Good day and thank you for standing by. Welcome to the OneSpan Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in listen-only mode. After the presentation there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to Joe Maxa, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone. And thank you for joining the OneSpan fourth quarter and full year 2023 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 Limongelli, our Interim 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 2023. 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 2024 and other 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 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 March 6 2024. 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 Victor.

Thank you, Joe, and good afternoon, everyone. Thank you for joining us. I would like to begin today's call by sharing my perspective on OneSpan. When I joined the company two months ago, I was already impressed with its strong customer relationships, solution set and the difficult but important decisions it had made to right size, its cost structure and refocus on driving efficient revenue, growth, profitability, and cash flow. Today, I'm even more impressed. We have great assets to build upon, including more than 60% of the world's largest banks as customers, industry leading authentication and transaction signing technologies in an enterprise class e-signature solution. And we have talented employees across the organization. I have met many of them in my first few months, and I've seen firsthand their strong work ethic and dedication to operational excellence. In the short run, we are focused on continuing our operational improvements, which began last year. Over the longer run, we will work towards identifying those areas in which our offerings put us at a competitive advantage vis-à-vis other providers. I have been with OneSpan only a couple of months, and I'm confident that we will be able to reorient our offerings over time towards areas more highly valued by our customers and prospects. Turning to our fourth quarter results. First, I want to congratulate the team on the solid quarter. Their hard work across the board in 2023 resulted in a strong end to the year including 11% year-over-year revenue growth to $63 million, 11% ARR growth to $155 million and adjusted EBITDA of $11.2 million or 18% of revenue, representing our highest quarterly adjusted EBITDA margin in several years. During the quarter, we reduced headcount by approximately 5% and executed on several vendor related savings as well, resulting in annualized…

Thank you, Victor, and good afternoon, everybody. Before reviewing our fourth quarter and full year 2023 results, I will provide an update on the restructuring actions we have taken to rebalance our cost structure to help drive profitability. As Victor mentioned, we reduced headcount by about 5% in the fourth quarter, net headcount reduction from the time we started taking action during Q2 2023 to December 31, 2023, was about 24%. We achieved annualized cost savings in excess of 15 million in the fourth quarter, and in excess of 58 million for the full year. We expect additional annualized savings, approximating 5 million by the end of Q1 2024, most of which has already been executed on largely completing our restructuring activities. We expect to have some additional cost savings later in 2024 and now anticipate reaching 64 million to 65 million in annualized cost savings by the end of 2024, up from $60 million to $65 million by the end of 2025 that we projected previously. Turning to our financial results, ARR grew 11% year-over-year in 2023 to $155 million. ARR specific to subscription contracts grew 18% to 125 million and accounted for approximately 81% of total ARR. Net retention rate or NRR was 110%. We've seen modest improvements in these metrics in recent quarters, primarily driven by expansion at existing customers. Fourth quarter 2023 revenue grew to 11% to $62.9 million, as compared to the same period last year driven by 17% growth in digital agreements and 10% growth in security solutions. For the full year 2023, revenue increased 7% to $235.1 million. Subscription revenue grew 15% to 27.4 million in the fourth quarter, led by 17% growth in digital agreements, including 28% growth in SaaS revenue, consistent primarily of our e-signature solution. Q4 security solutions subscription revenue…

[Operator Instructions] Our first question will come from the line of Rudy Kessinger with DA Davidson.

There's more moving pieces on this model than I'm sure anybody on this call can count. Jorge, could you just I mean number of comments, I guess, gross margins, I'll keep it simple, 67% this year, what should they be next year?

So I would expect for next year, there's a few dynamics that I want to walk through before I tell you a number. So first one is next year, you heard about the increased amortization or depreciation [indiscernible], so that's going to continue to impact DA higher than it did this year. The second component is on the security hardware is the mix of EMEA versus APAC clients. And the product mix as well which drives that gross margin for that particular business. And so we continue to see, we ended this year with better than expected APAC versus EMEA, we expect in 2024, things to normalize a bit. So we'll see that more consistency me versus APAC margin, so that we'll see a little bit of drop there. So net-net, I think you would expect the key, the 2024 gross margin to be consistent with 2023, this puts and takes were consistent is kind of the high level.

That's helpful. And then just to read it back, I had to make sure I caught it all correctly. We should be expecting maintenance and support in both digital agreements and security solutions to continue to decline. And then on hardware, it was actually a pretty strong quarter, were there any pull forwards? And do you expect hardware to be flat or up slightly again, next year down?

So you are correct on the maintenance and support. So you would expect that to continue to decrease. Again, that's by the sign and on the DA side of the house is the end of life on premise to those conversions, so you'd expect that lower. On the security side, again, you expect a lower because of the perpetual to turn conversions. So I think that's by the side. So the answer is yes, there. On the hardware, we did have a very strong Q4 2023 because of the product mix. And the climbing, as I mentioned, a APAC generally comes with higher margins than some of the largest banks at EMEA, lower margins on average. And so we expect that to normalize a little bit in 2024, some of the deals that were accelerate, if you would from upside from Q1 to Q4, included higher margins. So that's why, when you look at this year Q1, 2024, you would expect, not only seasonally lower revenue on hardware which is normal for a company our case. But also, because we pull some of the better margin deals into Q4. So you would expect that to impact as well in Q1.

Okay. And then, Victor, I guess, just more kind of high level, haven't been here for a few months now, just where do you see the opportunities to drive higher levels of growth on a sustainable basis, as we all know that business has struggled to really achieve that for a long time now. Where do you see room to improve the go-to-market organization and drive higher levels of growth?

Yes. Thanks, Rudy. I mean, there are a couple things. One, I've been here for just two months yesterday was actually my two month anniversary. So I don't want to get into too many details. But I think on the security side of the business, there are opportunities. We did mention a new product last quarter, we have other things planned for later in the year. And there are some adjacent markets that we haven't really been in, like workforce authentication, that might provide opportunities, as well. So overall, we're going to be looking to identify those and even within our existing businesses, segment the customer base so that we can spend our time on the highest value areas. So there's some potential growth in that way as well.

Our next question will come from the line of Gray Powell with BTIG.

A few questions on my side. Maybe to start off, Victor. So you mentioned, you've been at the firm for 60 days. What surprised you the most so far? And then just kind of following up on Rudy's questions. I mean, in terms of potential changes, I know you don't want to say too much, but should we expect them to be more operational in nature just getting more efficient or more strategic?

Thanks, Gray. What surprised me, I don't know if surprise is exactly the right word. But one of the things that really struck me, as I got involved over the last 60 days is the strength of the customer relationships, we have. I mean, 60, of the of the top 100 banks, it is an incredible asset for the company. So that's the first thing. And then the second thing is the team has been working really hard. And you can see it in the execution in Q4 did very well through a lot of change. Rudy had mentioned the amount of moving pieces. And there's certainly been a lot of change over the last six months and the team's executed very, very well. As to your second question. operational efficiency is absolutely an important feature of our 2024 plants. It's the overriding feature, I think. But we are also going to explore areas for increased growth as we do that, though, we're going to do it in an efficient way. So if we decide to move into an adjacent market, you should not expect us to go hire 30 or 40 salespeople to go after it. As we identify opportunities, we'll test, we'll iterate, and we'll try to do it in a super-efficient fashion.

Understood, okay, that's good to hear. And then I just had a question on sort of the cost savings that you achieved last year. So you have some good charts in the slide decks over the course of the year. I just want to make sure I understand it correctly. So the cost savings totaled close to 59 million at the end of 2023. I guess my question is like, what was the starting point on that cumulative number? Like, we know that 15.5 came out in Q4, we know that 24 million came out in Q3. Just wondering how much came out during the first half of the year, we tried to like sort of, just line up how things should have expanded?

Yes. So I can take that one, Gray. So if you look at sort of Q2 cumulative, and you have to take a step back and think about, we had the phase one and phase two, right, phase one was completed, the range for that was 10 to 12. We ended up I think 11.8. So close to the high-end, and that was completed early in 2022. Then Phase 2 kicked off and so I would say Q1 and Q2 from Phase 2, plus a lot of the new actions that we announced in Q2, that total about 19.1 million, right and so that was completed that is the number you will get, was 19.1 million in Q2. So like here, they and then in Q3, you add another 24 million that we discussed last quarter plus a 15.5 million this quarter. That's your 58.5.

Understood. So the trendline was 19, 24, 15.5, q2, q3, q4.

You got it.

Okay. Then, last one on my side. All right, so, I mean, I understand that the cost savings like [face-in] [ph], right, like these are sort of end of quarter numbers that we're talking about. Was there anything like one-time in nature that created a headwind because I mean, we're talking about like, huge cost saving numbers. But EBITDA for the year went from like 6 million to 12 million. So I'm just trying to like reconcile, like, what appears to be very large cost saving numbers versus the lower growth on EBITDA in 2023.

Yes. I think I think part of the equation that you need to factor is that we started in Q1, and we're sort of Q4. But we started in Q1 and the first half of Q2, really investing heavily in sales and marketing. And the thing that's what the piece you also have to factor in. Just to give you an example, a number of sellers. We hired, I believe in the first four months of 2023, probably about close to 38, 39 sellers, right? And so when you start taking that investment that we made earlier in the year, then the offset with this cost savings, you have to take all into account to get to that a number.

[Operator Instructions] Our next question will come from the line of Alex Hantman with Sidoti.

Hi, this is Alex Hantman on for Anja Soderstrom. So my first question, I would love to hear a little bit more context around the guidance. So I think you mentioned that you're on target for the low to middle of guidance for revenue and EBITDA, can you talk about some of the scenarios that bring you from the low to mid, and maybe even to higher end?

Yes, Alex. How are you doing? Thanks for the question. So I think part of that range is to account for the lumpiness that you see in the hardware business, as you know, is lumpy because of the timing of shipments. So part of the guide there is to consider that lumpiness. The other component is primarily on the term on the security software. That is, you'll see this sometimes these pops up revenue, right. And that's because again, [indiscernible] recognized upfront from a term license perspective. And so some of these deal may or may not close in a particular quarter particular year, you'll have those pops, where you have a lot more seasonality or expectation of trends is more on the completely faster which is DA. And so that doesn't play that much of a factor, although obviously there is some new logo, new revenue potential there. So those are the three factors, Alex, that I can comment to you regarding the range.

Thank you. Appreciate that. And I think you very briefly mentioned, sales force, but I was wondering if you could elaborate on average what level of productivity would you say the sales force has achieved? And how much room for improvement do you think there is?

Yes. We don't normally comment on those metrics, Alex. One of the things that big outlook to get you can probably chime in here as well. But one of the things that we're -- this has been tasked with, obviously, you certainly find efficiencies, and that includes sales and marketing. And that includes working with [Sammy and Sameer] [ph] as the GMs to improve the efficiency of our sales dollar spent as well as the productivity for our sellers. So Vic, I'll turn it over to you for additional comments there.

Yes. Thanks, Jorge. So not just at OneSpan, but at any company, typically takes a while for salespeople to ramp up and become fully productive. And one of the things, I think you saw in OneSpan over the last few years is there were a whole bunch of new salespeople just started going through a six month or longer ramp up period, and the productivity wasn't high. At this point, we have Jorge, you can probably provide the details but a much more tenured team than we had a year ago. People who have at least hit a year or over close to the year mark. And so naturally, we expect that productivity to increase as they have been in the positions longer and have been working the accounts longer.

That concludes today's question-and-answer session. I'd like to turn the call back to Joe Maxa for closing remarks.

Thank you, everyone, for joining us today. We appreciate your time and look forward to sharing our progress with you next quarter. Thanks again and have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.