Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- OneSpan Inc (OSPN, Financial) reported a 9% year-over-year revenue growth in Q2 2024.
- Annual Recurring Revenue (ARR) grew by 15%, reaching $165 million.
- Adjusted EBITDA was $16 million, representing 27% of revenue.
- The company generated $2 million in cash from operations, a significant improvement from the previous year's $20 million cash usage.
- The sales team performed well, with bookings exceeding internal plans and a strong focus on customer feedback.
Negative Points
- Maintenance revenue is expected to decline due to the end of life of the Dealflo product and perpetual to term conversions.
- Hardware revenue is anticipated to decline in the second half of the year compared to the prior year.
- The third quarter is typically a weaker bookings quarter due to seasonality.
- Gross margins in the digital agreements business unit were impacted by one-time costs related to discontinuing R&D investments in the Trust Vault blockchain product.
- The macroeconomic environment, particularly in Europe, remains challenging, which could impact future performance.
Q & A Highlights
Q: Victor, you've been at OneSpan as CEO for seven months now. Do you see anything major that needs to be changed, or are there any areas where you want to maybe increase your focus and level of investments?
A: We're really happy with our ARR growth and the overall strength in our software business. My background has been on the software side, but I'm also liking the hardware business. It's a good margin business with long customer relationships. We are doing some investment there, and the goal is to have both business units growing and profitable. The security business could benefit from additional investment on product refreshes, and we'll continue to do that as we set up our 2025 plan.
Q: Across software, it's been a fairly rough Q2 so far. You just added more net new ARR this quarter than the prior three quarters combined. What surprised you the most? What drove the upside?
A: One thing that really stands out is the NRR (Net Retention Rate). If you're at 1.12, 1.10, 1.12, those types of ranges, it's really beneficial for the business. The strength was on both sides of the business, with strong NRR results in Security as well. It was a tremendous job by the team.
Q: Could you unpack the $10 million of net new ARR and the jump in ARR? Was there any concentration in large expansions or pull-forwards?
A: We closed a ton of business, including some large deals. We saw great expansion, particularly a low-seven-figure deal that was more cross-sell on the DA side. We also saw strong expansion in authentication products. Additionally, we had lower churn and contraction this quarter compared to the past.
Q: The EBITDA guide for the second half seems lower compared to the first half. Could you unpack that a bit?
A: EBITDA is heavily dependent on revenue. We expect year-over-year declines in the hardware business based on current visibility into customer delivery schedules. The hardware business is lumpy due to lead times for production and deliveries. We have been cautious with our guide, but we hope to be on the high end of the range.
Q: How much of the tailwind is driven by demand versus your changes in execution?
A: It's hard to pull that apart. The team has executed better, and we saw good performance across the board in both security and DA business. I'm happy with how we're engaging with customers, but I can't give a precise number on demand versus execution.
Q: How is the macro environment for you? Do you still see it as challenging?
A: Europe is a huge market for us, and the European economy hasn't been great, but it's not in a deep recession either. The macro environment isn't fantastic, but it's not the worst I've experienced. We have to be able to execute through economies like this.
Q: Are you still looking for potential further cost savings, or have you reached your target?
A: We're almost there from a cost savings perspective. There will be incremental fine-tuning, but I don't expect another huge number. It's part of running the business and trying to improve and expand operating margins.
Q: Will there be any significant cost increases due to product investments?
A: We're trying to keep a close eye on expenses. There may be a small incremental investment, but for the most part, we're directing our team to areas that can have the biggest benefit for our customers rather than just throwing dollars at it.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
