 2024 cumulative annualized cost savings goal of $75 million.
Thank you Victor and good afternoon, everyone.
Jorge Martell: Before reviewing our financial results I want to highlight the substantial completion during the third quarter of a multiyear cost reduction initiatives.
Jorge Martell: Very pleased with the team's efforts as we work to capture a significant cost savings over the last couple of years, which has helped us meaningfully improve our operating profitability.
During the third quarter, we realized $3 million in annualized cost savings, bringing our cumulative annualized cost savings to $18 million year to date and to approximately $76 5 million.
Dating back to May of 2020 to exiting our year end 2020 for cumulative annualized cost savings goal of $75 million.
Jorge Martell: Now turning to our third quarter results. ARR grew 9% to $164 million, and our net retention rate was $160 million. As compared to last year, ARR and NRR primarily benefited from customer expansion contracts and ARR, to a lesser extent, also benefited from new customers. Growth in ARR and NRR was partially offset by an increase in typical churn and churn related to end-of-life product. third quarter 2024 revenue was $56.2 million, 4% lower than last year's Q3, primarily due to the expected decline in hardware revenue. digital agreements revenue grew 18% and was offset by a decline in security revenue of 11%.
Now I'll turn it to our third quarter results.
Jorge Martell: <unk> grew 9% to $164 million.
Victor Nemanja: And our net retention rate was 106%.
Victor Nemanja: As compared to last year.
And NRI, primarily benefited from customer expansion contracts and.
To a lesser extent also benefited from new customers.
Growth in <unk>, and NR was partially offset by an increase in typical churn and churn related to end of life products.
Third quarter 2024 revenue was $56 2 million, 4% lower than last year's Q3, primarily due to the expected decline in hardware revenue.
Victor Nemanja: Digital agreements revenue grew 18% and was offset by a decline in security in a revenue of 11%.
Jorge Martell: Within our security business unit, software and services grew 6%. Subscription revenue grew 29% to $33.6 million, including 29% growth in security solutions and 27% growth in digital. maintenance revenue declined by design as we continue to transition to a SAS and subscription license model. The third quarter growth margin was 73.9% compared to 69.1% in the prior year quarter. The increase in gross margin was primarily driven by a favorable product mix within our security segment, including an increase in software and a decrease in hardware, partially offset by an increase in depreciation of capitalized software costs in digital equipment.
Victor Nemanja: Within our security business unit software and services grew 6%.
Subscription revenue grew 29% to $33 6 million, including 29% growth in security solutions and 27% growth in digital agreements.
Maintenance revenue declined by design as we continue to transition to SaaS and subscription license model.
Victor Nemanja: Third quarter gross margin was 73, 9% compared to 69, 1% in the prior year quarter.
The increase in gross margin was primarily driven by a favorable product mix within our securities segment, including an increase in software and a decrease in hardware, partially offset by an increase in depreciation of capitalized software costs in digital agreements.
Jorge Martell: The third quarter GAAP operating income was $11.3 million compared to an operating loss of $4.8 million in the third quarter of last year. The year-over-year improvement was primarily driven by an increase in gross profit dollars due to the favorable product mix just discussed, a decrease in operating expenses, primarily from lower headcount and vendor-related costs, and lower resource requirements. gap net income per share was 21 cents in the third quarter of 2024 compared to a gap net loss per share of 10 cents in the same period last year. non-GAAP earnings per share was 33 cents in the third quarter of 2024.
Victor Nemanja: Third quarter GAAP operating income was $11 3 million compared to an operating loss of $4 8 million in the third quarter of last year.
Victor Nemanja: The year over year improvement was primarily driven by an increase in gross profit dollars sort of a favorable product mix just discussed a decrease in operating expenses, primarily from lower head count and vendor related costs and lower restructuring costs.
Victor Nemanja: GAAP net income per share was 21 cents in the third quarter of 2024 compared to a GAAP net loss per share of <unk> 10 in the same period last year.
non-GAAP earnings per share was 33 in the third quarter of 2024. This compares to a non-GAAP earnings per share of nine in the third quarter of 2023.
Jorge Martell: This compares to a non-GAAP earnings per share of 9 cents in the third quarter of 2023.
Jorge Martell: third quarter adjusted EBITDA and adjusted EBITDA margin was $16.7 million and 29.7 percent compared to $6.3 million and 10.7 percent in the same period of last year respectively.
Third quarter, adjusted EBITDA, and adjusted EBITDA margin was $16 7 million and 29, 7% compared to $6 3 million and 10, 7% in the same period of last year, respectively.
Jorge Martell: turn into our security solutions business unit. ARR grew 6% in the third quarter to $104 million. ARR growth was negatively impacted by approximately one and a half percentage points through the relocation of identity verification products to our digital agreements business unit at the beginning of the year. In addition, ARR headwind related to end-of-flight products was approximately 1.6 million in the quarter and 2 million year-to-date. In the third quarter, security revenue declined 11% to $40.8 million, primarily due to the expected decrease in hardware revenues we discussed previously. Harvard revenues declined 36% year-over-year to $12.1 million. security suppression revenue increased 29% to $18.6 million, primarily driven by expansion of licenses from existing customers for software-based authentication solutions.
Turning to our security solutions business unit.
<unk> grew 6% in the third quarter to $104 million.
Our growth was negatively impacted by approximately one five percentage points to the relocation of identity verification products to our digital agreements business unit at the beginning of the year.
In addition, a headwind related to end of life products was approximately $1 6 million in the quarter and $2 million year to date.
Third quarter security revenue declined 11% to $48 million, primarily due to the expected decrease in hardware revenues we discussed previously.
Victor Nemanja: Hardware revenues declined 36% year over year to $12 1 million.
Security subscription revenue increased 29% to $18 6 million, primarily driven by expansion of licenses from existing customers for software based authentication solutions.
Jorge Martell: maintenance and support revenue declined by design and was in line with our expectations as we continue to transition legacy perpetual maintenance contracts to term life. Q3 2024 gross profit margin in our security segment was 75% as compared to 67% in the third quarter of 2023. The increase in margin is primarily attributable to favorable product and customer. operating income was $20.2 million and operating margin was 49 percent compared to $15.7 million and 34 percent in last year's third quarter. The enhancement in gross profit margin combined with reduced operating expenses primarily attributed to restructuring and other cost reduction activities drove the majority of the improved performance.
Maintenance and support revenue declined by the sign and was in line with our expectations as we continue to transition legacy perpetual maintenance contracts to term licenses.
Victor Nemanja: Q3, 2024 gross profit margin in our Securities segment was 75% as compared to 67% in the third quarter of 2023.
The increase in margin is primarily attributable to favorable product and customer mix.
Operating income was $20 2 million and operating margin was 49% compared to $15 7 million and 34% in last year's third quarter.
Victor Nemanja: The enhancement in gross profit margin combined with reduced operating expenses, primarily attributed to restructuring and other cost reduction activities throughout the majority of the improved performance.
Jorge Martell: turn it to a digital agreements business. ARR grew 16% in the third quarter to $60 million. AR growth benefited by approximately three percentage points due to the relocation of identity verification products to digital agreements at the beginning of the year. ARR Headwind related to end-of-life products was less than half a million dollars in the quarter and approximately three million dollars year-to-date. Third quarter revenue grew 18% to $15.4 million, primarily driven by new contracts and expansion of renewal contracts, and to a lesser extent, the relocation of identity verification products. Subscription revenue, consisting of 100% SAS revenue, grew 27% to $15 million.
Turning to our digital agreements business unit.
AOR grew 16% in the third quarter to $61 million.
AUR growth benefited by approximately three percentage points due to the relocation of identity verification products to digital agreements at the beginning of the year.
<unk> headwind related to end of life products was less than half a million dollars in the quarter and approximately $3 million year to date.
Third quarter revenue grew 18% to $15 4 million, primarily driven by new contracts and expansion of renewal contracts and to a lesser extent the relocation of identity verification products.
Victor Nemanja: Subscription revenue consisted of 100% SaaS revenue grew 27% to $15 million.
Jorge Martell: third quarter gross profit margin was 72% as compared to 75% in the prior year quarter. The year-over-year change was primarily driven by an increase in depreciation of capitalized software costs. operating income was $3.4 million or 22% of revenue as compared to an operating loss of $4.7 million or 36% of revenue in Q3 last year. A significant improvement in performance was driven by an increase in revenue and gross profit dollars, along with a decrease in operating expenses, primarily attributed to restructuring and other cost reduction activities.
Third quarter gross profit margin was 72% as compared to 75% in the prior year quarter.
The year over year change was primarily driven by an increase in depreciation of capitalized software costs.
Operating income was $3 4 billion or 22% of revenue as compared to an operating loss of $4 7 million or 36% of revenue in Q3 of last year.
The significantly permanent performance was driven by an increase in revenue and gross profit dollars along with a decrease in operating expenses, primarily attributed to restructuring and other cost reduction activities.
Jorge Martell: Now turning to our balance sheet, we ended the third quarter of 2024 with $77.5 million in cash and cash equivalents compared to $42.5 million at the end of 2023. generated $14 million in cash from operations during the quarter and used $2 million in capital expenditures, primarily capitalized software.
Now turning to our balance sheet. We ended the third quarter of 2024 with $77 5 million in cash and cash equivalents compared to $42 5 million at the end of 2023.
We generated $14 million in cash from operations during the quarter and used $2 million in capital expenditures, primarily capitalized software costs.
Jorge Martell: We have no long-term. Geographically, our revenue mixed by region in the third quarter of 2024 was 40% from EMEA, 39% from the Americas, and 21% from Asia Pacific. This compares to 45%, 34%, and 21% from the same regions in the third quarter of last year, respectively.
We have no long term debt.
Geographically our revenue mix by region in the third quarter of 2024 was 40% from EMEA 30.
89% for the Americas, and 21% from Asia Pacific.
This compares to 45%, 34% and 21% from the same reagents in the third quarter of last year, respectively.
Jorge Martell: I will not provide our financial outlook. For the full year 2024, we are narrowing the range of our previously issued revenue guidance to reflect a reduction in anticipated hardware token shipments, partially offset by stronger than previously expected subscription revenue. We are affirming our ARR guidance, and we are significantly increasing our adjusted EBITDA guidance to reflect stronger-than-originally-anticipated operating leverage driven by improved execution of our cost-savings initiatives.
I will now provide our financial outlook.
Jorge Martell: More specifically, we expect revenue to be in the range of $238 to $242 million as compared to our previous guidance range of $238 to $246 million. ARR to end the year in the range of $166 to $170 million and adjusted EBITDA to be in the range of $65 to $67 million as compared to our previous guidance range of $55 to $59 million.
Jorge Martell: That concludes my remarks.
Victor Limongelli: Victor? Thank you, Jorge. I am very proud of the entire OneSpan team. Their hard work and focus on operational rigor over the last several quarters has resulted in a much stronger company. Our ability to generate cash has significantly improved, and we are much more profitable as compared to recent years. Looking ahead, we are committed to delivering value to our customers and to returning value to our shareholders by growing revenue efficiently and profitably.
Prior to recent years.
Looking ahead, we are committed to delivering value to our customers and to returning value to our shareholders by growing revenue efficiently and profitably.
Victor Limongelli: Jorge and I will now be happy to take your questions. Thank you.
Victor Nemanja: Or <unk> and I will now be happy to take your questions.
Operator: At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star-one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star-one-one again. Please stand by while we compile the Q&A roster.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Catharine Trebnick: First question comes from the line of Catharine Trebnick of Frozen Block Securities. Your line is now open.
Speaker Change: First question comes from the line of Catherine <unk> Frozen bought Securities. Your line is now open.
Victor Limongelli: Oh, hi, thank you for taking my question. So, you know, you've talked a lot about focus on execution. Can you give us an update on where you are with your ecosystem and building that out? Because I think that was one of the areas that I thought was interesting when I came back to covering the stock. Thank you. Thanks. Thanks, Catherine. Yeah, one of the ways we want to grow the business is to extend our reach by by working through partners and we have some progress in that on that front but I would say the impact to date is not in the numbers that we reported, it's more in the future than in the past.
Oh, hi, Thank you for taking my question.
Speaker Change: <unk> you.
Speaker Change: You've talked a lot about our focus on execution can you give us an update on where you are with your ecosystem and building that out because I think that was one of the areas that I thought was interesting when I came back to covering the stock. Thank you.
Thanks, Thanks, Catherine Yeah, one of the ways, we want to grow the business is to extend our reach by.
By working through partners.
Speaker Change: And we have some progress on.
On that front, but.
I would say the impact to date is not.
Not in the numbers that we've reported it's more in the future than in the past.
Victor Limongelli: So we have a direct sales force that can, when we talk about banks, as an example, we talk about having over 60 of the 100 biggest banks as customers and other banks of that scale, we deal with our direct sales force. But for us, it's way more efficient to work for, to address the mid market and lower banks through partners. So we've started to sign up partners. We have a new leader of the channel in Europe, and I expect to see that continue to develop as we move into 2025. All right, so it's more of a three or four quarter out type of positive impact on revenue.
Speaker Change: So we have a direct sales force that can we talk about banks as an example, we talk about having over 60 of the 100 biggest banks as customers and other banks have that scale, we deal with with our direct sales force, but for US it's way more efficient to work for.
To address the mid market and lower banks through partners. So we've started to sign up partners.
We have a new leader of.
Speaker Change: The channel in Europe, and I expect to see that continue to develop as we move into 2025.
Alright, so its more of a three or four quarter out type of.
Catharine Trebnick: Certainly. So what's going on now is signing up partners, getting them trained, and it takes some time before they're productive. and probably even longer for them to materially impact grass. Okay, thank you very much. Appreciate the explanation. Thanks, Catherine.
Operator: Thank you.
Trevor Rambo: Our next question comes from the line of Trevor Rambo of BTIG, your line is now open.
Victor Limongelli: Hey, guys, this is Trevor on for Gray Powell. Congrats on some solid results. So, to start, how would you guys say the overall macro environment is now compared to about earlier in the year? And I know you touched on it a little bit during the prepared remarks, but could you add some more color on what you're seeing in the hardware business going forward kind of now and in the next year and, and what you guys are seeing around some customer churning. So I know you mentioned that as well on the prepared remarks. I'll be great.
Victor Limongelli: Thank Sure, with respect to hardware, so there's a couple things going on in the retail consumer banking in Europe and to a lesser extent in Asia-Pac, there's definitely more mobile authentication than there was, you know, some years ago. And that trend's been going on for a while. Less so in corporate banking. Corporate banking still tends to be done in front of a screen in front of a computer. So it's more amenable to hardware, I think, than consumer banking. So that's been a long-term trend, and you can see that, and if you look back over the last decade, you can see that in our hardware numbers.
Victor Limongelli: The advantage we have is that if a bank is going to use some hardware, we enable them, our solution enables them to use the same authentication backend for both hardware and software. So if they go with OneSpan, they can have one backend, easy to administer, handle their hardware needs for the customers who want that, handle their mobile authentication needs maybe for the majority of consumers. versus going with a competitor and then having to have two different back ends if they're going to have any hardware at all. So I think there's still some long-term strength in having the hardware offering.
Back end for both hardware and software.
Speaker Change: So if they go with one span they can have one back and easy to administer handle their hardware needs for the customers, who want that handle their mobile authentication needs maybe for the majority of consumers.
Versus going with a competitor and then having to have two different back ends if theyre going to have any hardware at all so I think there are some still some long term strength and having the hardware offering it actually helps our software offering.
Trevor Rambo: It actually helps our software offering, if that makes sense, Trevor. Yeah, that makes sense. Yeah, that's some good color.
Speaker Change: That makes sense cover.
Speaker Change: Yeah that makes sense.
Yeah. That's that's that's some good color and then maybe just one more are you guys getting some nice jobs with the cost cutting initiatives, both finishing that earlier than you initially expected and you've been really ramping both operating margins and your adjusted EBITDA.
Victor Limongelli: And maybe just one more. You guys did some nice jobs with the cost cutting initiatives, both finishing that earlier than you initially expected. And you've been really ramping both operating margins and your adjusted EBITDA throughout the year. So I guess moving forward, how are you guys thinking about your ability to both sustain those margins, but also reaccelerate the top line growth as we finish this year and head into next fiscal year? Yes, great question. So of course, we want to get to the rule of 40. And I think we're going to get there through a combination of operating income, operating leverage, and some growth.
Speaker Change: Throughout the year. So I guess moving forward. How are you guys thinking about your ability to sustain those margins, but also reaccelerate. The top line growth as we finish this year and head into next fiscal year.
Yes, great question. So of course, we want to get to the rule of 40.
Speaker Change: And I think we're going to get there through a combination of operating income operating leverage and some growth. We don't think we we don't think it makes sense, we don't think will generate as much value by having it all be EBITDA.
Victor Limongelli: We don't think we we don't think it makes sense. We don't think we'll generate as much value by having it all be So we are looking at ways to grow faster, whether that's through a partner channel, whether it's through new offerings. of our relationships with existing customers. We haven't given guidance for 2025 and in fact, haven't finished our budgeting for 2025 yet, but we are definitely looking to grow faster. With respect to the operating income, we certainly don't think we're at a peak there. We think we can do better.
So we are looking at ways to two.
Speaker Change: To grow faster.
Speaker Change: Whether that's through our partner channel, whether it's through new offerings.
Expansion of our relationships with existing customers.
And we haven't given guidance for 2025 and in fact I haven't finished our budgeting for 2020 financial but we are definitely looking to grow faster with respect to the.
Speaker Change: Operating income.
We certainly don't think we're at the peak there we think we can do better but.
Trevor Rambo: But if you're writing in to shop, is YouTube taking too much exciting and requiring a little push? It's fair to say that Progress from here on out will be a little bit harder. So it's one thing to go from negative to upper 20, suggested EBITDA. We're obviously not going to go from upper 20s to 50s. We're not going to make the same jump, but we do think we can make additional progress. Great, it's great to hear. Thanks again and congrats again on a nice quarter. Thank you. Thanks, Trevor.
Operator: Thank you.
Anja Söderström: Our next question comes from the line of Anja Soderstrom of Sidoti. Your line is now open.
Anja Söderström: Hi, thanks for taking my question and congrats on the nice progress here. Thank you. So the cost-cutting, is that coming through faster, or are you seeing more savings than you initially thought?
Victor Limongelli: It is, I can jump in here, Vic. So it's a little of both, Anja. So the team executed very well. So we had a plan, you know, particularly for the second and third quarter. Some of those savings came in earlier than we expected. And so you see that reflected in the numbers for sure. And then obviously the adjusted EBITDA guide that we that we changed favorably. So some of that and then some of it is also unplanned savings that we identified as you know, as you are always trying to identify how do we work smarter?
Jorge Martell: How do we make sure that we can do things more efficiently? So some of these, either through vendors or just process improvements that led you to operational efficiencies come to light. And so some of that is unplanned. And to a certain extent, also, you may have an idea in terms of, you know, like real estate footprint, but some of that comes to fruition into accelerating some of those or increasing some of those savings. So maybe not the nature of it may be new, but in terms of maybe the mix of different vendors that contribute to the same and maybe a little bit different than original plan.
Anja Söderström: So, you know, we'll take those. Okay, thank you.
Jorge Martell: And as we think about that adjusted EBITDA increase, and with the hardware becoming a smaller part now, does the high, do you expect the growth margin to also be maybe higher and contribute to that? IBIRA, or is it mostly on the operating side? for, you're talking about for 2025? 24. For 24. So maybe to unpack that a little bit. So I think, overall, we're increasing that a little bit in terms of our expectation to the low 70s, just like you saw, you know, the benefit in Q3. If you look at the two business units, DA, I guess both DA and security will be in the low 70s.
Or is it mostly on the operating side.
Are you talking about for 2020 five.
Plenty of floor.
For 24, so let me to unpack that a little bit so I think overall, we're going to.
We're increasing that a little bit interested where our expectation to the low seventies Ah just like you saw.
The benefit in Q3, if you look at the two business units D. A.
Both the unsecured will be in the low seventies, we've talked about hardware hardware actually is increasing because of the mix of APAC clients that come with a better margin. So that's probably been a little bit of impairment there.
Jorge Martell: We've talked about hardware. Hardware actually is increasing because of the mix of APAC clients that come with a better margin. So that's driving a little bit of improvement there. So, again, just to answer your question, from the earlier discussion that we had maybe a couple quarters ago from the high 60s, I think we now can say it's likely going to be in the low 70s. So it's an increase overall. Okay, thank you.
So I guess just to answer your question from the earlier discussion that we tend to get a couple of quarters ago from the high sixties I think we're now can say is likely going to be in the low seventies. So it's an increase overall.
Jorge Martell: And then the jump in the security solutions in the subscription there was so nice and it jumped sequentially. What drove that and how should we think about that going forward? Sorry, I missed the first part of the question, honey, can you repeat that? The jump, sequential jump in the subscription for the security solution. What drove that and how should we think about that going forward? Yeah, so we continue to see very good progress on the demand side for authentication products, Anja. Also, mobile application products that we cross-sell to our existing customer base. And so that is primarily what drove that on the subscription revenue.
Okay. Thank you and then and then jumping to the kids installations in the subscription there with some nice.
Jumped sequentially, what drove that and how should we think about that going forward.
Sorry, I missed the first part of the question on it can you repeat that.
Speaker Change: That jumped sequentially jump into first subsequent Tim for that security solutions.
Speaker Change: What drove that unless you would think about that going forward. Yes. So we continue to see very good progress on the demand side for authentication products on here are.
Also mobile application products that we cross sell to our existing customer base and so that that is primarily what drove that.
Victor Limongelli: So we're seeing a lot of good adoption, new licenses in particular. Some of those are obviously conversions on the perpetual term. And so we tend to see price upside to those conversions. So that also benefited the quarter, either year-over-year. I mean, let me add a comment to that.
On the on the subscription revenue so we're seeing a lot of good adoption.
New licenses in particular some of those are obviously conversions on the perpetual determined so we tend to see price upside to those conversions. So that also benefited the quarter either year over year or sequentially.
I mean, let me add a comment to that if you look at 2024 is the first time that security subscription revenue.
Victor Limongelli: If you look at 2024, it's the first time that security subscription revenue will exceed hardware revenue. And on top of that, our security BU is just about two-thirds software, when you count maintenance and support and subscription, so that certainly has helped the operating Leverage of that beat.
Victor Limongelli: Okay, and at what sort of revenue level do you expect to be profitable in the security solution? Yeah, so. That was, as you know, Security Solutions is our highest of the two BUs, the one that generates the most profit. If you're looking for a revenue break-even for that business unit, I mean, you can probably look at mid, you know, low to mid-20s is probably a good number, but, you know, just doing the math here in my head, Anja, if you just look at, just try looking at the numbers, so. Okay. Thank you.
Anja Söderström: That was all from me. On a quarterly basis, yeah. Sorry. Okay, thank you.
Anja Söderström: That was all for me. Thank you.
Operator: I am showing no further questions at this time.
Joe Maxa: I would now like to turn it back to Joe Maxa for closing remarks. Thank you, everyone. Thank you for your time today. We look forward to sharing our progress with you again next quarter.
Joe Maxa: Thanks again, and have a great day.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thanks for watching!