Transition To High-Margin Software And Subscriptions Drives Long-Term Profitability Boost

Key Takeaways

• Transitioning to higher-margin software and subscription models is boosting net margins and future revenue growth.
  
• Cost reductions and strategic partnerships are set to enhance profitability and expand market reach.
  
• Declining hardware revenues and transition to SaaS could pressure OneSpan's short-term revenue amid execution risks in early-stage partnerships.

Catalysts

Designs, develops, and markets digital solutions for identity, authentication, and secure digital agreements worldwide.

• Transitioning to higher-margin software revenue and executing strategic cost reductions are expected to continue improving net margins and operational profitability.
  
• The profitable shift towards Digital Agreements and subscription-based models can significantly drive future revenue growth, aided by double-digit growth in subscription revenues.
  
• The completion of multiyear cost reduction initiatives has enabled significant operating cost savings, which are likely to boost future earnings and profitability.
  
• Strategic emphasis on leveraging partnerships for market expansion, particularly in the midmarket segment, is expected to enhance revenue growth over the next few quarters.
  
• Increasing ARR and favorable product mix, with growth in software and services, position the company for enhanced revenue stability and higher earnings in the long term.

OneSpan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OneSpan's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 20.3% in 3 years time.
• Analysts expect earnings to reach $55.3 million (and earnings per share of $1.24) by about November 2027, up from $28.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, down from 24.4x today. This future PE is lower than the current PE for the US Software industry at 42.3x.
• Analysts expect the number of shares outstanding to grow by 5.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

OneSpan Future Earnings Per Share Growth

Risks

• Despite the profitable quarter, overall revenue for OneSpan declined by 4%, primarily due to the anticipated decline in hardware. This trend could impact future revenue growth projections as hardware continues to be a significant part of the business.
  
• ARR growth slowed down to 9% this quarter, compared to 15% in the previous quarter, influenced by the sunsetting of certain products. This churn could negatively impact the company's ability to achieve its revenue targets.
  
• OneSpan anticipates hardware revenues will continue to decline modestly year-over-year in fiscal year '25. This potential ongoing decline in hardware revenue could put pressure on overall revenue unless offset by growth in higher-margin software revenues.
  
• The transition to a SaaS and subscription model entails planned decreases in maintenance revenue. While strategically beneficial for long-term profitability, the short-term revenue contraction could affect earnings.
  
• Execution risk remains regarding future growth through partnerships, particularly as these initiatives are still in the early stages and thus do not yet materially impact revenue. Delays or challenges in building this ecosystem could hinder future revenue expansion.

Valuation

• The analysts have a consensus price target of $17.33 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 $19.0, 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 2027, revenues will be $272.6 million, earnings will come to $55.3 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of $18.47, the analyst's price target of $17.33 is 6.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.