OneSpan Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results; amounts below are in U.S. dollars. OneSpan provides digital agreement, e-signature, identity and authentication security, and related hardware and services. Its reportable segments are Digital Agreements and Security Solutions.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $58.8m | $57.1m | $172.2m | $162.4m |
| Gross profit / margin | $40.7m / 69% | $38.4m / 67% | $114.2m / 66% | $110.6m / 68% |
| Operating loss | $(4.8)m | $(5.6)m | $(30.7)m | $(23.1)m |
| Net loss | $(4.1)m | $(7.2)m | $(30.2)m | $(11.3)m |
| Adjusted EBITDA (non-GAAP) | $6.3m | $4.5m | $0.8m | $3.2m |
| Operating cash flow | Not separately provided | Not separately provided | $(13.8)m | $(13.7)m |
Q3 revenue grew 3%; nine-month revenue grew 6%. Foreign exchange favorably affected revenue by approximately $1.9m in Q3 and $1.0m year to date. Subscription revenue was $26.2m in Q3 and $79.1m year to date. The company reported ARR of $149.8m at September 30, up 10% year over year, and net retention rate of 108%, versus 109% a year earlier.
At September 30, cash and cash equivalents were $68.5m, restricted cash $0.8m, and short-term investments nil; cash, cash equivalents, and restricted cash totaled $69.3m. Cash declined $28.1m from the start of the year. Working capital was $54.7m, down from $87.6m at December 31, 2022. Total liabilities were $105.4m; the filing reports lease liabilities, including $6.6m total operating lease liabilities, but does not present a separate borrowing balance. Management said financial resources were adequate for operating needs over the next 12 months. Capital expenditures were $9.0m in the first nine months, primarily including capitalized software activity.
Material changes and segment performance
- Digital Agreements: Q3 revenue increased 7% to $13.0m; nine-month revenue was nearly flat at $36.4m. Segment operating loss was $4.7m in Q3 and $17.8m year to date, compared with operating income of $2.2m and $2.8m in the respective 2022 periods. Cloud subscription growth from existing customers was offset by the sunsetting of an on-premises e-signature product. Q3 gross margin declined to 75% from 80%.
- Security Solutions: Q3 revenue increased 2% to $45.8m; nine-month revenue rose 7% to $135.8m. Segment operating income was $15.7m in Q3 and $39.8m year to date. Growth in term subscriptions was partly offset by lower perpetual license revenue and hardware volumes.
- Consolidated Q3 gross margin improved to 69% from 67%, while nine-month margin fell to 66% from 68%, reflecting, among other factors, higher cloud-service costs and $1.6m of inventory impairment related to Digipass CX.
- Nine-month operating expenses rose 8% to $144.9m. Sales and marketing increased 25% to $56.4m; R&D declined 12% to $29.7m, partly due to capitalization of development costs; G&A rose 11% to $44.0m. Restructuring charges were $13.1m year to date.
- Nine-month net loss widened from the prior-year period, which included a $14.8m gain on sale of the Promon investment. Adjusted EBITDA also declined year to date, primarily due to increased sales and marketing investment and compensation costs. Q3 adjusted EBITDA improved, with management attributing much of the year-over-year increase to nonrecurring items, including a reduction in bonus accruals.
Outlook, management commentary and risks
- Management said Digital Agreements growth is taking longer than planned, citing slower pipeline development, longer sales cycles, customer spending scrutiny, market maturity, and competitive pricing. It adjusted its operating model while maintaining the broader strategic transformation plan.
- For the 2023 cost-reduction actions, the company expects approximately $11m–$12m of employee transition and severance charges, excluding retention payments. It expected to complete about 85% of planned workforce reductions by year-end 2023, with most remaining reductions during 2024; vendor actions are planned through 2025. The filing does not provide specific revenue or earnings guidance.
- Management expects ARR in Q4 2023 and Q1 2024 to be affected by customer contraction following migrations from on-premises e-signature to cloud, and by some contraction among Security Solutions customers.
- Q3 and nine-month restructuring costs included severance and real-estate actions; the company vacated and terminated leases in Chicago and Brussels, and discontinued investment in Digipass CX. The longer-running restructuring plan is expected to continue through 2025.
- Risks highlighted include execution and disruption risks from restructuring, customer retention and acquisition, competition and pricing, lengthy sales cycles, cybersecurity, product performance, macroeconomic and geopolitical conditions, supply-chain issues, foreign exchange, and potential asset impairment. The filing says there were no material changes to previously disclosed risk factors.
- Ordinary-course legal matters were not expected to have a material adverse impact; OneSpan recorded a $1.0m loss-contingency accrual and reported no estimable reasonably possible losses.
- After quarter-end, the company said it planned to announce a modified Dutch auction tender offer for approximately $20m of common stock. During Q3 it repurchased 305,381 shares for approximately $3.5m. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Digital Agreements sales execution and customer migration trends support improved growth, margins, and the reported ARR trajectory.
- Actual savings, timing, and total costs from the transformation and 2023 cost-reduction actions, including effects on product development and customer service.
- Whether operating cash use, lower deferred revenue, and reduced working capital stabilize; the filing reports a $28.1m decline in cash since year-end.
- How much Q3 adjusted EBITDA improvement was attributable to nonrecurring items and whether future results convert to stronger operating cash flow.
- Final terms and execution of the planned $20m tender offer, and the effect of continued repurchases on cash and share count.
- Final purchase-price allocation for the ProvenDB acquisition and any resulting changes to goodwill or acquired-asset values.