Earnings call transcript: OneSpan Q3 2025 beats EPS forecasts, stock rises

OneSpan Inc. (OSPN) reported its third-quarter 2025 earnings, surpassing Wall Street expectations with an earnings per share (EPS) of $0.33, compared to the forecasted $0.29, marking a 13.79% surprise. Despite a slight revenue miss, with $57.1 million against a forecast of $58.18 million, the company's stock rose by 2.31% in aftermarket trading, closing at $15.16. The company continues to transition towards software-focused solutions, showing growth in subscription revenue and a strong market position in multi-factor authentication.

Key Takeaways

• OneSpan's EPS exceeded expectations by 13.79%.
• Revenue growth was 1% year-over-year, despite a slight miss against forecasts.
• Subscription revenue increased by 12%, driven by security and digital agreements.
• Stock price rose by 2.31% in aftermarket trading.
• Company is shifting focus from hardware to software, now comprising 80% of its business.

Company Performance

OneSpan demonstrated resilience in Q3 2025, achieving a 1% year-over-year increase in total revenue to $57.1 million. The company is capitalizing on the secular shift from hardware tokens to software solutions, with a significant portion of its revenue now derived from subscriptions. This strategic pivot is in line with industry trends towards mobile-first and software-based authentication solutions.

Financial Highlights

• Revenue: $57.1 million, up 1% year-over-year.
• Earnings per share: $0.33, exceeding the forecast of $0.29.
• Adjusted EBITDA: $17.5 million, representing 31% of revenue.
• Cash from operations: $11 million.
• Annual Recurring Revenue (ARR): $180 million, a 10% increase year-over-year.

Earnings vs. Forecast

OneSpan reported an EPS of $0.33, beating the forecast by $0.04, or 13.79%. However, revenue fell short of expectations by $1.08 million, a 1.86% miss. This mixed performance reflects the company's ongoing transformation and the challenges of transitioning from hardware to software.

Market Reaction

Following the earnings announcement, OneSpan's stock rose by 2.31% in aftermarket trading, reflecting investor confidence in the company's strategic direction and financial health. The stock's current price is $15.16, within its 52-week range of $12.51 to $20.36, indicating room for growth as the company continues to innovate.

Outlook & Guidance

For the full year 2025, OneSpan projects revenue between $239 million and $241 million, with software/services revenue expected to reach $190 million to $192 million. The company anticipates ARR to be between $183 million and $187 million. Adjusted EBITDA is forecasted to range from $72 million to $76 million. OneSpan is optimistic about accelerating subscription revenue growth in 2026.

Executive Commentary

CEO Victor Limongelli emphasized the company's foundational efforts in 2025, stating, "2025 has been about putting the pieces in place while continuing to operate with strong profitability to enable growth." He also noted, "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."

Risks and Challenges

• Decline in hardware revenue as the company transitions to software.
• Challenges in the EMEA and APAC regions impacting growth.
• Potential market saturation in North America.
• Macroeconomic pressures that could affect consumer spending.
• Competition in the multi-factor authentication space.

Q&A

During the earnings call, analysts questioned the reduction in revenue guidance, which was attributed to a decline in hardware sales and lower net expansions. The company reiterated its confidence in the Q4 pipeline and ARR potential, while noting minimal impact from federal shutdowns. CEO Limongelli highlighted the year as a "foundation-building" period, setting the stage for future growth.

Full transcript - OneSpan Inc (OSPN) Q3 2025:

Conference Operator: Good day, and thank you for standing by. Welcome to the OneSpan Q3 2025 earnings conference. All participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press Star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press Star 11 again. 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.

Joe Maxa, Vice President of Investor Relations, OneSpan: Thank you, Operator. Hello, everyone, and thank you for joining the OneSpan Q3 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 Q3 2025. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we'll 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 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, for future events, or for any other reason. I will now turn the call over to Victor.

Victor Limongelli, Chief Executive Officer, OneSpan: 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. In addition, we also completed an acquisition and made a strategic investment, all funded by cash generated by the business. 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 a new Chief Technology Officer, Ashish Jain, to lead our R&D efforts and improve our internal development efforts. Second, in June, we acquired Knock Knock Labs, bringing the best FIDO2 software product called S3 to our portfolio. I'm happy to report that in the first four months since the acquisition, we've already closed two new logos for S3, both in the low six-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 risk 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. We expect these efforts to drive growth, particularly in our software business, as we continue to work towards achieving a Rule of 40 performance level. 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 nine months of the year, we generated record adjusted EBITDA of $58 million, representing 32% of 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 bookends in certain regions, including our security business in North America, our Latin America business, and the southern portion of our EMEA region. I'm also heartened by the progress in APAC, and our digital agreements business grew subscription revenue by double digits. 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 Knock Knock Labs deal. With respect to hardware, as we've discussed many times, there has been a long-term secular shift away from consumer banking tokens to the point that in the first nine 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, total revenue grew 1% to $57 million, driven by double-digit organic subscription revenue growth. This growth was primarily offset by a reduction in security 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 Knock Knock business in Q3, although we expect it to be accretive to security's operating income in Q4.

As I mentioned earlier, we continue to generate significant cash from operations, $47 million in the first nine 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 nine months of 2025. We also used cash to make the strategic acquisition of Knock Knock, and after the third quarter ended, to obtain a 15% equity stake in ThreatFabric. Our investment in ThreatFabric, as well as our acquisition of Knock Knock 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 fit 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 making 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.

Jorge Martell, Chief Financial Officer, OneSpan: 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 Knock Knock 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%, 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 non-recurrent items, along with the expected dilution related to our acquisition of Knock Knock. As a reminder, we expect the acquisition of Knock Knock to 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 non-recurrent 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 $140.3 million.

Subscription revenue grew 13%, driven by cloud and on-prem authentication software, including a modest contribution from Knock Knock Labs 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 Knock Knock Labs, and conversion of customer contracts to multi-year terms. Gross margin was 74.4%, 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 Knock Knock Labs acquisition, higher share-based compensation, and other non-recurrent 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 the renewal contracts, and an increase in one-time 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 substantially completed the transition to a SaaS business model in our digital agreements business. Gross margin was 72%, 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 in 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 Knock Knock Labs, 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 Knock Knock Labs 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 trends 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 our 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 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 and as compared to our previous guidance range of $186 million to $192 million. 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.

Victor Limongelli, Chief Executive Officer, OneSpan: 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.

Conference Operator: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask questions, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question comes from the line of Anja Soderstrom with Sidoti. Your line is now open.

Anja Soderstrom, Analyst, Sidoti: Hi, and thank you for taking my questions. I'm just curious, what do you think now compared to last quarter that led you to scale back on the revenue and ARR guidance? If you can just double-click on that a bit more.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, Anja, can you repeat the question? I think she dropped. Did she drop, operator?

Anja Soderstrom, Analyst, Sidoti: I'm here.

Jorge Martell, Chief Financial Officer, OneSpan: Okay. Anja, can you—sorry, there was some feedback. Can you repeat your question for me?

Anja Soderstrom, Analyst, Sidoti: Yeah. 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?

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, I can start, and then maybe you want to chime in as well. There's a couple of things, Anja. First is, we saw a little bit of 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 security business outside of North America. I think EMEA and APAC had some of that, primarily EMEA. It's important to understand a couple of things. One is, when we think about—I'm hearing some feedback. One is, when you think about where we are with our updated guidance of, say, to $40 million at the midpoint, that is modestly lower versus prior year, about 1% lower, Anja.

I think we need to take a step back in terms of understanding the position 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 Knock Knock Labs acquisition that we did, very good capabilities that we're adding to our product portfolio. The ThreatFabric strategic investment that we are very excited about as well. We're looking at enhancing—we've been enhancing our product portfolios this year to deliver on that software. It's really, when you think about what we've done, it's primarily on the software areas, right? We really enhanced our software product portfolio and capabilities to really position the company for future growth in the next few years.

More and more as the hardware sector of the client continues, that's going to be less and less impactful to us. We mentioned this, software is about 80% of our business. Hardware is 20% and potentially lower in the next few quarters. All of this with, obviously, the strong cash flow generation and profitability that we should expect to continue. 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. The decline in the guide, although due to hardware and also a little less activity, we're really thinking about 2025 as the foundation year to build the blocks from our product capability. I don't know, maybe you have any additional thoughts.

Victor Limongelli, Chief Executive Officer, OneSpan: Yeah. Let me just add to what Jorge said. Obviously, the specifics he gave are correct, but if I zoom out a little bit and just think about the business from when I joined, it's almost two years. In a few months. Two years ago, about a third of our revenue was hardware, and now it's about 20%. We ended 2023 two years ago with ARR of $155 million, and the midpoint of our guidance for the last quarter would have us ending up at $185 million, so $155 to $185. 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. 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.

We've started to do that, not just with the acquisition and the strategic investment, but also internally with the hiring of a new Chief Technology Officer and internal investment. That's what we're working on to transform the business. Keep in mind that the Knock Knock Labs acquisition happened in June. The ThreatFabric strategic investment was October. We'll get some positive impact from Knock Knock Labs, but we expect more in the future, and ThreatFabric is largely a 2026 story. We're continuing to work on other things as we continue to try to improve the value proposition that we're offering our customers.

Anja Soderstrom, Analyst, Sidoti: Okay. Thank you. In terms of the hardware, do you see that being shifted out to the right, or is it just sort of a decline in demand overall?

Victor Limongelli, Chief Executive Officer, OneSpan: If you talk to our customers, 10 to 12 years ago, customers in EMEA and in APAC might have had 100% of their consumers using consumer banking tokens to log on, to authenticate. I was in Europe last month, and we had a meeting with eight banks, and we were surveying them. What percentage are using hardware now? It was about 20%. Most of their customers have moved over to mobile authentication, and we see that in our business. Look at our business 10 years ago to what it is now on the hardware side. It's probably 20% of the size. We don't think that number is going to zero, by the way. There are people who prefer hardware, and maybe that goes down to 15% of their consumers or 12%, but we don't think it's going to zero.

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 introduced years ago, but also with newer protocols like FIDO2 that we acquired through the Knock Knock Labs acquisition.

Anja Soderstrom, Analyst, Sidoti: Okay. Thank you. 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 if I get it right here. How should we think about the gross margin altogether? Also, on the operating expenses, do you see that now after you've done all your cuts? How should we think about growth in that in the coming years?

Jorge Martell, Chief Financial Officer, OneSpan: Yeah. I can answer that, Anja. That's a good question. 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's what we have today. From a gross margin perspective, it's going to be, I would say, probably similar to last year's Q4, Anja. That will put the full year gross margin in around 73%—slightly higher than last year's, which I think was 72%. From an operating expense perspective, one thing to keep in mind in the year-over-year is the Knock Knock Labs acquisition. For the quarter, it's around—I'm just going to do round numbers—it's around $2 million on a round-rate basis that we'll be adding year-over-year. Obviously, we've done some also incremental investments in R&D and things like that.

I don't expect this sequentially to increase dramatically compared to what you saw in Q3, but there will be a maybe modest increase because of that. Thanks.

Anja Soderstrom, Analyst, Sidoti: Okay. Great. Thank you. That was all from me.

Conference Operator: Thank you.

Thank you. Our next question comes in the line of Catharine Trebnick with Rosenblatt Securities. Your line is now open.

Catharine Trebnick, Analyst, Rosenblatt Securities: Thanks for taking my question. Can you, just in a snapshot, your product roadmap, where you feel that the deficiencies, these headwinds that you've been experiencing, just really, what are the two or three products you think in the next 12 to 24 months are going to make up for this gap we've been having? Thanks.

Victor Limongelli, Chief Executive Officer, OneSpan: Yeah, 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. As you know, multi-factor authentication has been around for a long time. Everyone's familiar with getting—in the U.S., you get an SMS or a text message with it, or you might get an email. Overseas, one-time passcodes are widely used as well, although not via SMS. Everyone's very familiar with multi-factor authentication. That protocol or approach has been widely adopted. As Jorge mentioned, we have good market share there. Even our NRR in security in Q3, I think, was 101, or it'll be about 101 for the year. It's very solid. Over time, technologies change. We're seeing that with the adoption of passkeys.

With FIDO2, we're going to see much broader adoption of passkeys as we move through the rest of the decade. 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-based authentication that existed many years ago and still exists for a portion of our customers, but also enables passkeys at a very, very scalable level. It also has very good latency. We've proven it out at scale with many different customers. We think that's going to be a very interesting area for growth.

Catharine Trebnick, Analyst, Rosenblatt Securities: Thank you. That was very helpful. Is there anything you can add on digital agreements and what you're seeing there, and how you expect the growth there to pan out in the next 12 months?

Victor Limongelli, Chief Executive Officer, OneSpan: Yeah. 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. We expect—it's October 30th, so you can't be too certain about how Q4 is going to go, but we feel pretty good about the Q4 pipeline. We think we have an opportunity to not just expand with customers we already have, but also to land some new ones. That's an area where our internal development—I mentioned internal development. That's an area where we'll be using AI in the product more in the coming 12 months. That's a focus area for us in the coming months. We think that's going to be a strong product, continue to be a strong product. Obviously, we're always trying to do better and have better results, but I think we're making very good progress on the digital agreements business.

The other piece, Catharine, on the digital agreements business, Jorge mentioned this, is record operating income this quarter, I think 25%. When you layer that on top of the growth there, the numbers start to—the business starts to look more and more appealing.

Catharine Trebnick, Analyst, Rosenblatt Securities: All right, thank you very much.

Conference Operator: Thank you. The next question comes in the line of Eric Sepparger with B. Riley Securities. Your line is now open.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, thanks for taking the question. First off, you're taking a lot of steps this year to start accelerating growth as you get into 2026, and it's mostly on the software side. Can we assume that your subscription revenue growth in 2026 should accelerate over 2025? If we anticipate double-digit growth in 2025, can it accelerate from there in 2026?

Victor Limongelli, Chief Executive Officer, OneSpan: 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.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah. I think just the one thing that I would add is, Eric, 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 those dynamics in terms of the perpetual term. Maintenance will be a little bit choppy, right? I think if you focus on the subscription security, I think that's a fair assessment. 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?

Victor Limongelli, Chief Executive Officer, OneSpan: We don't have a ton of exposure.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah. Go ahead, Jorge. I would say no. I think we're lucky in that sense, Eric, that we really haven't felt it. We have a little bit of exposure in our digital agreements business, but it has not been anything material at all, luckily. Nothing would. I think from that standpoint, the shutdown has been a non-event for us. Okay. Lastly, just to follow up on Catharine's question, is there any change or has there been any intensity of competition, or have the market dynamics changed at all in terms of software authentication for banks? Is there any change in that market?

Victor Limongelli, Chief Executive Officer, OneSpan: No, I think if you actually look at our business, we've been doing quite well in North America. We started a North American security sales effort about 15 months ago, July of 2024. That's a small, historically a small portion of our business. Although there's been good progress, it's from a small base. 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. I think that has historically been a very large part of our business. I think that has impacted us to a certain extent. It hasn't been the strongest economy there.

Jorge Martell, Chief Financial Officer, OneSpan: Okay. There is no particular change from a competitive perspective?

Victor Limongelli, Chief Executive Officer, OneSpan: No. No. If anything, I think we're becoming more competitive as we add new capabilities. I've mentioned S3 a few times, but it has some large customers that we're going to start rolling out. I think it overall helps our competitive position compared to six months ago.

Jorge Martell, Chief Financial Officer, OneSpan: Okay. In terms of the FIDO2 push, what progress have you made with channel partners? What progress have you made with channel partners on that front?

Victor Limongelli, Chief Executive Officer, OneSpan: I want to talk in general about the FIDO2 push and the S3 product. I mentioned we got our first two new logos, which is good within four months of closing the deal. We have others in line, some of which are from channel partners. One of those two actually was from a channel partner, one of those two new logos I mentioned. We think 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? You can stand up your own FIDO2 server if you want. What you get from 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. There are customers with both deployment modes. It is a very appealing offering, I think, in the financial services world because some banks, as everyone knows, some large banks still prefer on-prem. We give them maximum flexibility.

Jorge Martell, Chief Financial Officer, OneSpan: Are those customers buying the tokens from you as well, the FIDO2 tokens?

Victor Limongelli, Chief Executive Officer, OneSpan: The FIDO2 tokens, this is an interesting other area, right? We started developing those internally. That was internal development. We feel good about that business as we move forward. We have quite a bit of pipeline. We're expecting orders. We've gotten some orders already. We expect that to be a more meaningful revenue contribution in 2026 than it is today. 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.

Jorge Martell, Chief Financial Officer, OneSpan: Very good. Thank you.

Conference Operator: Thank you. The next question comes in the line of Gray Powell with BTIG. Your line is now open.

Eric Sepparger, Analyst, B. Riley Securities: Okay. Great. Thanks for taking the questions. Hey, look, I only have one question, but I'm going to break it down into 27 parts. Is that okay?

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, sure, Greg. Go ahead.

Eric Sepparger, Analyst, B. Riley Securities: All right. Okay. So just really just two questions on my side. You 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. I'm just curious, is that the case? Is it a direct shot, or is there more of a jump ball situation where you have to fend off that customer from other competitors?

Victor Limongelli, Chief Executive Officer, OneSpan: It could be a jump ball situation. In a lot of these cases, I alluded to customers saying they have 20% of their consumers using hardware. 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. They might have been five years ago, 40% of their consumers using hardware, and 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? 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. Greg, when you see a bank go from 40% consumer banking tokens 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.

Eric Sepparger, Analyst, B. Riley Securities: Understood. That's helpful. I guess maybe the bigger question for me personally is just on the ARR side. Can you talk about the visibility you have on late-stage deals and pipeline, just the overall confidence level you have in the Q4 ARR guide? It does imply a decent uptick in the pace of net adds from what we've seen the last four or five quarters. I know it's Q4, which is some seasonality. Any color there would be greatly appreciated.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, I can start.

Victor Limongelli, Chief Executive Officer, OneSpan: Jorge, if you want to talk about the model, you can talk about the model. I'm happy to talk about the outlook. Go ahead, and I'll let you start.

Jorge Martell, Chief Financial Officer, OneSpan: I think so from a model perspective, 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. We have weekly calls. We have visibility 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. It is an active discussion and conversation with the sales leader to understand what is the potential risk, what is the potential expansion. This applies to both business units, digital agreements as well as security, and it's an active dialogue.

It is sort of like a bottoms-up, if you would, where we try to—when we model a forecast, it is when it's a Q plus one or the same quarter, it is sort of like a bottoms-up, Greg. It's all about just execution, making sure that we can close those. Not everything's going to be perfect like everything else. Sometimes it's art, it's not a science. We try to—so we do have, I would say, within the quarter, some visibility, right? There are some bloopers that happen that we don't anticipate, like we mentioned, the HDFC situation last quarter. Sometimes we see some contraction, and that's because our sales leader or the client is not—they don't know yet, right? Those, we have less visibility. For the most part, I think within the quarter, we have a fair amount of visibility.

I'll turn to you, Vic, to talk about the other component.

Victor Limongelli, Chief Executive Officer, OneSpan: Yeah. I mean, we feel pretty good about it. I mean, it's October 30th, so we have pretty good visibility. You don't know for sure what's going to close. I think our sales team, 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 FIDO2 security keys. We bought Knock Knock Labs. We have the partnership with ThreatFabric. 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 vibe.

Eric Sepparger, Analyst, B. Riley Securities: Understood. All right, thank you very much.

Conference Operator: Thank you.

Jorge Martell, Chief Financial Officer, OneSpan: Thank you.

Conference Operator: The last question comes to the line of Rudy Kessinger with D.A. Davidson. Your line is now open.

Victor Limongelli, Chief Executive Officer, OneSpan: Hey, thanks. Kind of just a follow-up to some questions I've 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 previously expected cross-sell and upsell? Thank you.

Jorge Martell, Chief Financial Officer, OneSpan: Yeah, Jorge, I can give you the details. Go ahead, Jorge.

Eric Sepparger, Analyst, B. Riley Securities: Thank you, Victor. It is primarily related to lower activity in net expansions. We did have, I would say, this quarter in Q3 that impacted one contraction. I think overall, taking a step back, Rudy, it is primarily the lower activity for expansions. New logos is to a lesser extent, but it's primarily more the net expansions.

Jorge Martell, Chief Financial Officer, OneSpan: Also hardware, right, to a certain extent.

Eric Sepparger, Analyst, B. Riley Securities: For sure.

Jorge Martell, Chief Financial Officer, OneSpan: You have $2 million of hardware lower than.

Eric Sepparger, Analyst, B. Riley Securities: For sure, on the revenue side, yes.

Victor Limongelli, Chief Executive Officer, OneSpan: Okay. As we think about maybe 2026, do you feel like—could you give us maybe kind of a timeline for when you think you might start to see some more traction with some of these newer products and maybe might be able to reignite growth here?

Yeah. Let me talk a little bit about—I think we're going to see traction in 2026 with S3. I think we've already seen traction with a couple of deals closing and more pipeline for Q4. 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. That'll have a $3 million or $4 million impact on our business in terms of bookings. 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 a partnership and an investment, and that's going to—it's a little bit harder to tell because it's only been three weeks.

We think that'll contribute, not as meaningfully as Knock Knock, but for our business, 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. 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 runs by hitting a bunch of singles. It doesn't all have to be a home run.

Conference Operator: Thank you.

Jorge Martell, Chief Financial Officer, OneSpan: Thank you, Rudy.

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

Joe Maxa, Vice President of Investor Relations, OneSpan: 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.

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

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