Good day and thank you for standing by. Welcome to the OneSpan Q3 2024 Earnings Conference Call. [Operator Instructions] 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, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone and welcome to the OneSpan third quarter 2024 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 Chief Executive Officer; and Jorge Martell, our Chief Financial Officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our third quarter 2024. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments, 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 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 and in the earnings 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 October 30, 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 hand the call over to Victor.

Thank you, Joe. Hello, everyone. Thank you for joining us on the call today. I’m thrilled we reported another solid profitable quarter, driven by the team’s hard work and focus on operational excellence. Adjusted EBITDA was $17 million or 30% of revenue, and both business units were profitable. I am particularly pleased that our Digital Agreements segment for the first time was profitable on a fully burdened basis, that is including corporate allocations, and that our Security segment continued to be highly profitable. We had strong double-digit subscription revenue growth in the third quarter. Subscription revenue grew 29% and accounted for 60% of total revenue. Total software and services revenue grew 10% and accounted for 78% of revenue. Overall, revenue declined 4%, primarily due to the anticipated decline in hardware that we discussed on last quarter’s call. ARR grew 9%, in line with the approximate 7% to 10% guidance range implied by our full year ARR guidance of $166 million to $170 million. As a reminder, we saw ARR growth of 15% last quarter, driven in part by a few large deals that closed earlier than expected. Q3 ARR was impacted sequentially by approximately $2 million from products we previously sunsetted. We believe we are on track to achieve our full year 2024 ARR guidance range. I want to remind everyone that the products we sunsetted, though they contributed some revenue and ARR, and therefore, have some associated top line and ARR headwinds, were low growth and low return on investment products. We are already benefiting from increased operating efficiencies and profitability from the sunsetting of these products and believe we are better positioned from a product portfolio perspective to drive increased profitable growth in the coming years. We continue to generate strong cash. We generated $14 million in cash…

Thank you, Victor, and good afternoon, everyone. Before reviewing our financial results, I want to highlight the substantial completion during the third quarter of our multiyear cost reduction initiatives. I’m very pleased with the team’s efforts as we worked to capture significant cost savings over the last couple of years, which has helped us meaningfully improve our operating profitability. During the third quarter, we realized $3 million in annualized cost savings, bringing our cumulative annualized cost savings to $18 million year-to-date and to approximately $76.5 million dating back to May of 2022, exceeding our year-end 2024 cumulative annualized cost savings goal of $75 million. Now, turning to our third quarter results. ARR grew 9% to $164 million and our net retention rate was 106%. As compared to last year, ARR and NRR primarily benefited from customer expansion contracts and ARR to a lesser extent also benefited from new customers. Growth in ARR and NRR was partially offset by an increase in typical churn and churn related to end-of-life products. Third quarter 2024 revenue was $56.2 million, 4% lower than last year’s Q3, primarily due to the expected decline in hardware revenue. Digital Agreements revenue grew 18% and was offset by a decline in Security revenue of 11%. Within our Security business unit, software and services grew 6%. Subscription revenue grew 29% to $33.6 million, including 29% growth in Security Solutions and 27% growth in Digital Agreements. Maintenance revenue declined by design as we continued to transition to a SaaS and subscription license model. Third quarter gross margin was 73.9% compared to 69.1% in the prior year quarter. The increase in gross margin was primarily driven by favorable product mix within our Security segment, including an increase in software and a decrease in hardware, partially offset by an increase in depreciation…

Thank you, Jorge. I am very proud of the entire OneSpan team. Their hard work and focus on operational rigor over the last several quarters has resulted in a much stronger company. Our ability to generate cash has significantly improved and we are much more profitable as compared to recent years. Looking ahead, we are committed to delivering value to our customers and to returning value to our shareholders by growing revenue efficiently and profitably. Jorge and I will now be happy to take your questions.

[Operator Instructions] First question comes from the line of Catharine Trebnick of Rosenblatt Securities. Your line is now open.

Hi. Thank you for taking my question. So, you have talked a lot about focus on execution. Can you give us an update on where you are with your ecosystem and building that out, because I think that was one of the areas that I thought was interesting when I came back to covering the stock? Thank you.

Thanks Catharine. Yes, one of the ways we want to grow the business is to extend our reach by working through partners. And we have some progress on that front, but I would say the impact to-date is not in the numbers that we reported. It’s more in the future than in the past. So, we have a direct sales force that can – when we talk about banks, as an example, we talk about having over 60 of the 100 biggest banks as customers. And other banks of that scale, we deal with our direct sales force. But for us, it’s way more efficient to work for – to address the midmarket and lower banks through partners. So, we have started to sign up partners. We have a new leader of the channel in Europe, and I expect to see that continue to develop as we move into 2025.

Alright. So, it’s more of a three-quarter or four-quarter out type of impact – positive impact on revenue?

Certainly, so what’s going on now is signing up partners, getting them trained, and it takes some time before they are productive and probably even longer for them to materially impact revenue.

Okay. Thank you very much. Appreciate the explanation.

Thanks Catharine.

Thank you. Our next question comes from the line of Trevor Rambo of BTIG. Your line is now open.

Hi guys. This is Trevor on for Gray Powell. Congrats on some solid results. So, to start, how would you guys say the overall macro environment is now compared to about earlier in the year? And I know you touched on it a little bit during the prepared remarks, but could you add some more color on what you are seeing in the hardware business going forward kind of now and into next year? And what you guys are seeing around some customer churn because I know you mentioned that as well in the prepared remarks. That will be great. Thank you.

Sure. With respect to hardware, so there is a couple of things going on. In the retail consumer banking segment in Europe and to a lesser extent in Asia-Pac, there is definitely more mobile authentication than there was some years ago, and that trend has been going on for a while. Less so in corporate banking, corporate banking still tends to be done in front of a screen, in front of a computer. So, it’s more amenable to hardware, I think than consumer banking. So, that’s been a long-term trend. And you can see that in – if you look back over the last decade, you can see that in our hardware numbers. The advantage we have is that if a bank is going to use some hardware, we enable them – our solution enables them to use the same authentication back-end for both hardware and software. So, if they go with OneSpan, they can have one back-end easy to administer, handle their hardware needs for the customers who want that, handle their mobile authentication needs maybe for the majority of consumers versus going with a competitor and then having to have two different back-ends if they are going to have any hardware at all. So, I think there is still some long-term strength in having the hardware offering. It actually helps our software offering, if that makes sense, Trevor.

Yes, that makes sense. Yes, that’s some good color. And then maybe just one more, you guys did some nice jobs with the cost-cutting initiatives, both finishing that earlier than you initially expected. And you have been really ramping both operating margins and your adjusted EBITDA throughout the year. So, I guess moving forward, how are you guys thinking about your ability to both sustain those margins, but also reaccelerate the top line growth as we finish this year and head into next fiscal year?

Yes. Great question, so of course, we want to get to the Rule of 40. And I think we are going to get there through a combination of operating income, operating leverage and some growth. We don’t think it makes sense. We don’t think we will generate as much value by having it all be EBITDA. So, we are looking at ways to grow faster whether that’s through a partner channel, whether it’s through new offerings, expansion of our relationships with existing customers. And we haven’t given guidance for 2025, and in fact, haven’t finished our budgeting for 2025 yet, but we are definitely looking to grow faster. With respect to the operating income, we certainly don’t think we are at a peak there. We think we can do better. But it’s fair to say that progress from here on out will be a little bit harder. So, it’s one thing to go from negative to upper-20s adjusted EBITDA. We are obviously not going to go from upper-20s to 50s. Like we are not going to make the same jump, but we do think we can make additional progress.

Great. It’s great to hear. Thanks again and congrats again on a nice quarter.

Thank you. Next one.

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

Hi. Thanks for taking my question and congrats on the nice progress here.

Thank you.

So, the cost cutting, is that coming through faster, or is it more – or are you seeing more savings than you initially thought?

It is – I can jump in here, Vic. So, it’s a little of both, Anja. So, the team executed very well. So, we had a plan, particularly for the second quarter and third quarter. Some of those savings came in earlier than we expected. And so you see that reflected in the numbers for sure. And then obviously, the adjusted EBITDA guide that we changed favorably. So, some of – and then some of it is also unplanned savings that we identified as you are always trying to identify how do we work smarter, how do we make sure that we can do things more efficiently. So, some of these either through vendors or just process improvements that led you to operational efficiencies come to light, and so some of that is on plan. And to a certain extent, also you may have an idea in terms of like real estate footprint, but some of that comes to fruition into accelerating some of those or increasing some of those savings. So, maybe not the nature of it may be new, but in terms of maybe the mix of different vendors that contribute to the savings may be a little bit different than originally planned. So, we will take both of these.

Okay. Thank you. And as we think about that adjusted EBITDA increase and with the hardware becoming a smaller part now, does the – do you expect the gross margin to also be maybe higher and contribute to that EBITDA, or is it mostly on the operating side?

You are talking about for 2025?

‘24?

For ‘24, so maybe to unpack that a little bit, so I think overall, we are going to – we are increasing that a little bit in terms of our expectation to the low-70s, just like you saw the benefit in Q3. If you look at the two business units, DA – I guess both DA and security will be in the low-70s. We have talked about hardware. Hardware actually is increasing because of the mix of APAC clients that come with a better margin. So, that’s driving a little bit of an improvement there. So, I guess just to answer your question, from the earlier discussion that we had maybe a couple of quarters ago from the high-60s, I think we now can say it’s likely going to be in the low-70s, so it’s an increase overall.

Okay. Thank you. And then the jump in the security solutions, in the subscription, there was a nice jump sequentially. What drove that, and how should we think about that going forward?

Sorry, I missed the first part of the question, Anja, can you repeat that?

The jump, sequentially jump in the subscription for the security solutions, what drove that and how should we think about that going forward?

Yes. No, we continue to see very good progress on the demand side for authentication products, Anja, also mobile application products that we cross-sell to our existing customer base. And so that is primarily what drove that on the subscription revenue. So, we are seeing a lot of good adoption, new licenses in particular. Some of those are obviously conversions on the perpetual to term. And so we tend to see price upside to those conversions. So, that also benefited the quarter either year-over-year or sequentially.

Anja, let me add a comment to that. If you look at 2024, it’s the first time that security subscription revenue will exceed hardware revenue. And on top of that, our security BU is just about two-thirds software when you count maintenance and support and subscription. So, that certainly has helped the operating leverage of that BU.

Okay. And at what sort of revenue level do you expect to be profitable in the security solutions?

Yes. So, that was – as you know, security solutions is our highest, of the 2 BUs, the one that generates the most profit. If you are looking for a revenue breakeven for that business unit, I mean you can probably look at mid – low to mid-20s is probably a good number, but just doing the math here in my head, Anja, if you just look at – just try to look at the numbers. So, on a quarterly basis, yes. Sorry. Just to clarify that.

Okay. Thank you. That’s all for me.

Thank you.

Thank you. I am showing no further questions at this time. I would now like to turn it back to Joe Maxa for closing remarks.

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

Alright. Thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.