OneSpan Inc. (OSPN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the OneSpan First Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Joe Maxa, Vice President of Investor Relations. Please go ahead, sir.
Joe Maxa: Thank you, operator. Hello, everyone and thank you for joining the OneSpan first quarter 2021 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 are Scott Clements, OneSpan's Chief Executive Officer; and Mark Hoyt, our Chief Financial Officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our first quarter 2021. To access a copy of the press release and other investor information, including a presentation reflecting our first quarter financial results, please visit our website.
Scott Clements: Thanks very much, Joe, and good afternoon, everyone. Thanks for joining us on the call here today. During the first quarter of 2021, our annual recurring revenue, ARR, increased 29% year-over-year and ARR specific to subscription and term-based contracts grew in excess of 50%. In addition, a record 87% of our software and services bookings and revenues were recurring. We’ve made tremendous progress in our shift to recurring software revenue, and we expect to be materially complete with this transition by the end of 2021. Subscription revenue grew 47%, driven primarily by strong demand for e-signature solutions. Term license revenue declined from last Q1's pre-pandemic record quarter, but Q1 2021 was the third highest term license revenue quarter in our history and just shy of Q4 2020's total. Mark will provide more detail on these revenue items during his financial review in a few minutes. Profitability was impacted in the quarter by planned growth investment, several one-time expenses and higher vacation accruals, which we expect to return to normal levels in future quarters as employees return to more typical vacation patterns.
Mark Hoyt: Thank you for the kind words, Scott. Before I get into the results, I want to acknowledge that it has been a privilege to serve as part of the OneSpan team, and I want to thank all of my colleagues for the support and collaboration over the years. We've made tremendous progress in transforming the company, and I’m confident that OneSpan is well-positioned to continue that progress.
Scott Clements: Thanks, Mark. Before we open it up to questions, I'd like to provide a bit of perspective on the current market landscape. The global economy is improving, but it is still uneven. In North America, profitability at large banking institutions improved substantially, and new account opening trends are improving as we expected. In Europe, travel restrictions and physical lockdowns continue, but with expected improvements in vaccine distribution, we should start to see sequential improvement going forward. The Asia Pacific region also had a soft first quarter, but as in other regions, we expect improvement as the year progresses. The outlook for e-signature remains strong around the world with continued demand for digitization services in today's economic environment. At this time, we are reaffirming our FY '21 objectives and full-year guidance, consisting of the following: total revenue of $215 million to $225 million; recurring revenue to be in the range of $120 million to $125 million; ARR growth of 22% to 26%; and adjusted EBITDA to be approximately breakeven. In the second quarter of 2021, we expect ARR growth of 25% to 30%, and for recurring revenue to increase sequentially and year-over-year. While perpetual license and hardware revenues decline as we continue to shift to a recurring model. We expect profitability to improve in the second quarter on higher revenue with increasing contributions from software and services. The second half of 2021 revenue is expected to exceed the first-half revenue, led by continued growth in recurring software and services. And as previously indicated, we expect hardware revenues to decline in the mid single-digit range for the full year. We also continue to expect $15 million to $20 million of revenue headwind resulting from our transition to recurring revenue for the full year of 2021, and then we expect to see acceleration in software and services revenue growth in 2022 with increasing bottom-line profitability. Our core value propositions in security, productivity, positive digital user experience and regulatory compliance remain solid. Our transformation from a hardware-centric technology business to a modern cloud based software and solutions company is well under way and is driving positive results. Along with this transition, our Board has evolved with the addition of significant expertise and experience matched with the businesses' changing risks and opportunities.
Operator: Thank you. And the first question will come from Andrew Nowinski with D.A. Davidson. Please go ahead.
Andrew Nowinski: Great. Thank you. I will start with a question on the e-signature business. So was there any more details you could provide on the record contract that you won in the quarter, maybe the size of the contract or the length of the contract?
Scott Clements: Andy, yes, I think, Mark, that's a 3-year contract, correct?
Mark Hoyt: This was the initial phase one, yes, that's correct. And it's -- the total value of the project is, I would call it, mid single-digit millions.
Andrew Nowinski: Great. thank you. Maybe shifting gears then, I know you said you had record demand for term-based licenses in Q1 of 2020, but it looks like the term-based revenue is still down a bit more than hardware this quarter. Were you surprised by the magnitude of the decline? And was there anything in term-based licenses that may have impacted that decline other than the tough comp?
Scott Clements: No, I don't think so, Andy. Really when you go back and look at -- or personally, it was in the range of what we expected, I think, in the quarter. If you go back and look at Q1 of last year, we went from about $500,000 of term license revenue out in Q1 2019 to something -- I think it was about $9.5 million or so in the first quarter last year. So it was an order of magnitude increase in the first quarter last year that related to some specific large contracts, particularly around mobile security and things like that. So the -- and then, of course, the other compares sequentially and we had a real -- very, very strong fourth quarter of 2020 as we usually do have a back-end loaded results. So I think as Mark said in his comments, it was still the third highest quarter for us in terms of term license. So it's -- yes, I don't -- I think we are just bumping up against a couple of real tough compares, but it doesn't really change our outlook for the business or our expectations.
Andrew Nowinski: Okay. Great. And then maybe just last one for me real quick. Is it possible -- I know you reiterated your hardware guidance for the year of down mid single digits. But as the economy starts to reopen, do you think there could be some pent-up demand for hardware and maybe even a pending hardware refresh cycle that might provide a little bit of upside to that guidance?
Scott Clements: Well, I think, first quarter, I think came in pretty good, I think relative to our expectations. We will see as we go through the year. We do know there are some -- a few larger opportunities that are out there. Whether they really come through the right kind of timing to impact revenues this year is TBD. I think these larger projects tend to have a pretty long cycle, right, of manufacturing and delivery and so on and so forth. So -- and when you go through that cycle, it's a few months, right, you get through that cycle. So if some of these things come in, or booked early enough in the year, we could see some better performance out of hardware. But I think it's kind of -- it's too early to call that, really. As you know, historically, this is a little bit of a volatile part of the portfolio or a solution category. And so we -- I think we feel good about the guidance we've given at this point. And -- but a lot of that tends to come late in a year or two with hardware. Usually, hardware is a later -- we have bigger quarters later in the year. So there's a lot yet to go, I guess, let me put it that way.
Andrew Nowinski: Okay. That makes sense. Thanks a lot guys and best of luck, Mark.
Mark Hoyt: Thank you, Andy.
Operator: The next question will come from Gray Powell with BTIG. Please go ahead.
Gray Powell: Okay. Great. Thanks for taking the questions. Yes, just a couple, if I can. So maybe a follow-up on Andy's question. So I mean, it definitely seems like sentiment in the banking sectors improved a lot this year. Do you see that impacting purchase decisions or sales cycles at your larger customers for any part of the product portfolio? And then just how should we think about that recovery playing out over the rest of the year?
Scott Clements: Yes, I think we -- our expectation is that, sequentially, things are going to continue to get better through the year. And we have seen some of that in terms of the structure of our sales pipeline in terms of more of the sales pipeline is in the later stage gates of the pipeline than we saw early in the first quarter. So things are moving through the pipeline. We have seen, certainly, North America banks, their profitability has improved quite a lot. As you know, they've been reversing some of the reserves they've put up last year. And we have also seen some upticks in new account opening at some of the large banks that report those figures here for the first quarter. I think that on the other hand, the area that -- there's a couple of areas that remain concerning, and those are Europe. Certainly, we have a very uneven situation in Europe with some lockdowns coming back and continuing in spikes in infection rate. I do believe that they are starting to do better moving forward with vaccination over the coming few months, and that will, I believe, have a positive effect on that region and on our business as we, I think, are beginning to see here in the U.S. at this point. Japan is a hard one to call. There is a spike in infection rates going on in Japan right now. And then we also have the issues in Brazil, which are concerning. So all of those, I think, are the present period and we do expect generally to see progress in those areas over the coming months. So I think we said really since the fourth quarter last year that we expected sequentially better business conditions as we go across the year. I don't see any reason to change that expectation at this point in time.
Gray Powell: Understood. Okay, that's really helpful color. And then maybe just kind of help us think about some duration and how that impacts term license? And I'm guessing that the answer is really, that we should just focus on the ARR metric. But how should we think about multiyear term license deals within the context of your 2021 guidance? And then would it be possible to say like sort of a -- I think you said that duration was down 60% in Q1. Is there a way to sort of just give like an apples-to-apples for like constant duration Q1 term versus last year?
Mark Hoyt: Gray, the 60% down reflects the term license duration that we've seen for the last couple of quarters, which we've mentioned is approaching about 12 months. It's approaching about 1-year. So last year, Q1 was kind of an aberration because we had a couple large 3-year deals that brought that average up to about 1.6 years. So we saw that revert back to the median of about one this quarter, not unusual. And that's reflected, the 1-year average duration was reflected in our guidance and in our numbers for 2021. And it's along -- it's in the plan with what our sales team is offering to customers and what our customers are asking for as they approach more 1-year deals. Of course, if we have customers that request 3, 5-year deals, we feel we are happy to oblige. But we are seeing a lot of customer traffic headed towards 1-year deals that are pretty close to mirroring subscription-like terms.
Scott Clements: I think in general that we have -- as a matter of course, really tried to move toward 1-year terms in general to really, I think, minimize revenue volatility from one period to the next. And so that's really been -- as we've gone through the transformation away from perpetual to recurring license models, we wanted to keep it somewhat simple, as simple as we could, and then also get that outcome of improving or reducing the historic revenue volatility that the company have seen. So that's really what the goal has been. I think as we look into 2022, we could potentially fine tune that to some degree. As Mark said, we're not -- we don't tell customers who want a multiyear contract to go away. We love them, and we will take it. But that has been really on purpose that we have moved toward a 1-year average duration. And we will see whether we continue on that course in the quarters ahead or we start to modulate that a little bit. But right now, we continue to believe that's the best course.
Gray Powell: Got it. Okay. That’s really helpful. Thank you very much.
Mark Hoyt: Thanks, Gray.
Operator: The next question will come from Anja Soderstrom with Sidoti. Please go ahead.
Anja Soderstrom: Hi. Thank you for taking my question. I just had a follow-up first on the e-signature contract you mentioned. You said the total value was in the mid single millions. But in context to sort of your average contract, are you going after these kind of deals? Or how did this come about?
Scott Clements: Well, I think this was a customer that was actually a customer of a competitor who had a large deployment, I guess, of e-signature across different use cases in the company. And so when they decided to seek alternatives, we were, I think, well-positioned to take advantage of that and win that customer. So I think our average contract value in e-signature has come up quite a lot over the last year or so, and that was on purpose. We have focused our direct salespeople on pursuing larger contracts there. There have been, I think, a tendency in that we're going to, in that part of the organization to maybe chase too many small contracts. And so we really did refocus everybody on larger sized contracts. And I never talk top of my head, Mark, I don't know if you do know exactly what those numbers are. But this -- they're not in the million. The average is not in the million, let's put it that way.
Anja Soderstrom: Okay.
Scott Clements: It's much smaller. But we do have -- it's not that we have not had other contracts over $1 million. We have. But this one is a little remarkable, I think, in terms of the size. And I think indicative of the progress that we are making in that business, both in terms of our product and also our go-to-market model.
Anja Soderstrom: Okay. That was good color. And then in terms of the other virtual meeting room that you launched, I would assume there's a good use case for that in your adjacent businesses. Well, are you going after that initially, or are you just pushing it to your existing customers in finance or?
Scott Clements: I'm sorry, Anja, I didn't quite hear the other business, what you said. Could you just repeat that?
Anja Soderstrom: Just wondering how you're going to market with that. Are you trying to upsell existing customers? Or are you -- I would assume there's a broad use case for that product that you might be able to push in the adjacent, too.
Scott Clements: No question there. There's a broad set of opportunities for that product. And we -- banking is definitely a high demand area for it. This is a solution that has been a specific request of many of our customers to really help them personalize their relationships with important customers, even in the digital space, so they can put a face to a transaction and really interact in a more intimate way, I think, with their customers in higher value type transactions. And I think you can -- when you sort of conceptualize the best value proposition, I think you can see that it should have application across many different use cases where there is discussion or negotiation or an agreement that's being put in place that is of value and requires strong identity verification component to it. So it's -- I think it's very much a horizontal solution. We will, I think, in the early period here, the -- most of the opportunities will be in banking, really just because of where we come from. But certainly, as you know, we think about government and we think about health care and some of the other spaces that we're interested in, certainly should be opportunity in those as well.
Anja Soderstrom: Okay. Thank you for the color. That was all from me.
Scott Clements: Right. Thanks, Anja.
Operator: This concludes our question-and-answer session. I would like to turn the conference over to Scott Clements, President and CEO, for any closing remarks. Please go ahead, sir.
Scott Clements: Thank you, operator, and thanks to all of you for joining the call today. We have -- we are very -- looking very much looking forward, I think, to the balance of this year and the continued progress. As you know, we are making significant incremental investments in our solutions and our go-to-market model this year so that we can continue the transition to recurring revenue and really materially complete that transition this year and start to see that be reflected in the overall growth rates of the company as we move into 2022. So thanks again for your attention, and hope you all have a good evening.
Joe Maxa: Good bye.
Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
