Ladies and gentlemen, welcome to the OneSpan Q4 2022 Earnings Conference Call. My name is Glenn, I'll be the moderator for today's call. [Operator Instructions] I'll now hand you over to your host, Joe Maxa, VP Investor Relations. Joe, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan fourth quarter and full year 2022 earnings conference call. My name is Joe Maxa and I’m the VP of Investor Relations. 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 Matt Moynahan, our Chief Executive Officer and Jorge Martell, our Chief Financial Officer. This afternoon after market close, OneSpan issued a press release announcing results for our fourth quarter and full year 2022. 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 2023 and our long-term financial targets are forward-looking statements. These 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. We have 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. In addition, please note that the date of this conference call is February 28, 2023. 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. I will now turn the call over to Matt.

Thank you, Joe. Hello everyone. Thank you for joining us on the call today. I want to start off by acknowledging and congratulating our talented employees for delivering a strong quarter and year, driven by significant improvement in operational rigor and financial discipline. I'm very proud of the team for their dedication and execution during a year that substantially redefined the company and resulted in a return to top line growth and profitable adjusted EBITDA. Our solid 2022 results came during the year where we defined and began executing on a new strategy to become the enterprise class digital agreement security company. We restructured the company to align to our go-forward strategy, executed significant cost savings initiatives, rationalized our product portfolio and navigated through a more challenging and uncertain macroeconomic environment. All following two years of negative top line growth. Our mindset has changed. We are laser focused on sustainable growth and profitability, and our momentum is building across both dimensions. Let's dig a little deeper. OneSpan is known for its enterprise class products. In fact, the strength of our products, along with the market opportunity before us is why joined the company 15 months ago and why many of our employees have joined over this past year. Our employees are excited. We are moving from a product company to a problem solving company for our customers and they see what I see, which is an opportunity to transform OneSpan into a faster growing and much larger company that is a strategic partner to enterprises around the globe. We have great assets and great people as our foundation to build upon, and we are just getting started. The strong effort and commitment from the team over the last several quarters has me convinced we are well-positioned for continued success as…

Thank you, Matt. Good afternoon everybody. I’m pleased that we've reported another solid quarter, largely driven by improved operational discipline and execution in the business. For the full year 2022, we exceeded our revenue and adjusted EBITDA guidance and met the low end of our ARR guidance provided to you last quarter. ARR grew 12% year-over-year to $139 million, excluding the FX impact of approximately $4 million ARR would've been 15% higher year-over-year. ARR specific to subscription contracts grew 22% to $105 million and accounted for approximately 76% of total ARR. Net retention rate or NRR was 107%. We defined NRR as the year-over-year growth in ARR from existing customers. We've previously referred to this metric as dollar-based net expansion or DBNE. There is no change in how we would define or calculate NRR as compared to DBNE. ARR and NRR were impacted by FX, longer sales cycles in certain international regions, timing related to contract renewals and as mentioned last quarter, a few lost contracts, some customers rightsizing volumes to reflect post-pandemic levels and product portfolio sunsetting decisions which we expect will impact us for the next few quarters. Fourth quarter revenue decreased 4% to $56.6 million as compared to the same period last year. This is primarily due to a strong comparable in last year’s Q4 as a result of a significant number of hardware delivery orders moving from Q3 to Q4 2021 to the supply chain disruptions. Q4 2022 revenue was also negatively impacted by FX and delays in certain hardware delivery orders moving to the first half of 2023 also related to supply chain constraints. Excluding the effect of FX of $2.9 million, Q4 revenue would’ve been $59.5 million or 1% higher compared to last year’s Q4. For the full year 2022 revenue grew 2% to…

Thank you, Jorge. Key priorities for OneSpan in 2023 include new enterprise logo acquisition and expanding our relationship with our installed based customers by cross-selling our entire solution portfolio to deliver complete solutions. We have a great enterprise class product set, are bringing new advanced services like OneSpan Notary to market, have an excellent core employee base to build upon, and recently launched a disruptive pricing model to assist us to capture market share. These ingredients combined with the investments we are making and our focus on operational rigor and financial discipline are all part of our multi-year plan to drive sustainable growth and profitability. I’m very proud of the team and the great progress we’ve made on our journey to become the clear leader in digital agreement security, of course, anchored by our global security DNA, our new transaction cloud platform and of course, the most importantly, our people. Jorge and I will now be happy to take your questions.

Thank you. [Operator Instructions] We have our first question comes from Gray Powell from BTIG. Gray, your line is now open.

Okay, great. Thank you for taking the question. Just a couple on my side. Maybe to start off just how do you feel about the visibility you have on your pipeline and the demand environment today versus six months ago? And then within the product lines, where do you feel like you have the most confidence on trend lines? Is it on the digital agreement side or in the security business?

I can take that Jorge just maybe you can provide color there. So on the visibility side, I would say obviously security business has been there for 30 years. So obviously a slower growth industry for us, but deep customer relationships, so just because of the long-term history and the data points that we have, I would say the visibility is greater in security. Digital agreements, the green shoots are coming out of the bamboo. We have shown that when the right enterprise seller speaks to the right enterprise customer, our enterprise class product wins and all the patterns that you would expect to see associated with the increase in deal size et cetera, et cetera, happen. And that is why we’re so focused – laser focused on new logo acquisition, the top half of the pyramid. And so good long-term visibility with security, the short-term visibility that we do have with the behavior of our digital agreements product when we sell it to the right customer is everything you’d expect. And now we just need to go build a broader pipeline and new local acquisition digital agreements to get similar visibility to that we have over our 30 year history in security. But I do believe we’ve made significant progress year-over-year in improving that visibility.

Understood. Okay. That’s really helpful. And then with the new pricing model on the digital agreements cloud, how does your pricing stack up to your main competitor? And I know it’s only been out there for like, I don’t know a week or two. But how’s the reception been so far?

Good, actually. So it’s only been out there for a couple of weeks, but I would say we have presented it at least a dozen times to major enterprise customers. We have received from one large customer verbal that is very promising and it is obviously in one of the larger customers in in North America. And so the pricing model is really designed to solve two ills with the way this market operates. OneSpan, much like our larger competitor priced off transactions or the equivalent of an envelope it’s almost imagine going back to the early days of these signature and walking into a company and asking them to predict how many signatures they have on contracts. It’s only almost impossible to do that yet asking them to sign up for a volume and to pay for it upfront, it’s very, very difficult. So what we’re seeing now post-COVID and more in a normal run rate maturing market, but I would say still early innings is we see the unpredictability and the ability to determine how many signatures are going to happen, and then an unwillingness by the current pricing model when they get driven into – they get driven into contraction at the end of a contract. And so this pricing model is really designed to eliminate both of those, the two greatest sources of dissatisfaction in the marketplace. And so I’m very bullish on this. I think in a macroeconomic environment like this we will be able to enable significant cost savings in what is a maturing market and drive market share shift.

Okay. Very helpful. Thank you very much.

Thank you. With our next question comes from Rudy Kessinger from D.A. Davidson. Rudy, your line is now open.

Hey guys, thanks for taking my questions. I’m curious, I know you’re only given annual guidance, but just how should we think about the ARR growth trend line, I guess, throughout the year? Is 12% growth in Q4 going to mark a bottom or does it potentially still tip down another couple points before re-accelerating throughout next year?

I can take that Matt. Rudy, thanks for asking the question. So as you pointed out, so the way we think about ARR as you pointed, so 12% was growth nominal currency, 15% constant currency. And we guided to 12% to 13% last quarter. We gave a 3% to 4% in terms of FX. So there’s a few factors to think about into 2023, particularly the first half of the year. Early one is, we signaled and let you guys know about some churning contraction that we saw as we expected, and materialized last quarter, we’re going to have that impact for the next few quarters. We also, as you know, we sunset some of the products strategic decisions that we made and so, three products deal flow, risk analytics, and the on-premise of deal agreements. And so those few factors will continue to impact us for the next few quarters really into 2023 until it bleeds out. Now the other thing that we’re also doing is converting in the case of deal flow, for example, we’re converting – trying to convert those customers into our asymmetry solution, and we’ve been successful, but not everybody is going to convert. And so we have some headwinds from that perspective. The other component rooted to consider here, the conversion from perpetual to term recurring revenue. So that is almost complete, at this point in time. So you’ll have that dynamic factored in as well. And then just lastly, when you think about the 12%, as I said, $3.9 million was FX, depending what the macro does in 2023, and nobody has a crystal ball, so that could be a headwind or a tailwind for us. And so that’s my response. Matt, I don’t know if you have any thoughts on that?

The only one we’re hard at work operationalizing new logo acquisition and getting more hands into the – and getting more products into the hands of our sellers, right? And so OneSpan Notary which has general availability next week, every bank in the world has a notary. We’re very excited about the ability to go reach out to our installed base with a new product line. And then we’ve also announced ProvenDB acquisition which is another product, again, not commercialized at this point. There are customers on it but we are going to be doing the integration into our product portfolio, but that would be another product that will be coming in the market in the second half of the year. And that would also allow us to do the up-sell and cross-sell in a different way than we had historically. So I feel good about that. So that remains to be seen in FY2023, how that counterbalances some of the FX. I mean, some of the headwinds from some of the portfolio management decisions we had to make, but we’ll see what those puts and takes are. But I’m very positive about new products coming into the family.

Okay. And then on the sales side, you said you’re still on target to double head count by the end of this year, I guess, last quarter you said you were up 20% since May. Do you have an update on that figure? Just how much you’ve added since May. And then on the reps you’ve added, curious how they’re ramping versus your expectations? And then in the existing tenured reps, I’m curious, I know it’s still early days since you’ve kind of unified the sales teams, but have you seen any increases in productivity? Just what have you seen there?

Yes. So we’re up north of 50% from where we were in May. So we are tracking slightly ahead of plan to where we would want to be entering into the month of February. So I feel good about that. I personally interviewing every single sales executive coming into the company and also meeting with them within the first 30 days. And I can tell you, obviously we’ve had great sellers here over the course of time at OneSpan. But I can tell you that the new type of talent that we’re bringing in, particularly with enterprise application experience is really augmenting our current security sellers in a great complimentary way. So I would say it’s early days, obviously given the number of new heads that have come in, in the past three or four months, but there’s nothing to suggest that we’re not tracking according to plan, and we’ll continue to give updates over the course of the year.

Great. Thanks for taking the questions.

Thank you. We have a next question comes from Nick Mattiacci from Craig-Hallum. Nick, your line is now open.

Hi, this is Nick on for Chad Bennett. Thanks for taking our questions. Matt, maybe if you could expand on your product vision when you talk about Web3 including the recent acquisition of ProvenDB. And if you could comment on the extent this product roadmap is being defined by what you're hearing from your customers.

Sure, sure. Yes, no, it's very interesting. So I believe, and I've been in cyber for 25 years, that the security market is going to fundamentally change, and you've seen it happen with the explosion and identity over the past 10 years, with markets like identity and access management that have been around for 30 years really getting prominence because the security threat has moved to the end user. Most of enterprise security companies focus on protecting enterprise assets, laptops, cloud payloads, clouds, network interfaces what have you, even Norton Antivirus and McAfee, which are consumer products are protecting the laptops not the end user. And so we've seen this explosion, and if you look at what's happening with Microsoft and some of the tech providers from the identity market in general, understanding who you're doing business with is paramount. The first attack surface was employees trying to break into companies. It is now going to move to the end user level. Anytime a new customer is onboarded or a partner is onboarded to a company and every company wants more online and more customers, this trend is not going to stop. They become an attack surface and/or regulatory risk. And so this is really taking all of our capabilities, breaking the bone, and resetting them in a way where we can be the first enterprise security company, and it helps any company that's doing business online have a trust model that begins with engaging in an unknown customer and partner and weaving that security through the identity process, the authentication process, if that engagement model requires virtual interaction, transacting with our e-signature, and then ultimately securing the artifact of that transaction in a blockchain like environment, so that it's immutable is really what I believe is needed when you think about transacting business in the web with the world of deep fakes and increasingly asset classes coming into attack that are represented in the forms of documents and other types of audit and compliance records. And so that's exactly what we're trying to do. We're just taking it from the employee level, which has created a multi-billion identity market and moving it to the customer level and making sure that that attack surface is secure and which is increasingly challenging for security companies, because we sit in the customer flow, are able to do it with the best user experience in the market. And we're very excited by this five pillar service strategy is resonating, and now we've just got to go execute because the market, I believe is moving in the right direction.

Great. And then besides the change, the digital agreement enterprise pricing model, have you made or do you plan to make any other pricing or packaging changes to other products?

We will be coming out with bundles, so we are moving more towards a modularized portfolio where you would purchase a base access, a fee to our transaction cloud platform and then can upsell or cross-sell additional seats and licenses and/or capabilities. So you can think of a ProvenDB type of technology just to visualize it for you, as someone's going through our e-signature workflow, after all the signatures have been captured by the by the signers to have an administrator have the ability to go press, push to blockchain and essentially immutably bind the identities of those signatures, the audit trails, timestamps, other records and artifacts for compliance regulatory purposes and elements of the document itself to an environment that will stand up in a court of law and can't be tampered with. And so that would be a good example of taking ProvenDB, bolting it onto our e-signature package and having it be a true competitive discriminator for us. At the end of the day, for any enterprise that has a transaction of consequence and any large enterprise out there certainly has some of that regard. So that is the way we do plan on bringing new products to market, more of additional services and add-ons that can be bolted together based on the transaction requirements.

Got it. Thanks for taking the questions.

Thank you.

Thank you, Nick. [Operator Instructions] We have a next question comes from Anja Soderstrom from Sidoti. Anja, your line is now open.

Hi, thank you for taking my question. So it’s encouraging to see that you're taking up your longer term growth targets, but what gives the confidence in doing in this kind of environment?

Excuse me, the question was about the ramp. Go ahead, thank you, Jorge

Yes, the question was about raising our long-term targets, Matt. I think from a visibility perspective, as we said, 2023 is going to be an investment year for both sales and marketing, bringing quarter bearing sellers driving the demand generation, market awareness, et cetera. We have a lot more visibility. Obviously, it’s still early in the three year plan, but we feel confident about the quality of the team that's coming on board. From a sales perspective, the demand that we are seeing as well for our products and the market that we are in, particularly the e-signature market, which is growing double-digits as you know. So that's from a top line perspective. So a new logo is a priority and we have we invest in that. As I said, cross-selling is a big opportunity as well for us in terms of e-signature to our huge customer install base in the security portfolio that we have. And then the pricing model also designed to gain market share. So we have those three headwinds, if you would going into the long-term plan. And then from a cost perspective, we have a lot more visibility into our cost structure today that we did six months ago, seven months ago, nine months ago. We have identified a number of projects that we are working on that will help us drive that profitable growth that we've been mentioning. And I feel pretty bullish about that. I feel pretty bullish as well about executing on the $20 million to $25 million of base savings. As I mentioned earlier, we exited 2022 with north of $10 million of the $20 million to $25 million, and I think there's more to go and get there. So we just got to be financial discipline. I think that mentality is here to stay. The executive team, myself, Matt, we all aligned in terms of what that means and it is just about execution. So Matt, you have any thoughts on that?

No, I agree. Thank you.

Okay, thank you. And in terms of acquisition, what can we expect? Are you actively looking at doing more or?

So we are – we will continue to assess the market and any opportunities that arise. And we use the five pillar strategy as our guide, identify, verify, collaborate, the interaction with the e-signature and then the store. ProvenDB gets a checkbox for us. We have historically had some e-vaulting capabilities in the company, and this with its secure vault, I would say gives a firm check mark over that fifth pillar. But we are continually scouring the market for, I would say more tuck-in the type of opportunities as this was where we bring great tech and teams to the market to drop in the hands of our sellers to go drive NRR. I don't believe that there's a game-changing acquisition that needs to be done for us to compliment our portfolio. But being strategic and opportunistic in this market makes absolute sense for me. And I would say the board agrees with that.

Okay. Thank you. That was all for me.

Thank you. [Operator Instructions] We have no further questions on the line. I will now hand the floor back to Matthew for closing remarks.

Thank you everyone for joining today's call. We appreciate the time you spent with us over the course of our first fiscal year together, and we look forward to continue to drive successful execution as our plan. Please stay tuned, further updates, and I look forward to speaking with you and follow one-on-one meetings. Thank you very much for your time today.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.