OneSpan Inc.

Good day, and thank you for standing by. Welcome to the Q3 2023 One Span 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 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 speaker, Joe Maxa, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining the OneSpan Third 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 close, OneSpan issued a press release announcing results for our third quarter 2023. 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 2023 and longer-term financial targets, or 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 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 November 8, 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, and thank you for joining us. We announced important changes to our operating model last quarter to help us drive more efficient revenue growth, increase profitability, and enhance shareholder value. I'm pleased to tell you we made good progress towards these objectives in the third quarter, including the execution of significant cost reduction activities and the appointments of general managers for our two operating business units. We are working hard toward our commitment of achieving the Rule of 40 and are driving toward our aspirational goal of attaining a level of 30% under the Rule of 40 framework by the time we exit 2024. Third quarter revenue grew 3% year over year to $59 million. ARR grew 10% to $150 million and adjusted EBITDA was 6.3 million, or 11% of revenue. I am pleased by the 11% adjusted EBITDA margin reported, driven primarily by our focus on operational rigor and our cost reduction initiatives. During the quarter, we reduced headcount by approximately 15%, resulting in an annualized cost savings of more than $20 million. This was in addition to the approximate 5% headcount reduction we completed in Q2. and we are planning further rightsizing before the end of this year. Jorge will provide more details on our annualized cost savings during his financial review, including our expectation to achieve approximately $58 million of cumulative savings by the end of 2023. Based on our Q3 results and our plan to execute on additional cost savings, I believe we have positioned OneSpan to achieve our full year 2024 targeted adjusted EBITDA margin of at least 20%. We are closely monitoring our go-to-market metrics, including sales productivity and marketing efficiency, along with our revenue growth. If necessary, we plan to further address our cost model to achieve our profitability commitments. Turning to our two operating segments, digital agreements and security solutions. In the third quarter, we transitioned from segment reporting to formally creating two distinct operating business units, each with a general manager. Samir Hajarnas has been appointed General Manager of Digital Agreements, and Mahmoud Sami Ibrahim named General Manager of our Security Solutions Unit. Samir and Sami are seasoned executives with relevant domain expertise and are focused on driving operational excellence as they execute their respective business strategies of driving digital agreements for efficient growth and security solutions for cash flow. During the quarter, both segments performed generally as expected. with revenue growth driven primarily by expansion at existing customers and profitability benefiting sequentially from higher gross margin and lower operating expenses, among other items. In digital agreements, we continue to see increased deal scrutiny and reprioritization of customer investments driven by the macroeconomic uncertainties. This is putting pressure on sales cycles, deal sizes, and pipeline conversion rates for both expansion opportunities and new logos. That said, We had a solid sequential SaaS revenue growth of 11% in Q3, which included a three-year, $2 million ACV contract that we have discussed in the last quarter that moved out of Q2 and closed in early Q3. I would like to highlight one additional customer, a large US bank that upgraded from our on-premises form factor to our leading cloud e-signature solution. The customer issued an RFP as part of their transition to the cloud and chose OneSpin over our key competitors, in a three-year upper six-figure ACV deal that begins in Q4. The customer specifically noted the important role that OneSpan's high-quality customer service played in their final decision. This customer also valued our virtual technology and signed a low six-figure ACV deal to begin using it along with our cloud-based e-signature solution in a separate line of business, replacing one of our major competitors in Q3. They will also be trialing OneSpan Notary beginning in Q4. As mentioned in prior calls, new logo attainment and increased sales productivity are core to our digital agreements growth strategy. We continue to focus on brand recognition as well as sales enablement and training to improve the productivity of our sellers and enable them to more aggressively generate and close enterprise new business opportunities. Our value proposition, including our five pillar solution strategy of identity verification, authentication, high assurance virtual collaboration, e-signature, and secure transaction evolving is very different from other e-signature companies in the market, and it continues to gain interest and set us apart. In fact, we were recently named a leader in the IDC Marketscape Worldwide e-signature software vendor assessment for 2023, and were recognized for our, quote, white glove service to all customers to ensure their success while making it easy, without sacrificing the security necessary to perform high assurance interactions. The report highlighted One Span's expertise in heavily regulated industries, customization, and white labeling capabilities, while calling out a robust audit trail as a key differentiator, stating, One Span provides a single audit trail of the entire agreement process, from identity verification and authentication to signature. The audit trail is constantly embedded within the signed document for EZ, one-click verification. We are the only company in the industry focused on securing the entire digital transaction lifecycle, and we believe the cyber threat environment is moving in our direction. We're also working to improve our go-to-market demand engine and are excited by our new partnership with an external demand generation agency. We believe this new agency has a stronger understanding of our business strategy, market position, and value proposition than our previous partner. We're demonstrating innovation by bringing next-generation capabilities to market, such as One Span Trust Vault that we launched last week. I'm excited about this new capability, which helps guarantee the integrity and long-term viability of documents through the use of immutable storage capabilities based on blockchain technology. Trust Vault allows organizations to keep their digital agreements protected against hacking, data breaches, and emerging technologies like quantum computing. that can pose security risks throughout the lifetime of a document. And we continue to put the One Spend Notary infrastructure in place to broaden the addressable market for our solution. It is currently available for use in 28 states, which is more than our largest competitor, and we are targeting availability for approximately 40 U.S. states by the end of the first quarter of 2024. As a reminder, most states require certification, which is done on a state-by-state basis, Currently, OneSpan Notary has a handful of paying customers and about 50 customers within market proofs of concept. Lastly, and perhaps most importantly, we continue to target the first half of 2024 for general availability of our self-service try-and-buy e-signature solution focused on the SMB and commercial market segments. I'll now spend a few minutes on our security solution segments. In security solutions, we continue to see subscription license expansion opportunities from existing customers, primarily for our mobile security and authentication solutions to mitigate potential hacking attacks. Security subscription revenue grew 20% year over year in the quarter, driven by demand for authentication, transaction signing, and app shielding solutions. DigiPass token revenue declined 5%, primarily due to product mix and timing of order shipments as compared to the prior year period. Visibility into DigiPath orders remain strong at our large banking customers, though we continue to see, to some extent, the macroeconomic environment affecting orders in the mid-market banking sector. We are watching the market ripple effect on the mid-market financial sector very closely. Top priorities in our security solutions segment include deepening our relationships with strategic accounts, re-engaging the channel, and bringing new relevant solutions to market. We have a history of supporting our customers in times of new regulation and have another opportunity to do so with the forthcoming PSD3 regulation in the European Union, which we plan to support with our mobile software and DigiPath security solutions, including forthcoming new solutions. We also continue to focus our discussions with customers around their future mobile authentication strategies, whether mobile first, mobile only, or a hybrid approach using mobile and DigiPath tokens. And we're excited to be launching a new channel program, which we plan to announce in the coming weeks. We plan to grow our new channel partner network in the coming years and enable it to sell all of our solutions, expanding our market and helping us grow our top line. We also plan to bring new solutions to market to support our channel program, including an offering targeting workforce authentication named DigiPath FX1 Bio. We plan to provide you with more information on this new device in the near future. Next, I want to provide an update on our capital allocation plans. We used 3.5 million in cash to repurchase common stock during the third quarter. We expect to announce in the next week a modified Dutch auction tender offer to repurchase approximately 20 million of our common stock, consistent with our plan to return capital to shareholders as we seek to balance revenue growth and profitability. I believe the actions we are taking to right-size our cost structure return capital to shareholders, and focus on efficient growth of the right operational and strategic decisions for OneSpan that will help us to achieve our commitment to create and return value to our shareholders. With that, I will turn the call over to Jorge to review our financials. Jorge?

Thank you, Matt, and good afternoon, everybody. Before reviewing our third quarter results, I want to provide an update on the actions we are taking to rebalance our cost structure to drive more efficient top-line growth. For simplicity, we are providing combined total annualized cost savings for the cost reduction actions we announced last quarter and phase two of our restructuring plan announced in May of 2022. As Matt mentioned, we reduced headcount by approximately 15% in the third quarter and was mostly related to the cost reduction actions we announced last quarter and resulted in annualized cost savings of approximately $21 million. Total annualized cost savings achieved in the third quarter, including headcount reductions, vendor consolidation, and other optimization strategies, were approximately $24 million. Cumulative annualized cost savings as of the end of the third quarter were approximately $43 million. We expect to execute an approximately $50 million of additional cost savings in the current quarter, mostly labor-related, bringing total annualized cost savings to approximately 58 million by the end of 2023. Over the course of the last few months, we have firmed up incremental vendor-related savings and other cost optimization strategies, and now expect to achieve total annualized cost savings of 60 to 65 million by the end of 2025, or approximately 10 million more than the 50 to 55 million range we discussed last quarter which included a level of conservatism. The $10 million increase is due to a stronger line of sight into our cost savings targets, which had already been incorporated into our 2024 adjusted EBITDA margin target range of 20 to 23%. Turning to our third quarter results, third quarter ARR grew 10% year-over-year to $150 million. ARR specific to subscription contracts grew 17% to $119 million and accounted for approximately 79% of total ARR. Net retention rate, or NRR, was 108%. Similar to prior quarters, ARR and NRR were impacted by the macroeconomic environment with increased yield scrutiny and longer sales cycles resulting in more moderate new business and expansion rates. These metrics also continue to be impacted by our decision to sunset certain portfolio offerings last year. Third quarter revenue increased 3% to $58.8 million. Subscription revenue grew 18% to $26.2 million, led by 20% growth in security software and 15% growth in the signature SaaS revenue. Perpetual software licenses and maintenance and support revenue declined as suspected, driven by our strategic decision to sell only new recurrent revenue contracts as part of a three-year plan. DigiPath's token revenue declined 5%. Third quarter gross margin was 69%, compared to 67% in the prior year quarter, driven primarily by favorable product mix and improved hardware margins. I'll provide additional comments on gross margin by operating segment in a few minutes. Operating loss was $4.8 million compared to $5.6 million in the third quarter of last year. Increases in revenue and gross profit margin were mostly offset by increases in operating expenses resulting from higher headcount-related costs and increases in T&E expenses. Gap net loss per share was $0.10 in the third quarter of 2023 compared to $0.18 in the third quarter of last year. Non-gap earnings per share, which excludes long-term incentive compensation, amortization, restructuring charges, other non-recurring items, and the impact of tax adjustments, was $0.09 in the third quarter. This compares to non-gap earnings per share of $0.03 in Q3 of last year. Third-quarter adjusted EBITDA was $6.3 million as compared to $4.5 million in the same period of last year. Third-quarter adjusted EBITDA benefited from approximately $2.3 million in one-time items, most of which were driven by an adjustment to bonus accruals and, to a lesser extent, an immaterial catch-up adjustment from a prior period multi-year agreement. I'll now discuss our third-quarter digital agreement segment results. ARR grew 13% year-over-year to $51 million. Subscription ARR grew 15% to $47 million. Digital agreements revenue increased 7% to $13 million. SAS subscription revenue grew 15% to $11.7 million and accounted for nearly 100% of the subscription revenue in the quarter. As discussed previously, we are sunsetting our on-premise version of our e-signature solution at the end of 2023 and stopped selling new licenses effective January 1st. We expect minimal on-premise subscription revenue for the full year 2023. For comparison purposes, on-premise digital agreement subscription revenue, which is included in our total subscription revenue, contributed $4.8 million for the full year 2022, including $1.1 million in the fourth quarter of last year. Third quarter gross profit margin was 75% as compared to 80% in the prior year quarter. Gross margin in the prior year period benefited by approximately six points due to a one-time credit from a cloud service provider. Operating loss was $4.7 million as compared to an operating profit of $2.2 million in Q3 last year, and an operating loss of $7.1 million last quarter. As a reminder, in Q1 of this year, we reallocated expenses from our security solutions operating segment to digital agreements, which accounted for the majority of the year-over-year change in profitability in the quarter. Lower gross margin combined with increased sales headcount and an increase in sales and market travel and entertainment expenses contributed to the change. Turning to our security solution segment results. ARR grew 9% year over year in the third quarter to 98 million. Subscription ARR grew 18% to 72 million and was partially offset by a declining perpetual maintenance ARR, a trend we expect to continue as legacy perpetual based maintenance contracts shift to subscription contracts over time. Revenue increased 2% to 45.8 million. subscription revenue increased 20% to 14.4 million, our second highest quarterly result, following a strong first half of the year. Strength in Q3, subscription revenue in the quarter and year to date continue to be driven by demand for authentication, transaction signing, and app shielding solutions, primarily from existing customers. The growth in Q3, subscription revenue was offset partially by expected declines in perpetual software and lower volumes of hardware sold. Q3 gross profit margin was 67% as compared to 64% in the same period last year. The increase in margin is primarily attributable to an increase in subscription revenue and a five-point increase in hardware margin. I want to remind you that DigiPass token deliveries returned to normalized levels beginning last quarter. and the hardware margins can fluctuate in any given quarter based on product and customer mix. Operating income was $15.7 million, and operating margin was 34%, compared to $5.7 million and 13% in last year's third quarter. An increase in revenue and gross profit margin, a reallocation of certain expenses to digital agreements, and a $3.8 million impairment charge related to the sunsetting of Non-core assets last year accounted for the majority of the increase. Turning to our balance sheet, we ended the third quarter of 2023 with $68.5 million in cash, cash equivalents, and short-term investments, compared to $98 million at the end of 2022. Key uses of cash year-to-date include approximately $9 million in capitalized expenditures, primarily capitalized software costs, $9 million in restructuring payments, $2 million in acquisition-related costs, $3.5 million to repurchase common stock, and $8 million from changes to networking capital. We have no long-term debt. Consistent with the changes to the operating model, we expect to generate positive cash flows from operations in Q4 2023 and 2024. Geographically, our revenue mixed by region in the third quarter of 2023 was 45% from EMEA, 34% from the Americas, and 21% from Asia Pacific. This compares to 45%, 36%, and 19% from the same regions in the third quarter of last year, respectively. I will now provide an update to our financial outlook. For the full year 2023, we expect... Revenue to be in the range of $228 to $232 million as compared to our previous guidance range of $226 to $232 million. ARR to be in the range of $148 to $152 million. And adjusted EBITDA to be in the range of $2 to $4 million up from our previous guidance range of $0 to $3 million. As discussed previously, Our business can be affected by the timing of contracts and product mix. In Q4, we are expecting pressure on hardware margins due to a less favorable mix of customers and products. We're also expecting a decrease in digital agreements gross margin due to an increase in amortization of capitalized software costs, which we began capitalizing last year. We've also discussed our plan to sunset our on-premise e-signature and legacy deal flow solutions at the end of this year, which, along with some expected contraction from a few security solution customers, may impact ARR and NRR in Q4 2023 and Q1 2024. For example, some customers purchased our cloud e-signature solution in prior quarters due to the planned sunsetting of our on-premise solution. These customers are running both e-signature versions as they migrate to the cloud. We expect contraction from these customers as their on-premise contracts expire in Q4. We also expect some contraction in Q1 from customers migrating from on-premise, e-signature, and deal flow to other solutions. Turning to our full year 2024 outlook, your hard work on our budget, which will be completed by the end of this year and will need approval by the board in due course. We are targeting full-year 2024 revenue growth in the low to mid-single-digit range and full-year 2024 adjusted EBITDA margin in the range of 20% to 23%. Accordingly, we expect to generate cash from operations in the range of $32 to $36 million by the end of 2024, excluding restructuring-related payments, M&A activities, and return of capital to shareholders. That concludes my remarks. I'll now turn the call back to Matt.

Thank you, Jorge. I'm very proud of the work our team is doing to transform OneSpan into an enterprise-class company with a performance-based culture. We are committed to creating and returning value to our shareholders by growing revenue efficiently and profitably. Jorge and I will now be happy to take your questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will be coming from Gray Powell of BTIG. Your line is open.

Great. Thanks for taking the question. I have a few on my end, but before I get into it, just congratulations on what looks like a fairly clean quarter. So, yeah, just to start off, a number of other tech companies are talking about how they're seeing macro headwinds get worse in October. I was just wondering if you could talk about the linearity that you saw throughout Q3 and then just provide any color on what you've seen like the last 30 or 40 days and just your overall confidence level in terms of your visibility on demand.

Hey, Greg. How are you? It's Matt. I don't think there's been any material change over the course of the year. We've seen this over the past two or three quarters, and we continue to see somewhat consistent macroeconomic challenges. Obviously, we've mentioned some lengthening sales cycles, some deal prioritization in DA, which is more typical than it would be in the cyber side of the house, which is strategic and tied to online banking. The one area that we do believe is having a slight increasing effect is in the mid-market financial sector, particularly as it relates to the purchase of hardware tokens. We're hard at work launching a new channel program that should get us more visibility into that particular sector. But I would say that would be the only one that there's a question mark for me. Has it worsened yet? or not, and we'll have more visibility, I'm sure, next quarter, particularly after the release of this new program, channel program, which should give us more visibility with those partners who control most of that volume for us.

Okay, that's really helpful. And I think you may have kind of sort of answered this one on prepared remarks, but I just want to make sure I have it correct.

Sure.

All right, so net new AR additions bounced back pretty nicely in Q3. You added just over 5 million of net new AR. I know there was some deals slipped from Q2 to Q3 that probably helped that number. But the high end of guidance implies that you only add $2 million in Q4. So is there any reason to think that's not just a conservative number? I know you talked about the sunsetting issues. So I just want to make sure that I'm sort of thinking about the ARR trend lines correctly.

Yeah, we have. No, I think that's fair to say. I mean, we do have, you know, a couple of, you know, mitigating impacts here, as Jorge mentioned. We sort of have a double bump going on right now as we've been migrating on both the e-signature and the security side of the house, obviously migrating from perpetual to subscriptions in the e-signature side of the house at SAS. So we oftentimes during the migration from an on-premise to a cloud-based installation, you run both in parallel. So there's a tail where we're sort of getting the double benefit of both contracts in place at the same time. And so we do anticipate as customers roll off of on-prem and the maintenance associated with that to the cloud application that there's a little bit of a headwind or a dampening effect, I should say, associated with that. We also have a couple of planned downsides in one of our banking customers is selling off some international assets, for example, which is really obviously uncontrollable. And then the big thing, Gray, is really just the importance of getting a new logo acquisition engine going. And so the biggest area for us, given our size, is the index that we have to drive ARR and NRR associated with new logo acquisition. And so, again, we've seen some lengthening in sales cycles. So I think all those dampening effects suggest that we're being prudent in where we are right now, given that we are at the midpoint of the range. But I don't think your comment's unwarranted if we continue to perform the way we think we will this quarter.

All right, perfect. Then last one on my side, I know I've asked a couple here. Just looking at slide 19, that summary is really helpful on the cost reduction actions. Back of the envelope map, it looks like you're going to generate maybe in, you know, if I just kind of look at like full year 23 versus full year 24, it looks like you're going to get like an extra $40 million or so in cost savings, and that pretty much gets you to your EBITDA target. Is that directionally correct?

Hey, Greg, this is Jorge. How are you? I apologize because I'm a little under the weather. Yeah, so I think, you know, just to maybe take a step back. So we're planning by the end of this year to be at 43 million. And that's the sum of 19 that we had entering Q3. And we executed on 24 million in Q3. That gets you to that 43 million. We plan to execute, as I mentioned, an incremental 15. That gets you to the 58 million that you see on that slide 19 of the investor deck. And, you know, the range that we're looking at is 60 to 65. Now going back to sort of how we laid this out. So we had clear identification of the sources that this is going to come out. Some of the work that we've done over the past couple of months, last quarter, firmed up some of these specific numbers in terms of the makeup of the mix between headcount and vendors, etc. And so we guided to that number. So the 60 to 65 has already been included in the 20 to 23%.

Got it. Okay. Yeah, I was trying to factor in like sort of the timing of when they layered in, but it might be easier for me just to take it after the call. I've been on here long enough.

Yeah, no, you're happy to, Gray. There's just some dynamics with the sources of those spend, particularly as it relates to some of the savings associated with the vendor community that obviously has a little bit longer tail and a different layering in as far as when the impact takes place. We'll be happy to walk through it in detail with you after the call. Cool. All right.

Thanks a lot.

Thank you.

Again, ladies and gentlemen, if you would like to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. One moment for our next question. Our next question will come from Anja Satterström of Sudoti. Your line is open.

Hi, thank you for taking my question and congrats on a good performance here against your challenging backdrop. In terms of the scrutinizing of projects and longer sales cycle, do you see it has become worse or is it the same or is it improving?

No, I think it's largely the same this year. Certainly, it was worse than last year for us when we started calling it out this year, but I don't think there's been any material change in that. Again, I think the challenge with the e-signature businesses we've talked about, I would say it's important. Obviously, every business is going through some sort of digital transformation, and it's strategic in the long term, but in certain macroeconomic cycles, you know, when an IT budget's being chopped from the top 10 to top seven to top five, you know, there's just the question whether e-signature is the area they're going to invest their calories, particularly if there's an incumbent in place already, right? So I would say it really is the macroeconomic, you know, challenges, Anja, where it meets, you know, a particular incumbent and the ability to unseat them in that environment. And now we are seeing some benefits from our new pricing model, which hopefully plays a role and provides an incentive for some of these enterprises to see material savings by moving. But nonetheless, they do have to apply IT resources to make that migration happen. And, you know, so we continue to see that happening. And I would expect that to the first half of next year to some degree.

Okay, thank you. And I think you said you cut about 50% of headcount in the quarter. Where did most of the cuts come from? And then how's your sales organization ramping up?

Sure. So just walk through the high-level math, and, Jorge, please feel free to dive in. So out of total expenses that came through, about half of them came from the digital agreement side of the house. About 30% of them came from security and 20% from G&A. And we can let Jorge walk through some of the details on that. But let me just give you the high-level narrative. On the digital agreement side of the house, obviously, we've been committed since day one to profitable growth. digital agreements was always going to be that primary growth engine given the size of the signature market and Security obviously we're going to consistently run for cash flow on the da side of things in addition to the macroeconomic You know is clear for us that the operating leverage that we thought may be there from cross-selling into our installed base essentially turned into a completely new sale and Okay, given the distance between the buying centers and the influencers on the security side of the house versus the signature side of the house. And so we rebalanced our sales capacity, not just in the direct sellers, but also with the sales development reps and the sales engineering community attached to those sellers to really make sure that we focus really on less so much the one-standard 1,000, which we spoke about before, which was 1,000 top install-based customers, So really, as we created this new digital agreements division on the top 500 installed-based customers for digital agreements, which have really been driving our growth. So the increased focus on the installed base of the digital agreement community, coupled with our execution, I would say, of a more focused go-to-market, which focused on Tier 1 and common law countries, really provided us the opportunity to reduce the size of the sales force and the marketing spend associated with those other countries where we weren't seeing material growth. and really having a more focused effort on making sure that North America, ANZ, Canada, which are the common law countries where there's exceptional product market fit, get the lion's share of our attention. And we'll continue to sell the product globally, but the way we're serving that market is slightly different. And we'll continue to evolve as we get a more cost-effective approach with the self-serve try-and-buy model coming in Q2 of next year. So I would just say it was rebalancing and refocusing of the DA business to ensure that we get that beachhead of growth in common law countries that allow us to reduce some of the sales capacity across the town executive sales engineering and STR communities inside of One Span.

And Ania, just to add to your first, to Matt and to your first question. So in terms of the split, S&M, so sales and marketing was about close to 40%. Then it's R&D about 27% and then G&A about 15%. And then there's vendors, If I go across these three sections, that's about 20% of the savings. And as Matt said, digital agreements, it's about 50% of the total savings combined.

Okay, thank you. And also, I think you alluded to it in your remarks, Jorge, but for the fourth quarter, you're implying with the full-year guidance on the adjusted EBITDA that will be lower. Is that because of those one-time items in the third quarter or...?

I think there's two or three dynamics that I think it's important to explain. One is the visibility that we have into particularly the hardware margins, which is very dependent on the customer mix, as I mentioned. So this quarter, we benefited from that, particularly because a larger portion of the orders went to APAC, which have a higher margin. In Q4, we have this ability, that mix is going to shift. And so that's going to have an impact, unfavorable impact on the hardware margins. The second component is the increased amortization of CAP software, as I mentioned, that is going to impact our DA. Also security, but to a larger extent, is going to be DA. And so the mix of revenue does impact profitability. And so I think you're going to continue to see this restructuring taking hold, taking place, and OPEX coming down. But these other dynamics on the profitability side will impact that number in Q4.

Okay, thank you. And then one last thing on capital allocation and the Dutch auction tender offer. How... What made you decide for that, and what are some other options? And you acquired ProvenDB. Is there other acquisitions in the pipeline, or how are you thinking about that?

So we do continue to look at tuck-in acquisitions for sure. We're hard at work at that and are committed to our overall strategy. We do believe it's prudent, particularly with this pivot to the new operating model, Anya, that we have the flexibility, given that we have proven since day one our ability to control costs, and that's the one thing we've been very, very consistent in. We've simply changed the capital allocation model from investing more materially in sales and marketing to having that cash from the balance sheet in addition to the operating model pivot that we feel comfortable going and returning $20 million-ish, if you will, to this Dutch tender offer. That does not mean we're not continuously looking for tuck-in acquisitions. In fact, this environment is quite favorable for those, but obviously you want that fit to be truly strategic like the proven DV acquisition was, and we're going to hold out until that becomes the case.

Okay. Thank you. That was all from me.

Thank you, Anya. Thank you.

Thank you. And I would now like to turn the conference back to Matt for closing remarks.

Thank you, everyone, for joining. I really appreciate your time today and attention. I look forward to sharing progress with you next quarter. And thank you all and have a nice day. And a big thank you to the OneSpan team as well for all the hard work over the past quarter. Thank you, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect.