Legacy Challenges Will Constrain Revenue While Digital Shifts Offer Relief

Key Takeaways

• Dependence on legacy financial clients and increasing competition from integrated security platforms threaten long-term customer growth and revenue sustainability.
  
• Transition to subscription and new product innovation face headwinds from customer losses, slow adoption cycles, and persistent challenges in core markets.
  
• Reliance on acquisitions, shrinking hardware revenue, client churn, and competitive cloud trends threaten OneSpan's sustainable growth and weaken its market position.

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.

• While OneSpan is positioned to benefit from the accelerating digitization of business processes and increased regulatory focus on data privacy and cybersecurity, the company's dependency on a legacy base of financial institutions exposes it to the risk that consolidation in banking and heightened competition from larger, integrated platforms could limit its ability to win new customers and sustain top-line revenue growth in the long term.
  
• Despite the long-term demand for secure authentication and digital agreement solutions being driven by rising mobile and remote work, OneSpan's addressable market may shrink if enterprises increasingly adopt zero-trust architectures and hyperscale cloud-based security suites from major players, which could erode the company's revenue opportunities.
  
• While the transition to a subscription-based model and investments in R&D enable higher recurring revenues and improved gross margins, ongoing customer contraction-as seen with multi-million dollar ARR reductions from certain banking clients in the first half of the year-raises the risk that net retention may stagnate and drag on overall earnings growth.
  
• Although product innovation and the acquisition of Nok Nok Labs expand OneSpan's authentication portfolio and cross-sell potential across its customer base, implementation delays and the slow adoption cycle for FIDO2 solutions point to a possible lag before any material uplift in revenue or margin is realized.
  
• While management highlights operational discipline and strong adjusted EBITDA margins, persistent declines in hardware revenue, exposure to sunsetting legacy products, and continued headwinds in core European markets threaten to weigh on overall revenue and margin expansion through 2026 and beyond.

OneSpan Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on OneSpan compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming OneSpan's revenue will grow by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.9% today to 9.5% in 3 years time.
• The bearish analysts expect earnings to reach $25.7 million (and earnings per share of $0.96) by about August 2028, down from $59.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, up from 8.3x today. This future PE is lower than the current PE for the US Software industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

OneSpan Future Earnings Per Share Growth

Risks

• The continued decline in hardware-based authentication revenues, driven by banks in EMEA and APAC shifting to mobile-first strategies and sunsetting of legacy products, poses an ongoing headwind that could limit overall total revenue growth in the long term.
  
• Increased customer contraction and churn-including the accelerated exit of a large banking client in the Middle East and delays from a seven-figure customer in adopting OneSpan's solutions-reflect growing risks to annual recurring revenue and reduce the predictability of future earnings.
  
• OneSpan's ARR and net retention rate growth is being sustained primarily through acquisitions, such as Nok Nok Labs, rather than organic expansion, which may mask underlying stagnation in customer acquisition and jeopardize sustainable revenue growth over time.
  
• Industry-wide trends toward zero-trust security architecture and integrated cloud-based security suites from larger cloud providers could marginalize traditional multi-factor authentication and best-of-breed point solutions, thereby pressuring OneSpan's competitive position and long-term addressable market, impacting revenue and net margins.
  
• Weakness in key geographic markets, particularly the instability and slower growth in Europe (EMEA), could stall segment expansion and dampen total earnings, especially as the company's historical reliance on this region as a source of strength diminishes.

Valuation

• The assumed bearish price target for OneSpan is $15.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of OneSpan's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $272.1 million, earnings will come to $25.7 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $12.91, the bearish analyst price target of $15.0 is 13.9% 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.