Good day, ladies and gentlemen, and welcome to the OneSpan Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] It is now my pleasure to turn the conference over to your host Joe Maxa, Director of Investor Relations. Please go ahead.

Thank you, Halie. Hello, everyone and thank you for joining the OneSpan fourth quarter and full year 2018 earnings conference call. My name is Joe Maxa and I am the Director of Investor Relations. This call is being broadcast over the Internet and can be accessed on the Investor Relations section of OneSpan’s website at investors.onespan.com. With me on the call today are Scott Clements, our Chief Executive Officer; and Mark Hoyt, our Chief Financial Officer. This afternoon after market close, OneSpan issued a press release announcing results for our fourth quarter and full year 2018. To access a copy of the press release and other information, please visit our website. Following our prepared comments today, we will open the call for questions on our financial and operational results and outlook for the future. Please note that statements made during this conference call that relate to future plans, events or performance, including the guidance for full year 2019 are forward-looking statements. We have tried to identify these statements by using words such as beliefs, anticipates, plans, expects, projects and similar words, and these statements involve risks and uncertainties and are based on current expectations. 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 in this regard. Please 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. We have provided an explanation and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release that can be found on the Investor Relations section of our website. In addition, please note that the date of this conference call is February 19 and any forward-looking statements and related assumptions are made as of this date. Except as expressly required by the federal security laws, we undertake no obligation to update these statements as a result of new information or future events or for any other reason. At this time, I will turn the call over to Scott.

Thanks very much, Joe. Good afternoon, investors and OneSpan colleagues, around the world. I'm pleased to have the opportunity to speak with you this afternoon. We had a strong fourth quarter and full year revenue and adjusted EBITDA exceeded the high end of our guidance range. Our fourth quarter revenue was near-record levels with software and services growing 27% year-on-year, achieving a record high and hardware also growing at a strong 13% in the quarter. We also reported record gross profit for the fourth quarter and full year, a clear indication of the profit-generating capacity of our business. For the year, we achieved 10% revenue growth, including a doubling of sales from new customer logos. And for the first time ever, our software and services revenue exceeded our hardware revenue. Mark will provide additional details on our fourth quarter and full year results during his financial review. OneSpan is the leading provider of authentication and fraud prevention solutions to the financial services industry. Our deep insights and comprehensive portfolio of security and productivity solutions makes OneSpan the partner of choice in this evolving landscape. The successful execution of our Trusted Identity strategy is enabling us to help our banking customers address the range of urgent challenges they face, from increases in fraud and regulation, the rapid technology change, and the emergence of non-traditional competitors. I'll now touch on each of these business drivers in more detail. Sophisticated hacking attacks and unprecedented data breaches are increasing losses to fraud on a global basis. More than 185 million Social Security numbers, those are well over half of the U.S. population are now in the hands of criminals. The result is that in the U.S. alone identity fraud including account takeover and new account fraud increased to nearly $17 billion in 2017 with…

Thank you, Scott. OneSpan's strong fourth quarter was fueled by 19% revenue growth to $64.8 million. Product and license revenue grew 11% to $47.6 million and services and other revenue grew 47% to $17.2 million. For the full year 2018, revenue increased 10% to $212 million and as Scott mentioned, for the first time, our annual revenue from non-hardware was more than hardware. Subscription revenue grew 68% in the quarter and 50% for the full year 2018. OneSpan Sign subscription revenue grew more than 20% in 2018 and total Dealflo revenue including subscription, maintenance, and professional services met our expectations contributing $4 million for the year. Software license revenue includes mobile security, server, and OneSpan Sign e-signature licenses. It grew 6% in the quarter and 15% for the year. Maintenance, support, and other revenue grew 24% in 2018 and professional services revenue grew 17%. Hardware grew 13% in the quarter and included a broad base of customers. For the year, hardware was flat, ahead of our expectations. We still expect a longer term hardware revenue trend line to be a decline in the mid-single-digit range. Gross margin for the fourth quarter of 2018 was 65% compared to 66% for the fourth quarter of 2017. Gross margin percentage was affected by the product mix and by an increase in expenses to service our cloud customers. Gross margin for the full year 2018 was 69%. Our operating expenses for the fourth quarter 2018 totaled $38 million, an increase of 10% from $35 million reported in Q4 last year. For the year, our OpEx increased 15% to $147 million. The increases in the quarter and the year are largely driven by investments in R&D, and sales and marketing, and include OpEx attributed to the Dealflo business. We finished the year with 732 employees.…

Thanks very much, Mark. As financial institutions and enterprise works on growth and their digital channels, it's more important than ever to protect the customer journey as fraud and other financial crimes become more sophisticated and pervasive. At OneSpan our mission is to ensure customers can establish trust in people's identities and the devices they use and in the transactions they conduct. Our investments in technology, people and business processes are intended to ensure that we continue to be a market leader. Our pipeline of opportunities is growing and we will continue to invest in R&D while managing overall operating expenses. The significant investments we've made over the prior year are contributing to growth and we're confident 2019 will be a year of progress, enhancing customer and shareholder value. One final note before I finish my comments. As you may have seen a shareholder has sent an open letter to our Board of Directors, making a number of recommendations with respect to the configuration of our business. Our board takes the inputs of shareholders very seriously and you should know that the board is evaluating the contents of that letter and as it always does other approaches for creating value for shareholders. So as we move into the Q&A section, I want to remind participants that the purpose of today's call is to discuss our operational and financial results. So we ask that you please keep your questions focused on that topic. And we thank you for your cooperation in this regard. Operator, we are ready to take questions.

Thank you. [Operator Instructions] Our first question comes from Zack Turcotte of Dougherty. Your line is now open.

Hey, thanks, guys. Zack on for Catharine Trebnick. So you talked about some of your customers having mixed environments both your software solutions as well as hardware. What does the time line look like as far as when some of those customers may be willing to move fully to software particularly with increased regulation you talked about as well as their historical confidence in the higher level security?

Hi, Zack. I’ll take a crack at that. I think that for the foreseeable future, I think most of our large customers will continue to operate in a mixed environment of hardware and mobile security software, our Mobile Security Suite. And I think the reason for that is we need to remember that many of these customers, even the smaller ones have hundreds of thousands of users, and the larger ones have many millions of users. And those users are everything from 18-year young 16-year, 17-year, 18-year olds opening their first bank account to older people like my parents who have been banking for a long time. And so we see that those different cohorts in the customer base really do want -- they've different requirements for their authentication solution. Some people really value the simplicity of using a hardware authenticator. Some really value the fact that they can do everything, they need to do on their mobile device, and don't need to have a hardware authentication. And we see the propensity to go one way or another varies a lot by region of the world. And in Asia, for example, hardware authentication remains quite popular even as we sell a lot of Mobile Security Suite there. So I think there -- our view is and there is no -- I don't think there's a lot of doubt about this that over time there is a substitution taking place of mobile security for hardware authentication. That's why we continue to suggest that we will see a gradual decline in unit sales of hardware authenticators over the next -- over the coming years with continued growth in Mobile Security Suite as the mix of banking customer shifts younger or towards newer generations, they will have a tendency to use their mobile devices rather than hard authentication, but this is going to take a long time. We do see that in the commercial banking space, our hardware authenticators are still the dominant approach because of the security that they offer and in fact they're not connected to the internet they're quite secure. So, that's I think what's happening. And I would make one other point about our hardware business. It plays a critical role and opening up opportunities for us, because of the penetration that we have of this hardware business on a global basis, it really is a key thing that customers want. And it opens the door in many cases and gives us the opportunity to talk about mobile security and adaptive authentication and Risk Analytics, the things that are being driven both by fraud and by regulation around the world.

Got it. Okay. And then on talking about e-signature, the subscription growth, are you seeing a lot of traction from moving your current on-premise e-signature customers to your cloud-based offering? Or is it primarily from new cloud deals?

Yes. It's really new customers predominantly, Zack, I think. The reason that we have had an on-premise offering in that business even when other competitors have not is because particularly banks to a degree insurance companies have been slow, I think to move to the cloud because of the complexity of their infrastructure, and also their traditional view that they could be more secure if their software solutions were operating behind the firewall of their company. And so that is beginning to change. That is why when we talk about our Trusted Identity strategy and adaptive authentication that, it's a cloud-first strategy is because we believe when we develop that strategy that banks were going to be accelerating a shift toward the cloud. We're in the early days of that. I think this transition will happen gradually over the coming years. So I don't expect a big shift in a short period of time with our existing on-prem customers toward cloud. I think that will take place over somewhere in the 3 to 5 year timeframe. And so I think it's a very manageable transition for us, even as we expand globally with this business and see these opportunities around cloud -- new cloud opportunities for growth. I don't think we're going to see an on-mass move for example from on-prem to cloud for those kinds of institutions.

Okay. One last one on the geographic split, substantial amount of revenue from EMEA in the quarter, I know you partially attributed to Dealflo customers. So do you expect similar level of revenue for EMEA in the future next 12, 24 months? And could you see some additional international cross-selling opportunities for e-signature through those customers?

Well, I think that we will see some. We will still see some benefit in EMEA from a Dealflo in 2019 because we don't have a fully year of it in the numbers yet. So we still got about five months of sort of onetime pickup in EMEA in 2019 for Dealflo. So I think that's the first thing. Mobile Security Suite continues to be -- have a lot of opportunity, that opportunity is global. But given that the largest proportion of our install base is in Europe, we see a lot of that transition or uptake of Mobile Security Suite happening in Europe, although it's also strong in North America and Asia-Pacific. So I think those things will continue to be a factor in EMEA. I think with respect to e-signature, we have a number of things that are going on with the intent of strengthening opportunities for our e-signature business in the rest of the world. I did talk about some of those in the comments that I gave earlier. We have focused I think on our e-signature business more than most other competitors in the financial services and the regulated industries. The reality is that in Europe, the banks have been slow to take up e-signature because initially there was uncertainty about the requirements and the implications of the eIDAS regulation. We have seen that clarify. And I think one of the issues that they now face is the scalability and cost of delivering qualified electronic signature solutions. This is -- we can deliver QES Solution today. But it's -- I think we have opportunities to really make it more scalable, more cost-effective easier for the consumer to deal with. These are all challenges around QES. And QES, Qualified Electronic Signature will be a minority of the E-Signature business in Europe and Asia. But it is something that is an element of the solution story that needs to be used for certain types of transactions. Even if it's not the most of the transactions, it needs to be something that's available, scalable deliverable to consumers. So as I mentioned in the call, we are working very hard on a QES solution that we intend to launch in 2019 that will help with that. At the same time, we do see opportunity for cross-selling with Dealflo and our e-signature product line. And then finally, we continue to evolve our go-to-market model and our sales model internationally to support the e-signature business. In fact, in 2018, we saw roughly 10% of our revenue come through our -- really our security channel and out of the global -- the rest of the world environment outside of North America. So we've seen some beginnings there. We expect to see a lot more progress and traction in that in 2019. Q – Zack Turcotte: Great, thanks Scott. A – Scott Clements: Thanks Zack.

Thank you. Our next question comes from Joel Fishbein of BTIG. Your line is now open. Q – Joel Fishbein: Good afternoon and congrats on a great quarter and end of the fiscal 2018. Scott, I have two couple for you. The initial guide for 2019 above where we where implies roughly 10% growth. Love to just understand your confidence in the full year guide and what kind of visibility that you have into that number? A – Scott Clements: Sure. I think we do take a lot of effort to model the revenue outlook for the coming year. We take a lot of inputs from everything serve a bottoms-up view from our sales organization as well as input from our marketing and product management people about new solutions. I feel -- I do feel confident about the guidance range that we have given. It does not -- I don't think require us to deliver huge amounts of new product revenue. It does require that we deliver some. If we -- I think if we do better then -- if we do I guess quite well on these new products in 2019, we could see -- we could do better. We could see better performance out of the business. We also have taken I think a reasonably conservative view of the hardware business in 2019 as we did in 2018. And in 2018, we did quite a bit better than we expected. So yes I think we tried to look at all the parts and the pieces and be realistic about those individual components of the revenue growth and put together something that is -- stretches our organization a little bit, but is achievable for our -- in terms of meeting our commitments to investors and to our board. Q – Joel Fishbein: Great. Just one quick follow-up. Were there any very large deals in 4Q particularly on the hardware side? A – Scott Clements: Not from a revenue point of view. We did have a large hardware booking in the fourth quarter, but the revenue contribution from that was limited in Q4. So I think it was a pretty broad demand for our hardware products around the world Europe and Asia in particular. As I noted in the comments, we have positioned ourselves I think to take advantage of the -- some of the regulatory things that are happening around PSD2. And it's been very interesting to watch that as PSD2 has become now and we see parts of Asia and – well a number of different parts of Asia and the Pacific, who are basically adopting a similar viewpoint around strong authentication and Risk Analytics although with a longer time line around when they plan to adapt that. So I think that's the drivers that, we're seeing for the hardware business. Q – Joel Fishbein: Great. Thank you so much.

Thanks. Good to talk to you Joel.

Thank you. Our next question comes from Matthew Galinko of National Securities. Your line is now open.

Hey. Good afternoon. Thanks for taking my couple of questions. I guess, first one is just – heard your comments on hardware, but just curious what visibility you have into the pipeline and sort of closure of the pipeline just given the outperformance this year and kind of the general trends that you discussed over the last few quarters?

A - Yeah. I think it – I would say generally you have to think about the hardware business in some sort of multiple parts right. So there is a part which is what I like to call sort of flow business right. I mean, these are just orders that kind of come in because an existing customer needs more tokens, because they have new customers or they are replacing old tokens or lost or broken ones. So there's a fair amount of underlying business that occurs related to that. And when you look at that – when you look at the customer base for hardware that customer base is pretty well known, a large proportion of their revenue as I noted are reorders and additional orders in the hardware business. Now that doesn't mean, we necessarily have specific visibility more than say 90 days or 120 days or something like that. But it does give us some confidence in baseline level of the business activity. On top of that, are new projects where a customer is deploying maybe there – they've been a customer before and they're upgrading to a new token technology for example our Cronto technology, which has been an important driver for us over the last few years, and will be an important driver for us in 2019. And so we do have some good visibility to some of that project work. A meaningful part of the hardware revenue in 2019 is related to orders we've already received for larger orders from large customers. And so we layer that on top of the – on top of that flow business that I talked about. So that's kind of the pieces that we look at. And I would say, our visibility to 2019 isn't materially different than it was for 2018.

Okay. Thanks. And then you talked about investments in global cloud infrastructure. Can you be a little more specific about what those investments might entail? And are they limited to 2019? Do you effect made earlier in the year and sort of will see them flow through the year?

Yes. So we do have cloud infrastructure in many places around the world today to support our e-signature business. We have cloud platforms in Canada, U.S., Europe, the Pacific. So we do have a lot of it already, but that infrastructure is really supporting e-signature today. As we begin to deploy these new integrated TID solutions, adaptive authentication and risk analytics and then later in the year some of the new agreement automation offerings which will tie together e-signature and our identity verification capabilities. Those are all going to require, in some cases, new and in some cases expanded infrastructure for these cloud offerings. So in order for us to -- only to say, first of all, we have global interest in these new solutions, adaptive authentication and risk analytics, for example. In every region, we have customers that we're engaged with and talking about those products, those solutions. Obviously, before we can deploy those products or let those customers do proof-of-concepts and things like that, we need to put the cloud infrastructure in place. So that's a part of what's required. I would say, that's coming a little bit faster than maybe we originally thought. And the reason for that is, because of the amount of customer interest that we're seeing. You have to keep in mind that that infrastructure has to be in place and then there's a buying process, a buying cycle that takes place and then there's a deployment period that takes place and there is a ramp-up of volume on that platform. So we are using public cloud infrastructure for most of that. So there's an upfront investment that we need to make to enable our ability to sell these solutions. And that does run ahead of revenue initially. And then, after that, we do this in a way that we can then scale those platforms with demand. But there's a getting in price, it's sort of the cost to get started and that's what we're talking about. That's happening -- has already been happening in 2018. Mark, I think, referred to it in his comments. We are already seeing a significant uptick in cloud infrastructure cost in 2018 related to the intelligent -- sorry, Intelligent Adaptive Authentication product and the Risk Analytics that we just launched. So that will continue to build, I would say, throughout 2019, probably be a little more heavily weighted in the early part of the year. As you know, we have season -- look, not a seasonality but a sort of a pattern to our business over the kind of the revenues in the first half and the second half and revenues tend to be higher in the second half. So there's a little bit of -- there's certainly some pressure on margin in the early part of the year, just based on that infrastructure investment that starts to get a little better as we look at the second half.

Great. Thank you.

Thanks, Matt.

Thank you. Our next question comes from Anja Soderstrom of Sidoti & Company. Your line is now open.

Thank you and congratulations on a good quarter. I have some follow-up questions on the e-signature. So I just want a clarification. So people still going on-premise first or are people most going into the cloud directly now, or clients, I would say?

Sure. Hi, Anja, nice to hear from you. The change that's really happening Anja in through 2018 and in through the early part of 2019 is that most of our new opportunities or our new customers are -- do want to use the cloud product and the cloud platform. I think that this is true, certainly true for those customers -- or non-banking customers I would say in e-signature and it's becoming increasingly true for our banking customers, although again that's going to be -- that's going to take a little bit of time, but it is -- we are seeing that happen. It is the case that financial institutions for example have very rigorous internal processes and regulatory issues related to putting systems into the cloud. So they really have to do their homework. They are doing that home work and the reason they are doing it, is because they are under significant financial pressure as I mentioned in my comments. And so they -- and then they also need to be more responsive to their new customers and being agile at delivering new services. So a cloud deployment of these types of services can be quite useful or quite helpful, both in reducing costs and increasing their speed-to-market. So that's why we see it happening. It's happening again with banks slowly. I don't think we see it in terms of a big shift, but we will see it as a transition over time and indeed most of our new opportunities are coming as recurring revenue cloud-based implementation.

Okay. Thank you. That was helpful. And then also -- I wanted also to have some clarity on the e-signature as it relates to the new client on-boarding that you are launching in the second half. That's going to be an essential part for that right?

Certainly. I think it's -- we've been looking at this opportunity for quite some time with -- we know that it is a realtime opportunity with banks and other types of customers around the world, this ability to digitally open new accounts and onboard customers, verify their identity, meet the Know Your Customer and any money-laundering requirements. It's complicated to do it and the success rate for many institutions in doing it has not been very high. So it is a big opportunity, because nobody -- let me not say nobody, many people, particularly young people are not interested in going into a bank branch to open a new account. They expect to be able to do it online or on their phone. And today it's a mixed bag and some places you can do it and some you can't. And so we know that this is a big opportunity and we have been looking at it very hard for well over a year. That was one of the fundamental drivers for the acquisition of Dealflo to increase our capability and accelerate our speed-to-market to capture that opportunity and do it in a way that is really focused on the security issues around new account opening. The trick is not so much of workflow, a web-based workflow that allows you to show screens to people and capture information. It's really about how you can use that data and other information to ensure that someone is who they say they are and that they are a legitimate client for that bank, that institution. So, that's our approach, that's what we're focused on and we think it's a pretty big deal over the next few years.

Okay. Thank you. And then lastly sort of M&A you acquired Dealflo and you're still sort of working on that. Is there any other -- how do you think about M&A, are you looking for more like technology or--?

Yes, so I think on Dealflo, first of all, so far so good. We have -- really I would say fully integrated that business into OneSpan. We are doing, as I noted, we're doing a lot of work right now in integrating the Dealflo technology not only into our e-signature, but also into our Trusted Identity Platform. So, there's some good progress that's going on there. We continue to, I would say, be methodical about our M&A opportunity. We are always looking at lots of companies. We filter the companies that we look at based on our strategy first and foremost and second of all based on actionability and potential cost and risk and all of those. And we really consider all of those kinds of things when we -- as we do this. It's not a -- it's not kind of a one-off where somebody gets a big idea to do a deal. It's a process that we carry out on a continual basis to identify gaps in our capability that we can best fill through acquisition. So, we continue to do that in real-time. And I would say -- I'm not trying to tell you there is anything imminent necessarily, but we are -- we continue to be very active and thoughtful about how to best use our balance sheet how to best get a good return on the capital that we have available for our business. We're very focused on making sure that we use our cash and our capital for high return opportunities.

Okay. Thank you. Those were helpful.

Great. Thanks Anja.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Reed Motulsky of Imperial Capital. Your line is now open.

Hi, speaking on behalf of Saliq Khan. Could you please give us some more color on OneSpan's transformation towards more of a cloud-based and services business model?

Sure. Hi Reed and our thoughts to Saliq. I don't know if he's on a plane or something right now, but anyway we're glad to have you. Reed let me just try and think about kind of where to start with that. We today -- as we narrated in our comments earlier, for the first time in 2018, a minority of our revenue came from our hardware products. The majority came from our non-hardware products which includes software, different types of services, and subscription-based revenues. So the subscription-based revenue is -- I would say is a smaller part of that right now, but it's a part that is growing pretty quickly as Mark shared with you in his comments. We have built our Trusted Identity strategy and our Trusted Identity Platform to be a cloud first strategy that doesn't mean necessarily cloud-only over time but as a cloud first strategy because we believe that's where the highest growth is and that's where the biggest demand is going to be. And I think most of the analyst reports that you read about the cyber security industry when you look at the cloud-based deployment model, part of each different category of cyber security, the cloud model is always growing faster. And as you know it delivers -- can deliver a more stable recurring revenue model with strong levels of profitability and all that. So that -- those are the reasons, right that we decided to use a cloud-first model with Trusted Identity. We learned a lot, I think about cloud from our acquisition of e-SignLive a few years ago. And with the addition of Dealflo, we're increasing the proportion of our revenue that comes from cloud and recurring revenue. So it is a learning process for our organization. I think to really become a cloud first company, we're making I think a lot of progress on that. And that as we see from the release of the products that I talked about intelligent adaptive authentication and risk analytics, and so it's hard work but we're making good progress and I'm -- I think it's going to be an increasing contributor to our overall revenue stream profitability as we get through 2019 and into 2020 and forward. So don't know if I exactly answered your question but I did.

Thank you. And you talked earlier about hardware reorders and some of that category that's more predictable. Are those sales largely put into the maintenance support and other category when you breakout revenue by major products and services?

Mark do you want to take that one?

Sure. Reed, we include the hardware products in licenses subset non-service and maintenance. There is maintenance and service that we get in our business of course and that's included in the next line. But the bulk of that hardware revenue comes through the product and license subset.

And the bulk of the maintenance is actually software maintenance.

Correct.

Right.

Thank you very much.

Thanks, Reed.

Thank you. Ladies and gentlemen, at this time this does conclude today's question-and-answer session. I would like to turn the call back to Scott Clements, CEO for any closing remarks.

Thank you very much operator. Thanks to all of you for listening in and asking I think some very, very good questions that I'm sure were beneficial to others who were on the call beyond just yourself. So we're very pleased with the performance that we saw in 2018. Two years ago we defined a three-year plan to transform our company. And through two years of that three-year plan, I believe we have delivered on what we said we are going to do. And we're excited for 2019 and looking forward to another year of progress and contribution that really creates a shareholder value for our shareholders and those who are participating in the story of this company through holding our shares. Thanks everybody. Have a good rest of your day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.