Q3 2024 Earnings Summary
- Accelerated Cost Reduction and Margin Expansion: Executives highlighted early completion and additional unplanned cost savings, resulting in higher operating margins and an improved adjusted EBITDA guidance, reflecting efficient expense management and stronger profitability prospects.
- Robust Shift to Recurring Subscription Revenue: The clear transition from hardware to subscription-based (software) revenue was underscored by strong sequential growth in Security Solutions subscriptions, now surpassing hardware revenues, which supports enhanced recurring revenue and stability.
- Expansion Through Strategic Partner Channels: The firm is actively building its ecosystem with new partner sign-ups and channel leadership in Europe. Although benefits are expected to materialize later, this strategy positions the company for scalable revenue growth in the midmarket.
- Declining Hardware Revenue: Executives noted that hardware revenue is expected to continue its downward trend as more banks shift to mobile-first strategies, which might pressure overall revenue mix and impact future growth.
- Customer Churn Concerns: There were indications of rising churn, particularly related to end-of-life products and transitional offerings, posing risks to recurring revenue and customer retention.
- Slowing Margin Expansion: While current cost-cutting initiatives have boosted profitability, leaders cautioned that further improvements may be more challenging to achieve, suggesting potential deceleration in operating margin gains going forward.
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Margin Outlook
Q: Will gross margins jump to low 70s?
A: Management expects 2024 gross margins to improve into the low 70s across both business units, driven by a better product mix and higher-margin hardware from APAC regions. -
Security Revenue
Q: What drove Security Solutions subscription growth?
A: The jump was fueled by strong demand for authentication and mobile application solutions along with license conversions, with break-even profitability expected at a quarterly revenue in the mid-to-low 20s. -
Cost Efficiency
Q: Are cost savings delivering faster than expected?
A: Management reported that both planned and unplanned cost reductions have materialized earlier than anticipated, significantly improving EBITDA outlook. -
Sustainable Growth
Q: How will margins and top-line growth be sustained?
A: They aim to achieve the Rule of 40 by combining steady operating efficiencies with targeted growth initiatives and strategic partnerships, while acknowledging that rapid margin jumps are harder to sustain from here. -
Partner Strategy
Q: What progress is there with the partner ecosystem?
A: New partnerships are being established and trained to drive future revenue growth, though notable contributions are expected to materialize in 3-4 quarters. -
Hardware Outlook
Q: What is the forecast for hardware amid churn?
A: There is a modest decline in hardware revenue expected due to increased mobile adoption, yet the integrated hardware-software solution remains competitive in corporate banking.
Research analysts covering OneSpan.