Executive Summary / Key Takeaways

• OneSpan is successfully executing a strategic transformation, shifting from a hardware-centric model to a higher-margin software and subscription-based business focused on secure authentication and digital agreements.
• This pivot, coupled with aggressive cost optimization, has dramatically improved profitability and cash flow generation, highlighted by record Q1 2025 Adjusted EBITDA of $23.04 million (36.4% margin) and operating cash flow of $29.37 million.
• While total revenue saw a slight decline in Q1 2025 due to expected hardware headwinds and sunsetted products, subscription revenue continues to grow double-digits (9% in Q1 2025), driven by expansion with existing customers.
• The company leverages its deep security expertise and strong relationships with over 60% of the world's largest banks as a competitive moat, particularly in the regulated financial services sector, offering differentiated technology like a unified hardware/software authentication back-end.
• Management has affirmed its full-year 2025 guidance, projecting revenue of $245M-$251M, ARR of $180M-$186M, and Adjusted EBITDA of $72M-$76M, signaling confidence in sustained profitability and modest growth despite ongoing hardware declines and macro uncertainties.

The Transformation Takes Hold: From Hardware Roots to a Software-First Future

OneSpan Inc., with roots tracing back to 1991 as VASCO Data Security, has long been a fixture in the digital security landscape, initially built on the foundation of its ubiquitous Digipass authenticator devices. Over three decades, the company has evolved, formally rebranding as OneSpan in 2018 and strategically expanding its portfolio beyond secure authentication to encompass digital agreements. Today, OneSpan operates through two core business units: Security Solutions and Digital Agreements, serving a global clientele that notably includes over 60% of the world's 100 largest banks.

At the heart of OneSpan's current narrative is a deliberate and ongoing strategic transformation. Recognizing the industry's shift towards software and cloud-based solutions, and aiming to enhance financial performance, the company has aggressively pivoted towards a higher-margin software and subscription model. This involves transitioning customers from legacy perpetual licenses and maintenance contracts to term-based subscriptions and cloud deployments, while simultaneously optimizing its operational cost structure. This pivot is not merely a tactical adjustment but a fundamental reshaping of the business model, designed to drive efficient growth and unlock greater profitability and cash generation.

The company's foundational strength lies in its deep expertise in digital security, particularly in the demanding financial services sector. Its technology portfolio spans advanced secure authentication, mobile application protection, identity verification, electronic signatures, and digital workflows. The Security Solutions segment provides robust multi-factor and passwordless authentication, mobile security suites, and the traditional Digipass hardware. The Digital Agreements segment offers cloud-based solutions like OneSpan Sign for e-signatures, OneSpan Notary, and Identity Verification, streamlining processes requiring consent and compliance.

A key technological differentiator for OneSpan, particularly in its core banking market, is its ability to provide a unified authentication back-end that seamlessly supports both hardware and software authenticators. This allows banks to cater to diverse customer preferences and regulatory requirements with a single, easy-to-administer platform, offering a distinct advantage over competitors whose solutions might necessitate separate systems for different authentication methods. While specific, quantifiable performance metrics comparing the efficiency or cost benefits of this unified back-end against fragmented competitor solutions are not detailed, management highlights it as a factor that helps retain customers and supports the transition to software.

Furthermore, OneSpan continues to invest in its technology roadmap. The R&D team in the Security segment is actively developing enhancements and new products, including FIDO hardware tokens, signaling a commitment to evolving its core offerings to meet emerging security standards and use cases, such as workforce authentication. While R&D investments in the Trust Vault blockchain product were discontinued in Q2 2024 as part of strategic rationalization, the focus remains on areas deemed most strategic and likely to yield profitable growth.

Competitive Positioning: Leveraging Security Expertise in a Crowded Market

OneSpan operates in a competitive landscape populated by both large, diversified technology companies and more specialized players in digital security and agreement workflows. Key publicly traded competitors include DocuSign (DOCU) in e-signatures, Okta (OKTA) in identity and access management, and Adobe (ADBE) with its document cloud offerings including e-signatures.

Compared to DocuSign, the dominant e-signature player, OneSpan's Digital Agreements solutions, particularly OneSpan Sign, compete directly. While DocuSign holds a significantly larger market share (estimated 40-50% vs. OSPN's smaller combined share), OneSpan often differentiates on the strength of its integrated security features, leveraging its authentication expertise. The competitive analysis suggests OSPN's solutions may offer higher security features like biometrics and visual cryptograms, potentially leading to faster transaction processing in high-security contexts, though possibly at a higher upfront cost. DocuSign's strength lies in its broad adoption, network effects, and user-friendly interface, reflected in its higher revenue growth and superior gross and operating margins (DocuSign TTM Gross Margin ~79%, Op Margin ~7% vs. OSPN TTM Gross Margin 71.86%, Op Margin 20.52% - noting OSPN's recent margin surge).

Against Okta, a leader in identity and access management, OneSpan's authentication suite competes directly, particularly in cloud-based authentication. Okta's cloud-native approach offers faster deployment times and scalability, contributing to its higher revenue growth (Okta TTM Gross Margin ~76%, Op Margin ~-3% vs. OSPN). OneSpan differentiates with its hardware-backed security options and compliance-focused tools, which management believes can reduce fraud rates in financial transactions. While Okta focuses on broad enterprise scalability, OneSpan targets regulated industries like banking with tailored, high-assurance solutions.

Adobe, with its extensive document management suite including Adobe Sign, represents another competitor in the e-signature space. Adobe benefits from its integrated software ecosystem and strong brand recognition, reflected in its high margins (Adobe TTM Gross Margin ~89%, Op Margin ~31%). OneSpan competes by emphasizing its security-first approach and potentially more advanced fraud detection features within its e-signature workflows.

Overall, OneSpan's competitive positioning is strongest in regulated sectors, particularly banking, where its legacy relationships, deep security expertise, and integrated hardware/software authentication capabilities provide a significant moat. The ability to serve the complex needs of large financial institutions, including stringent security and compliance requirements, is a key advantage. However, OSPN faces challenges related to scale and brand recognition compared to larger, more diversified competitors. Its strategic focus on driving higher-margin software revenue and leveraging its security differentiators is crucial for competing effectively and improving its financial standing relative to peers.

Operational Execution and Financial Performance: The Pivot Delivers

The strategic pivot and focus on operational excellence have yielded tangible improvements in OneSpan's financial performance, particularly evident in recent periods. The first quarter of 2025 showcased the impact of these efforts.

Total revenue for Q1 2025 was $63.37 million, a slight decrease of 2% compared to $64.84 million in Q1 2024. This decline was anticipated and primarily driven by lower hardware revenue ($11.06 million in Q1 2025 vs. $12.58 million in Q1 2024), reflecting the ongoing secular shift from hardware to mobile authentication in regions like EMEA and APAC, as well as lower maintenance and professional services revenue due to the transition to subscription models. Headwinds from previously sunsetted products also contributed, amounting to $1.4 million in Q1 2025.

Despite the dip in total revenue, the core of OneSpan's strategy – subscription revenue – continued its upward trajectory, growing 9% year-over-year to $43.62 million in Q1 2025. This growth was fueled by strong performance in both segments: Security Solutions subscription revenue grew 7% to $28.07 million, primarily from expansion contracts with existing large bank customers, while Digital Agreements subscription revenue increased 13% to $15.55 million, driven by both expansion and new logos.

The shift in revenue mix towards higher-margin software significantly boosted profitability. Gross profit for Q1 2025 was $47.09 million, resulting in a gross margin of 74%, an improvement from 73% in Q1 2024. This was attributed to a favorable product mix (more software, less hardware) and improved operational efficiencies.

Operating expenses saw a substantial decrease, falling 10% from $33.29 million in Q1 2024 to $29.91 million in Q1 2025. This reduction was a direct result of the multiyear cost-cutting initiatives, which included significant headcount reductions and rationalization of consulting, marketing, and travel expenses. Restructuring charges were also significantly lower ($0.4 million in Q1 2025 vs. $1.5 million in Q1 2024) as the majority of workforce actions were completed in prior periods.

The combination of improved gross margins and reduced operating expenses led to a significant increase in operating income, which rose 22% to $17.18 million in Q1 2025 from $14.11 million in Q1 2024. Adjusted EBITDA reached a record high of $23.04 million in Q1 2025, representing a robust 36.4% margin, compared to $20.22 million (31.2% margin) in Q1 2024. Net income for the quarter was $14.51 million, or $0.37 per diluted share, up from $13.47 million, or $0.35 per diluted share, in the prior year period.

Segment-level profitability also showed strength. Security Solutions remained highly profitable with operating income of $24.16 million (51% margin) in Q1 2025, though slightly down from $25.88 million (51% margin) in Q1 2024 due to lower revenue and higher operating expenses within the segment. Digital Agreements demonstrated significant progress, swinging from an operating loss of $0.26 million (-2% margin) in Q1 2024 to a profit of $3.37 million (22% margin) in Q1 2025, driven by revenue growth and lower operating costs.

OneSpan's cash flow generation has seen dramatic improvement. Cash provided by operating activities surged to $29.37 million in Q1 2025, up from $27.0 million in Q1 2024. This strong performance was driven by the higher net income and effective management of working capital, including a significant decrease in accounts receivable. The company ended Q1 2025 with a healthy cash and cash equivalents balance of $105.21 million, an increase from $83.16 million at the end of 2024, with no long-term debt.

Outlook and Strategic Path Forward: Sustaining Profitability, Seeking Growth

Looking ahead, OneSpan's management has affirmed its full-year 2025 guidance, signaling confidence in the continued execution of its strategy despite acknowledging potential external headwinds. The company expects full-year revenue to be in the range of $245 million to $251 million. Annual Recurring Revenue (ARR), a key metric for the subscription business, is projected to end the year between $180 million and $186 million, representing continued growth.

The guidance incorporates several key assumptions. Double-digit subscription revenue growth is expected to continue throughout 2025, driven by ongoing expansion within the existing customer base and new customer acquisition, particularly in Digital Agreements and potentially in workforce authentication via channel partners. However, the guidance also factors in the anticipated decline in hardware revenue, with Q2 2025 hardware sales expected to be in a similar range to the prior three quarters and a modest year-over-year decline expected for the full year 2025. Headwinds from sunsetted products are expected to persist, with approximately $1.4 million in Q2 2025 and around $1 million spread across the second half of the year before becoming minimal in 2026.

On the profitability front, the successful cost optimization initiatives are expected to sustain high levels of Adjusted EBITDA. The full-year 2025 Adjusted EBITDA guidance is set at $72 million to $76 million. While this represents a significant improvement over historical levels, management anticipates modest increases in cash from operations and Adjusted EBITDA compared to the dramatic gains achieved in 2024, suggesting that the most impactful phase of cost reduction is complete, and future improvements will likely be more incremental. Restructuring charges related to the 2023 actions are expected to be minimal, ranging from $0.1 million to $0.6 million in future periods, as the plan concludes by the end of 2025.

Strategically, OneSpan is focused on driving efficient revenue growth. This includes investing in its Security software offerings, both in product enhancements and expanding its reach through channel partners, particularly for opportunities like workforce authentication. Targeted M&A is also being considered, likely focused on the security side to acquire technology that can be cross-sold to the large existing banking customer base, with any potential deals expected to be modest in size in 2025.

The company's strong cash position and ongoing cash generation support its balanced capital allocation strategy. This includes the recently initiated recurring quarterly cash dividend of $0.12 per share, with the second dividend already declared for Q2 2025. The Board is also considering other forms of capital return to shareholders, such as share buybacks, while ensuring sufficient resources for organic investments and strategic M&A.

Risks and Challenges: Navigating External Headwinds

Despite the positive momentum from its strategic pivot, OneSpan faces several risks and challenges that could impact its performance and outlook.

The most significant top-line headwind remains the ongoing decline in hardware revenue. While the company is successfully transitioning customers to software, the pace of this transition and the rate of hardware decline, driven by mobile-first policies in key regions, introduce uncertainty. Although mitigation efforts, such as shifting production to Romania to address potential U.S. tariffs on China-assembled devices, are underway, they may not fully offset the impact in the near term. Tariffs themselves pose a risk, potentially increasing costs or discouraging customer orders.

Macroeconomic uncertainty, including inflation, trade disputes, and political instability, could affect customer buying behavior and the timing of large deals, making forecasting more challenging, particularly for the latter half of the year. Foreign currency fluctuations, especially the Euro-Dollar exchange rate, can also impact reported revenue and operating expenses, as a significant portion of the business is conducted outside the U.S. While the company attempts to hedge naturally, a significant shift could still create headwinds.

Competition remains intense across both segments. While OneSpan leverages its security focus and banking relationships, larger competitors like DocuSign, Okta, and Adobe possess greater scale, broader product portfolios, and larger sales forces. Maintaining technological leadership and effectively communicating its differentiated value proposition are crucial for winning new business and retaining existing customers against these formidable rivals.

Finally, while the major cost-cutting initiatives are substantially complete, sustaining operational efficiency and achieving further margin expansion may become more challenging. The company must balance cost discipline with necessary investments in R&D, sales, and marketing to drive future growth.

Conclusion

OneSpan is in the midst of a significant and, thus far, successful transformation. By strategically shifting its focus to higher-margin software and subscription solutions and executing aggressive cost optimization, the company has dramatically improved its profitability and cash flow generation. The record Adjusted EBITDA and strong operating cash flow reported in Q1 2025 are clear indicators that this pivot is yielding tangible financial benefits.

While the top line continues to be impacted by the secular decline in hardware and the phasing out of legacy products, the underlying subscription business is healthy, demonstrating consistent double-digit growth driven by expansion within its valuable customer base, particularly large financial institutions. OneSpan's deep security expertise and differentiated technology, such as the unified authentication platform, provide a competitive moat in the highly regulated banking sector, positioning it favorably against broader competitors.

Management's affirmation of the full-year 2025 guidance reflects confidence in sustaining the improved profitability and achieving modest growth, supported by continued subscription momentum and operational efficiency. The strong balance sheet and robust cash generation enable a balanced capital allocation strategy, returning value to shareholders through dividends while investing organically and considering targeted M&A to fuel future growth.

The investment thesis for OneSpan hinges on the continued successful execution of this strategic pivot. Key factors to watch include the pace of subscription revenue growth, the ability to manage the decline in hardware revenue, the effectiveness of investments in new products and channel partners, and the company's capacity to maintain operational efficiency while navigating competitive pressures and external economic uncertainties. If OneSpan can continue to leverage its security strengths and banking relationships to drive software adoption and expand its market reach efficiently, the foundation laid by its recent transformation could support sustained profitable growth and further value creation for shareholders.