OneSpan Inc.

Good day, and thank you for standing by. Welcome to the OneSpan second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joe Maxa, VP of Investor Relations. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining the OneSpan second quarter 2023 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, our chief executive officer, and Jorge Martel, our chief financial officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our second quarter 2023. To access a copy of the press release and other investor information, please visit our websites. 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 2023 and our 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. 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. Also note that 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 August 9th, 2023. 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. I will now turn the call over to Matt.

Thank you, Joe. Good afternoon, everyone. Thank you for joining us. Today, I would like to begin by providing a progress update on our plan to transform OneSpan into an enterprise class company, achieve the Rule of 40, and create meaningful value for our shareholders. We are now more than two quarters into the plan, and the operating visibility we have into the execution of our transformation has increased. Given this increased visibility, it is now apparent that it will take longer than originally projected for our sales productivity and marketing demand generation engines to mature exacerbated in part by current market conditions and increased competitive pricing pressure. As mentioned during previous calls, sales productivity and marketing demand generation are the two most important drivers of top line growth in our three year strategic plan. We believe our five pillar solution strategy designed to enable us to secure an entire digital transaction lifecycle by weaving together identity verification, authentication, high assurance virtual collaboration, e-signature, and secure transaction e-vaulting is sound, and it continues to resonate with customers across the globe. And the need to securely digitize business processes is becoming a must in today's world of generative AI and deepfakes. Given the visibility we have into our business, coupled with our business strategy and improved operational rigor throughout the company, we've decided to make adjustments to our operating model, including the acceleration of cost reduction initiatives to significantly improve our profitability while maintaining our long-term growth potential. To that end, we are taking our operating segments to the next logical level to continue driving operational excellence by formally creating two distinct operating business units, digital agreements and security solutions, each with a general manager to execute their respective business strategies of driving digital agreements for growth and managing the security segment for cash flow. We believe these changes will enable the company to achieve 20 to 23% adjusted EBITDA margin for the full year 2024. This compares to our previous longer-term adjusted EBITDA target range of 10 to 12% in 2025. We also expect to reach the rule of 40 more quickly than in our original plan. It is also our intention to return up to 20 million in capital to our stockholders by the end of 2023, through stock repurchases, dividends, or a combination of both. Going forward, we will provide more detail regarding our strategy to return capital to stockholders, consistent with our focus on balancing growth and profitability. It became clear during the second quarter that the time to implement a high-performing, enterprise-class sales and marketing engine, primarily in our digital agreements operating segment, would take more time, and therefore would take more time to achieve our full-year 2023 financial targets and consequently, our three-year financial targets in this segment. As a result, in late Q2, we proactively took actions in connection with our change of operating model to begin rebalancing our cost structure by accelerating certain cost savings initiatives. We reduced headcount by approximately 5%, reduced variable spend across the organization, consolidated certain vendors, and began the process of closing two offices. We're also planning additional substantial right sizing before the end of the year. primarily related to headcount, providing us with the visibility and confidence in our 2024 adjusted EBITDA targets. We will continue to refine our go-to-market strategy to efficiently serve new and installed base customers in our core geographic markets. In digital agreements, we will focus our efforts in common law countries. Security will continue to be a global in nature, and we will continue to focus our investments on our most promising ROI solutions, such as new self-service e-signature offering we plan to roll out in the first half of 2024 perhaps most importantly we are creating a performance-based culture across the company i am very proud of the work our team is doing and what has been accomplished to date today's economic environment requires strong execution and we are improving every day we believe we have the right executive team in place and line of sight into what is needed to effectively manage the business with the alignment of our people products and organizational design for efficient growth Turning to our Q2 results, revenue grew 6% to 56 million, ARR grew 8% to 144 million, and adjusted EBITDA was negative 4 million. Our security operating segment performed generally as expected, as preventing and mitigating hacking attacks remains a high priority for our customers, driven in part by the proliferation of cyber attacks that continue to make news headlines on a regular basis. For example, in Q2, a large international banking customer purchased additional authentication and mobile security licenses to protect their retail banking customers. The contract was in the mid-six-figure ACB range and was the second such order in consecutive quarters from the bank, which we competitively won against multiple firms last quarter, largely due to the strength and flexibility of our mobile solutions. We continue to have good visibility into DigiPath token orders at our large banking customers who account for the majority of our hardware revenue. We did, however, see the macroeconomic environment begin to affect orders to some extent in the mid-market banking sector. We continue to watch the market ripple effect of the mid-market financial crisis very closely. In our digital agreement segment, macroeconomic uncertainties had a more profound effect on us in Q2 as compared to prior quarters. Increased deal scrutiny and reprioritization of customer investments put pressure on sales cycles, deal sizes, and pipeline conversion rates. for both expansion opportunities and new logos. One contract I want to highlight is a three-year, $2 million ACV digital agreements contract that slipped out of Q2 and closed in early Q3. It was with a longtime customer in North America that had been using our on-premises e-signature product, which we communicated at the end of last year, our plans to sunset at the end of this year. The deal took longer to close than we anticipated, primarily due to red tape associated with the size of the contract and the use of the public cloud, which required additional due diligence by the customer. By upgrading to our leading cloud solution, this customer was able to improve its ROI, driven by a reduction in infrastructure costs that more than offset the increase in price per transaction. I also want to highlight a key win related to our new pricing model. A large customer expecting to see their e-signature volumes grow by more than 50% over the next few years shows a volume band that allows them to confidently forecast their e-signature costs as their volumes grow. This eliminated the concern of potential catch-up or overage charges if their volume forecasts were not accurate. The customer signed a mid-seven-figure, three-year contract that increased ACV by nearly 400,000. Next, I will provide updates on key product initiatives. We are targeting the general availability of our self-service, try-and-buy e-signature solution, focused on the SMB and commercial market segments in the first half of 2024. Our recently launched one-span notary solution, initially targeting existing customers, is gaining interest and we have signed our first customer. It currently has more than 50 trials at play and we are working on getting regulatory approval in several additional states. We are also on track to bring secure e-vaulting for documents and artifacts based on blockchain technology to market later this year. Finally, consistent with our pivot to a more highly profitable operating model that includes product rationalization, we are discontinuing investment in marketing activities for DigiPath CX. We plan to repurpose some of these investments into other new products with higher potential ROI opportunities. In summary, we believe the actions we are taking to drive efficiency across OneSpan will accelerate our path to become a leaner, more efficient, and more profitable company, and provide us with a stronger foundation to achieve our commitment to create and return value to our shareholder base by growing profitably over the long term. Jorge will now discuss our second quarter financial results in more detail. I will then come back and provide an update to our financial outlook. Jorge?