OneSpan Inc.

Good afternoon, ladies and gentlemen. I'm just here to make a patient's announcement. I ask that you guys hold on just for a moment while we begin very soon. Thank you. We'll be right back. Good afternoon and thank you for attending today's OneSpan fourth quarter 2021 conference call. My name is Jason and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Joe Maxa, Vice President of Investor Relations. Joe, please proceed.

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan fourth quarter and full year 2021 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. Joining me on the call today is Matt Moynihan, OneSpan's chief executive officer, and Jan Kays van Gaalen, our interim chief financial officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our fourth quarter and full year 2021. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions. Please note that statements made during this conference call that relate to future plans, events, or performance, including the outlook for full year 2022, are forward-looking statements. These statements use words such as believes, anticipates, plans, expects, projects, and similar words, and these statements involve risks and uncertainties and are based on current assumptions. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to today's press release and the company's Form 10-K filing with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. Also note that certain financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from a related GAAP financial measure. We have provided an explanation for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release. In addition, please note that the date of this conference call is February 22nd, 2022. 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 or future events or for any other reason. With that, I will turn the call over to Matt.

Thank you, Joe, and good afternoon, everyone. Thank you for joining the call today. Today's call, I will cover a handful of topics, including our Q4 results, our value proposition and relevant growth drivers, a few key customer wins equally important i'll provide an update on the progress with our long-range strategic planning efforts after that john keys will walk you through our financials before opening the call to questions first i would like to begin by sharing my perspective on the company i joined one span at the end of november and i'm excited by the strength of our solution portfolio and market position as well as the potential to enhance our operations and overall customer value proposition two months into my tenure I have to say that I'm encouraged by the progress we've made on the development of our long-term strategic plan, and I've been impressed by the talented people in our company who will execute on the opportunities that lie ahead of us. I am also confident in our ability to drive revenue growth while increasing profitability as we transition to the next generation of One Span. I joined the company because One Span has an exciting and relevant value proposition, and I truly believe we can unlock significant shareholder value by increasing our focus, leveraging our competitive advantages to improve our growth profile, all the while enhancing our operational performance and capital efficiency. We operate in two important markets, in cybersecurity and digital agreements, both of which will only become more important to enterprises in the years to come. We also have a tremendous asset in our top tier customer base that includes many of the largest and most security conscious companies in the world. companies that trust us to mitigate their risk of fraud and help them comply with regulations while delivering compelling user experiences across such technologies as e-signature, identity verification, video signing, mobile authentication, mobile app shielding, transaction signing, and more. During the other quarter, Q4 revenue of $59 million was the highest level achieved in eight quarters, and revenue, ARR, and adjusted EBITDA exceeded expectations in December we announced the cost savings plan that is expected to result in pre-tax savings of approximately 10 to 12 million for fiscal year 22 primarily from headcount related actions and reduction in leased office spaces now turning to our strategic action plan we've made significant progress in the evaluation of our markets prioritizing our product portfolio and aligning our investments and operations to execute against our most compelling opportunities. We are on track to update you on the details of our go-forward strategy at our investor day in mid-May. Stay tuned for more information. But today, I would like to share with you my initial observations. And sure, I believe we have a strong suite of e-signature and security solutions that provide us with a solid platform to both enhance our go-to-market and also introduce new, innovative solutions that will deepen our customer relationships. We also believe we can establish a clear and disruptive leadership position in the markets we serve by leveraging our identity, security, and compliance DNA to deliver trusted agreements and transactions as a core differentiator. We're fortunate to have a strong market position as we progress in our transformational journey. Our selling efforts will continue to focus on providing new and existing customers with our core security and e-signature solutions. We will strengthen our go-to-market strategy with an increased focus on account expansion, cross-selling, new customer targeting, and creating sales leverage through strategic alliances, such as our recently announced partnership with Smart Communications. This partnership combines our smart digital forms with One Span Sign to improve the customer experience, increased application completion rates, and reduce document errors while maintaining the strictest security and compliance standards. We expect to form additional partnerships, including OEM relationships, in the coming months. We also have a significant opportunity to drive increased demand for our security and e-signature solutions. Recent customer wins demonstrate our value as a strategic provider of essential solutions that enable our customers to execute trusted and user-friendly digital agreements and transactions. Improving the end-user experience is as important for our customers as is mitigating the risk of fraud, as a rising trend of identity and credential theft increases regulations and accounts for billions of dollars in losses each year. The need to comply with government regulations is a key driver of innovation in our markets. A recent study found 85% of global banks need technology vendors to be trusted advisors to help navigate the changing regulatory environment. Top challenges for financial institutions are fraud, safeguarding sensitive data, and keeping pace with changes in consumer privacy laws. To help them comply with regulations, banks are partnering with trusted companies like OneSpan to put innovative solutions such as digital remote identity verification in place. We had a number of six-figure digital security contracts closed during the fourth quarter as customers continued to roll out our mobile and other security solutions. We also closed a number of six-figure e-signature contracts driven by increased transaction volumes, expansions to additional business units, and competitive displacements, including from DocuSign. Let me provide you with a few examples. First, a major digital security customer in the United Kingdom increased its annual commitment ninefold to approximately 900,000 ACB. Similarly, a major e-signature customer in the United States expanded its e-signature deployment across multiple lines of increasing its ACB with us from $50,000 to $1 million. A major leading global HR and temporary staffing firm selected OneSpan Sign over their previous well-known e-signature provider in a mid-six-figure ACB deal. And lastly, a major North American and long-time digital security banking customer selected OneSpan Sign with identity verification over their incumbent provider for use in their insurance arm. One span's trusted provider status in this 300,000 ACV deal was a key reason for the win. Beyond a strong product portfolio, we have a significant opportunity to become more capital efficient across our organization by better aligning our costs with our growth opportunities. I look forward to addressing more detail of these topics at our upcoming investor day. With that, Jan Kies will now take you through our financial. Jan Kies?

Thank you, Matt. Good afternoon, everybody. For the full year, 2021, we exceeded the high end of our revenue and adjusted EBITDA guidance ranges provided to you in early November. Annual recurring revenue, or ARR, grew 20% year-over-year to $125 million, and came in at the high end of our guidance range. ARR specific to SAS, subscription and term-based subscription contracts grew in excess of 30% and accounted for approximately 70% of total AR. BB&E, or dollar-based net expansion rate, which we define as the year-over-year growth in AR from existing customers, was 115% in the fourth quarter. Total recurring revenue, which consists of SaaS and term-based subscription and maintenance licenses increased 4% year-over-year to $32 million in the fourth quarter of 2021 and accounted for 91% of software and services revenue. For the year, total recurring revenue increased 18% to $120 million coming in at the high end of our guidance range and accounted for 89% of software and services revenue. SaaS subscription revenue grew 15% to $10 million in the fourth quarter and 38% to $38 million for the year. Growth in Q4 e-signature and cloud authentication was partially offset by a decline in legacy deal flow revenue. In addition, the revenue recognition timing of a handful of large subscription contracts adversely impacted our Q4 results. For the year, e-signature SaaS subscription revenue grew 40%. Term-based subscription revenue grew 8% to 9 million in the fourth quarter and 23% to 30 million for the year. Mobile security and server software were the largest contributors. Maintenance revenue declined 6% to 13 million in the fourth quarter and grew 4% for the year. Total company revenue increased 12% to $59 million in the fourth quarter and declined 1% to $214 million for the full year 2021. Hardware revenue grew 51% to $24 million in the fourth quarter and declined 3% to $80 million for the year, in line with our expectations. During the fourth quarter of 2021, we identified and corrected immaterial prior period classification errors related to certain costs directly attributable to the production and distribution of hardware products. This resulted in an understatement of product and license cost of goods sold and an overstatement of sales and marketing expense. It did not, however, affect overall profitability. Additional details, including the adjustments to prior periods, can be found in our earnings press release and in our 10-K filing published today. Gross margin in the fourth quarter of 2021 was 63% compared to 72% in the fourth quarter of 2020. The difference in gross margin is primarily attributed to product mix. with software and services contributing 59% of total revenue in Q421 as compared to 69% in Q420. We also recognized revenue from a higher mix of lower margin authentication tokens in the quarter and experienced global transportation and supply chain disruptions, which increased our reliance on air freight. These supply chain challenges are expected to continue in 2022. Adjusted EBITDA was negative 1 million for the fourth quarter of 2021. This compares to positive 3 million in the fourth quarter of 2020. Adjusted EBITDA margin was negative 1% in the fourth quarter of 2021 versus positive 6% in the year-ago quarter. For the full year 2021, adjusted EBITDA was negative 5 million and adjusted EBITDA margin was negative 2%, outperforming our expectations. Fourth quarter 2021 income tax expense included an 8 million attributed to an increase in the valuation allowance recorded on U.S. deferred tax assets. gap loss per share was $0.35 in the fourth quarter 2021 compared to $0.04 in the fourth quarter of 2020. Non-gap loss per share, which excludes long-term incentive compensation, amortization, non-recurring items, and the impact of tax adjustments was $0.24 in the fourth quarter of 2021 compared to non-gap earnings per share of $0.03 in the fourth quarter of last year. We ended the fourth quarter of 2021 with $98 million in cash, cash equivalents and short-term investments, compared to $115 million at the end of last year. Cash utilized in operations during the year was $3 million. Also during the year, we used $7.5 million to repurchase approximately 340 2,000 shares of common stock. Geographically, our revenue mixed by region in the fourth quarter of 2021 was 53% from EMEA, 30% from the Americas, and 18% from Asia Pacific. For the full year 2021, the revenue mixed by region was 49% from EMEA, 32% from the Americas, and 19% from Asia Pacific. Thank you. I will now turn the meeting back to Matt.

Thank you, Young Keys. As mentioned previously, we will update you on a go-forward strategic plan at our investor day in the second quarter, including how we plan to become more efficient by better focusing and aligning our organization from a go-to-market perspective. I do believe we have an opportunity to establish a clear and disruptive leadership position in the markets we serve by leveraging our strengths in identity, security, and compliance. For instance, By leveraging our security and transaction signing expertise, we believe we can provide significantly differentiated e-signature and other digital agreement solutions. While we have work to do, including optimizing our solution portfolio, I am confident we have the ability to unlock shareholder value by improving our execution in core markets and better aligning our cost structure and routes to market to our most promising growth opportunities, thereby improving our capital efficiency. While we have much of what we need today, We plan to add pertinent pieces to drive increased growth through profitability in the coming years. As you can see, the end of the year was solid momentum that made strong progress in the development of our long term strategic plan. But there is more work to be done in flushing out the details and recognizing the work to be done ahead of our mid-May investor day and the desire to share more fully the details of our long term plan. We will not be providing detailed 2022 guidance at this time. However, and importantly, For 2022, we expect revenue to meet or exceed 2021's level and for adjusted EBITDA to be break-even or better for the fiscal year. In closing, I'm excited about the future of OneSpin and look forward to discussing the details and metrics of our full-year outlook and long-term plan at our investor day in just a quarter's time. With that, John Keyes and I will be happy to take your questions.

Operator? Thank you.

If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. If you're streaming today's call, please dial in and enter star one. As a reminder, if you're using your smartphone, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.

Our first question is from Chad Bennett with Craig Holland.

Chad, please proceed.

Great. Thanks for taking my questions. Welcome, Matt, and look forward to working with you in the future. So I guess a couple things. First, on the subscription line, just in terms of, you know, I guess first question would be, If there's any quantification on the revenue rack impact on that line from I think you indicated a few large transactions that just timing-wise didn't hit in the quarter, is there any quantification you could provide there?

No, we're not prepared to do that.

Okay. So I guess maybe more importantly going forward, How should we view the growth of the subscription business going forward and related to that? Have your thoughts changed? It seems like you're pretty optimistic about eSign and being able to sell that in more places and digital agreements being a big part of that and whatnot. Do you think the growth rate of the eSign business And do you think that was a business that kind of had some pull forward in the last four to six quarters where growth rate of 40% plus is going to be more challenging? Or how do we think about overall subscription growth going forward?

We do anticipate sequential growth throughout 2022, and we're working through some of the elements of that mix now in our long-term strategic plan. I am absolutely laser-focused on the subscription side of the business, but given the continued material portion of our total revenue that does come from hardware, which is perpetual, you do see from time to time a dampening effect with the overperformance on the hardware line. Again, hardware is not a bad thing as part of our total solution portfolio, but it should become a decreasing portion of our total revenue on a go-forward basis. And we're right in the middle of that transition right now. But we'll have much more detail for you on that plan as we disclose it in the May timeframe.

Got it. Appreciate you taking my questions. Thanks.

Thank you, Jeff.

Thank you, Mr. Bennett, for your question. Our next question is with Stefan Schwartz with BTIG. Mr. Schwartz, please proceed.

Hi, this is Stefan on for Gray. Thanks for taking my question. You know, I wanted to ask, hey, thank you. So related to the dampening effect created from perpetual, I just wanted to ask how should we think about that shift for perpetual and multi-year term impacting headline revenue growth for the year? And how close do you think you are at this point to the end of that transition?

I think last year was when the largely concluded a transition from the legacy business model, if you will, to a subscription-based business model. As you know, the subscription model is comprised of term and more traditional SaaS subscription from our e-signature business. But I would say we've largely gone through that migration. And what we have now is a laser focus on the elements of ARR drivers, which are new customer acquisition, obviously better cross-selling, as I alluded to in my comments, And then making sure that we're laser focused on ensuring customer churn rates are low. Okay. And so that's really where I'm most excited is not so much moving beyond the business model shift in and of itself, but the operationalizing of our strategy to go drive ARR. We're hard at work doing that now in a long-range plan, but also equally important, bringing a level of transparency to the investor community about how they should be viewing the business in total, but also these two different dynamics that exist inside of the company.

Got it. Thanks. And then just one more. It looks like you had a few e-signature wins. I was hoping maybe you could drill down maybe why you win, particularly against – DocuSign, which I think you mentioned.

I'm very heartened by what I've seen in here. When we do the right things with the right customers, the natural behavior of a land and expand and a renew is happening. I think where we can benefit from is being more focused in the segments of our horizontal segmentation where we win the most. What's one significant benefit for OneSpan relative to DocuSign? DocuSign was born in more of an SMB environment, real estate, and they've worked themselves into a nice enterprise company, obviously. OneSpan was born in the enterprise in very discriminating environments, in very complex heterogeneous environments. So I've been pleased to, through my customer conversations, to feel like we have significant feature parity in the areas that customers count on most so that the features aren't a big discriminator or lack of a discriminator against DocuSign, who is significantly larger. But where we are winning is that we seem to be more enterprise class in working in a heterogeneous environment that has very high regulatory and compliance requirements, and in many cases, integration requirements in their systems. And that is our background. I would say that is a unique differentiator for us, in addition to our DNA on the identity and verification side of the house.

Got it. Thank you very much.

Thank you, Mr. Schwartz for your question. Our next question is with Catherine Trebnick with Colliers. Ms. Trebnick, please proceed.

Thank you. Thanks for taking my question. Mine's on the subscription staff piece of it. Grew 15% year over year. Hadn't you, had you closed these deals or moved them into the quarter, what would that growth spend for the quarter?

Look, you would have, you had a couple of percent more in terms of the OSS subscription numbers.

Got it. And then were there anything outside eSignature that would have been in the subscription line or other software?

Yeah, we've mentioned that there is a little bit of a decrease in the legacy deal flow product.

Okay, got it. And then on the growth margin, you're down to 63%. Can you give a little bit more detail on that mix shift and where the low margin is coming from? Is it from the hardware?

Yeah, so there was significantly a big shift in the overall composition with less software and a higher component of hardware than in the comparable quarter in 2020. If you normalize it, we had about $1.2 million related to increased costs of freight, air freight primarily. And then we had about $2.5 million-ish which was related to a shift to a somewhat lower margin authentication products. And that happens from time to time at year end. So those are the big components in that shift, in that lower margin.

All right. Thank you.

Thank you, Ms. Trebnick, for your question.

Our next question is with Anja Soderstrom from Sedoti. Please proceed.

Hi. Thank you for taking my question. So a lot of good questions asked already. I just have a question about, I guess you touched on what affected the margin for the fourth quarter, but how should we think about the margin performance in 2022 and how much or that is going to be hampered by cost inflation and things like that?

Yeah, we see the impact of air freight and the reliance on air freight in the hardware side of the house continuing at least into the first quarter, perhaps into the second quarter. But for the full year, we would expect the margins to be quite similar to what we had in the year 2021.

okay and the cost saving of 10 to 15 million for the year that that's mainly going to come from headcount and and downsizing of of the space yes there are two components uh a and not filling the um the positions that were open also um unfortunately having

to release some people from the company and the other side of that was also reduction in real estate leases space predominantly and making savings there.

And it's important to note that the execution of these actions is still continuing throughout the year, so there will not be realization of the full year benefit of that full amount. And we're also obviously right in the middle of our strategic planning process and evaluating whether some of the savings that will be realized will be reinvested into growth areas. And we'll be prepared to talk in detail about that in the May investor meeting.

Yeah. We'll provide you with a tracker on a quarterly basis where you can see the savings accruing.

Okay, great. Thank you. That was all from me. Thank you.

Thank you, Ms. Soderstrom. Thank you.

And our next question is with Rudy Kessinger with DA Davidson. Please proceed.

Thanks for taking my questions. I want to go back to the subscription just one more time. I know it's been touched on a couple of times, but on the sequential decline, we're down 4% from Q3. I know typically Q3 to Q4, there's some overages or usage that drives a pretty big sequential growth, 10% and 14% sequential growth each of the last Q4. So is there a way you can quantify just, I mean, how much was the decline from the legacy deal flow product Q3 to Q4?

um it's just a bit perplexing the the q4 subscription being even lower than not just q3 but even q2 as well yeah hey rudy this is joe so as you look at the the overall numbers we do have to factor in that like you said that deal flow that which came down i i think it was in the 20% range. We don't have the exact number in front of us right now. But yeah, that had an overall impact on the subscription line. And then some of the deals that we expected to close early in the quarter pushed out on the e-signature side to basically the last day of the quarter and into Q1. So we didn't recognize that revenue from those contracts.

Got it. And then on the cost cuts, Just going back to your last comment there, I think you said 10 to 12 million pre-tax savings in 22, but that's not a full-year realization yet. Can you quantify how much on a full-year basis those cuts will equate to, be it, I don't know, 15 or 20 or, I mean, somewhere higher than 10 to 12? What will it be once you're fully realizing it?

Well, I think you'll see those cuts realizing in the year 2023 fully but for the year 2022 you you're probably only going to have a percentage say 30 40 perhaps 50 depending on how quickly certain actions can be can be implemented coming through in the in the financial statements um okay got it thank you for taking the question

Thank you, Rudy.

Thank you, Mr. Kessinger, for your question. There are currently no further questions waiting at this time, so as a reminder, to ask a question, press star 1.

There are no more questions waiting at this time, so I'd like to pass the conference back over to the management team for closing remarks.

Thank you everyone. I'd like to end on a positive note here that again, I'm very excited to be at OneSpan and feel very confident in our ability to deliver a quite detailed view of the business in May. We've been hard at work at our strategic planning process. We are on track and we have hit all of our internal milestones and deliverables. And based on what I see, I'm very excited about our path forward and our ability to offer our customers an enhanced value proposition and hopefully look to seeing you all in person, if not virtual, in the mid-May timeframe with much more detail.

Thank you for joining the call today. That concludes the OneSpan fourth quarter 2021 conference call.

Thank you for your participation. You may now disconnect your lines.