Executive Summary / Key Takeaways

• Strategic Transformation Yields Profitability: OneSpan has successfully executed a multi-year restructuring, achieving record Adjusted EBITDA and strong cash generation, fundamentally transforming its financial profile from prior losses to robust profitability.
• Software-Driven Growth & Margin Expansion: The company is strategically shifting its revenue mix towards higher-margin software and subscription solutions, driving significant gross margin expansion despite anticipated declines in legacy hardware revenue.
• FIDO Leadership & Comprehensive Authentication: The acquisition of Nok Nok Labs enhances OneSpan's FIDO authentication capabilities, positioning it to offer the industry's most comprehensive and flexible authentication portfolio, crucial for addressing evolving cyber threats.
• Balanced Capital Allocation for Future Value: With a strong cash position and a new credit facility, OneSpan is committed to a balanced capital allocation strategy, including recurring dividends, organic investments, and targeted M&A to accelerate growth.
• Outlook for Sustainable Growth: Management projects continued double-digit subscription revenue growth and expects to return to positive overall revenue growth in the second half of 2025, aiming for "Rule of 40" performance in 2026.

The Foundation of Digital Trust: OneSpan's Strategic Evolution

OneSpan Inc. (NASDAQ:OSPN), originally founded in 1991 as VASCO Data Security International, has evolved into a pivotal player in the digital security landscape. Its core mission revolves around designing, developing, and marketing cutting-edge solutions for secure authentication, identity verification, electronic signatures, and digital workflow products. Serving a global clientele that notably includes over 60% of the world's 100 largest banks, OneSpan's foundational strength lies in its deep entrenchment within highly regulated and security-conscious industries.

The company embarked on a significant transformation starting in 2021 with a comprehensive restructuring plan, further intensified by "2023 Actions" aimed at enhancing profitability and long-term growth. This disciplined focus on operational rigor has yielded remarkable results, with cumulative annualized cost savings reaching approximately $76.5 million by Q3 2024, surpassing initial targets. This strategic pivot from a period of losses to consistent profitability is the bedrock of OneSpan's current investment thesis.

Technological Moats and Innovation Driving the Future

OneSpan's competitive edge is deeply rooted in its differentiated technology and continuous innovation, particularly in the critical domain of authentication. The company offers a broad portfolio, including its proprietary Mobile Security Suite and Mobile Application Shielding, which protect mobile transactions and applications from malware attacks, allowing secure usage even in hostile environments. Its Authentication Suite and Digipass Authenticators provide robust multi-factor and passwordless authentication, transaction signing, and mobile application security solutions. These technologies are designed to defend against sophisticated digital attacks, a crucial capability as AI increasingly amplifies the scale and sophistication of account takeover attempts.

A key strategic move reinforcing its technological moat was the June 2025 acquisition of Nok Nok Labs, Inc., a leading provider of FIDO (Fast IDentity Online) passwordless software authentication solutions. This "tuck-in" acquisition is not primarily for immediate revenue, but rather to integrate Nok Nok's FIDO2 software with OneSpan's recently launched FIDO2 security keys hardware. This combination enables OneSpan to offer the industry's most innovative, comprehensive, and future-ready authentication portfolio. Whether on-prem or in the cloud, using OTP (One-Time Password) or FIDO, or opting for software or hardware, OneSpan now provides customers maximum flexibility. This unified backend for both hardware and software authentication is a significant differentiator, allowing banks to transition to the FIDO ecosystem at their own pace without needing separate, complex systems from competitors. This strategic foresight aims to prevent customer churn and capture future growth in the rapidly expanding FIDO protocol market, which is expected to grow significantly over the next 3 to 5 years.

OneSpan's R&D efforts, now led by a new CTO with significant digital identity expertise, are focused on staying ahead of emerging threats and delivering value-added solutions. This commitment to innovation, coupled with its regulatory licenses that provide access to restricted markets, strengthens its competitive position and enhances its ability to secure recurring, high-margin software revenue.

Competitive Landscape: A Specialized Player in a Dynamic Market

OneSpan operates within a competitive digital security market, facing both direct and indirect rivals. Its primary direct competitors include DocuSign (DOCU) for e-signatures, Okta (OKTA) for identity and access management, Adobe (ADBE) with its Adobe Sign, and Palo Alto Networks (PANW) in network security, which also offers authentication tools.

OneSpan's competitive positioning is distinct. While companies like DocuSign and Adobe prioritize broad accessibility and ease of use in their e-signature offerings, OneSpan Sign focuses on tailored security features, making it a stronger choice for high-security applications and regulated industries. In authentication, OneSpan's comprehensive portfolio, particularly with the integration of Nok Nok's FIDO2 software, allows it to offer greater security depth and flexibility compared to Okta's broader access management tools or Palo Alto Networks' network-centric security. OneSpan's ability to provide a single authentication backend for both hardware and software is a key differentiator, as competitors might force a choice, leading to more complex implementations for clients.

Financially, OneSpan's profitability and growth trajectory, while showing dramatic recent improvement, can be more volatile compared to larger, more diversified players like Adobe or Okta, which benefit from greater scale and broader ecosystems. For instance, OneSpan's TTM Gross Profit Margin of 73.93% is competitive, standing favorably against Okta's 76% and DocuSign's 79%, but slightly below Adobe's 89%. Its TTM Operating Profit Margin of 21.09% and EBITDA Margin of 25.95% demonstrate strong operational efficiency, especially compared to Okta's TTM Operating Profit Margin of -3% and EBITDA Multiple of 660.79, indicating OneSpan's disciplined cost management. However, OneSpan's smaller scale (TTM Revenue $243.18M) compared to these larger players (e.g., Adobe's substantial revenue) can lead to higher operational costs and potentially slower market share capture in broader segments.

OneSpan's competitive advantages, or "moats," include its proprietary authentication technology and its strong focus on regulatory compliance, which provides access to restricted markets and fosters robust growth in niche, high-value segments. However, its smaller scale and potential technological gaps in certain advanced threat detection areas (where Palo Alto Networks excels) remain vulnerabilities. The company is actively addressing these by investing in R&D and pursuing targeted M&A to enhance its product portfolio and expand its channel partnerships, particularly in the workforce authentication market.

Financial Performance: A Story of Turnaround and Efficiency

OneSpan's financial narrative in 2024 and the first half of 2025 is one of a significant turnaround. After experiencing an operating loss of $28.87 million and a net loss of $29.80 million in 2023, the company achieved a GAAP operating income of $44.80 million and a net income of $57.08 million for the full year 2024. This dramatic improvement continued into 2025.

For the second quarter of 2025, OneSpan reported total revenue of $59.84 million, a modest 2% decline year-over-year, primarily due to anticipated hardware revenue reductions. Despite this, gross profit increased by $3.60 million, or 9%, reaching $43.97 million, with a gross margin of 73% (up from 66% in Q2 2024). This margin expansion was largely driven by a favorable product and customer mix, emphasizing higher-margin software, and the absence of a $1.5 million asset write-off from Q2 2024 related to discontinued blockchain technology.

The company's Adjusted EBITDA for Q2 2025 was $17.6 million, representing a robust 29.5% of revenue. For the first half of 2025, Adjusted EBITDA reached a record $41 million, or 33% of revenue. This strong profitability is a direct result of the successful execution of cost reduction initiatives and the strategic shift towards software. Both the Security Solutions and Digital Agreements segments demonstrated profitability, with Digital Agreements achieving profitability on a fully burdened basis for the first time in Q3 2024.

Subscription revenue, a key focus, grew 22% in Q2 2025, led by a strong 39% growth in Security Solutions and 5% in Digital Agreements. For the first half of 2025, Security Solutions' subscription revenue grew 19%, driven by on-prem authentication and app shielding software, multi-year renewals, and customer contract conversions. This growth occurred despite a 3% decline in Security Solutions' total revenue in Q2 2025, primarily due to the mobile-first trend impacting hardware sales.

OneSpan's liquidity remains strong, ending Q2 2025 with $92.9 million in cash and cash equivalents. The company generated $6.2 million in operating cash flow in Q2 2025 and $36 million in the first half of 2025, reflecting efficient operations and improved working capital management. A new $100 million revolving credit facility, secured in June 2025, further bolsters its financial flexibility for general corporate purposes and targeted M&A, with no outstanding borrowings as of June 30, 2025.

Outlook and Growth Catalysts

OneSpan's management has provided a clear outlook for 2025, reflecting confidence in its strategic direction. The company maintains its full-year 2025 revenue guidance in the range of $245 million to $251 million. This guidance anticipates that incremental revenue from the Nok Nok acquisition will be offset by a similar reduction in hardware revenue, reflecting the ongoing strategic shift.

Annual Recurring Revenue (ARR) guidance has been increased to a range of $186 million to $192 million, up from the previous $180 million to $186 million. This upward revision is primarily attributed to the Nok Nok acquisition, which added $8 million to ARR, partially offset by approximately $3 million in customer contractions due to a bank selling operations and a customer experiencing implementation delays. Management expects ARR to grow at a mid-single-digit percentage rate from the June 30 ARR level by the end of 2025, with a sequential increase in year-over-year ARR growth and Net Retention Rate (NRR) expected in both Q3 and Q4 2025.

Adjusted EBITDA guidance for 2025 is maintained in the range of $72 million to $76 million, with the Nok Nok acquisition expected to be slightly accretive to Adjusted EBITDA in Q4 2025. This reflects continued strong profitability driven by operational excellence and a favorable product mix. The company expects double-digit subscription revenue growth for the full year 2025 and anticipates a return to positive overall revenue growth in the second half of the year.

Looking beyond 2025, OneSpan aims to accelerate top-line growth in 2026, striving for a "Rule of 40" performance. This will be driven by continued enhancements to its go-to-market capabilities, including the successful dedicated sales effort in North America, and further product suite evolution under its new CTO. The company's balanced capital allocation strategy, including recurring quarterly dividends ($0.12 per share declared for Q3 2025) and potential targeted M&A, underscores its commitment to shareholder returns while investing for long-term growth.

Risks and Considerations

While OneSpan's transformation has been impressive, investors should consider several factors. The ongoing "mobile-first" trend will continue to exert pressure on hardware revenue, particularly in EMEA and APAC, with management projecting modest year-over-year declines in 2025 and some hardware deals already delayed to 2026. While this is a strategic shift towards higher-margin software, it creates near-term revenue headwinds.

Customer contractions and implementation delays, as seen in the $3 million ARR impact, highlight the potential for lumpiness in large enterprise deals. Foreign exchange rate fluctuations, particularly the euro-dollar rate, can also impact revenue and operating expenses, though the company benefits from a natural hedge due to its European employee base. Lastly, while the impact of tariffs has been minimal to date (estimated at a few hundred thousand dollars for FY25), geopolitical factors could introduce further volatility. OneSpan's ability to continue converting hardware customers to software, expand its software offerings, and effectively integrate acquisitions like Nok Nok Labs will be crucial for sustained success.

Conclusion

OneSpan has undergone a profound transformation, successfully pivoting from a period of financial underperformance to a highly profitable and cash-generative enterprise. This turnaround is not merely a result of cost-cutting, but a strategic reorientation towards higher-margin software and subscription revenues, underpinned by a robust and evolving technological foundation. The acquisition of Nok Nok Labs is a testament to OneSpan's commitment to leading the FIDO authentication space, offering unparalleled flexibility and comprehensive solutions to its blue-chip customer base.

As OneSpan continues to execute its strategy of efficient growth, focusing on its core strengths in digital security and identity verification, it is well-positioned to capitalize on the increasing demand for advanced authentication solutions in an AI-driven threat landscape. The company's disciplined financial management, balanced capital allocation, and clear roadmap towards accelerating top-line growth in 2026, aiming for the "Rule of 40," present a compelling investment narrative. While challenges like hardware declines and customer-specific dynamics persist, OneSpan's strategic responses and technological leadership suggest a resilient path towards sustainable value creation.