OAKBROOK TERRACE May 6, 2020 (Thomson StreetEvents) — Edited Transcript of Onespan Inc earnings conference call or presentation Tuesday, May 5, 2020 at 8:30:00pm GMT
OneSpan Inc. – Director of IR
OneSpan Inc. – CFO, Executive VP & Treasurer
* Scott M. Clements
OneSpan Inc. – CEO, President & Director
Dougherty & Company LLC, Research Division – VP and Senior Research Analyst of Data & Internet Protocol Networking
BTIG, LLC, Research Division – Director & Security and Analytics Software Analyst
Ladies and gentlemen, thank you for standing by, and welcome to the SpanOne (sic) [OneSpan] First Quarter 2020 Earnings Conference Call. (Operator Instructions)
I would now like to introduce your speaker today, Mr. Joe Maxa, Director of Investor Relations. Sir, please go ahead.
Joe Maxa, OneSpan Inc. – Director of IR 
Thank you, Michelle. Hello, everyone, and thank you for joining the OneSpan First Quarter 2020 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 Scott Clements, OneSpan’s Chief Executive Officer; and Mark Hoyt, our Chief Financial Officer. This afternoon, after market close, OneSpan issued a press release announcing results for our first quarter 2020. To access a copy of the press release and other 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 guidance for full year 2020, are forward-looking statements. We have tried to identify these statements by using words such as believes, anticipates, plans, expects, projects and similar words, and these statements involve risks and uncertainties and are based on current expectations.
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.
Please 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 non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release.
In addition, please note that the date of this conference call is May 5, 2020. Any forward-looking statements and related assumptions are made as of this date. Except as expressly required by the Federal Securities laws, we undertake no obligation to update these statements as a result of new information or future events, or for any other reason.
At this time, I will turn the call over to Scott.
Scott M. Clements, OneSpan Inc. – CEO, President & Director 
Joe, thanks very much. Good afternoon, everyone, and thank you for joining us here today from wherever you are. OneSpan reported an outstanding first quarter of 2020, with 19% year-over-year revenue growth and a significant increase in profitability. Q1 continued the strong momentum in software and services that began in the middle of 2019, and we saw favorable impact late in the quarter, related to the global pandemic, with some orders accelerated from Q2.
Our total software and services revenue grew 58%, to $37 million, and accounted for a record 65% of total revenue in the quarter. As you know, our strategy is to transition toward a majority recurring revenue during the 2020 to 2022 period. Recurring revenue grew 62% in the first quarter, to a record $26 million.
Looking at profitability, adjusted EBITDA improved by $8 million year over year to $5 million, on higher revenue and gross margin, partially offset by higher operating expenses. Mark will give you additional detail on both the top- and bottom-line drivers in just a moment.
I’d like to spend a few minutes on how the pandemic is affecting our core customers. Banks are seeing sharp increases in digital channel banking activities and hacking attacks. They’re telling us this, and it is evident in various studies as well. JD Power found online banking logins grew 40% month over month in the first three weeks of April, and that among the four largest banks in the U.S., the use of mobile banking increased from 63% of their customers in 2019 to 72% of their customers so far in 2020. The study also found that many people surveyed began using mobile banking for the first time since the coronavirus pandemic started. We believe these trends are an acceleration of longer-term financial services industry trends and bode well for the future of digital banking and OneSpan.
In another recent study, [IK] Group interviewed fraud executives at North American financial institutions and found that most expect to see increased in online and mobile fraud losses this year. One large financial institution revised its fraud loss prevent — projection, sorry — from a decrease of 8% before the pandemic to an increase of 10% to 15% now. Our digital banking, fraud prevention, and secure account opening technologies enable the proper functioning of the financial system around the world and have never been more important than they are right now.
We’re also benefitting from increasing demand for electronic signatures and saw a spike in transaction volume and order activity late in quarter and into Q2. Notable sales activity included a large mid-six-figure annual contract win over an e-signature competitor and a dramatic increase in usage from the U.S. Small Business Administration Office of Disaster Assistance. As an example of our ability to quickly respond and to deliver value to our customers, the CEO of a community bank said, “I’m very pleased with OneSpan’s e-signing process for the Paycheck Protection Program loans. They set us up in less than 24 hours, and it has been a game changer for us. I would highly recommend them.” The bank was able to process more than 225 loans totaling nearly $50 million the very next day, meeting their deadline to fund these loans.
Let me turn briefly to our cloud-first Trusted Identity solution portfolio. The value of our opportunity — pipeline of opportunities increased nearly 60% from last year at this time with a growing contribution from our Secure Agreement Automation offering over the last two quarters. Secure Agreement Automation helps institutions open new customer accounts online by integrating identity verification with e-signature, on top of the TID workflow engine.
I’ll now turn the call over to Mark. He’ll provide some further financial information about the quarter, and then I’ll come back to provide some closing comments, along with our 2020 outlook, before opening the call to questions. Mark?
Mark Stephen Hoyt, OneSpan Inc. – CFO, Executive VP & Treasurer 
Thank you, Scott. It really was an outstanding quarter, and I want to join you in thanking all of our OneSpan associates around the world for powering through the adversity of this pandemic to service our customers.
Total revenue for the first quarter of 2020 grew 19% to $56 million. Product and license revenue grew 20% to $38 million. And services and other revenue grew 16% to $18 million. Revenue by major products and services were as follows: software license revenue grew 145% to $19 million, with both mobile security and server software contributing to the rapid growth. Subscription revenue grew 11% to $6 million. Total software revenue, including software licenses and subscriptions, grew 90% to $24 million. Maintenance, support, and other revenue increased 13%, and hardware revenue declined 19% to $20 million this quarter, in line with our expectations.
This quarter, we disclosed our term-based software license revenue in order to provide you with a more detailed look at our rapidly growing recurring revenue, which includes subscription, term-based licenses, and maintenance revenue. Term licenses grew 750% to $9 million from the same period last year, and as Scott mentioned, our recurring revenue grew 62% to a record $26 million in the quarter.
Gross margin for the first quarter of 2020 was 72%, compared to 70% in the prior quarter and 66% in the first quarter of 2019. The increase in gross margin is primary attributed to product mix, with software and services contributing 65% of revenue in the first quarter, versus 55% in the fourth quarter of 2019 and 49% in the quarter — first quarter of last year.
Operating expenses for the first quarter of 2020 were $39 million, an increase of 6% from $37 million reported in Q1 last year. The increase was primary driven by G&A, with investments in areas like IT, financial, and HR processes, along with bolstering our information security. This was partially offset by a decrease in travel expenses across the company. We expect operating expenses for the full year to normalize over the remaining three quarters, with higher growth in sales and marketing and R&D, and lower growth in G&A.
Adjusted EBITDA, or adjusted earnings before interest, taxes, depreciation, amortization, long-term incentive compensation, and nonrecurring items, was $5 million, or $8 million higher than in the first quarter of 2019. Adjusted EBITDA margin was 9%, compared to a negative 5% in the first quarter of last year.
GAAP earnings per share were $0 in the first quarter of 2020, compared to a loss of $0.14 in the first quarter of 2019. Non-GAAP earnings per share, which excludes long-term incentive compensation, amortization, nonrecurring items, and the impact of tax adjustments, was $0.08 in the first quarter of 2020, compared to a loss of $0.07 in the first quarter of last year.
We ended the first quarter with $105 million in cash, cash equivalents, and short-term investments, compared to $110 million at the end of last year. Cash utilized in operations was $2 million in the quarter.
Geographically, our revenue mix for the first quarter included 60% from EMEA, 22% from the Americas, and 18% from the Asia-Pac region. This compares to 54%, 27%, and 19% in the same regions in Q1 2019 respectively.
I now turn the meeting back to you, Scott.
Scott M. Clements, OneSpan Inc. – CEO, President & Director 
Thanks a lot, Mark. The financial services industry’s response to the pandemic is accelerating the adoption of mobile and cloud technologies, and of the antifraud technologies that are needed to protect those channels. By market-lea