OneSpan Inc. Aktie

Good day and thank you for standing by. Welcome to the Q1 2026 OneSpan 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, VP of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan First Quarter 2026 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 first quarter of 2026. 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 2026 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 financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from this 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 investor 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 April 30, 2026. 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 to Victor.

Thank you, Joe. Hello, everyone. Thank you for joining us today. We had a good first quarter with strong profitability and solid revenue growth. Indeed, subscription revenue grew 8% year-over-year, and our adjusted EBITDA margin was 32%.

I'm also happy to report that notwithstanding the doom and gloom you might hear about software, our gross revenue retention increased again in Q1, reaching 90% for the company as a whole and 94% for our Digital Agreements business. We also generated healthy cash flows, and we returned capital to shareholders via share buybacks, which have totaled approximately 1.5 million shares for more than $18 million over the past 3 quarters and via an increased quarterly dividend as well.

Before reviewing our results in more detail, I'd like to provide an update on our investments and how we are positioning the company for stronger growth over time. First, in Q1, we completed the acquisition of Build38, which brings a fantastic team to OneSpan with deep expertise in mobile threats and mobile application protection, and provides customers with telemetry to help them understand the attacks targeting their mobile applications and the environment in which they operate. Keep in mind that the vast majority of consumer banking is now conducted through mobile banking applications, making this a critical attack surface for banks to protect.

We now offer post-compilation application protection, sometimes called post-compilation wrapping as well as an SDK-based approach through which customers can build an application protection and the telemetry necessary for visibility into the threat environment and overall operating environment. With the addition of Build38's capabilities, I am happy to report that we now offer a comprehensive set of leading mobile application security technologies across the app shielding landscape.

Second, I want to update you on the acquisition we completed last year of NOK NOK Labs, a pioneer of the FIDO Alliance and of passwordless authentication. A fabulous team from NOK NOK joined our company. And together, we have grown that business materially with ARR having increased about 20% in less than 10 months since closing. And it has broadened our product set as well. We now have the broadest B2B2C authentication offering, both hardware and software, cloud and on-prem and OTP and FIDO.

Third, we continue to invest in internal research and development. In our Digital Agreements business, we continue to make strides towards our goal of delivering secure, seamless agreement workflows purpose-built for the financial services industry, combining white label capabilities with embedded security, compliance and identity assurance across the e-signature journey.

We're also planning to integrate AI-driven capabilities to provide deeper insights, streamline decision-making and further simplify integration into our customers' existing environments.

Last but not least, I want to reiterate that neither our Digital Agreements business nor our Cybersecurity business has seat-based licensing as the primary revenue model. In Cybersecurity, we sell to our customers based on the number of their end users and not based on the number of their employees or seats.

Our licenses are tied to the number of consumers using strong authentication or app shielding solutions. Similarly, in Digital Agreements, the vast majority of our business, about 97%, is priced based on the number of expected e-signature transactions or documents rather than customer employee counts or user counts.

Turning to our results. As mentioned, we started the year with a strong first quarter. We generated $21 million of adjusted EBITDA in the quarter or 32% of revenue. We ended the first quarter with annual recurring revenue of $192 million, up 14% year-over-year, inclusive of the uplift from the 2 acquisitions in the past year. This strong ARR growth continues a positive trend as ARR is now up 24% since March 31, 2024. Total revenue grew 4% to $66 million, driven by 11% growth in Digital Agreements, which had another strong quarter, and 2% growth in Cybersecurity.

Subscription revenue in Digital Agreements grew 11%, driven by demand for e-signatures, while subscription revenue in Cybersecurity grew about 6.5%, reflecting growth in cloud authentication, passwordless authentication and app shielding. Both business units were solidly profitable at the division level. Overall, the company generated $28 million in cash from operations during the quarter.

Our Board remains committed to a balanced capital allocation strategy that considers shareholder returns, organic investment and targeted M&A. In the first quarter, we invested nearly $35 million to acquire Build38 and returned more than $10 million to shareholders through dividends and share repurchases following nearly $32 million returned in 2025. The Board has approved a quarterly dividend of $0.13 per share to be paid in the current quarter, and we'll continue to evaluate additional share repurchase opportunities.

In summary, we serve a diverse global customer base, and we deliver comprehensive offerings in strong B2B2C authentication, app shielding and e-signatures. We are investing internally and through targeted M&A to strengthen our portfolio and go-to-market execution, and we continue to make solid progress in building a stronger foundation for growth. We remain committed to maintaining strong profitability, cash generation and returning capital to shareholders.

With that, I'll turn the call over to Jorge.

Thanks, Victor, and good afternoon, everyone. I'm pleased to report another strong quarter and continued progress in building a solid foundation for future growth. I'm particularly excited about our acquisition of Build38, which strengthens our mobile application security offering and enhances our ability to protect customers and their customers from increasingly sophisticated AI-driven threats. We acquired Build38 on February 27. And as such, our first quarter results include just over one month of Build38's financial contribution.

Before turning to our Q1 results, I'd like to briefly highlight a change we made this quarter to how we present revenue by operating segment. To better align with how we manage the business and our strategic focus on growing recurring revenues, we now include term maintenance revenue within subscription revenue. As a result, subscription revenue now consists primarily of term licenses for on-prem software, the related maintenance and support revenue and SaaS revenue.

In addition, maintenance revenue associated with perpetual licenses and professional services is now presented together, better reflecting the continued evolution of our business away from perpetual license arrangements. These changes are presentation only and have no impact on total revenue, operating income or cash flows, and prior period results have been updated for comparability. Additional details are included in the revenue tables in today's press release, our Form 10-Q and the investor presentation on our website.

With that context, let me turn to our first quarter results. Annual recurring revenue, or ARR, increased 14.1% year-over-year to $192.1 million, inclusive of the 2 acquisitions. Our net retention rate was 105%, benefiting from customer expansion contracts. ARR also benefited from new customer additions and M&A. First quarter revenue was $65.9 million, an increase of 4.1% compared to last year's Q1, driven by 5.8% growth in software and services revenues, partially offset by a 4.3% decline in hardware revenue.

Continuing a long-term declining trend in Q1, hardware comprised only 16% of our overall revenue. Subscription revenue grew 8.2% to $52.7 million and accounted for 80% of total revenue. Gross margin was approximately 74%, consistent with the prior year period. I'll provide additional detail on these metrics as I review each business division in a couple of minutes.

First quarter GAAP operating income was $14.8 million compared to $17.2 million in Q1 of last year. The year-over-year decline in operating income primarily reflects increased operating costs related to the acquisition of NOK NOK and Build38, including headcount and nonrecurring acquisition-related consulting costs as well as certain costs related to organic investments, partially offset by lower share-based compensation expenses.

GAAP net income per share was $0.30 compared to $0.37 a year ago. Non-GAAP net income per share was $0.39 compared to $0.45 in prior year period. First quarter adjusted EBITDA and adjusted EBITDA margin was $21 million and 31.9% compared to $23 million and 36.4% in the first quarter of last year.

Turning to our Cybersecurity division. Cybersecurity ARR grew 16.5% year-over-year to $124.6 million, again, inclusive of the 2 acquisitions in the past year. First quarter revenue increased 1.7% to $48.5 million. Subscription revenue grew 6.6% to $35.3 million, driven by customer expansions, new logos and M&A, partially offset by lower multiyear term license revenue. Hardware revenue declined 4.3%, which was less than expected due to the earlier-than-anticipated delivery of certain customer shipments. As expected, perpetual maintenance and services revenue declined as we continue to transition legacy perpetual contracts to term-based arrangements.

Gross margin for the Cybersecurity division was 74% compared to 76% in the prior year quarter, primarily reflecting incremental third-party license costs as well as subscription and professional services costs. Operating income was $20.8 million or 43% of revenue compared to $24.2 million or 51% of revenue in last year's Q1, driven by increased operating expenses from the acquisitions, the incremental cost of revenues just discussed, higher nonrecurring acquisition-related consulting costs and increased investments.

Now turning to Digital Agreements. ARR grew 9.9% year-over-year to $67.5 million. First quarter revenue grew 11.2% to $17.4 million, driven by expansion of renewal contracts, new customer additions and overage fees. Gross margin improved to 72.5%, up from 70.3% in the prior year period, reflecting higher revenues and greater efficiency in our cloud infrastructure costs. Operating income was $5.3 million or 30.4% of revenue compared to $3.4 million or 21.5% in the same period last year, driven by revenue growth, higher gross margins and a modest decline in operating expenses.

Turning to our balance sheet. We ended the first quarter with $49.8 million in cash and cash equivalents compared to $70.5 million at the end of 2025. We generated $28.2 million in operating cash flows during the quarter. Uses of cash included $5 million for our quarterly dividend, $5.4 million to repurchase approximately 510,000 shares of common stock, $34.6 million related to the Build38 acquisition and $2.6 million in capital software development costs, among other things. We ended the quarter with no long-term debt.

Geographically, revenue in the first quarter of 2026 was 43% for EMEA, 38% from the Americas, 19% from Asia Pacific compared to 49%, 33% and 18% from the same regions in the first quarter of 2025, respectively. Year-over-year changes reflect growth in Digital Agreements and Cybersecurity software revenue in the Americas, lower Cybersecurity hardware and software revenue in EMEA, and increased hardware revenue in Asia Pacific.

Now turning to some modeling notes and our outlook. We are pleased with our first quarter results and the progress we've made in positioning the company for long-term growth. We are affirming our full year 2026 guidance for revenue and adjusted EBITDA, and we are raising our guidance for ARR. We expect continued growth in software and services revenue, driven by solid performance in Digital Agreements and moderate growth in Cybersecurity.

In Cybersecurity, we anticipate a second quarter ARR headwind of approximately $3 million from 2 contracts not expected to renew. In both cases, the customer is not a bank or a financial institution and the majority of that total is from a customer moving to passwordless authentication with a decision taken a year ago before we had acquired NOK NOK Labs. Indeed, this reinforces our belief that adding NOK NOK to our product portfolio was the right strategic move as we expect passwordless authentication to only grow going forward. As such, we expect ARR to grow in the second half of the year with most of that growth occurring in the fourth quarter.

Finally, we also expect the secular shift away from consumer banking hardware tokens to continue. For the full year 2026, we expect total revenue to be in the range of $244 million to $249 million. We expect software and services revenue to be in the range of $201 million to $204 million.

We expect hardware revenue to be in the range of $43 million to $45 million. We expect ARR to be in the range of $194 million to $198 million as compared to our previous guidance range of $192 million to $196 million. And we expect adjusted EBITDA in the range of $64 million to $68 million.

That concludes my remarks. I will now turn the call back to Victor.

Thanks, Jorge. To recap, we delivered a strong first quarter and over the past year, we have better positioned the company to deliver value to customers and create value for shareholders. While we know there is more work ahead that one good quarter does not make an excellent year, we are encouraged by the progress we have made.

Jorge and I will now be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Erik Suppiger of B. Riley Securities.

First off, when will we start to realize some of the returns that you're making on the -- in the operations over the course of 2026? When can we anticipate some acceleration in top line? And do you have a time frame when you can get back to a Rule of 40 -- delivering on the Rule of 40?

Yes. Thanks, Erik. I think before getting to the exact timeline for the Rule of 40, it's important to highlight the progress we've made. If you look at where we were on the Rule of 40 metrics in 2023, I believe the number was 12 on a combined basis, not for one of the metrics. And for the most recent quarter, we were at 36 and 32 last year. So we've definitely made progress. I don't want to pin an exact date on when we'll be at exactly 40, but we're making progress. You see it in our ARR growth. You see it in our subscription growth.

Of course, for quite a long time, we've had a consumer banking token decline, and you saw hardware decline again year-over-year. It's now only 16% of our revenue. We feel like we've made some good progress. We've added some real key functionality to our product set. And we're investing in go-to-market as well to continue to try to drive that subscription growth and try to drive the ARR forward.

Our next question comes from the line of Rudy Kessinger of D.A. Davidson.

First one for me on ARR, just so we can kind of try to get to an organic ARR growth rate. What was the NOK NOK ARR and Build38 ARR as of the end of Q1?

Rudy, thanks for the question. So as of the end of Q1, NOK NOK's ARR was $9.7 million, which is an increase from the $8.1 million that we acquired really 9 months ago, which we feel pretty good about. And Victor alluded to that 20% growth over the last 9 and change months, 9-ish months. The Build38 ARR that we acquired was $2.8 million, Rudy. So combined, it's about $10.9 million, call it, $11 million. And so when you look at ARR growth organic, it's about 7% to 8%.

Got it. That's super helpful. And the growth on NOK NOK is good to see. Obviously, you lap that next quarter as far as organic goes.

And then second question for me. Obviously, just given your guys' significant EMEA mix, I'm curious what impacts, if any, maybe you saw in the quarter or you're seeing in current deal conversations just given the conflict in the Middle East right now?

Yes. Thanks, Rudy. The Middle East itself -- well, the Gulf region itself is a small part of our business, only about 4% of revenue. And we're obviously keeping an eye on it like many people are.

For Europe, I think you'll see in the geographic mix or Jorge talked about the geographic mix, EMEA is a little bit of a smaller portion compared to growth in the Americas. Part of that strategic, we do think we're under-indexed to North America when it comes to security in particular. So we feel like we're going to grow faster in North America than we had in the past. And also the DA business has been doing well, and that's largely a North American business.

Overall, we're optimistic, I would say, about EMEA and cautiously watching the Middle East situation.

Our next question comes from the line of Gray Powell of BTIG.

I just had a couple here. So it's good to hear the commentary on NOK NOK. Where are you seeing the strongest pull with NOK NOK within your installed base? And then just like when a customer decides to take a product set, just how should we think of the upsell opportunity?

NOK NOK, I think, is an upsell opportunity because people are going to move to passwordless over the coming years. So having that capability is a core part of our offering. So some of that is customer retention. We talked about GRR in the first quarter. It was at a very strong level, 94% for DA, but 88% for security, Cybersecurity, so higher than it had been in quite a while. And there's also opportunity to get new customers with NOK NOK's offering as passwordless becomes more and more prevalent, having a super strong offering, having the Board seat on the FIDO Alliance, having the history with FIDO that NOK NOK had brings a lot to the table.

Geographically, we have seen it so far be stronger in North America with strength in Japan as well. But we expect it to grow in Europe, ultimately, to grow in Latin America and all over the world. In 5 years, people -- everyone will use passkeys and passwords we'll see and outdated.

Okay. That's really helpful. And then I just want to make sure I'm thinking about Build38 correctly. So I mean, it makes perfect sense on how it can make your existing products better. This might be a dumb question, but what was the acquisitions main purpose? Is it simply to make you more competitive on the authentication side and to make your existing stuff more compelling? Or is it going to ultimately result in another SKU that you can sell to customers and therefore, like I just said, something else that can generate revenue?

It broadens the offering. So if you think about what our app shielding offering was, first of all, it was through a partner. We had a long partnership in that realm that was successful. But that offering was what is called a wrapping. So you build the application and then after it's compiled, there's a wrapper or protection put around the app. And it's useful; it locks attacks, but it doesn't give you as much information about what type of attacks are coming in, what the operating environment is.

And the Build38 approach is different. It has an SDK-based implementation where the protection is built into the app, and it enables telemetry back from the applications. Remember, they don't control the devices. These are all consumer devices that are using mobile banking apps. It gives them lots of information about the devices themselves and about what attacks are happening. So that has all kinds of implications to broaden the Cybersecurity solution that we're offering customers.

Our next question comes from the line of Anja Soderstrom of Sidoti.

Just curious, the contracts that are not renewing in the second quarter, how big of a shortfall is that? And can you just sort of double-click on what gives you confidence in raising the ARR guidance?

Sure. We've seen good progress with ARR. Those 2 accounts -- I mean, one of them is about $2 million, right? That decision was taken a year ago for them to move to passwordless. This is a great -- it just underscores why the NOK NOK acquisition was important for us. We did not have an offering at the time. So we didn't have the opportunity to even compete effectively as they move to passwordless. We do now. Unfortunately, that decision had already been taken.

So in the short run, we're going to have a little bit of a hit, as mentioned, to ARR, but we do feel good about the growth that we've seen so far, the pipeline. And we do have seasonality in our business. We closed a lot more business in Q4 than we do in the summer, typically in most years. So we think most of that ARR kind of reinvigoration will happen in the latter part of the year, say, September through December.

Okay. And now when you have NOK NOK, do you feel you're getting better attention since you are having that offering or...?

Well, it's hard to put a precise quantification on it. But if you look at the growth in our GRR, I think we are positioned better with our customers. Instead of having technology that maybe a few years ago, someone would have viewed as dated, we have up-to-date market-leading technology in critical areas. So that helps customers feel that they should stick with you, that you're going to be a long-term solution. And we've seen our GRR go up. I don't think it's only as a result of that because our renewals team has done a great job. We've done better engagement with customers as well, but I think it certainly helps.

Our next question comes from the line of Erik Suppiger of B. Riley Securities.

A follow-up here. Of your FIDO2 customers, how many of them are buying both the NOK NOK back-end software as well as the tokens?

To date, not too many. It's -- the NOK NOK, of course, did not have a token business. So most of them are pure software customers. And that's another area that I think as we look ahead, we have an opportunity to do better in. It's something that we're hoping can blunt the decline in the consumer banking tokens as we move forward.

Having that broad offering does give flexibility to customers if they have a portion of their workforce that they want to have hardware authentication for. We can offer that without them needing to go to somebody else to a hardware-only vendor as an example. But to date, we haven't had a ton of cross-sell on that. It is an opportunity rather than a material contributor at the moment.

Is it a synergistic sale where you're able to provide any kind of advantage by using an end-to-end solution? Or is it just simply standards-based and therefore, there's no end-to-end benefit?

Well, the NOK NOK offering has advantages. Of course, it is an open protocol, fire protocol, but the NOK NOK solution has additional technology built in to enable device binding of keys, which financial institutions like a lot, not to get into too much into the weeds. But sync keys sync to Google or other cloud providers can sometimes make banks nervous. And the NOK NOK offering has the ability to have device bound key so that they're not synced on the software side.

On the hardware side, it is -- again, it's an open protocol. So they could buy hardware from someone else. It is advantageous in having the same vendor. We do very nice branding on the devices, which we have history having done that with banks for many, many years. So to the extent that they like that, it's an appealing offering. But again, open protocol, so it's not -- there's not a vendor lock-in situation when it comes to hardware.

Our next question comes from the line of Catharine Trebnick of Rosenblatt.

Now with subscription revenue roughly 80% of total and you have a good track record or it seems like Digital Agreements and the Cybersecurity subscriptions growing, can you kind of lay out a plan for -- will it always be 80%, 85%? I mean what's going to happen with the hardware you think over the next 12 months? Because I know it's been lumpy and there's obvious some changes and just kind of lay out a road map.

So let me just talk about the underlying business trends. The consumer banking tokens, we expect to continue to decline. We don't think they'll go 0. We think there'll be some portion of consumers in Europe and Asia that are using tokens to authenticate because they're doing web banking and they're not doing their banking through a mobile banking app. You ask banks, a lot of them will say 80% of their traffic is now through the mobile app versus laptops or desktops.

The hardware piece, the part that could offset that ongoing decline that's been going on for over a decade, is the FIDO2 security piece. If we can get that piece to grow, we could offset that growth and keep the hardware business at a stable rate. Of course, most of our focus -- most of our attention is on growing the subscription, growing the ARR and driving value that way.

Jorge, I don't know if you want to add anything on modeling, that would be helpful.

Yes. So I think for purposes of '26, Catharine, we didn't change our guide for hardware. Where it goes in '27, '28, nobody has a crystal ball. I think Victor have some input on that. It's obviously still in secular decline. But to Vic's point, we don't think it's going to go to 0, right? There's going to be -- even corporate banking is still done through a hardware token is the safest way to do providers transactions and things of that nature. And so there will be specifically a pool and a target sort of customer base that will continue to use that device, right, hardware token. So I cannot add more to what you said, Vic, other than hopefully stabilizes and continue a new baseline soon.

This concludes the question-and-answer session. I would now like to turn it back to Joe Maxa for closing remarks.

Thanks for joining today, everyone. We look forward to talking with you again next quarter. Have a great evening.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Q4 2025 OneSpan Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand your conference over to your first speaker today, Joe Maxa, VP of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan Fourth Quarter and Full Year 2025 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 close, OneSpan issued a press release announcing results for our fourth quarter and full year 2025. 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 2026 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 investor 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 February 26, 2026. 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 to Victor.

Thank you, Joe. Hello, everyone, and thank you for joining us today. Before reviewing our Q4 results, I would like to begin today's call with an overview of OneSpan, sharing how we look at the business and the key characteristics that we think are important and which investors may also consider in port.

First and foremost, OneSpan is a software business with over 80% of revenue in 2026 expected to be derived from software. Hardware this year will be less than 20% of our business, down from over 50% in 2019 and over 1/3 of the business as recently as 2022. However, it's important to note that in addition to strengthening our overall authentication and transaction signing functionality, the hardware portion of our business delivers attractive cash generation that supports our software growth and overall profitability.

Second, within our software business, we operate in 2 areas: Cybersecurity and Digital Agreements. I will address each in turn. In Cybersecurity, we provide value to our customers in 2 critical areas. Our first focus area is B2C or consumer authentication, particularly for banking and financial institutions. We differentiate ourselves by offering the industry's broadest portfolio for end-user log-in, corporate banking access and transaction signing.

Each authentication method delivers a balance of security characteristics and user experience, and we pride ourselves on providing a wide range of options, including onetime pass codes, SMS, Pass Keys and 502 security piece. Additionally, our solutions are available both on-premises and in the cloud to meet the diverse needs of our customers.

The second critical area of our Cybersecurity value to customers extends beyond authentication into the adjacent area of mobile application protection. Since most consumer banking and a great deal of retail is now conducted via mobile apps. As you know, we have been offering app shielding capabilities for many years. but the threat landscape is evolving rapidly, and we're seeing an increase in sophisticated attacks. As a result, we recognize that app shielding is a critical area where we need to invest more deeply.

To that end, we recently announced a definitive agreement to acquire Build38 to strengthen our app shielding offering. This acquisition will enable deeper integration with our customers' mobile applications and will allow us to dynamically update our detection methods. Over time, it also creates an opportunity to combine the signals detected across our broader mobile portfolio, giving us the ability to deliver richer insights and more robust protection for our customers. With respect to timing, we expect the acquisition to close this quarter.

Importantly, in both critical areas, consumer authentication and app shielding. We sell to our customers not based on the number of seats or users employed by our customers but rather based on the number of their end users, either consumers using strong authentication or the number of consumers using mobile apps. Over time, as consumers move towards employing agents to say, conduct banking for them or do online shopping for them, there is potential for us to strengthen our value proposition to our customers. by being able to offer more authentication and more app protection to enable their consumers to engage with them safely.

In the coming years, we expect the development and growth of consumer AI agents to increase demand by our banking and financial services customers for strong authentication and application protection. In a similar way, the ease by which deep fakes can be created using AI will likely drive demand for secure authentication, which will manifest itself in a variety of ways, including the establishment of digital credentials or wallets by various governments.

Turning to our DA business. We deliver enterprise-grade e-signature and related functionality through a stable, reliable SaaS platform, which offers a secure audit trail, white labeling flexibility, industry-leading price value and consistently high customer satisfaction. This functionality powers critical business processes for our customers, such as account opening, loan origination and the like. If those business processes are interrupted or unreliable, our customers lose meaningful revenue and importantly, reputation as well.

We've invested years in building a highly reliable, secure and high-performance platform. replicating this level of maturity internally would be a substantial undertaking for any enterprise. Indeed, if I were an enterprise relying on this proven functionality from OneSpan, I would think long and hard before building this type of critical functionality myself. In addition, while we can't predict the future, we can see that our gross retention rate in our DA business improved by over 4% in 2025 compared to 2024 and is now over 90%, which indicates that more customers are satisfied with our offering.

Looking ahead, we are continuing to invest in internal development efforts within the DA business to further strengthen our offering and expand the value we deliver. As part of this, we're planning to integrate AI-driven capabilities to provide deeper insights, streamlined decision-making, and make our platform even easier to integrate into our customers' existing environments.

As I shared last quarter, we are in a far stronger operating position today than we were just a couple of years ago. Both divisions, Cybersecurity and Digital Agreements are now solidly profitable. In fact, in 2025, we generated nearly $60 million in cash from operations. We have pursued a balanced capital allocation strategy, returning nearly $32 million to shareholders in 2025 between dividends and buybacks and also completing the Nok Nok acquisition the strategic investment in ThreatFabric and soon the acquisition of Build38 without drawing on our credit facility.

In addition to strengthening our value proposition for customers and prospects through internal innovation, targeted M&A and strategic partnerships, we're also making disciplined investments in sales and marketing, including the hiring of our new Chief Revenue Officer in December.

Turning to our results. I'm pleased the team's hard work and focus on operational excellence drove a strong quarter and a record year of profitability. Before getting into the specifics, I would like to note that we had a strong finish at the end of Q4, resulting in about $3 million of revenue coming in Q4 and that we typically would have expected to come in Q1 2026. So a great job by our sales and renewals teams in closing out the year.

The net result is that it makes our 2025 finish a little better than we would have expected and correspondingly makes 2026 a little lighter than we would have expected. But of course, we always want to close deals as soon as possible. So we're pleased that the business came in by the end of December.

In Q4, we generated $19 million of adjusted EBITDA and or 31% of revenue. For the year, we generated $78 million of adjusted EBITDA or 32% of revenue. We ended the quarter and year with annual recurring revenue of $187 million, up 11.5% year-over-year. This includes 12% growth in Cybersecurity and 10% growth in Digital Agreements. In fact, the $187 million of ARR at year-end is a real marker of our progress over the past couple of years. since we started 2024 with only $155 million of ARR.

Q4 software and services revenue grew 4% year-over-year and total revenue in the quarter grew 3% to $63 million, driven by 11% growth in digital agreements, which had a solid quarter all around. Q4 Cybersecurity revenue was flat year-over-year. For the full year 2025, our software revenue, not including services, grew by 6.4% and including 8% in DA and 6% in Cybersecurity. Indeed, overall subscription revenue grew 12%, with DA subscription revenue growing 11% and Cybersecurity subscription revenue grew 13%, driven by increases in both cloud and on-prem authentication software and mobile app shielding software.

Overall, company revenue in 2025 was flat due to the 17% decline in hardware revenue as a result of the long-term secular decline in consumer banking tokens, as consumers shift to mobile banking and bank shift to mobile authentication. For the year, software and services accounted for 80% of revenue up from 76% in 2024. The growth in software was primarily driven by growth in subscription revenue. Both business units were solidly profitable at the division level for the quarter and year.

Looking ahead, I'm excited about our opportunities to drive growth in our software business. Some of the investments I discussed are already modestly contributing to revenue as well as ARR. And we expect additional contributions as we move through 2026 and into next year. We will also continue investing in sales and marketing as well as R&D, and we will continue to evaluate targeted M&A to drive further growth. These investments, which we believe are necessary to drive stronger growth in the years ahead and enable us to achieve our long-term goal of sustainable Rule of 40 performance will have a modest near-term impact on profitability. Jorge will discuss this in more detail in a few minutes as he walks through our guidance.

Our Board remains committed to a balanced capital allocation strategy, weighing shareholder returns, organic investments and targeted M&A. Accordingly, the Board will consider additional share repurchases and for 2026 has also approved an increase in our quarterly dividend from $0.12 a share to $0.13 per share reflecting an annualized dividend rate of $0.52 per share, representing an increase of 8%.

In summary, we continue to make solid progress in building a stronger foundation for growth and we remain committed to maintaining strong profitability and cash generation while returning capital to shareholders.

With that, I'll turn the call over to Jorge.

Thank you, Victor, and good afternoon, everyone. I am pleased that we reported a strong quarter and full year of adjusted EBITDA and cash generation. Combined with our strong balance sheet, this performance enabled us to invest in the business throughout the year organically and through M&A to support our long-term growth foundation while also returning cash to shareholders.

As Victor mentioned, we intend to continue leveraging our strong balance sheet and cash generation for these purposes, including funding our planned acquisition of Build38. As a reminder, the first quarter of the year is typically our strongest for cash generation, and we also have an untapped $100 million revolver.

In the fourth quarter, our net retention rate was 104%, up from 103% last quarter. We ended the year with ARR of $187 million, up 11.5% year-over-year. Q4 revenue was $62.9 million, an increase of 3% compared to last year's Q4. Full year 2025 revenue was $243.2 million, the same as the prior year reflecting an increase in software and services revenues of 5.3% and a decrease in hardware revenues of 16.6%.

Q4 subscription revenue grew 7% to $38.6 million. Full year subscription revenue grew 12% to $156.1 million. Gross margin was approximately 74% in the fourth quarters of both years. Gross margin for the full year 2025 was 74% and compared to 72% for the full year 2024.

I'll provide a more detailed discussion on our financial metrics during my review of each business division in a few minutes. Fourth quarter GAAP operating income was $12.5 million compared to $11.8 million in Q4 of last year. The year-over-year increase in operating income reflects higher revenue and gross profit, partially offset by a slight increase in operating expenses. The increase in Q4 operating expenses primarily reflects higher headcount, including head count expenses resulting from the acquisition of Nok Nok and the nonrecurring acquisition-related consulting costs partially offset by a lower share-based compensation expense, bonus accruals and favorable software capitalization costs.

Full year 2025 GAAP operating income was $48.4 million compared to $44.8 million for the full year 2024. The increase in 2025 reflects an increase in gross profit driven by favorable product and customer mix, partially offset by an increase in operating expenses. The increase in full year operating expenses was impacted by the same items in Q4's OpEx as well as lower restructuring costs year-over-year.

GAAP net income per share was $1.13 in Q4 2025 as compared to $0.72 in Q4 2024. GAAP net income per share was $1.88 for the full year 2025 as compared to $1.46 for the full year 2024. Fourth quarter and full year 2025 GAAP net income per share included income tax benefits related to the release of valuation allowance. Fourth quarter and full year 2024 GAAP net income per share also included income tax benefits related to the release of valuation allowance, the subset and liquidation of our deal flow subsidiary and the transfer of our Cybersecurity intellectual property from Switzerland to the U.S. as part of our restructuring efforts. We adjusted for these tax benefits in non-GAAP EPS.

Beginning in the first quarter of 2025, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework to better reflect our profitability trajectory and to ensure consistency of interim periods going forward. We have provided additional details regarding these changes in quarterly earnings releases and investor presentations.

In 2025, our non-GAAP earnings per share were $0.36 in the fourth quarter and $1.49 for the full year. In 2024, our non-GAAP earnings per share were $0.38 for the fourth quarter and $1.42 for the full year. Fourth quarter adjusted EBITDA and adjusted EBITDA margin was $19.4 million and 30.9% as compared to $20 million and 32.7% and in the same period of last year, respectively. Full year 2025 adjusted EBITDA and adjusted EBITDA margin was $77.6 million and 31.9% in compared to $73.4 million and 30.2% in the prior year.

Turning to our Cybersecurity division. ARR grew 12% on a year-over-year basis in the fourth quarter to $120 million. Fourth quarter Cybersecurity revenue was $45.4 million or basically flat with the prior year quarter. Subscription revenue grew 1% and compared to a very robust 49% in the fourth quarter of last year, which was particularly strong, driven by expansion of customer software licenses, including robust growth from multiyear contracts.

For the full year 2025, Cybersecurity revenue declined 2.5% to $177.7 million, primarily due to the expected decline in hardware partially offset by 13% growth in subscription revenue, which was driven by expansion of licenses, new logos and the acquisition of Nok Nok.

Q4 gross profit margin was 74% as compared to 75% in Q4 last year. The difference from last year is primarily attributed to incremental third-party software costs, partially offset by favorable hardware product and customer mix. Full year 2025 gross profit margin was 74% as compared to 73% for the same period last year. The increase in gross margin is primarily attributable to more favorable product mix, including more favorable hardware product and customer mix, partially offset by an increase in third-party software costs.

Q4 operating income was $19.4 million or 43% of revenue compared to $23.3 million or 51% of revenue in 2024. Full year operating income was $80 million or 45% of revenue compared to $90 million or 49% of revenue in 2024. The year-over-year change in both periods was primarily due to increases in operating expenses from Nok Nok, investments made in people costs across sales and R&D and incremental third-party sulfur costs, partially offset by lower restructuring costs.

Now turning to Digital Agreements. ARR grew 10% to $67 million, Fourth quarter and full year 2025 revenue grew 11% and 7% to $17.5 million and $65.5 million, respectively, as compared to the same period in 2024. The increase in revenue for both periods was driven by expansion of renewal contracts, new contracts and an increase in overages and other onetime revenues, partially offset by a reduction in maintenance revenue due to the sunsetting of our on-prem e-signature product.

Subscription revenue grew 14.5% in Q4 and 11% for the full year 2025 to $17.4 million and $65.2 million, respectively. Q4 gross profit margin was 74% as compared to 70% in Q4 last year. Full year 2025 gross profit margin was 72% as compared to 68% for the full year 2024. The increase in gross margin for both periods was driven by increases in revenue, including increases in overages and other onetime revenues and lower cloud costs. Digital Agreement also had a $1.5 million asset write-off in the second quarter of 2024, which impacted the 2024 gross margins by approximately 2.5 percentage points.

Q4 operating income was a record $5.6 million or 32% of revenue compared to $2.6 million or 17% of revenue in the same period last year. Full year 2025 operating income was $16 million or 24% of revenue compared to $5.6 million or 9% of revenue in 2024. The year-over-year improvement in performance for both periods was driven by increases in revenue and gross profit and decreases in operating expenses.

Turning to our balance sheet. We ended the fourth quarter of 2025 with $70.5 million in cash and cash equivalents compared to $83.2 million at the end of 2024. For the year, we generated $15.5 million in operating cash flow and uses of cash in 2025 included $18.5 million to pay our quarterly dividends, $13.1 million to repurchase approximately 1 million shares of our common stock, $14.7 million related to our acquisition of Nok Nok and $11.6 million to acquire a 15% ownership of ThreatFabric among other things. We have no long-term debt at the end of 2025.

Geographically, our revenue mix for the full year 2025 by region was 42% for EMEA, 39% from the Americas, 19% from Asia Pacific compared to 44%, 36% and 20% for the same regions in 2024, respectively. The year-over-year changes by region were primarily driven by growth in Digital Agreements and Cybersecurity software revenue in the Americas and lower hardware revenues in both Europe and Asia Pacific consistent with mobile first trends in those regions.

Moving to some modeling notes and our financial outlook. We are very pleased with our Q4 and full year profitability and cash generation. as well as the progress we've made in positioning the company for long-term growth. The investments we've made recently and those planned for this year are allowed to drive higher software revenue growth in the future and to enable us to achieve long-term sustainable Rule of 40 performance. Specifically for this year, we are planning on making incremental internal investments of approximately $5.5 million in our sales and marketing and product and R&D organizations. These investments will have a near-term impact on our profitability in 2026.

Additionally, we are expecting the pending Build38 acquisitions to dilute adjusted EBITDA this year in the range of $3 million to $4 million. Regarding revenue, in 2026, we expect growth in software and services, driven by a solid performance in Digital Agreements and moderate growth in Cybersecurity.

In Cybersecurity, we anticipate contributions from our newer offerings to increase as the year progresses. We are also forecasting lower revenue from multiyear term licenses primarily due to the lower visibility into expansion and our conversions from annual licenses at this early time of the year. In addition, we accept a secular shift away from consumer banking hardware totes to continue in 2026.

More specifically, for the full year 2026, we expect software and services revenue to be in the range of $201 million to $204 million, representing 4% to 5% growth. We expect hardware revenue to be in the range of $43 million to $45 million, a decline of 8% to 12% year-over-year. We expect total revenue to be in the range of $244 million to $249 million, representing a 0% to 2% growth. We expect ARR to be in the range of $192 million to $196 million or 3% to 5% growth year-over-year. And we expect adjusted EBITDA in the range of $64 million to $68 million, inclusive of the impact of the pending Build38 acquisition I mentioned earlier.

That concludes my remarks. I will now turn the call back to Victor.

Thanks, Jorge. I want to conclude today's remarks by thanking the OneSpan team for delivering a good quarter including a great finish to the quarter and a solid full year. Their hard work over the course of 2025 and has put the company in a much better position to drive increased growth and profitability over the long term.

We are making great progress in strengthening our growth foundation. Compared to this time last year, we've enhanced our B2C authentication offerings with the addition of the leading 502 platform. We plan to expand and enhance our mobile app protection capabilities with the acquisition of Build38, and we've expanded our capabilities to detect and help prevent complex attacks through our strategic investment in and partnership with ThreatFabric. We're also working hard to improve our go-to-market capabilities so that we can capitalize on our expanded and improved customer value prop.

Jorge and I will now be happy to take your questions.

[Operator Instructions] Our first question comes from Catherine Trebnick from Rosenblatt Securities. One moment please. It looks like she did not want to ask a question, so we will take another question. Our next question comes from the line of Trevor Rambo from BTIG.

This is Trevor on for Gray Powell. Some nice results in Q4. So maybe touching on that. So we're almost about 2 months through now in your fiscal Q1. And to that extent, can you comment or give us some more color on what you've seen at the start of this year in terms of demand? And maybe how has that demand environment been for you guys started this year compared to almost the same time period at the start of last year?

Thanks, Trevor. Yes, I mean, we finished -- we mentioned on call, we finished the year strongly. So we had literally like the last couple of days of the year, some good business that came in that probably would have more naturally occurred in Q1. So that was a great finish to the year. And I think in terms -- I mean it's early, it's still February, but I think we're off to a reasonable start in terms of building pipeline for the year.

We have a new CRO, I think you know that we hired in December, and he's going to be also making hires on the marketing side and making investments on the marketing side. And so over the course of the year, we expect to start to see the benefits of that as we move through the year. Of course, it's not like flipping a light switch where you hire somebody new, and all of a sudden, all this business funds in, it's a 6- to 9-month sales cycle, but we do expect to see benefits from that in the second half of the year.

Okay. Great. That's good color. And maybe just 1 more for me. So on the hardware side, it looks like you guys saw some outperformance there. in the quarter, I mean, relative to previous quarters. Was that where the pull forward was with revenue? And then maybe on the second half of that question, we look into 2026 in the guidance that implies the hardware at the midpoint declines by around 10%. Is there a reason why the bleeding has slowed there? I mean if I look, hardware has gone from down 22% in fiscal '24, then down 16.5% last year and then now down 10%. So maybe some more color on the puts and takes of the hardware business going into 2026 would also be helpful.

So I think it's important to remember what's driving this. I mean this is going to go way back, but if you go back 25 years ago, hardware authentication for online banking on computers, on a web banking or laptop or desktop was growing like crazy. And over the last decade, that shift has gone over to mobile banking, mobile applications being used for consumer banking. And in terms of where that ultimately ends up, it depends on where it ends up. In a lot of markets, it's 80% mobile. Consumer banking is 80%, mobile use, 20% web.

And if that stabilizes or if it starts to decline less than the decline in consumer banking tokens will lessen. So far, I mean, again, it's early but I think Q1 looks reasonable, maybe down a little bit from last Q1, but in line with what we guided to for the full year.

Yes. Trevor, I just want to add to what Vic just mentioned. So in Q4, hardware landed pretty much where we expected it. If you look at our Q3 guide with respect to hardware, we ended the year at 49%, which is what we were expecting. So we ended up pretty much there. And just want to clarify what we call pull forward. So the incremental per million that Victor alluded during his remarks, that we're not on the hardware side. We're on the software side, on the security side. I just want to clarify that point.

Yes, good point, Jorge. I should have mentioned that, Trevor. Of course, we have to ship the hardware to recognize the revenue. So that was on the software side late in the year.

Our next question comes from Anja Soderstrom from Sidoti. .

Congrats on the nice progress in the fourth quarter. I'm curious with the new CRO coming on board. What we expect from him sort of implementing in terms of the sales or marketing that you haven't done before that you expect to see results from?

Yes. Thank you. It's a great question. So just as a reminder, when we went through our restructuring to cut costs, One of the things we did was I was running sales directly. And having Shaun on board is a huge benefit because he's able to focus full-time hours a week on sales execution on pipeline development on review of any accounts that may be at risk. So the ability to really add focus and discipline, I think, is one of the things we're going to see from Shaun.

And then he also owns all of go-to-market. So improving our lead generation ultimately leading to pipeline ultimately leading to closed business. Of course, that will take a while, as I mentioned, a 6- to 9-month sales cycle, sometimes longer but we expect to see improvements in all those areas over time.

Okay. And then also in terms of the acquisition of Build38, how do you have come about? How should we think about further M&A opportunities? Are there any sort of capabilities that you currently feel that you are missing that you're actively looking that might help you accelerate?

Yes. Let me address that a little bit. Strategically, what we're trying to do with these acquisitions is find a good valuable technology that could solve problems for our customers ideally in our core areas and things like authentication or app shielding, we're not looking to buy customers. So we're not looking to buy revenue. We're looking to buy technology that is modern and valuable it solves problems.

And then we have a lot of customers and then ultimately sell that to our customers and new customers as well, and therefore, take that technology and get it more widely distributed. That's the goal. So these -- both of these companies, Nok Nok and Build38 really weren't -- they didn't have a ton of revenue, but they had spent a lot of time and a lot of investment building great technology, and that's really what we're looking for.

Okay. And just one last one as we have all this AI discussion. How do you see AI as an opportunity for Montana so maybe as a potential threat?

Thanks, Anja. Obviously, this has been all over the news in the software market in 2026. A couple of things. When you look at areas like app shielding, it's really cutting edge. If you're taking existing code and you're building an application shielding offering, next week, next month, the month after that, there were new cutting-edge exploits that you have to be on top of. So if we get to AGI, it's a totally different story. But the way things stand now, we think that, that is fairly well insulated. And even things like authentication, these are critical consumer interactions, enabling them to do business, and it just seems like the risk is super high for somebody to try to build their own.

On the opportunity side, you have things that aren't so common now but will likely be coming over the next 3, 4 years of consumers employing agents to interact with their banks to do shopping in retail, and that's going to increase the need for authentication far above what it is today. So over the longer run, we think there's going to be quite a bit of opportunity to deliver more value.

[Operator Instructions] At this time, I'm showing no further questions. So this does conclude the question-and-answer session. I would now like to turn it back to Joe Maxa, VP of Investor Relations, for closing remarks.

Thanks, everyone, for joining us today. We look forward to providing another update next quarter. Have a great day.

Thank you, and thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the OneSpan Third Quarter 2025 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. Hello, everyone, and thank you for joining the OneSpan Third Quarter 2025 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 close, OneSpan issued a press release announcing results for our third quarter 2025. 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 2025 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 and reconciliations of these nonfinancial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor 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, 2025. 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 call over to Victor.

Thank you, Joe. Hello, everyone, and thank you for joining us today. Before turning to our results, I'd like to recap our progress in the transformation of OneSpan. 2024 was about fixing the cost structure of the business ensuring that we could operate both business units in a profitable manner. The OneSpan team did a great job working through those challenges, and we entered this year in a much improved operating position. In fact, that improved operating position will enable us to return about $25 million to shareholders between dividends and buybacks by the end of this year.

And in addition, we also completed an acquisition and made a strategic investment, all funded by cash generated by the business.

In 2025, as we have discussed previously, has been about putting the pieces in place while continuing to operate with strong profitability to enable growth, it has been a remarkable year in that respect. Indeed, today, we announced that our software business now over 80% of the overall business delivered double-digit subscription revenue growth and ARR growth.

Turning to the specific components that we've been putting in place to drive growth. First, right before the year started, we hired [indiscernible], a shifting to lead our R&D efforts and improve our internal development efforts. Second, in June, we acquired Nok Nok bringing the best FIDO2 software product called S3, to our portfolio. I'm happy to report that in the first 4 months since the acquisition we've already closed 2 new logos for S3, both in the low 6-figure range, and we have built additional pipeline for Q4. We believe that there is a large opportunity in the coming years for S3 as FIDO2 becomes more widely adopted.

Initially, we see the U.S. and Japan as the leading markets for FIDO2. But over the coming years, we expect passkeys to become the standard around the world. Third, in October, we announced a strategic investment in and partnership with ThreatFabric to further enhance our value proposition to customers by offering mobile threat intelligence and fraud list insights. We are in the midst of sales enablement so that our team can effectively sell the ThreatFabric products and are optimistic that those products will add to growth in 2026.

Finally, you should not, in any way, consider OneSpan to be finished in our efforts to improve the value that we provide to customers and hence our growth prospects as a business. We are working on additional initiatives. While there might not be announcements each and every quarter, we will never be done improving our value proposition to customers, whether through internal development, through acquisitions or through strategic partnerships. And we expect these efforts to drive growth, particularly in our software business, as we continue to work towards achieving a Rule of 40 performance loan. .

Turning to our results. I'm pleased with the team's efficiency which drove another strong quarter of profitability and cash generation, including $17.5 million of adjusted EBITDA or 31% of revenue and $11 million in cash from operations. I'm especially proud that over the first 9 months of the year, we generated record adjusted EBITDA of $58 million, representing $32 million revenue and $47 million in cash from operations.

We ended the quarter with annual recurring revenue of $180 million, up 10% year-over-year. In regards to revenue, we have seen strong bookings in certain regions, including our security business in North America, our Latin America business the southern portion of our EMEA region. I'm also heartened by the progress in APAC, and our DA business grew subscription revenue by double digits. And as I mentioned a few minutes ago, we're encouraged by the progress we've seen with our new S3 product acquired as part of the Nok Nok deal.

With respect to hardware, as we have discussed many times, there has been a long-term secular shift away from consumer banking tokens. To the point in the first 9 months of the year, hardware was less than 20% of our overall business. That trend is part of what drives us to broaden and strengthen our product offerings. In the quarter, toll revenue grew 1% to $57 million, driven by double-digit organic subscription revenue growth. This growth was primarily offset by a reduction in security and hardware revenue due to the shift described earlier, in consumer banking strategies in EMEA and APAC, where banks continue adopting mobile-first authentication approaches.

Subscription revenue grew 12%, led by 13% growth in security, and 11% growth in digital agreements. The increase in security subscription revenue was driven by both cloud and on-prem authentication software along with mobile app shielding software. Both business units remained solidly profitable at the segment level with digital agreements delivering record high segment operating income. Security absorbed a modest cost impact from the Nok Nok business in Q3, although we expect it to be accretive to securities operating income in Q4.

As I mentioned earlier, we continue to generate significant cash from operations, $47 million in the first 9 months of the year, and we ended the third quarter with $86 million in cash on hand. In Q3, we used $6 million to repurchase shares of our common stock. And combined with our quarterly dividend payments, we returned more than $20 million to shareholders in the first 9 months of 2025. We also used cash to make the strategic acquisition of Nok Nok and after the third quarter ended, to obtain a 15% equity stake in ThreatFabric. Our investment in ThreatFabric as well as our acquisition of Nok Nok in Q2 and our internal development efforts are designed to enhance our product portfolio and move faster to deliver great products that provide additional value to our customers.

To that end, we will continue investing in internal R&D and pursuing targeted technology-driven investments with proven market day to enhance our product portfolio. Our Board remains committed to a balanced capital allocation strategy, weighing shareholder returns, organic investments and targeted M&A. Accordingly, the Board will consider additional share repurchases and has approved another $0.12 per share dividend to be paid in the current quarter.

In summary, we're in solid progress in building the foundation for growth in our journey towards achieving Rule of 40 performance. At the same time, we remain committed to driving efficient revenue growth while maintaining strong profitability and cash generation and returning capital to shareholders.

With that, I'll turn the call over to Jorge.

Thank you, Victor, and good afternoon, everyone. I am pleased that we reported another strong quarter of adjusted EBITDA and cash generation and that we are making good progress in building our long-term growth foundation. Before I review our third quarter results, I want to remind you that our acquisition of Nok Nok Labs which closed in June 2025, modestly contributed to our Q3 operating results this year, but did not contribute to the same period in 2024.

ARR increased 10% to $180 million, and NRR, our net retention rate increased sequentially to 103%. Third quarter revenue was $57.1 million, an increase of 1% compared to last year's Q3. Subscription revenue grew 12% and including 10% organically and was largely offset by the secular decline in our hardware token business, which is directly related to banks continuing with a mobile-first authentication approach and, to a lesser extent, maintenance and professional services revenues. Third quarter gross margin was 74%, consistent with last year's Q3.

GAAP operating income was $8.2 million compared to $11.3 million in Q3 of last year. The change in operating income primarily reflects an increase in operating expenses, including share-based compensation and other nonrecurring items, along with the expected dilution related to our acquisition of Nok Nok. As a reminder, we expect the acquisition of Nok Nok be accretive to earnings in Q4 2025. GAAP net income per share was $0.17 as compared to $0.21 in the same period last year.

Earlier this year, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework to better reflect our profitability trajectory and to ensure consistency across interim periods in 2025 and in future years. Please refer to our 2025 quarterly earnings releases and investor presentations for additional details. Non-GAAP earnings per share was $0.33 in both the third quarter of 2025 and 2024. This metric excludes long-term incentive compensation and related payroll taxes, amortization, restructuring charges and other nonrecurring items and the impact of tax adjustments.

Adjusted EBITDA and adjusted EBITDA margin was $17.5 million and 30.7% compared to $17 million and 30.2% in the same period of last year.

Turning to our cybersecurity business. ARR increased 11% to $115.5 million. Revenue decreased 1% to $40.3 million. Subscription revenue grew 13% driven by cloud and on-prem authentication software, including a modest contribution from Nok Nok and app shielding software. This growth was offset by the expected decline in hardware revenue and, to a lesser extent, maintenance and professional services revenues.

Subscription revenue primarily benefited from expansion of licenses and to a lesser extent, new logos. The acquisition of Nok Nok and conversion of customer contracts to multiyear terms. Gross margin was 74.4%, and similar to last year's third quarter gross margin of 74.7%. The change in gross margin was primarily driven by product mix. Operating income was $16.7 million or 41% of revenue compared to $20.2 million or 49% of revenue in the prior year quarter. The year-over-year change primarily reflects increased operating expenses related to the Nok Nok acquisition, higher share-based compensation and other nonrecurring expenses, such as advisory related expenses.

Turning to digital agreements. ARR grew 8% to $65 million. Revenue grew 9% to $16.7 million. New SaaS contracts, expansion of renewal contracts and an increase in onetime revenue was partially offset by reduced maintenance revenue from the sunsetting of our on-prem e-signature product. Subscription revenue grew 11% year-over-year to $16.7 million. Maintenance and support revenue was negligible compared to $0.3 million in Q3 of last year. The year-over-year decline is attributed to the sunsetting of our on-premise e-signature solution.

As mentioned previously, we have financially completed the transition to a SaaS business model in our digital agreements business. Gross margin was 72% and consistent with last year's third quarter. Segment operating income was $4.2 million or 25% of revenue compared to $3.4 million or 22% of revenue in Q3 of last year. The year-over-year increase in operating income was driven by increased revenue.

Now turning to our balance sheet. We ended the quarter with $85.6 million cash and cash equivalents compared to $92.9 million at the end of Q2 and $83.2 million at the end of 2024. We generated $11 million in operating cash flow during the quarter. Uses of cash in the quarter included $6.3 million to repurchase approximately 450,000 shares of common stock, $4.7 million to pay our quarterly cash dividend and $1.9 million deferred consideration payment related to our acquisition of Nok Nok among other items. We have no long-term debt as of the end of Q3 2025.

Geographically, our revenue mix was 46% from the Americas, 38% from EMEA and 17% from APAC. This compares to 39%, 40% and 21%, respectively, in the third quarter of last year. The year-over-year changes by region were primarily driven by growth in the e-signature business and mobile application security in North America. The acquisition of Nok Nok in June 2025, which has its largest presence in North America, growth in hardware revenue in Latin America and a decline in hardware revenues in both Europe and Asia Pacific, consistent with mobile first strength in those regions.

Moving to some modeling notes on our financial outlook. We are very pleased with our Q3 profitability and cash generation and the progress we've made in positioning the company for long-term growth. As Victor mentioned, we are seeing strong bookings in most geographic regions but have also seen challenges in some regions largely due to the secular shift away from consumer banking hardware tokens. We are working hard to improve our sales momentum in all regions and believe the steps we have taken this year, combined with our continuous focus on improving the value proposition we provide to customers better positions us for stronger growth in future years.

For the full year 2025, we are updating our revenue guidance to be in the range of $239 million to $241 million as compared to our previous guidance range of $245 million to $251 million. We expect software and services revenue to be in the range of $190 million to $192 million, representing an increase of between 3% and 4% in 2025. We also expect hardware revenue to be in the range of $49 million to $50 million, representing an approximately a 16% decline from 2024. As Victor mentioned previously, OneSpan as a business is approximately 80% software and 20% hardware. We are updating our ARR guidance to be in the range of $183 million to $187 million, up from $180 million at the end of the third quarter as compared to our previous guidance range of $186 million to $192 million, and we are maintaining our adjusted EBITDA guidance in the range of $72 million to $76 million.

That concludes my remarks. I will now turn the call over to Victor.

Thanks, Jorge. To recap, we are making progress in strengthening our foundation for long-term growth. while continuing to deliver strong profitability and cash generation and returning capital to shareholders. We are working hard to deliver greater value to our customers and to create value for our shareholders.

Jorge and I will now be happy to take your questions.

At this time, we'll conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Anja Soderstrom with Sidoti.

I'm just curious, what are you saying now compared to last quarter that led you to scale back on the revenue and ARR guidance, if you can just double to that a bit more.

There were some feedback. So can you repeat your question for me?

Yes. Can you just sort of double-click on what you're seeing now compared to last quarter that led you to scale back on the revenue and ARR guidance for the year?

Yes, I can start, and then Vickie, you want to chime in as well. So there's a couple of things, Anja. First is we saw a little bit of a higher headwinds with respect to our hardware business, about a couple of million dollars. I think the other large component was on the security business, specifically we saw lower activity with respect to net expansions and new logos, primarily net expansions as we have a large market share in our secure business are North America. So I think EMEA and APAC have some of that, primarily EMEA.

Now I don't think -- I think it's an important thing to understand a couple of questions. One is, when we think about I'm [indiscernible] some feedback. One is when you think about where we are with our guide -- our updated guidance of, say -- at the midpoint, that is modestly lower versus prior year you're about 1% lower, Anjau. And I think we need to take a step back in terms of understanding the position of the company is today versus what it was, say, 12 months ago. We've done a lot of good work, as Victor mentioned in his remarks with respect to building the foundation for growth, the Nok Nok acquisition that we did very, very good capabilities that we're adding to our product portfolio.

ThreadFabric strategic investment that we are very excited about as well. So we're looking at enhanced. We've been enhancing our product portfolio this year to deliver on that software. And it's really when you think about what we've done is primarily on the software areas, right? So we really enhanced our software product portfolio and capabilities to really position the company for future growth in the next few years. And so more and more as the hardware sector, the client continues. So that's going to be less and less impactful to us. And we mentioned this software is about 80% of our business, hardware is 20% and potentially lower in the next few quarters.

And all of this with, obviously, the strong cash flow generation and profitability and that we should expect to continue. And so I just want to take a step back and walk you through it because what we're doing is really transforming the product capabilities for the organization. And so the decline in the guide, although due to partly the hardware and also a little less activity, we're really thinking about 2025 as a foundation here to build in blocks from our product capability. I don't know Vicky if you have any additional thoughts.

Yes. Let me just add to what Jorge said. So obviously, the specifics you gave are correct. But if I zoom out a little bit and just think about the business from when I joined almost 2 years in a few months, and 2 years ago, about 1/3 of our revenue was hardware. And now it's about 20%. We ended 2023 years ago with AR of $155 million and the midpoint of our guidance for the last quarter would have us ending up at $185 million, so $155 million to $185 million. And a couple of years ago, from a product standpoint, we had not introduced any new capabilities in quite some time. In fact, you saw sunsetting products so it was important for us to, first of all, build the foundation of profitability so that we could invest back in the business while returning capital to shareholders. .

And we've started to do that, not just with the acquisition and the strategic investment, but also internally with the hiring of a new CTO and internal investment. And so that's what we're working on to transform the business. And keep in mind, that the Nok Nok acquisition happened in June, the ThreadFabric strategic investment was October. So we'll get some positive impact from Nok Nok but we expect to in the future and ThreatFabric is largely a 2026 story. And we're continuing to work on other things as we continue to try to improve the value proposition that we're offering to our customers.

Okay. And then in terms of the hardware, do you see that being shipped out to the right? Or is it just sort of a decline in demand overall?

Well, if you talk to our customers, 10 to 12 years ago, customers in EMEA and in APAC, they might have had 100% of their consumers. -- using consumer banking tokens to long to authenticate. I was in Europe last month, and we had a meeting with 8 banks and we were surveying them. What percentage are using hardware now it was about 20%. So most of their customers have moved over to mobile authentication. And we see that in our business. Look at our business 10 years ago took what it is on the hardware side, it's probably 20% of the sites. We don't think that number is going to 0, by the way. There are people who prefer hardware, and we don't -- maybe that goes down to 15% of their consumers or 12%. So we don't think it's going to sterile. But that's been a long-term trend. And it's important for us to manage around that, not only with our mobile authentication offerings that we entered just years ago, but also with newer protocols like FIDO that we acquired through the Nok Nok acquisition.

And then in terms of the margin, how should we think about that? It seems like even though we'll have more hardware in the fourth quarter, this quarter compared to last year's fourth quarter. The gross margin is going to be higher. I get it right here. But how should we think about the gross margin altogether? And then also on the operating expenses. Do you see that now after you done all your tops, how should we think about growth in that in the coming years?

Yes, I can answer that. That's the question. So from a hardware perspective, I think it's probably going to be even with last year, Anja, the hardware revenue, we mentioned that during the last call in terms of the split and that we see what we have today. And then from a gross margin perspective, is going to be, I would say, probably similar to last year's Q4, Anja. And so that will put the full year gross margin in around 73-ish percent slightly higher than last year's, which I think was [indiscernible] and then from an operating expense perspective, one thing to keep in mind in the year-over-year is the Nok Nok acquisition.

So for the quarter, it's around -- I'm just going to do a round number. It's around $2 million on a run rate basis that we'll be adding year-over-year. And then obviously, we've done some also incremental investments in R&D and things like that. And I don't expect it sequentially to increase dramatically compared to what you saw in Q3. but there will be maybe a modest increase because of that.

Our next question comes through the line of Catherine Trebnick with Rosenblatt Securities.

Can you just in a snapshot, your product road map, where you feel that the deficiencies, these headwinds that you've been experiencing just really, what are the 2 or 3 products do you think in the next 12 to 24 months are going to make up for this gap we've been having.

Yes, sure. Let me talk a little bit about that. I don't know that I would describe it as a deficiency. We have very good mobile authentication technology. But as you know, multifactor authentication has been for a long time. Everyone is familiar with getting in the U.S., you get an SMS text message with it or you might get an e-mail and overseas onetime passcodes are widely used as well, although not SMS. So everyone is very familiar with multifactor authentication. So that protocol or approach has been widely adopted.

And as Jorge mentioned, we have good market share there. And even our NRR in security in Q3, I think it was 101 or it will be about 101 for the year. So it's very solid. But over time, technology has changed, and we're seeing that with the adoption of passkeys. With FID02, we're going to see much broader adoption of passkeys as we move through the rest of the decade. And we think it's important for us to broaden our offering so that we have not just the mobile authentication on top of the hardware authentication that existed many years ago and still exists for a portion of their customers but also enables passkeys at a very, very scalable level. It also has very good latency and we've proven it out at scale with many different customers. So we think that's going to be a very interesting area for growth.

That was very helpful. And then anything you can add on digital agreements and what you're seeing there? And how you expect growth there to pan out in the next 12 months?

Yes. We've been doing pretty well there. I think if you look at the growth, it's been in the mid- to upper single digits, and we expect it's October 30. So you can't be too certain about how Q4 is going to go, but we feel pretty good about the Q4 pipeline. And we think we have an opportunity to not just expand with customers we already have, but also to land some new ones. And that's an area where our internal development, I mentioned internal development, and that's an area where we'll be using AI in the product more in the coming 12 months. That's an area for us, a focus area for us in the coming months. So we think that's going to be a strong product, continue to be a strong product.

And obviously, we're always trying to do better and have better results. But I think we're making very good progress on the DA business. And the other piece, Catherine, on the DA business, Jorge mentioned this, is record operating income this quarter, I think, 25%. So when you layer that on top of the growth there, the numbers start to -- that business starts to look more and more appealing.

The next question comes from the line of Erik Suppiger with B. Riley Securities.

First off you're taking a lot of steps this year to start accelerating growth as you get into '26 and it's mostly on the software side, can we assume that your subscription revenue growth in '26 should accelerate over '25, if we anticipate double-digit growth in '25. Can it accelerate from there in '26.

Jorge, I don't know if you want to talk about the specifics, but that's absolutely, our aim is to continue to improve the software business. I think software as a percentage of revenue, we're at 80% now, and it probably gets to, I don't know, 82% or 83% next year. Jorge, I don't know if you want to talk to any of the specifics on...

Yes. So I think just the one thing that I would add is Erik, is the -- I think the subscription, yes. I think when you look at the different components of revenue for security, you have to take into account maintenance and some of that -- those dynamics in terms of the perpetual term -- so main will be a little bit choppy, right? But I think if you are focused on the subscription security as a [indiscernible], et cetera.

Okay. Good. Good. I know you don't have much exposure to federal, but any comments on federal and if the shutdown is giving you any pause? .

I would say no. I think we're lucky in that sense, Erik, that we really haven't felt it. We have a little bit exposure in our digital Remis business but it has not been anything material at all luckily, not in wood. And so I think from that standpoint, the shutdown has been a nonevent for us.

Okay. And then lastly, just a follow-up on Catherine's question. What is -- is there any change or any -- has there been any intensity of competition? Or has the market dynamics changed at all in terms of software solution -- software authentication for banks? Is there any change in that market?

No. I think if you actually look at our business, we've been doing quite well in North America. We started in North American security sales effort about 15 months ago, July of '24. But that's a small -- historically, a small portion of our business. So although the -- there's been good progress, it's from a small base. So we're doing well there. We've mentioned on previous calls quite a few times, I think, that the economic environment in Europe was a little bit more challenging for us. And I think that that's historically been a very large part of our business. So I think that has impacted us to a certain extent, it hasn't been the strongest economy there.

Okay. But it's not -- there's no particular change from a competitive perspective? .

No. No. If anything, I think we're becoming more competitive as we add new capabilities I've mentioned that pretty a few times, but it has some large customers that were going to start rolling out. And I think it overall helps our competitive position compared to 6 months ago.

Then last question. In terms of the FIDO2 push, how -- what progress have you made with channel partners? Have you been -- what progress have you made with channel partners on that front?

Well, I want to talk in general about the FIDO2 push in the S3 product. I mentioned we got our first 2 new logos, which is good within within 4 months of closing the deal. And we have others in line, some of which are from channel partners. One of those 2 actually was from a channel partner, 1 of those 2 new lots I mentioned. And we think that, that is obviously going to be an important method for sales heading into 2026. That product, I mean, just to FIDO2 is an open protocol, right? So you can stand up your FIDO2 server if you want. But what you get from is S3 is extreme scalability, where you can scale it up to millions and millions and millions of users.

I alluded to this earlier, you get excellent performance with respect to latency. A great management console to make it easy to administer and also flexible deployment. This is something that we're well known for. You can deploy it in the cloud or on-prem and there with both deployment modes. So it's a very appealing offering, I think, in the financial services world because some banks, as everyone knows, some large banks still prefer on-prem. So we give them maximum flexibility.

Are those customers buying the tokens from you as well, the FIDO2 tokens?

So the FIDO2 tokens, this is an interesting another area, right? So we started developing those internally. That was internal development. And we feel good about that business as we move forward. We have quite a bit of time. We're expecting orders. We've gotten some orders already. And we expect that to be a more meaningful revenue contribution in 2026 than it is today. So if you think about consumer banking tokens, if that continues to decline, the FIDO2 security keys could perhaps offset some of the secular consumer banking token decline.

The next question comes to the line of Gray Powell with BTIG.

Okay. Great. look, I only have one question, but I'm going to break it down into 27 parts. Is that okay? .

Sure, right. Go ahead. Okay.

Now just -- okay, so just really just 2 questions on my side. And more or less hit on this. When a customer elects to not renew hardware tokens, I'm going to assume it creates an opportunity to upsell your mobile security suite and then I just -- like, is that the case, like it is a direct shot? Or is there more of a jump ball situation where you have to find off that customer from other competitors?

Well, it could be a jump ball situation. But in a lot of these cases, I alluded to customers saying they have 20% of their consumers using hardware. So in many cases, it's already happened. They were a dozen years ago at 100% of their consumers using hardware. And now they've moved over to mobile for the majority of their consumers, younger consumers, new accounts, and they might have been 5 years ago, 40% of their consumers using hardware. And so that number has been declining over time. It does tend, by the way, to have heavier use cases in the corporate banking market where you might see 50% of consumers -- not consumers, but companies using hardware tokens, why is that the case? .

Well, corporate banking very often still happens in front of a large screen in front of a computer, not on a mobile phone. The more you're using a mobile phone, the more mobile authentication is likely to be used. So Gray, when you see a bank go from 3% consumer banking token, to 20%. It's not really a jump ball situation. Yes, there's more opportunity for mobile, authentication licenses. But we're not getting as much revenue upfront from those as we are from the hardware tokens.

Understood. That's helpful. And I guess maybe the bigger question for me personally, just on the ARR side, can you talk about the visibility you have on late-stage deals and pipeline just like the overall confidence level you have in the Q4 ARR guide just because it does imply a decent uptick in the pace of net adds from what we've seen the last 4 or 5 quarters. And look, I know it's Q4, which is some seasonality. But any color there would be greatly appreciated. .

Jorge, you can talk about the model. I'm happy to talk about the outlook. So go ahead, and I'll let you start.

Well, I think -- so from a model perspective, so we obviously take into account what is going to renew, Greg, what is the potential expansion based on opportunities that we see in pipeline and obviously, talking to our sales leaders and all that. So we have weekly call, we have the ability to that. And that is part of how we build our ARR forecast, okay? What is the risk? Is there any slippage going in it, obviously, as you know, with term and something falls out of it for more than 90 days, we take it out of ARR. And so it's an active -- it's an active discussion that comes in with the sales to understand what is the potential rate, what is the potential expansion. And this applies to both business units. These are agreements as well as security. And it's an active dialogue. And so it is sort of like a bottoms up if you where we try to -- we model a forecast, it is when it's Q1 or the same quarter, it is sort of a bottoms up, Greg, and it's all about execution, making sure that we can close those. And not everything is going to be perfect like everything else. Sometimes it's art, it's not a science, but we try to -- so we do have I would say, within the quarter, some visibility, right?

There are some bluebirds that happen that we don't anticipate. Like we mentioned, the HDFC situation last quarter. And sometimes, we see some contraction. And that's because our sales leader or the client is not -- they don't know yet. So those we have less visibility. But for the most part, I think within the quarter, we have a fair amount of visibility.

So I'll turn it to you Vik to talk about the other component?

Yes. I mean, we feel pretty good about it. I mean it's it's October 30. So we have pretty good visibility. You don't know for sure what's going to close. I think our sales team, and if you could go back in time, 12 months to now feels a lot better about our competitive position. I mean we've introduced the FIDO security keys. We bought Nok Nok. We have the Threat fabric. There's a lot of exciting stuff happening and a lot of good conversations happening. You can't book exciting conversations and people feeling good about things, but it's definitely an optimistic side.

The last question comes from the line of Rudy Kessinger with D.A. Davidson.

Kind of just a follow-up to some questions have been asked. Just with respect to the cut for this year, specifically on revenue and ARR, is that more so related to gross churn? Is it more so related to lower than previously expected new logo or lower than expected -- lower than previously expected cross-sell and upsell.

Jorge, I can give you the details. Go ahead, Jorge.

Yes. Thank you. Thank you, Victor. So it is primarily related to lower activity in net expansions. We did have, I would say, this quarter in Q3 that impacted one contraction. But I think overall, taking a step backward, it is primarily the lower activity for expansions. [indiscernible] to a lesser extent, but it's primarily more than their expansions.

Well, and also hardware, right, to a certain extent versus we have $2 million of hardware lower than -- on the revenue side, yes.

Yes. Okay. And I guess, as we think about maybe '26, I mean do you feel like -- give us maybe kind of a time line maybe for when you think you might start to see some more traction in some of these newer products and maybe you might be able to reignite growth here? .

Yes. So let me talk a little bit about I think we're going to see traction in '26 with S3. I think we've already seen traffic with a couple of deals closing and more pipeline in Q4. But keep in mind that if that business grows 30% or 40% next year. That will be a vast acceleration over what they were doing prior to the acquisition. But that will have a $3 million or $4 million impact on our business in terms of bookings. So the scale of it will take a little bit of a while to build, even if we can accelerate growth to a much faster growth rate than the business was before or than we have been as a business over the past number of years.

ThreatFabric is our partnership and an investment. And that's going to -- it's a little bit harder to tell because it's only been 3 weeks but we think that will contribute not as meaningfully as knock. But for our business, like every bit of improvement helps. If we pick up $3 million or $4 million of ARR somewhere, I think that is a real positive for us overall. And of course, we're not -- we alluded to this on the prepared remarks, we're not just doing one thing. We're working on lots of different things, trying to get lots of -- we can score a bunch of netting a bunch of singles. It doesn't all have to be a home run.

This does conclude the question-and-answer session. And I'd now like to turn it back to Joe Maxa for closing remarks.

Thank you, everyone. I'm glad you could join us today. We look forward to sharing our results with you again next quarter. Have a great night. .

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

Welcome to the Q2 2025 OneSpan 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 Joe Maxa, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining the OneSpan Second Quarter 2025 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 close, OneSpan issued a press release announcing results for our second quarter 2025. 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 2025 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 investor 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 August 5, 2025. 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. Hello, everyone, and thank you for joining us on the call today.

Before turning to our results, as we are halfway through my second year at the company, I thought I'd take a moment to review our trajectory and the overall position of our business. Last year, as you know, we focused on restructuring OneSpan to enhance its profitability so that it remains viable as a business and continue to be a long-term reliable partner for our customers. With that accomplished, our focus in 2025 has been on building the foundation necessary for OneSpan to not only be profitable, but also to grow the business and strengthen our product offerings for our customers.

Right before the year started, we hired a new CTO, Ashish Jain, to lead our R&D team. And part of our strategy is to augment our increased internal development efforts with targeted M&A so that we can move faster in delivering great products to our customers.

You saw that in the second quarter, both with our acquisition of Nok Nok Labs and with the establishment of a new line of credit to facilitate that kind of targeted M&A. As we move through the second half of the year, we will continue to enhance our go-to-market capabilities so that we can deliver our great products to more customers.

As we have said previously, our goal is to grow the business while delivering strong profitability and to do both of those things while also returning cash to shareholders. Halfway through my second year, I'm happy to say that our transformation of OneSpan is on track. Looking ahead, our goal is that by the beginning of next year, we will have made significant progress in evolving our go-to-market capabilities as well as our product suite under Ashish's leadership such that we are well positioned to accelerate top line growth in 2026 as we continue to drive to a Rule of 40 performance.

Turning to our results. I'm pleased to report another strong quarter and a solid first half of 2025, reflecting our team's disciplined execution. This focus by our team is driving our strong performance and positions us well to deliver sustained long-term value for our shareholders.

As I mentioned a moment ago, I'm also pleased and excited by our acquisition of Nok Nok Labs during the quarter, which brings to us FIDO2 passwordless authentication software, to add to our Fido2 hardware security keys.

We have long been an industry leader in multifactor authentication and transaction signing technologies with our solutions widely trusted by many of the world's largest financial institutions, for their strong security, flexibility and innovation. The addition of Nok Nok's FIDO2 software, combined with our recently launched FIDO2 security keys hardware, enables the company to provide customers worldwide with the industry's most innovative, comprehensive and future-ready authentication portfolio.

Whether on-prem or in the cloud, OTP or FIDO, software or hardware, including DIGIPASS and FIDO2 protocols and Cronto solutions for transaction signing, OneSpan now offers customers maximum flexibility to meet their authentication needs.

As you can see, Nok Nok was exactly the kind of targeted acquisition that enhances our product portfolio and delivers value to our customers.

With respect to the second quarter, we were solidly profitable in the quarter with adjusted EBITDA of $18 million or 29.5% of revenue. Also, for the first half of the year, we achieved record adjusted EBITDA of $41 million, representing 33% of revenue, our highest first half performance to date. We ended the quarter with annual recurring revenue of $178 million, up 8% year-over-year, including $8 million from the Nok Nok acquisition.

Excluding Nok Nok, ARR grew 3%, in line with the low to mid-single-digit growth rate that we expected and discussed last quarter. As a reminder, we had a few very large contracts in last year's second quarter, which made for a challenging year-over-year ARR comparison this quarter.

By the end of 2025, we anticipate our ARR to grow at a mid-single-digit percentage rate from the June 30 ARR level. Subscription revenue grew 22% in the second quarter of 2025, led by 39% growth in security and 5% growth in digital agreements. Security growth was primarily driven by on-prem authentication and app shielding software. As expected, total revenue declined modestly in the quarter.

Strong subscription revenue growth was primarily offset by the three trends we've discussed on prior calls. First, banks in EMEA and to a lesser extent, in APAC and have been adopting mobile-first authentication strategies with respect to consumer banking. This has reduced the security hardware revenue over time. Second, our 2024 transition of certain legacy perpetual maintenance contracts to term-based subscriptions lowered maintenance revenue compared to the prior year. Third, revenue was impacted by $1.2 million from sunsetted products. However, this was partially offset by $300,000 of acquired revenue during the quarter.

Looking at geographies. In July 2024, we started a dedicated sales effort in North America focused on our security business. I'm pleased to report that, that team had a great first half, and we expect continued high performance in that region in the second half of the year.

As you know, historically, North America has represented only 10% to 12% of our overall security revenue. So we see that as a growth opportunity heading into 2026.

In the first half of 2025, we also saw strong bookings performance in our Latin American region. In terms of the overall outlook, Jorge will provide additional details on the second half in a few minutes.

Both business units remain solidly profitable at the segment level. and we believe we are well positioned to achieve our stated goals of delivering growth and strong profitability across both segments. We also continue to generate significant cash from operations. In the first half of the year, we generated $36 million and ended the second quarter with $93 million in cash on hand.

As we have discussed previously, our Board remains committed to a balanced capital allocation strategy, weighing shareholder returns, organic investments and targeted M&A. In the first half of the year, we returned cash to shareholders through two quarterly dividend payments of $0.12 per share, which totaled close to $10 million of cash returned to shareholders.

The Board has also approved another $0.12 per share dividend to be paid in the current quarter. In addition, we used cash to make the strategic acquisition of Nok Nok consistent with our plan to pursue targeted, technology-driven acquisitions with proven market fit, enabling us to bring additional value-added products to our customers and prospects.

We have a strong global customer base and a leading position in the authentication market. With AI increasingly being used to amplify the scale and sophistication of account takeover attacks, we remain focused on innovating to stay ahead of emerging threats and to enable customers to adopt a wide range of flexible, future-proof authentication solutions.

As a result, we will continue to invest in internal R&D and explore targeted M&A opportunities to enhance our product portfolio. And we plan to help our clients succeed by continuing to provide them with seamless and secure user solutions to meet their authentication needs and address related security challenges.

As we look to the future, we are committed to operational excellence and to driving efficient, sustainable revenue growth while maintaining strong profitability. With that, I'll turn the call over to Jorge.

Thank you, Victor, and good afternoon, everyone. I am pleased to report another strong quarter, and I'm excited about our acquisition of Nok Nok Labs, which enhances our authentication portfolio and allows us to bring a broader suite of authentication solutions to our customers. We acquired Nok Nok on June 4, as such, our second quarter results include Nok Nok's financials from the acquisition date or for about a month.

ARR grew 8% to $178 million, including $8 million from the Nok Nok acquisition. Our Net Retention Rate, or NRR, was 101%. As previously discussed, we anticipated a tough year-over-year ARR and NRR comparison this quarter, primarily due to large expansion contracts that benefited last year's Q2. In addition, this quarter, there was contraction at a few customers that reduced our overall ARR.

Second quarter revenue was $59.8 million, down 2% compared to last year's Q2, primarily due to the anticipated decline in security hardware as a result of the long-term trends of banks moving to a mobile-first authentication approach. Digital agreements revenue grew 1%, while Security Solutions revenue declined 3%, both in line with expectations.

Second quarter gross margin was 73%, up from 66% in Q2 of last year. The improvement was driven by favorable product and customer mix, including increased software and reduced hardware revenues as well as the absence of approximately $1.5 million in asset write-off charges recorded in the second quarter of last year.

GAAP operating income was $10.5 million compared to $7.6 million in Q2 last year. The increase reflects higher gross profit and lower restructuring costs, partially offset by increased operating expenses related to share-based compensation, commission expenses legal and consulting costs associated with the Nok Nok acquisition and incremental operating expenses from Nok Nok.

GAAP net income per share was $0.21, up from $0.17 in the same period last year. As a reminder, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework last quarter to better reflect our profitability trajectory and to ensure consistency across interim period in 2025 and in future years. Please refer to our Q2 earnings release and investor presentation for additional details.

Non-GAAP earnings per share was $0.34 compared to $0.31 in Q2 of 2024. This metric excludes long-term incentive compensation and related payroll taxes amortization, restructuring charges and nonrecurring items and the impact of tax adjustments. Adjusted EBITDA and adjusted EBITDA margin was $17.6 million and 29.5% compared to $16.2 million and 26.5% in the same period of last year.

Turning to our Security Solutions business. ARR was $114.5 million, up 9% year-over-year. Excluding Nok Nok, ARR grew 2%. Security revenue declined 3% to $44.2 million. Strong subscription revenue growth of 39%, including an immaterial amount of revenue from Nok Nok was offset by expected declines in hardware and maintenance revenues and headwinds from sunsetted products.

The strong growth in subscription revenue was primarily driven by the timing of multiyear renewals and conversion to multiyear customer contracts in the quarter, expansion of licenses and, to a lesser extent, new logos. This growth was partially offset by the sunsetting of our legacy deal flow solution. Gross margin for security was 74%, up from 67% in the second quarter of last year, reflecting favorable product and customer mix.

Segment operating income was $19.8 million or 45% of revenue compared to $20.7 million or 46% of revenue in the prior year quarter. The slight decline was primarily due to higher commission expense and increased operating expenses related to the Nok Nok acquisition.

Turning to our Digital Agreements business. ARR grew 4.5% to $63 million. Revenue grew 1% to $15.6 million. New SaaS contracts and expansion of renewal contracts were partially offset by reduced maintenance revenue from the sunsetting of our on-premise e-signature product. Headwinds related to sunsetted products impacted revenue growth by about 3 percentage points. Subscription revenue grew 5% to $15.6 million. As mentioned earlier, we faced a tough year-over-year comparison due to a few large contracts that benefited Q2 of last year.

Maintenance and support revenue was negligible this quarter compared to $0.5 million in Q2 of last year. The year-over-year decline is attributed to the sunsetting of our premise e-signature solution. Gross margin for digital agreements was 71%, up from 53% in the prior year quarter. The increase was primarily due to the absence of $1.5 million in asset write-off charges recorded last year.

Segment operating income was $2.9 million or 18% of revenue compared to a loss of $0.2 million or negative 1% in Q2 of last year. The improvement was driven by higher gross profit and lower operating expenses primarily due to lower headcount and variable expenses.

Now turning to our balance sheet. We ended the quarter with $92.9 million in cash and cash equivalents, compared to $105.2 million at the end of Q1 and $83.2 million at the end of 2024. We generated $6.2 million in operating cash flow during the quarter, up from $2.3 million in the second quarter of last year. We used $4.6 million to pay our quarterly cash dividend and $12.1 million net of cash acquired as part of the consideration for the Nok Nok acquisition. We expect to pay an additional $1.9 million in Q3 and the remaining balance in late 2026.

As you are already aware, during the quarter, we entered into a 5-year syndicated revolving credit facility in the amount of $100 million, which may be used for general corporate purposes, including to support our strategic growth priorities, including targeted M&A. Except for a small letter of credit supporting an office lease we currently have no borrowings under the credit agreement and have no long-term debt.

Geographically, our revenue mix was 39% from EMEA, 40% from the Americas and 21% from APAC. This compares to 41%, 35% and 24%, respectively, in the second quarter of last year.

Moving to our modeling notes and financial outlook. We're very pleased with our second quarter and first half performance and expect a return to positive revenue growth in the second half of the year. We expect double-digit subscription revenue growth for the full year 2025, along with a modest revenue contribution from the acquisition of Nok Nok. We expect to see continued hardware headwinds, primarily in Q3 with gradual improvement in Q4.

Also in the second half of the year as compared to the first half, we expect reduced year-over-year maintenance revenue headwinds from the transition of perpetual contracts to term-based licenses and from the impact of sunsetted of products. Regarding hardware, due to the increased visibility into orders and shipping schedules as compared to earlier in the year, including the delay to 2026 of the shipment of [ certain ] already booked hardware deals, we now expect total second half 2025 hardware revenue to be similar to the first half, with the majority of the second half revenue recognized in the fourth quarter.

On a sequential basis, in the second half of 2025, we expect an increase in year-over-year ARR growth and an increase in NRR for both the third and fourth quarters.

For the full year 2025, we are maintaining our revenue guidance in the range of $245 million to $251 million. We expect incremental revenue from the Nok Nok acquisition to be offset by a similar reduction in hardware revenue.

We are increasing our ARR guidance to be in the range of $186 million to $192 million as compared to our previous guidance range of $180 million to $186 million. The increase in guidance is attributed to our acquisition of Nok Nok, partially offset by a few reductions by the customers that I discussed earlier. And we are maintaining our adjusted EBITDA guidance in the range of $72 million to $76 million. We expect the acquisition of Nok Nok to be slightly accretive to adjusted EBITDA in the fourth quarter of 2025.

That concludes my remarks. I will now turn the call over to Victor.

Thanks, Jorge. To recap, we had another strong quarter, and I'm very proud of the OneSpan team's disciplined execution and commitment to operational excellence. I'm also excited about our strategic acquisition of Nok Nok, which expands our authentication offering to include software-based FIDO2 capabilities and provides us with an additional proven value-added solution that we can bring to our customers and prospects.

Looking ahead, we remain focused on delivering value for our customers, and executing well as a business in the second half, which we believe will position OneSpan for profitable growth. To that end, we remain committed to maintaining our strong profitability as we drive towards our goal of achieving a Rule of 40 performance as a business.

Jorge and I will now be happy to take your questions.

[Operator Instructions] Our first question comes from Catharine Trebnick of Rosenblatt.

Yes. On this acquisition, that's interesting that you're headed in this direction. Can you give us some more detail on how competitive you feel you'll be with this by buying Nok Nok and adding this to your capabilities?

I'll do it then, Catharine, maybe Vic can chime in. So thanks for the question, Catharine. So I think this is one of the areas that we have been talking about in terms of complementing our solutions in the security software space. It fits really well when it comes to -- it's a tuck-in acquisition where we like the technology and we can also plug it into an existing technology for FIDO. As you remember, we launched FIDO security keys, our hardware, a few of those keys last year. And so when you think about where this is headed in terms of security for user seamless authentication within FIDO2 is also going to be an important part of the mix that our banking and financial services customers will head and will move towards in the future. And so we think that this is going to be a very, very good acquisition in the long term for us as we provide, again, the maximum flexibility as Vic alluded in terms of offering and becoming the authentication company for -- particularly for banks and financial institutions. So happy to answer any additional questions you have on that.

Well, is this more like of -- if it's already installed customers more -- are you looking at this as maybe new landing because it's the newer tech but also an upsell to your existing banking customers?

Yes. So that's a very good question, Catharine. So when you think about one of the biggest assets, and Vic has mentioned this in the past, one of the biggest assets this company has an been. It's a long tenured customer base. So we service over 1,000 banks globally. And so when you think about that, so we really -- the purpose of this acquisition was not for the revenue, let's just be clear. The purpose of this acquisition was because of the technologies and the cross-sell opportunity that we can have from this technology to our existing customer base, okay? And so we see that as an opportunity.

Obviously, more in 2026 than 2025 in terms of the cross-sell. We're getting, obviously, the teams aligned. The product needs to be put in the same server, so it would be a seamless product for our customer base. And there's obviously the team I mentioned sales teams getting aligned as well is that we feel pretty good about not only the product that we are part of the team that we acquired as well. Catharine, it's a very experienced team that has been a pioneer in this area in the FIDO2 space. They also have a board seat in terms of the FIDO alliance that -- now we have a Board seat as well. And so we feel good about where we are. Again, this is more about the cross-sell opportunity into our existing customer base.

[indiscernible] Vic, feel free to chime in.

Our next question comes from Anja Soderstrom of Sidoti.

I have a question about the ARR guidance and the increase there about $6 million, but Nok Nok said added about $8 million for the second quarter. How should we think about that?

Yes, I can answer that. Thanks for the question, Anja. So yes, we mentioned knockout added about $8 million into ARR pool. Part of the -- and when you -- when we sort of like gave new guidance, we increased it by $6 million on both the low end and the high end. So the remaining $2 million, Anja, is primarily related to a couple of contractions that one that we have mentioned in the past calls really about a bank that was selling operations, particularly in the Middle East. And so that accelerated a little bit more than we expected in the first half of the year.

And then the second component of that was we also had another, I would say, 7-figure customer that impacted ARR that is moving slower than anticipated in implementing our solutions because of their internal delays. And so conservatively, we decided to move that out of the ARR for the remaining of the year. And so that's sort of the puts and takes for getting the 6% increase on both low and high end.

Okay. And then just in general, regarding the pipeline, how is that shaping up for you?

Sorry, say that one more time, Anja, you got off for me a little bit.

The pipeline, how is that shaping up for you just in general?

Vic, do want to take that one?

Hello. Okay. Great. I'm sorry, could you repeat the question? I had a little Internet trouble there.

No problem. Yes, I'm just curious about the pipeline just in general, how is that shaping up for you?

Well, we had a great first half of the year in terms of bookings. And then in the second half of the year, of course, the way our business works, the third quarter and the fourth quarter are much bigger -- tend to be much bigger quarters in terms of closing business. We've been very happy with the progress overall on our go-to-market. And the -- as we mentioned on the prepared remarks, the hardware business, we think will be a little bit tougher in the back half of the year, but we're excited about having something new to offer to customers as well with respect to the Nok Nok Labs FIDO2 capability. So the second half of the year, I think, is shaping up pretty well for us.

Our next question comes from Trevor Rambo of BTIG.

Trevor on for Gray Powell. So a lot was happening in the quarter from a macro perspective with the tariff announcement we had in April, then the 90-day pause and then an extension of that pause. And you mentioned in the prepared remarks that a few customers contracted in the quarter. But maybe from a higher level, can you give some more color on what you saw in the quarter? And then given the uncertainty in the macro had an impact on general customer buying behavior? And then has any of that spilled over into the first month of Q3 so far?

Yes. Thanks, Trevor. So we had a good first half in terms of bookings. So what we report, of course, is revenue, it's not exactly analogous to our bookings. But we had a good first quarter. The tariff situation for us was very minimal. I think we talked about it last year when I think the tariffs -- the initial tariffs proposed were much higher. It was still not going to be that big of an impact. The way things have shaken out, it's a few hundred thousand dollar impact for us. So that's a very minor thing.

And then the other aspect that a lot of people talked about in the second quarter was done the federal cuts, the DOGE cuts. And we have, I think 2% of our revenue is from the federal government. So that had a relatively small impact as well. So overall, things have been going pretty well in terms of our performance.

I mean I would say, geographically, Europe -- and I mentioned this last quarter, Europe has been a little weaker for us, and we've done a little bit better in the Americas in North and South America. And EMEA is typically a strong market for us. So we'd love to see that turn around. But overall, it has been solid so far.

Great. That's some great color. And then maybe for my second, you talked on the prepared remarks and a bit earlier about evolving the go-to-market program by the start of next year. Can you dive a bit deeper into what that's going to look like? And maybe you can provide some more color on the process and maybe what the outcome is?

Yes. I mean, so part of it is we're just putting additional resources where things are going well. So we talked about this on the call, we started up in North America. Before we had a combined team in North America, we had a sales team if you go back a year plus ago, a sales team that was supposed to sell both product lines, very different buyers, very different competitive set.

So when we started last July, so a year ago is we split the North American sales team to a dedicated security team and a dedicated digital agreements team. And what we're doing is continuing to invest as that's starting to pay off. So we've increased the size of the North American security sales team. We added additional resources when we did the Nok Nok acquisition as well. So that's part of it.

And then part of it is us refining our approach on the DA side and really trying to -- without giving too many competitive details, trying to do better in the new logo acquisition. That business, as we've talked about in the past, is a land-and-expand business. So we're really focused on trying to land more because we know the expansion happens.

[Operator Instructions] Our next question comes from Rudy Kessinger of D.A. Davidson.

Jorge, could you maybe expand or just quantify maybe the contraction with those two large customers? Because understanding you're saying second half bookings are stronger historically, but your first half net new ARR $2 million relative to past years. I know last year, Q2 is a tough compare even relative to several years prior to that, still down quite a bit. So could you quantify maybe what the impact there was from those two customers?

Yes, thanks for the question. It was about $3 million, Rudy, between those two customers of the year-over-year contraction.

Okay. And with that one customer selling off assets in the release? Is there a risk that they sell off more assets in other geographies or any further contraction risk from that one?

So obviously, we don't have the stability of the quantification ruling, specifically for that particular client. I think my sense is that, as I mentioned, this accelerated in the first half. I think there's still going to be some of it, but it may be a little more muted, but we still have yet to see it.

Okay. Got it. And then with Nok Nok, could you maybe just quantify or try to size up for us just the upsell, cross-sell opportunity that they bring? What percent of your installed base do you believe can really use this capability or that you could sell to over the next couple of years?

Yes. So this is an interesting topic because I think it's fair to say that the Fido authentication protocol is something that is has grown over the past few years and will grow even more over the next 3 to 5 years. So part of this strategy is for us to be able to offer a complete solution to our customers. And we saw this, if you go back 10-plus years ago, when banks in EMEA and in APAC were doing largely their consumer authentication was largely through hardware. And over time, we've talked about this before, it shifted to mobile first, so we needed to have a mobile offering. And we did.

So with respect to the FIDO Authentication Protocol, we wanted to make sure that we had an offering both in hardware which we introduced those recently and software. So it gives us the opportunity to grow with those banks, to grow with our customers into the FIDO ecosystem without losing them to competitors and offering them a solution where they don't have to rush all at once into FIDO like flipping a light switch, they can start using FIDO and they can still use our DIGIPASS approach.

So I think ultimately, all of our customers, if you fast forward 5 to 10 years out, we'll be using FIDO. Exactly how fast that goes, hard to say right now, but passkeys are here, and we see banks rolling it out in some markets, and other markets will probably take a little bit longer.

This concludes the question-and-answer session. I would now like to turn it over to Joe Maxa for closing remarks.

Thanks, everyone, and glad you could join us. Have a nice day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.