Shift To SaaS And Digital Identity Will Transform Business Model, But Hardware Declines May Pose Challenges

Key Takeaways

• Transition to higher-margin software revenue models is expected to enhance profitability and boost net margins.
  
• Strategic R&D investments in digital identity and innovative solutions support sustainable revenue growth and margin enhancements.
  
• A shift from hardware to SaaS and term licenses, alongside currency risks and declining legacy product revenues, threatens OneSpan’s overall financial stability and growth.

Catalysts

Designs, develops, and markets digital solutions for security, authentication, identity, electronic signature, and digital workflow products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific regions.

• OneSpan is transitioning to higher-margin software revenue, including subscription and SaaS models, which is expected to drive improved profitability and higher net margins.
  
• The company's focus on software and services revenue, which makes up nearly 75% of total revenue, is projected to enhance gross margins compared to legacy hardware sales, boosting overall earnings.
  
• The record adjusted EBITDA achieved in 2024 is the result of restructuring efforts and cost-saving initiatives, which are anticipated to continue delivering profitability improvements in the future.
  
• The ongoing expansion of security solutions, particularly through software authentication and multiyear term licenses, is likely to contribute to sustainable revenue growth.
  
• Strategic investments in R&D and new product offerings, particularly in digital identity, are expected to support future revenue expansion and margin enhancements.

OneSpan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OneSpan's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.5% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $38.3 million (and earnings per share of $0.81) by about March 2028, down from $57.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Software industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

OneSpan Future Earnings Per Share Growth

Risks

• A significant decline in hardware revenue, particularly driven by banks adopting mobile-first policies, is expected to continue in 2025, potentially impacting total revenue growth.
  
• The transition from maintenance and support contracts to SaaS and term software licenses is leading to a decline in maintenance revenue, which could negatively impact overall revenue despite an increase in high-margin software subscription sales.
  
• Revenue from end-of-life products continues to impact the company's Annual Recurring Revenue (ARR), which reflects a risk in relying on legacy product lines for consistent revenue generation.
  
• While ARR is expected to grow significantly, total revenue guidance is more subdued due to potential year-over-year declines in non-recurring revenues like hardware and perpetual license maintenance, reflecting a risk to overall financial performance.
  
• Currency fluctuations, particularly the euro-dollar exchange rate, pose an external risk that can adversely affect revenue reported in dollars, impacting overall financial results.

Valuation

• The analysts have a consensus price target of $19.333 for OneSpan based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $271.6 million, earnings will come to $38.3 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $15.96, the analyst price target of $19.33 is 17.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.