OneSpan Inc. (OSPN) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the One Span Second Quarter 2026 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 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 first speaker today, Joe Maxa, VP of Investor Relations. Please go ahead.

Thank you, Operator. Hello, everyone. Thank you for joining the OneSpan Second Quarter 2026 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 Victor Lomongeli, our Chief Executive Officer, and Jorge Martel, our Chief Financial Officer. Afternoon, after market close, OneSpan issued a press release announcing results for our second quarter of 2026. 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 2026 and other long-term financial targets are forward-looking statements. 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 a 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. You 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 and in the investor presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is August 4th, 2026. 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.

And I'll turn the call over to Victor. Thank you, Joe. Hello, everyone. Thank you for joining us today. We had a strong second quarter, including subscription revenue growth of 11% and solid profitability with an adjusted EBITDA margin of 28%. Before reviewing our results in more detail, I'd like to spend a few minutes discussing our recently launched DigiPAS 1 authentication platform, which represents an important milestone in OneSpan's evolution. DigiPASS One unifies the innovations from our Knock Knock Labs and Build 38 acquisitions with OneSpan's existing capabilities. delivering a single integrated platform solution. DigiPASS One includes four components, DigiPASS One Authenticate, DigiPASS One Verify, DigiPASS One Protect, and DigiPASS One Insights. First and foremost, DigiPath 1 Authenticate builds on the foundation of the world's broadest suite of authentication functionality, including pass keys, FIDO2 security keys, hardware tokens, mobile authenticators, and software authenticators, to deliver secure phishing-resistant login and transaction signing. Banks and other high-value, high-trust customers gain the flexibility to support different users, devices, and authentication preferences through a unified platform. DigiPASS One Verify expands the platform with our new capabilities for verifiable credentials and digital wallets. Verifiable credentials are designed to improve onboarding, authentication, and trust by enabling cryptographically secure and tamper-proof identity verification. SpeedGPAS One Protect strengthens the offering with our mobile application shielding technology. Delivered via both SDKs and post-compilation app wrapping, it protects mobile apps against tampering, abuse, and runtime threats, promoting reliability and trustworthiness for users. Last, but not least, DigiPASS One Insights ties it all together with telemetry and analytical insights across authentication flows and application protection signals so that customers can better react to imminent threats or challenging operating environments. Looking ahead, over the next few years, we expect consumers to begin using agents to conduct banking and other high-value transactions, and we further expect that the development of this new channel for customer interaction will augment, not replace, the existing channels of in-premise. person, online and mobile. In other words, in the future, banks will continue to engage with their customers across branches, websites and mobile apps while adding a new category of agent-driven banking interactions. DigiPath One provides the foundation to help banks and other high-value, high-trust businesses authenticate customers, verify intent, and protect transactions across both existing and emerging channels. We see the shift to agentic-driven interactions in the future as an opportunity to extend our offering and further strengthen our value to our customers. Stepping back, the launch of DigiPath 1 is a key milestone in a broader platform strategy that strengthens our ability to innovate, deepen customer relationships, address new market opportunities, and support long-term growth. Turning to our digital agreements business, where we focus on delivering secure, seamless agreement workflows purpose-built for financial services and other highly regulated industries. We believe our combination of white label these signatures, identity verification and workflow automation provides a meaningful differentiator in the market. In addition, we are investing in AI-enabled capabilities designed to help customers improve efficiency, gain deeper insights from agreement workflows, deliver a better end-user experience, seamlessly integrate with agentic workflows, and simplify deployment within existing environments. Turning to our results, as mentioned, we had a solid second quarter, including generating $17 million of adjusted EBITDA, or 28% of revenue. ended the second quarter with annual recurring revenue of $190 million, up 7% year over year. Total Q2 revenue grew 1% to $60.5 million, and second quarter subscription revenue grew 11% to $47 million and accounted for 77% of total revenue, up from 70% in last year's Q2. Both business units continued to be solidly profitable at the division level. supporting our board's commitment to a balanced capital allocation strategy that considers shareholder returns, organic investment, and targeted M&A. In the second quarter, we returned almost $8 million to shareholders through dividends and share repurchases. And on an aggregate basis over the last four quarters, the total return to shareholders exceeds $40 million, or over a dollar per share. The Board has also approved a quarterly dividend of 13 cents per share to be paid in the current quarter and will continue to evaluate additional share repurchase opportunities. In summary, we continue to make progress in building a stronger foundation for future growth. We have expanded our capabilities through targeted acquisitions and internal innovation. both of which are evidenced in the launch of DigiPath 1. We remain focused on serving our customers now and investing for the future in order to be able to continue delivering value to them for years to come.

With that, I'll turn the call over to Jorge. Thanks, Victor, and good afternoon, everyone. I'm very pleased to report another strong quarter and continue progress in building a solid foundation for growth. particularly excited about our recent launch of DigiPath 1, our platform strategy built to help customers modernize authentication and address other security needs without disrupting existing systems, user experience, or business operations. Turning to our results, annual return on revenue, or ARR, increased 6.7% year-over-year to $189.7 million, driven by expansion of existing customer contracts, new logos, and the acquisition of Bill 38. Our net retention rate, or NRR, was 103%. Due to revenue was 60.5 million, an increase of 1% compared to last year's second quarter, driven by 11% growth in subscription revenue, partially upset by a decline in hardware revenue due to the fact that significant hardware revenue had to pull forward into Q1, which we discussed with you last quarter, as well as a decline in perpetual maintenance revenue as customers continue to move to term licenses. For the quarter, as Victor mentioned, subscription revenue increased to 77% of total revenue, up from 70% in the prior year quarter. While hardware and perpetual maintenance revenues accounted for a combined 23% of total revenue as compared to 30% in last year's Q2. Gross margin was 73.6% compared to 73.5% in Q2 of last year. GAAP operating income was $8.7 million compared to $10.5 million in Q2 2025. The year-over-year change primarily reflects increased operating costs related to our recent acquisitions, including headcount, as well as certain cost-related go-to-market leadership and other organic investments. Gap net income per share was 18 cents compared to 21 cents in the second quarter of last year. Non-GAAP net income per share was 30 cents compared to 34 cents in last year's Q2. Adjusted EBITDA and adjusted EBITDA margin were $16.9 million and 27.9% respectively. This is a very important factor compared to 17.6 million and 29.5% in the same period last year. Next, I will discuss the financial results for our two business divisions starting with cybersecurity. Cybersecurity ARR grew 7.4% year-over-year to $123 million, inclusive of the $3 million headwind we discussed last quarter and the acquisition of Bill 38. Revenue decreased 7.5% to $40.9 million. Subscription revenue grew 2.5% to $27.2 million, driven by customer expansion contracts, new logos, as well as revenue from our acquisitions of NUCNUC and Bill 38, partially offset by lower year-over-year multi-year term license revenue, and lower past-due renewal catch-up revenue this quarter compared to last year's second quarter as we continue to improve our on-time renewal performance. As noted, hardware and perpetual maintenance revenue declined as suspected. Growth margin for the cybersecurity division was 73% compared to 74% in the prior year quarter, primarily reflecting incremental third-party license costs and incremental amortization of capitalized software costs from the building. the Bill 38 acquisition. Operating income was $13.8 million or 34% of revenue compared to $19.8 million or 45% of revenue in last year's Q2. The year-over-year change was driven by the differences in revenue and gross margin just discussed, an increase in operating expenses from acquired companies, and increased organic investments. Now turn into digital agreements. ARR grew 5.3% year-over-year to $66.7 million. Revenue grew 25.2% to $19.5 million, driven by strong overage revenue, expansion of renewal contracts, and new customer additions. are encouraged by the strong overage revenue because it is a positive indicator of transaction volume growth which often results in expansion contracts with existing customers due to higher utilization rates. We expect additional overages in the third quarter of 2026, but not to the same extent as in Q2. As a reminder, overages are not including NARR or NRR. Gross margin improved to 74.7%, up from 71.4% in the prior year period, primarily reflecting higher revenue, including overage revenue. Operating income was $7 million or 35.7% of revenue compared to $2.9 million or 18.4% of revenue in the same period last year. The strong improvement in operating income was primarily driven by revenue growth, higher gross margin, and a modest decline in operating expenses, primarily reflecting higher internal software capitalization costs. Turning to our balance sheet, we ended the second quarter with $43.3 million in cash and cash equivalents and $5 million outstanding under a credit facility compared to $49.8 million in cash and cash equivalents and no outstanding debt at the end of the first quarter. During the quarter, our primary cash outflows, including $4.8 million for our quarterly dividend, $2.9 million to repurchase approximately 230,000 shares of common stock, and $3 million for capitalized software development costs. Operating cash flow was a modest outflow of $0.1 million, primarily reflecting normal networking capital fluctuations. By geographic region, revenue in the second quarter of 2026 was 46% from the Americas, 35% from EMEA, and 19% from Asia Pacific, compared to 40%, 39%, and 21% from the United from the same regions in the second quarter of 2025, respectively. The year-over-year changes in revenue by region primarily reflect growth in digital agreements and cybersecurity software in the Americas, which is consistent with our investment strategy and plan. Lower cybersecurity, hardware, and software revenue in EMEA partially offset by growth in digital agreements. agreements and lower hardware revenue in Asia Pacific, partially offset by an increase in cybersecurity software. Now turn into some modeling notes and our outlook. We are pleased with our second quarter results and the progress we've made in positioning the company for long-term growth. For the full year 2026, we are increasing our revenue guidance primarily to reflect higher volumes and consumption in our e-signature business that is suspected to result in incremental contract overages, along with an increase in expected hardware revenue in the second half of the year, primarily Q4, due to increased hardware bookings in the first half of the year as compared to our plan. Our current hardware revenue forecast calls for about one-third of the second half hardware revenue to be recognized in Q3, which is consistent with the last couple of years showing Q3 as the seasonally lowest of the four quarters, followed by a much stronger fourth quarter. More specifically, for the full year 2026, we expect total revenue to be in the range of $248 million to $252 million as compared to our previous guidance range of $244 million to $249 million. We expect software and services revenue to be in the range of $202 million to $204 million as compared to our previous guidance range of $201 to $204 million. We expect hardware revenue to be in the range of $46 to $48 million as compared to our previous guidance range of $43 to $45 million. We expect ARR to be in the range of $194 million to $198 million. And we expect adjusted EBITDA to be in the range of $67 to $71 million as compared to our previous guidance range of $64 million to $68 million. That concludes my remarks. I will now turn the call back to Victor.

Thanks Jorge. To recap, we are pleased with our second quarter results and the progress we continue to make across the business. We are serving our customers with mission-critical solutions, investing in areas where we see meaningful growth opportunities, and maintaining the financial discipline that enables us to return capital to shareholders. We believe Wanspan is becoming a stronger and more focused company, and we remain committed to creating long-term value for our customers and shareholders.

Jorge and I will now be happy to take your questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Gray Powell from US Bank. Please go ahead.

Great, thanks for taking the question. Maybe a couple on my side. and more of a high-level question, I guess. Just thinking out like over the next year or two, as hardware becomes a smaller component of the business, how should we think about the potential for growth to improve on a sustainable basis? And then just more specifically, what are like the two or three things that need to happen for OneSpan to sustainably get revenue growth back into the, you know, call it mid to high single digits on an organic basis. Okay.

Yes, thanks, Gray. So I think you're familiar with this. We've certainly talked about it in the past, and you can see it in the numbers. Over time, our software business has been growing, and we had an offset, a negative offset from the hardware business. for quite some time. And we felt like if we could get the hardware business stable, maybe have some revenue coming from the newer security keys, as well as stabilization in the overall hardware business, that that growth would show up, overall growth would show up as a result of the software growth. So we've seen, you see in the subscription revenue numbers, you see it in the ARR numbers, we've been having solid software growth and we expect that to continue. Obviously we're not giving guidance for next year, but we have some exciting things happening in terms of our product portfolio, the new DigiPASS One, platform and we have emerging technologies with digit pass one verify as well So as well as new hires that we've announced On the go-to-market side new head of marketing new channel leader, etc so we are taking all those steps to build for additional growth and get those targets that.

that you're talking about. Okay, that's helpful. And then just, I guess a separate question. So look, I know DigiPASS One has only been out a couple of weeks. Anything you can say on early feedback or customer interest? And then just trying to think through like, what kind of ASP up left you think that could create for the platform and the potential for net retention.

rates to improve off of current levels. Yes, so if you think about the platform, we had a very strong authentication offering, which we strengthened considerably about a year ago, a little over a year ago, when we bought Knock Knock and added the... the passkey capability. So we have that strong authentication platform, and we have been providing app shielding, what we're calling DIGPASS 1 for 10, for some time, but now we own the technology with the acquisition of Bill 38. So those are cross opportunities go going to all the banks that we have and adding app shielding, and a potential new capability, not a potential, a new capability that we're developing to past one verify so those are cross opportunities if you think about how to increase revenue growth rates you're either selling existing things to new customers or new things to existing customers or or existing things to new customers as well. But the easiest path there is going to be a cross-sell, is to sell new things to existing customers. And that's what we're trying to do to drive up the attach rate with DigiPath One Protect to start down the path of an attach rate with DigiPath One Verify since that's new. And both of those give us an opportunity because we do have this great customer base built out over many years. And that's where we see the most straightforward way to increase the software growth rates.

Understood. Okay, thank you. Thank you. Our next question comes from Catherine Trebnick from Rosenblatt. Please go ahead.

Well, thanks for taking my question. You frame the age in driven interactions as incremental in the channel. I know you just released this product. So any specific use cases that your marketing team has identified that you're going after, like high-value payments, dispute resolution? And then what are you actually seeing in the budget for 26, or should we really think of this more like a 27 item? And then, Rarity, Brad? my question on the ASP. So thanks, Catherine. And then how do you change your goals?.

So, go ahead. To clarify, are you asking about DigiPest 1 Verify? Yes. Yes, so that's a new capability. We're doing POCs with customers in the second half of the year. We at least an early release version of that in June. And we expect to be learning a lot more about budgets as we go through the process. I think you know this, but in general, oh, go ahead. Sorry. Sure.

I don't know, I'm just trying to figure out what use cases you'd be targeting with that and how different that is from what you're currently selling.

So if you think about what it's doing, there is a... European digital identity regulations, the countries have to have wallet specifications done by the end of the year. Obviously, that's going to be many, many different wallets. You have Google and Apple as well. And then banks are going to have to accept them by the end of 27. So we see this as just such a great compliment to our authentication offering, because people are going to, in a cryptographically tamper-proof way, prove their identity, which is obviously super important in onboarding. and in general and authentication. So we see this as an add on that a lot of banks, well first of all in Europe are going to be, they're going to be regulatory drivers behind it, but also in other markets it's going to be a super helpful way to make for more secure interactions with your customers. Now, in terms of budgets for it, there our regulatory drivers in 27. Most of our, probably over half of our bookings come between September and Labor Day and the end of the year. So we're heading into our busy season in terms of sales. And I would say we don't have a clear read on 2027 budgets from our customers yet because we're focused, as you might imagine, I can't imagine very much on closing 2026 business. But the POCs and the interest we're seeing from customers are a good sign. Okay, very good. Thank you. Thank you.

Our next question comes from Eric Suppager from B. Riley Securities. Please go ahead.

Yes, thanks for taking the question and congrats on a good quarter and getting DigiPASS 1 out. Just following up on Catherine's question, what adoption, what are the use cases for banks banks that are using AI agents for banking. And then I'm just curious on the digital agreement side, was the overage associated with a particular account or is this more of a broader trend? It seemed like it was a particularly strong quarter and you're talking about some strength in Q3.

So what's driving that? Yes, so I'll let Jorge answer the overage question, but let me talk about AI agents. So what we believe will occur, so if you think about mobile banking apps, the most common activities that are undertaken by customers are things that are pretty straightforward, checking their balance, sending money to a friend or payment for something, monitoring transactions that have hit or not hit their account, and We think that agents will do, not all of it, right? I think this is going to be a new channel for banks, not a everything will happen with agents. So if you fast forward, you know, four or five years, then banks are interacting with customers in their physical branches. Some people still go into those, a few people at least. through websites, on a laptop or desktop, through a mobile banking app, which is very, very common today, but also through agentic workflows. Now, the ability for a bank to accept those agentic workbook for a consumer to have an agent that they use to hit multiple different accounts and for the bank to be able to authenticate that this agent is authorized to act on behalf of this consumer and to verify intent, you know, there's work to be done on those things. channel is absolutely coming. One of the things that we offer to banks and other high-trust, high-value customers is this breadth of offering. So we're not offering just pass keys or just protection for your mobile banking app, but across the ways that you interact with your customers. need multiple vendors for this consumer customer interaction you can use one span and cover well we don't cover branches I guess but you can cover all of the digital channels.

Yes, I can jump in and address the over the question, Eric. Thanks for that question. So look, I think we're pretty happy in terms of how DA performed for the quarter, 25% growth. Even if you exclude the overages, which were about year-round growth, we're pretty happy or a year higher by two and change a million, you still get to a growth, Eric, of double digit, 11.3%, which is pretty encouraging. And again, when you think about, take a step back and think about how are these overages generated, they're generated because our clients are over utilizing our development transactions they committed, which is a good thing. thing. Arguably, you can think about overages as a leading indicator for ARR if you would, because often happens that overages then translate into higher expansion contracts now part of ARR. At this point, if it's an overage, it's not part of ARR, so it's not part of NRR and So you can think about overages leading indicator for ARR and then leading indicator for revenue. So we feel good about that. Obviously happy with the performance. And yes, it did come from, I would say, a couple of customers primarily. Eric, we normally have a run rate of overages for the full year, year now, probably about a million to a million five. I think this year we're obviously going to exceed that that amount for the second half of the year is going to be much less than we that we recognize so far in the first half. But nonetheless, you know, we feel feel good about over this. We like over this not only because his revenue, but is is leading into for activity in our platform. Okay, and then we're quick on.