OneSpan (US:OSPN)2024-05-02 21:14PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements (Unaudited) OneSpan Inc. reported a significant Q1 2024 turnaround, achieving $13.5 million net income from a prior-year loss, and increasing cash to $63.9 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $63,859 | $42,493 | | Accounts receivable, net | $32,382 | $64,387 | | Total current assets | $134,167 | $146,343 | | Total assets | $277,142 | $289,191 | | Deferred revenue (current) | $55,573 | $69,331 | | Total current liabilities | $92,171 | $114,830 | | Total liabilities | $106,273 | $130,050 | | Total stockholders' equity | $170,869 | $159,141 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total revenue | $64,843 | $57,607 | | Gross profit | $47,395 | $39,286 | | Operating income (loss) | $14,110 | $(8,130) | | Net income (loss) | $13,468 | $(8,356) | | Diluted EPS | $0.35 | $(0.21) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,960 | $13,237 | | Net cash used in investing activities | $(3,080) | $(2,546) | | Net cash used in financing activities | $(1,795) | $(1,098) | | Net increase in cash | $21,351 | $10,162 | Notes to Condensed Consolidated Financial Statements OneSpan's notes detail business transformation, segment performance, and restructuring, including $1.5 million in Q1 2024 cost reduction charges - In August 2023, the company modified its strategy to focus more on improving profitability margins, approving cost reduction actions (the "2023 Actions") to drive higher profitability while maintaining long-term growth potential24 Segment Performance - Q1 2024 vs Q1 2023 (in thousands) | Segment | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | :--- | | Digital Agreements | Revenue | $14,414 | $11,552 | | | Gross Profit | $9,892 | $8,448 | | | Operating Loss | $(265) | $(6,033) | | Security Solutions | Revenue | $50,429 | $46,055 | | | Gross Profit | $37,503 | $30,838 | | | Operating Income | $25,878 | $15,631 | Revenue by Major Products and Services (in thousands) | Category | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Subscription | $39,994 | $29,956 | | Maintenance and support | $10,571 | $11,161 | | Hardware products | $12,576 | $14,866 | | Professional services and other | $1,702 | $1,624 | | Total Revenue | $64,843 | $57,607 | - In connection with its restructuring plan, the company recorded $1.5 million in charges for Q1 2024, primarily for employee severance costs. The remaining restructuring liability as of March 31, 2024, is $4.2 million8789 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses OneSpan's financial performance, highlighting 13% revenue growth and a shift to operating income, with Adjusted EBITDA at $19.8 million Business Transformation and Strategy OneSpan's business transformation, initiated in late 2021, shifted in August 2023 to prioritize Adjusted EBITDA margin improvement via cost reduction - In response to challenges in growing Digital Agreements revenue, the company modified its strategy in August 2023 to focus more heavily on improving Adjusted EBITDA margin across the business103 - The company expects to incur an additional $2.5 million to $4.5 million in restructuring charges related to the 2023 Actions, primarily for employee severance106 - On January 4, 2024, Victor Limongelli was appointed as Interim Chief Executive Officer, replacing Matthew Moynahan108 Results of Operations Q1 2024 revenue increased 13% to $64.8 million, with gross margin at 73% and operating expenses down 30%, leading to $14.1 million operating income Revenue Growth by Segment (Q1 2024 vs Q1 2023) | Segment | Revenue Growth | Key Drivers | | :--- | :--- | :--- | | Digital Agreements | +25% | Higher cloud subscription revenue from existing customer expansions | | Security Solutions | +9% | Higher on-premises term subscription revenue and customer conversions from perpetual to term licenses | Revenue by Geographic Region (in thousands) | Region | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | EMEA | $31,842 | $27,820 | +14% | | Americas | $21,344 | $20,498 | +4% | | APAC | $11,657 | $9,289 | +25% | - Total gross margin increased to 73% in Q1 2024 from 68% in Q1 2023, primarily due to a more favorable revenue mix between software and hardware, as well as lower third-party license costs141145 - Operating expenses decreased by $14.1 million (30%) YoY, driven by significant reductions in Sales and Marketing (-35%), Research and Development (-13%), and General and Administrative (-40%) expenses, largely due to lower headcount and consulting fees146148150152 Liquidity and Capital Resources OneSpan's cash and cash equivalents increased to $63.9 million as of March 31, 2024, with $27.0 million from operations, improving liquidity - Cash and cash equivalents increased to $63.9 million at March 31, 2024, from $42.5 million at December 31, 2023161162 - Cash provided by operating activities was $27.0 million for Q1 2024, more than double the $13.2 million generated in Q1 2023, primarily due to higher net income and a large decrease in accounts receivable168 - Working capital increased to $42.0 million at March 31, 2024, from $31.5 million at December 31, 2023169 Key Business Metrics and Non-GAAP Financial Measures OneSpan's key metrics show strong performance, with ARR growing 9% to $154.6 million and Adjusted EBITDA at $19.8 million - Annual Recurring Revenue (ARR) was $154.6 million at March 31, 2024, a 9% increase from $141.3 million at March 31, 2023, driven by an increase in subscription contracts181 - Net Retention Rate (NRR) was 107% at March 31, 2024, compared to 108% at March 31, 2023183 Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income (loss) | $13,468 | $(8,356) | | Interest income, net | $(101) | $(503) | | Provision for income taxes | $1,034 | $689 | | Depreciation and amortization | $2,082 | $1,319 | | Long-term incentive compensation | $1,621 | $3,923 | | Restructuring and other related charges | $1,516 | $706 | | Other non-recurring items | $171 | $585 | | Adjusted EBITDA | $19,791 | $(1,637) | Quantitative and Qualitative Disclosures about Market Risk No material changes in OneSpan's market risk were reported during Q1 2024, referring to the Annual Report on Form 10-K for details - There have been no material changes in the company's market risk during the first quarter of 2024189 Controls and Procedures OneSpan's CEO and CFO concluded disclosure controls were effective as of March 31, 2024, with no material changes to internal controls during Q1 - The CEO and CFO concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective190 - No material changes were made to the company's internal control over financial reporting during the first quarter of 2024191 PART II. OTHER INFORMATION Legal Proceedings OneSpan is involved in various legal proceedings, but management does not anticipate a material adverse impact on financial results - The company does not expect ongoing legal proceedings to have a material adverse impact on its financial results193 Risk Factors No material changes to OneSpan's risk factors were reported for the quarter, consistent with the prior Annual Report on Form 10-K - No material changes to risk factors were reported for the quarter195 Issuer Purchases of Equity Securities OneSpan did not repurchase common stock in Q1 2024; $15.8 million remained available under the program expiring May 11, 2024 - The company did not purchase any of its shares during the first quarter of 2024196 - As of March 31, 2024, approximately $15.8 million remained available for repurchase under the stock repurchase program, which was authorized until May 11, 2024196 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and the 2024 Management Incentive Plan - Key exhibits filed include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and the 2024 Management Incentive Plan (Exhibit 10.1)197198