OneSpan Inc. (OSPN) Q4 2018 Earnings Conference Call Transcript

OSPN earnings call for the period ending December 31, 2018.

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OneSpan Inc.  (NASDAQ:OSPN)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the OneSpan Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions)

It is now my pleasure to turn the conference over to your host, Joe Maxa, Director of Investor Relations. Please go ahead.

Joe Maxa -- Director, Investor Relations

Thank you, Haley. Hello, everyone, and thank you for joining the OneSpan fourth quarter and full year 2018 earnings conference call. My name is Joe Maxa, and I am the Director of Investor Relations. This call is being broadcast over the Internet and can be accessed on the Investor Relations section of OneSpan's website at investors.onespan.com.

With me on the call today is Scott Clements, our Chief Executive Officer and Mark Hoyt, our Chief Financial Officer. This afternoon, after market close, OneSpan issued a press release announcing results for our fourth quarter and full-year 2018. To access a copy of the press release and other information, please visit our website. Following our prepared comments today, we will open the call for questions on our financial and operational results and outlook for the future.

Please note that statements made during this conference call that relate to future plans, events or performance, including the guidance for full-year 2019, are forward-looking statements. We have tried to identify these statements by using words such as believes, anticipates, plans, expects, projects and similar words, and these statements involve risks and uncertainties and are based on current expectations. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements.

I direct your attention to today's press release and the company's filings with the US Securities and Exchange Commission for a discussion of such risks and uncertainties in this regard. Please note that certain financial measures that may be discussed on this call are expressed on a non-GAAP basis, and have been adjusted from a related GAAP financial measure. We have provided an explanation and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release that can be found on the Investor Relations section of our website.

In addition, please note that the date of this conference call is February 19th, and any forward-looking statements and related assumptions are made as of this date. Except as expressly required by the federal securities laws, we undertake no obligation to update these statements as a result of new information or future events or for any other reason.

At this time, I will turn the call over to Scott.

Scott M. Clements -- Chief Executive Officer and President

Thanks very much, Joe. Good afternoon, investors and OneSpan colleagues around the world. I'm pleased to have the opportunity to speak with you this afternoon.

We had a strong fourth quarter and for the year, revenue and adjusted EBITDA exceeded the high-end of our guidance range. Our fourth quarter revenue was near record levels, with software and services growing 27% year-on-year, achieving a record high and hardware also growing at a strong 13% in the quarter. We also reported record gross profit for the fourth quarter and full year, a clear indication of the profit generating capacity of our business.

For the year, we achieved 10% revenue growth, including a doubling of sales from new customer logos and for the first time ever, our software and services revenue exceeded our hardware revenue. Mark will provide additional details on our fourth quarter and full-year results during his financial review.

OneSpan is the leading provider of authentication and fraud prevention solutions to the financial services industry. Our deep insights and comprehensive portfolio of security and productivity solutions makes OneSpan the partner of choice in this evolving landscape. The successful execution of our Trusted Identity strategy is enabling us to help our banking customers address the range of urgent challenges they face, from increases in fraud and regulation, the rapid technology change and the emergence of non-traditional competitors.

I'll now touch on each of these business drivers in more detail. Sophisticated hacking attacks and unprecedented data breaches are increasing losses to fraud on a global basis. More than 185 million social security numbers, those of well over half of the US population are now in the hands of criminals. The result is that in the US alone, identity fraud, including account takeover and new account fraud increased to nearly $17 billion in 2017, with account takeover losses surpassing $5 billion.

Our recently launched Intelligent Adaptive Authentication and Risk Analytics offerings are seeing strong customer interest, as they expand our capabilities to detect and combat identity fraud across digital channels. This is a persistent problem, and demand for identity fraud solutions is growing.

We're taking advantage of the increased opportunity presented by PSD2 and similar regulations around the world that are driving an increase in demand for sophisticated multi-factor authentication and risk-based analytics. Our mobile security suite and hardware authentication solutions assist our clients with compliance, and ensure the security of their transactions and systems.

Online-only banks, FinTechs and digital platform companies are squeezing the profitability of traditional banking services. Our open cloud-based Trusted Identity platform is designed to improve agility and security, reduce complexity and costs, and speed time to market for new consumer and commercial banking offerings. Our solutions are also built for rapid integration with leading third party technologies and customers existing in-house systems.

Two weeks ago I met with one of Europe's largest financial institutions, and they told me that they need our help in moving their identity security infrastructure into an agile cloud environment so that they can be more responsive to the emerging needs of their customers. We are carefully integrating our portfolio of capabilities into solutions that respond to these business drivers.

Our strategy is to secure, enable the full Identity life cycle from new account opening to transaction security, to securing open banking. We're in a position -- we are positioning OneSpan to be the provider of choice. No competitor can match the range of offerings we provide and are developing. This is a powerful strategy that can support our growth objectives and financial institutions and beyond, and to government, insurance and enterprise markets.

Our increased R&D investment of the last two years is enabling us to launch innovative new solutions that address these urgent market needs. I'll now update you on some of our key offerings. First, mobile security suite or MSS. Mobile security suite had an outstanding year, with revenue growth in excess of 50% and our opportunity pipeline remains robust.

Many of our existing customers are adopting mobile security suite and are often operating in mix environments that use both mobile security suite software and our hardware products, reflecting the diverse needs of their own customer bases. Critical to our success is the ability of our solutions to use consistent authentication financial transaction protocols across the mix of end-user devices.

Mobile security suite not only delivers industry-leading security, but also a low-friction user experience through its biometric capabilities. Javelin Research -- Javelin Strategy & Research recently awarded OneSpan 2018 Best in Class Mobile Biometrics Platform over 11 other providers. Mobile security suite is also an important enabler of our Trusted Identity strategy, as it integrates with our cloud-based offerings to enhance risk analytics and adaptive authentication.

The second product category I'll talk about is our e-signature and identity verification solutions that help financial institutions and enterprise to digitize business processes to reduce costs, improve productivity and enhance customer experiences. Our e-signature subscription revenue grew in excess of 20% in 2018.

In 2019, with integration to our identity verification components and with the availability of a qualified electronic signature capability, we will deliver a new secure agreement automation offering to address global market needs. We see substantial opportunities for accelerated growth in this area. As we noted previously, our customers are increasingly choosing to deploy e-signature in the cloud through a recurring revenue model. This shift is leading to a decline in new license revenue through the first quarter of 2019.

Third, let me talk about our hardware offerings. We're the market leading provider of fraud and prevention -- fraud prevention solutions for authentication and transaction security in the financial services industry. And as noted above, hardware is a key element of our overall value proposition.

In 2018, hardware revenue outperformed our expectations, with 13% growth in Q4 and full-year results matching those of last year. We attribute this outperformance to increased regulation, our advanced hardware products and the fact that hardware provides the highest level of security.

And fourth, as you have heard, we are launching several new cloud offerings through our Trusted Identity platform. We released Intelligent Adaptive Authentication in Q3, and announced our cloud-based risk analytics fraud management solution just last week. Intelligent Adaptive Authentication and Risk Analytics both have significant opportunity pipelines, and we had initial Intelligent Adaptive Authentication sales in the fourth quarter of 2019 -- I'm sorry, 2018.

In 2019, as we noted previously, we're planning to launch our secure agreement automation offering, which combines e-signature, biometrics and digital identity verification technology to create a comprehensive integrated solution for our customers. This will allow us to address our customers' needs to securely enable digital account openings, while reducing new customer on-boarding abandonment rates that can reach up to 95%, and impose immense class and lost growth opportunities on banks.

These new offerings are designed to be predominantly subscription-based, and will help grow our recurring revenue stream. Our exciting roadmap of new offerings will continue to evolve through 2020 and future years. In the meantime, we are encouraged by the talent we are attracting from our largest competitors and across the industry as knowledge of our compelling growth strategy attracts attention.

Now, let me turn to our 2019 financial guidance. Revenue for the full year of 2019 is expected to be in the range of $229 million to $237 million. Adjusted EBITDA for the full-year 2019 is expected to be in the range of $22 million to $27 million. We expect 2019's quarterly revenue trend to be similar to 2018's, with new products contributing more significantly as the year progresses.

In 2019, we will be making significant investments in our global cloud infrastructure, which is necessary to support the growth in recurring revenue that we anticipate. This may result in modest pressure on gross margin until the growth of these new services contributes to margin expansion.

I'll now turn the call over to Mark Hoyt, our Chief Financial Officer, and he will provide details for you about the quarter, the full-year 2018 and our 2019 outlook.

Mark?

Mark Hoyt -- Chief Financial Officer, Treasurer and Executive Vice President

Thank you, Scott. OneSpan's strong fourth quarter was fueled by 19% revenue growth to $64.8 million. Product and license revenue grew 11% to $47.6 million, and services and other revenue grew 47% to $17.2 million. For the full-year 2018, revenue increased 10% to $212 million. And as Scott mentioned, for the first time, our annual revenue from non-hardware was more than hardware.

Subscription revenue grew 68% in the quarter and 50% for the full-year 2018. OneSpan's Sign subscription revenue grew more than 20% in 2018, and total Dealflo revenue, including subscription, maintenance and professional services met our expectations, contributing $4 million for the year. Software license revenue includes mobile security, server and OneSpan Sign e-signature licenses. It grew 6% in the quarter and 15% for the year.

Maintenance support and other revenue grew 24% in 2018, and professional services revenue grew 17%. Hardware grew 13% (ph) in the quarter, and included a broad base of customers. For the year, hardware was flat ahead of our expectations. We still expect the longer-term hardware revenue trend line to be a decline in the mid-single digit range.

Gross margin for the fourth quarter of 2018 was 65% compared to 66% for the fourth quarter of 2017. Gross margin percentage was affected by the product mix, and by an increase in expenses to service our cloud customers. Gross margin for the full-year 2018 was 69%. Operating expenses for the fourth quarter of 2018 totaled $38 million, an increase of 10% from $35 million reported in Q4 last year.

For the year, our OpEx increased 15% to $147 million. The increases in the quarter and the year are largely driven by investments in R&D and sales and marketing, and include OpEx attributed to the Dealflo business. We finished the year with 732 employees. We expect operating expense growth to moderate in 2019, with growth in R&D partially offset by declines in G&A, with slower growth in sales and marketing investments.

Adjusted EBITDA, or adjusted earnings before interest, taxes, depreciation, amortization, long-term incentive compensation and non-recurring items was $9.1 million, an increase of $2.7 million from $6.4 million in the fourth quarter of 2017. For the year, adjusted EBITDA totaled $21.6 million. And as Scott mentioned, it exceeded our guidance range of $15 million to $19 million.

GAAP earnings per share was $0.10 in the fourth quarter of 2018, compared to a loss of $0.65 in the fourth quarter of 2017, which, of course, was driven by the impacts of the 2017 tax reform law. Non-GAAP diluted earnings per share, which excludes long-term incentive compensation, amortization, non-recurring items and the impact of tax adjustments was $0.17 for the fourth quarter of 2018 compared to $0.14 in the fourth quarter of last year.

Geographically, our revenue mix for the fourth quarter included 59% from EMEA, 23% from the Americas and 18% from Asia-Pac. This compares to 55%, 28%, and 17% in the same regions in Q4 2017, respectively. The higher share revenue in EMEA was driven by strength in our mobile security suite and contributions from our Dealflo acquisition.

Looking at the balance sheet. We ended the fourth quarter with $99 million in cash, cash equivalents and short-term investments as compared to $158 million at the end of 2017. The acquisition of Dealflo accounted for a majority of that difference.

I will now turn the meeting back to Scott.

Scott M. Clements -- Chief Executive Officer and President

Thanks very much, Mark. As financial institutions and enterprise focus on growth in their digital channels, it's more important than ever to protect the customer journey, as fraud and other financial crimes become more sophisticated and pervasive. At OneSpan, our mission is to ensure customers can establish trust and peoples identities, and the devices they use and in the transactions they conduct.

Our investments in technology, people and business processes are intended to ensure that we continue to be a market leader. Our pipeline of opportunities is growing, and we will continue to invest in R&D, while managing overall operating expenses. The significant investments we've made over the prior year are contributing to growth and we're confident 2019 will be a year of progress, enhancing customer and shareholder value.

One final note before I finish my comments. As you may have seen, a shareholder has sent an open letter to our Board of Directors making a number of recommendations with respect to the configuration of our business. Our Board takes the input of shareholders very seriously, and you should know that the Board is evaluating the contents of that letter and as it always does, other approaches for creating value for shareholders.

So, as we move into the Q&A section, I want to remind participants that the purpose of today's call is to discuss our operational and financial results. So, we ask that you please keep your questions focused on that topic. And we thank you for your cooperation in this regard.

Operator, we are ready to take questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Zack Turcotte of Dougherty. Your line is now open.

Zack Turcotte -- Dougherty & Company -- Analyst

Hey. Thanks, guys. Zack on for Catharine Trebnick. So, you talked about some of your customers having mix environments both in software solutions as well as hardware. What does the timeline look like as far as when some of those customers maybe willing to move fully to software, particularly with increased regulation you talked about, as well as their kind of historical confidence in the higher-level security?

Scott M. Clements -- Chief Executive Officer and President

Hi, Zack. I'll take a crack at that. I think that for the foreseeable future, I think most of our large customers will continue to operate in a mix environment of hardware and mobile security software, our mobile security suite. And I think the reason for that is, we need to remember that many of these customers, even the smaller ones have hundreds of thousands of users and the larger ones have many millions of users. And those users are everything from 18 young -- 16, 17, 18 year old opening their first bank account to older people like my parents who have been banking for a long time.

And so we see that those different cohorts in the customer base really do want -- they have different requirements for their authentication solution. Some people really value the simplicity of using a hardware authenticator. Some really value the fact that they can do everything they need to do on their mobile device and don't need to have a hardware authentication. And we see the propensity to go one way or another varies a lot by region of the world. And in Asia, for example, hardware authentication remains quite popular, even as we sell a lot of mobile security suite there.

So, I think there -- our view is and there is no -- I don't think there's a lot of doubt about this that over time there is a substitution taking place of mobile security for hardware authentication. That's why we continue to suggest that we will see a gradual decline in unit sales of hardware authenticators over the next -- over the coming years with continued growth in mobile security suite.

As the mix of banking customers shifts younger or toward newer generations, they will have a tendency to use mobile devices rather than hard authentication. But this is going to take a long time. We do see that in the commercial banking space, our hardware authenticators are still the dominant approach because of the security that they offer and the fact, they are not connected to the Internet, they're quite secure.

So that's, I think what's happening. And I would make one other point about our hardware business. It plays a critical role in opening up opportunities for us because of the penetration that we have of this hardware business on a global basis. It really is a key thing that customers want and it opens the door. And in many cases, it gives us the opportunity to talk about mobile security and adaptive authentication and risk analytics, the things that are being driven both by fraud and by regulation around the world.

Zack Turcotte -- Dougherty & Company -- Analyst

Got it. Okay. And then on -- talking about e-signature, the subscription growth. Are you seeing a lot of traction from moving your current on-premise e-signature for customers to your cloud-based offering or is it primarily from new cloud deals?

Scott M. Clements -- Chief Executive Officer and President

Yeah. It's really new customers, predominantly, Zack. I think the reason that we have had an on-premise offering in that business, even when other competitors have not is because particularly banks, to a degree, insurance companies have been slow, I think, to move to the cloud because of the complexity of their infrastructure and also their traditional view that they could be more secure if there's -- if there are software solutions we're operating behind the firewall of their company.

And so that is beginning to change. That is why when we talk about our Trusted Identity strategy and adaptive authentication, that it's a cloud first strategy. It's because we believe when we developed that strategy that banks were going to be accelerating a shift toward the cloud. We're in the early days of that. I think this transition will happen gradually over the coming years. So, I don't expect a big shift in a short period of time with our existing on-prem customers toward cloud.

I think that will take place over somewhere in the three to five-year timeframe. And so, I think it's a very manageable transition for us, even as we -- even as we expand globally with this business and see these other opportunities around cloud, new cloud opportunities for growth. I don't think we're going to see an on-mass move, for example, from on-prem to cloud for those kinds of institutions.

Zack Turcotte -- Dougherty & Company -- Analyst

Okay. One last one on the geographic split. Substantial amount of revenue from EMEA in the quarter. I know you partially attributed to Dealflo customers. So, do you expect a similar level of revenue from EMEA in the future, next 12 months, 24 months? And could you see some additional international cross-selling opportunities for e-signature through those customers?

Scott M. Clements -- Chief Executive Officer and President

Well, I think that we will see some -- we will still see some benefit in EMEA from Dealflo in 2019 because we don't have a full year of it in the numbers yet. So, we still got about five months of sort of one-time pickup in EMEA in 2019 for Dealflo. So, I think that's the first thing. Mobile security suite continues to be -- have a lot of opportunity. That opportunity is global. But given that the largest proportion of our installed base is in Europe, we see a lot of that transition or uptake of mobile security suite happening in Europe, although it's also strong in North America and Asia Pacific.

So, I think those things will continue to be a factor in EMEA. I think with respect to e-signature, we have a number of things that are going on with the intent of strengthening opportunities for our e-signature business in the rest of the world. I did talk about some of those in the -- in comments that I gave earlier. We have focused, I think, in our e-signature business more than most other competitors in the financial services, in the regulated industries.

The reality is that in Europe, the banks have been slow to take up e-signature because initially, there was uncertainty about the requirements and the implications of the eIDAS regulation. We have seen that clarify, and I think one of the issues that they now face is the scalability and cost of delivering qualified electronic signature solutions. This is -- we can deliver a QES solution today. But it's -- I think we have opportunities to really make it more scalable, more cost effective, easier for the consumer to deal with.

These are all challenges around a QES. And QES, qualified electronic signature will be a minority of the e-signature business in Europe and Asia. But it is something that is an element of the solution story that needs to be used for certain types of transactions, even if it's not the most of the transactions, it needs to be something that's available, scalable, deliverable to consumers. So, as I mentioned in the call, we are working very hard on a QES solution that we intend to launch in 2019, that will help with that. At the same time, we do see opportunity for cross selling with Dealflo and our e-signature product line.

And then finally, we continue to evolve our go-to market model and our sales model internationally to support the e-signature business. In fact in 2018, we saw roughly 10% of our revenue come through our -- really our security channel and out of the global, the rest of the world environment outside of North America. So, we've seen some beginnings there. We expect to see a lot more progress and traction on that in 2019.

Zack Turcotte -- Dougherty & Company -- Analyst

Great. Thanks, Scott.

Scott M. Clements -- Chief Executive Officer and President

Thanks, Zack.

Operator

Thank you. Our next question comes from Joel Fishbein of BTIG. Your line is now open.

Joel Fishbein -- BTIG, LLC -- Analyst

Good afternoon, and congrats on a great quarter and end of the fiscal '18. Scott, I have -- just couple for you. On the -- I looked in initial guide for 2019, above where we were, implies roughly 10% growth. Love to just understand your confidence in the full-year guide and what kind of visibility that you have into that number?

Scott M. Clements -- Chief Executive Officer and President

Sure. I think we do take a lot of effort to model the revenue outlook for the coming year. We take a lot of inputs from everything, sort of a bottoms-up view from our sales organization as well as input from our marketing and product management people about new solutions.

I feel -- I do feel confident about the guidance range that we have given. It does not, I don't think require us to deliver huge amounts of new product revenue. It does require that we deliver some. If we -- I think if we do better, then if we do, I guess, quite well on these new products. And in 2019, we could see -- we could do better. We could see better performance out of the business.

We also have taken a, I think a reasonably conservative view of the hardware business in 2019 as we did in 2018. And in 2018, we did quite a bit better than we expected. So, I think we try to look at all the parts and the pieces and be realistic about those individual components of the revenue growth and put together something that is -- stretches our organization a little bit, but is achievable for our -- in terms of meeting our commitments to investors and to our Board.

Joel Fishbein -- BTIG, LLC -- Analyst

Great. Just one quick follow-up. Were there any very large deals in 4Q, particularly on the hardware side?

Scott M. Clements -- Chief Executive Officer and President

Not from a revenue point of view. We did have a large hardware booking in the fourth quarter, but the revenue contribution from that was limited in Q4. So, I think, it was a pretty broad demand for our hardware products around the world, Europe and Asia, in particular. As I noted in the comments, we have positioned ourselves, I think, to take advantage of the some of the regulatory things that are happening around PSD2. And it's been very interesting to watch that.

As PSD2 has become known, we see parts of Asia and the number of different parts of Asia and the Pacific who are basically adopting a similar viewpoint around strong authentication and risk analytics, although with a longer timeline around when they plan to adopt that. So, I think that's the drivers that we're seeing for the hardware business.

Joel Fishbein -- BTIG, LLC -- Analyst

Great. Thank you so much.

Scott M. Clements -- Chief Executive Officer and President

Thanks. Good talking to you, Joel.

Operator

Thank you. Our next question comes from Matthew Galinko of National Securities. Your line is now open.

Matthew Galinko -- National Securities Corporation -- Analyst

Hey. Good afternoon. Thanks for taking my couple of questions. I guess, first one is just, hear your comments on hardware but just curious what visibility you have into the pipeline and sort of closure of the pipeline just given the outperformance this year and kind of the general trends that you've discussed over the last few quarters?

Scott M. Clements -- Chief Executive Officer and President

Yeah, I think it -- I would say, generally, you have to think about the hardware business sort of multiple parts, right. So there is a part, which is, what I like to call sort of flo business, right? I mean these are just orders that kind of come in because an existing customer needs more tokens, because they have new customers that are replacing old tokens or lost or broken ones. So, there is a fair amount of underlying business that occurs related to that.

And when you look at the customer base for hardware, that customer base is pretty well known. A large proportion of their revenue, as I noted, are reorders and additional orders in the hardware business. Now, that doesn't mean we necessarily have specific visibility more than, say, 90 days or 120 days or something like that, but it does give us some confidence in a baseline level of the business activity.

On top of that are new projects, where a customer is deploying, maybe there -- they've been a customer before and they're upgrading to a new token technology, for example, our CRONTO technology, which has been an important driver for us over the last few years and will be an important driver for us in 2019.

And so, we do have some good visibility to some of that project work. A meaningful part of the hardware revenue in 2019 is related to orders we've already received for larger orders from large customers. And so, we layer that on top of the -- on top of that flo business that I talked about. So, that's kind of the pieces that we look at, and I would say, our visibility to 2019 isn't materially different than it was for 2018.

Matthew Galinko -- National Securities Corporation -- Analyst

Okay. Thanks. And then, you talked about investments in global cloud infrastructure. Can you be a little more specific about what those investments might entail and are they limited to 2019? Do you expect them to be made earlier in the year and sort of will see them flow through the year?

Scott M. Clements -- Chief Executive Officer and President

Yeah. So, we have -- we do have cloud infrastructure in many places around the world today to support our e-signature business. We have cloud platforms in Canada, US, Europe, the Pacific. So, we do have a lot of that already. But that infrastructure is really supporting e-signature today, as we begin to deploy these new integrated TID solutions, adaptive authentication and risk analytics. And then later in the year, some of the new agreement automation offerings, which will tie together e-signature and our identity verification capabilities. Those are all going to require in some cases new and in some cases, expanded infrastructure for these cloud offerings.

So, in order for us to -- let me just say, first of all, we have global interest in these new solutions; adaptive authentication, risk analytics, for example. In every region, we have customers that we are engaged with and talking about those products, those solutions. Obviously, before we can deploy those products or let those customers do proof-of-concepts and things like that, we need to put the cloud infrastructure in place. So, that's a part of what's required. We -- I would say that's coming a little bit faster than maybe we originally thought. And the reason for that is because of the amount of customer interest that we're seeing.

You have to keep in mind that, that infrastructure has to be in place and there's a buying process, a buying cycle that takes place and then there is a deployment period that takes place, and then there's a ramp-up of volume on that platform. So, we are using public cloud infrastructure for most of that. So, there is an upfront investment that we need to make to enable our ability to solve these solutions and that does run ahead of revenue initially. And then after that, we do this in a way that we can then scale those platforms with demand.

But others are getting in price. So, it's sort of the costs to get started and that's what we're talking about. That's happening -- is already been happening in 2018. Mark, I think referred to it in his comments. We did -- we are already seeing a significant uptick in cloud infrastructure costs in 2018 related to the intelligent -- sorry, Intelligent Adaptive Authentication product and the Risk Analytics that we just launched. So, that will continue to build, I would say throughout 2019, probably be a little more heavily weighted in early part of the year.

As you know, we have a -- not a seasonality, but a sort of a pattern to our business over the kind of the revenues in the first half and the second half, and revenues tend to be higher in the second half. So, there's a little bit of a -- there's certainly some pressure on margin in the early part of the year just based on that infrastructure investment that starts to get little better as we look at the second half.

Matthew Galinko -- National Securities Corporation -- Analyst

Great. Thank you.

Scott M. Clements -- Chief Executive Officer and President

Thanks, Matt.

Operator

Thank you. Our next question comes from Anja Soderstrom from Sidoti & Company. Your line is now open.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Thank you, and congratulations on a good quarter. And I have some follow-up questions on the e-signature. So, I just want a clarification. So, are people still going on-premise first or are people most going into the cloud directly now or clients, I would say?

Scott M. Clements -- Chief Executive Officer and President

Sure. Sure. Hi, Anja. Nice to hear from you. What's -- the change that's really happening, Anja, in through 2018 and into the early part of 2019 is that most of our new opportunities, our new customers are want -- do want to use the cloud, the cloud product and the cloud platform. I think that this is true, certainly true for those customers, our non-banking customers, I would say in e-signature and is becoming increasingly true for our banking customers, although, again, that's going to be -- that's going to take a little bit of time, but it is. We are seeing that happen. It is the case that financial institutions, for example, have very rigorous internal processes and regulatory issues related to putting systems into the cloud.

So, they really have to do their homework. They are doing that homework. And the reason they're doing it is because they are under significant financial pressure as I mentioned in my comments. And so they -- and then they also need to be more responsive to their new customers and being agile at delivering new services.

So, a cloud deployment of these types of services can be quite useful or quite helpful, both in reducing costs and increasing their speed to market. So, that's why we see it happening. It's happening again with banks slowly. I don't think we see it, in terms of a big shift, but we will see it as a transition over time and indeed most of our new opportunities are coming as recurring revenue cloud-based implementation.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay. Thank you. That was helpful. And then also, I wanted also to have some clarity on the e-signature as it relates to the new client on-boarding that you are launching in the second half, that's going to be an essential part for that, right?

Scott M. Clements -- Chief Executive Officer and President

Certainly, I think it's -- we've been looking at this opportunity for quite some time. With -- we know that it is a real-time opportunity with banks and other types of customers around the world. This ability to digitally open new accounts and onboard customers, verify their identity, meet the know-your-customer, anti-money laundering requirements. It's complicated to do it, and the success rate for many institutions in doing it has not been very high. So, it is a big opportunity because nobody -- let me not say nobody, many people, particularly young people are not interested in going into a bank branch to open new accounts. They expect to be able to do it online or on their phone.

And today, it's a mixed bag. In some places, you can do it and in some, you can't. And so we know that this is a big opportunity and we have been looking at it very hard for well over a year. That was one of the fundamental drivers for the acquisition of Dealflo to increase our capability and accelerate our speed to market to capture that opportunity and do it in a way that is really focused on the security issues around new account opening.

The trick is not so much a workflow, a web-based workflow that allows you to show screens to people and capture information. It's really about how you can use that data and other information to ensure that someone is who they say they are, and that they are a legitimate client for that bank, that institution. So, that's our approach. That's what we're focused on. And we think it's -- we think it's a pretty big deal over the next few years.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay. Thank you. And then lastly, sort of M&A. You acquired Dealflo and you are still sort of working on that. Is there any other -- how do you think about M&A? Are you looking for more like technology or?

Scott M. Clements -- Chief Executive Officer and President

Yeah. So, I think -- yeah, I think, on Dealflo, first of all, so far so good. We have really, I would say, fully integrated that business into OneSpan. We are doing, as I've noted, we're doing a lot of work right now in integrating the Dealflo technology, not only into our e-signature but also into our Trusted Identity platform. So, there is some good progress that's going on there.

We continue to, I would say, be methodical about our M&A opportunity. We are always looking at lots of companies. We filter the companies that we look at based on our strategy, first and foremost and second of all, based on actionability and potential cost and risk and all of those. And we really consider all of those kinds of things, when we -- as we do this. So, it's not a -- it's not kind of a one-off or somebody gets a big idea is to do a deal, it's a process that we carry out on a continual basis to identify gaps in our -- in our capability that we can best fill through acquisition. So, we continue to do that in real time.

And I would say, I'm not trying to tell you there's anything imminent necessarily. But we are -- we continue to be very active and thoughtful about how to best use our balance sheet, how to best get a good return on the capital that we have available for our business. We're very focused on making sure that we use our cash and our capital for high-return opportunities.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay. Thank you. That was very helpful.

Scott M. Clements -- Chief Executive Officer and President

Great. Thanks, Anja.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Reed Motulsky of Imperial Capital. Your line is now open.

Reed Motulsky -- Imperial Capital -- Analyst

Hi. Speaking on behalf of Saliq Khan. Could you please give us some more color on OneSpan's transformation toward more of a cloud-based and services business model?

Scott M. Clements -- Chief Executive Officer and President

Sure. Hi, Reed. And our thoughts to Saliq, he is on a plan or something right now, but anyway, we are glad to have you. Reed, let me just try and think about kind of where to start with that. We, today, as we narrowed in our comments earlier, for the first time in 2018, a minority of our revenue came from our hardware products, the majority came from our non-hardware products which includes software, different types of services and subscription-based revenues.

So we -- the subscription based revenue is, I would say, is a smaller part of that right now. But it's a part that is growing pretty, pretty quickly, as Mark shared with you in his comments. We have -- we have built our Trusted Identity strategy and our Trusted Identity platform to be a cloud-first strategy. It doesn't mean necessarily cloud only over time, but as a cloud-first strategy because we believe that's where the highest growth is and that's where the biggest demand is going to be.

And I think most of the analyst reports that you read about the cybersecurity industry, when you look at the cloud-based deployment model, part of each different categories of cybersecurity, the cloud model is always growing faster. And as you know, it delivers -- it can deliver a more stable recurring revenue model with strong levels of profitability and all that. So that -- those are the reasons, right, that we decided to use a cloud-first model with Trusted Identity. We learned a lot, I think, about cloud from our acquisition of eSignLive a few years ago. And with the addition of Dealflo there, we are increasing the proportion of our revenue that comes from cloud and recurring revenue.

So, it is a learning process for our organization. I think to really become a cloud-first company, we're making, I think a lot of progress on that. And as we see from the release of the products that I talked about, Intelligent Adaptive Authentication, Risk Analytics. And so it's hard work, but we're making good progress and I'm -- I think it's going to be an increasing contributor to our overall revenue stream profitability as we get through 2019 and into 2020 and forward. So, don't know if I exactly answered your question but I will try again if I didn't.

Reed Motulsky -- Imperial Capital -- Analyst

Thank you. And you talked earlier about hardware reorders and some of that category is more predictable. Are those sales largely put into the maintenance support and other category when you break out revenue by major products and services?

Scott M. Clements -- Chief Executive Officer and President

Mark, you want to take that one?

Mark Hoyt -- Chief Financial Officer, Treasurer and Executive Vice President

Sure. Reed, we include the hardware in our products and licenses subset, not service and maintenance. There is maintenance and service that we get on our other business, of course, and that's included in the next line. But the bulk of that hardware revenue comes through the product and license subset.

Scott M. Clements -- Chief Executive Officer and President

And the bulk of the maintenance is actually software maintenance.

Mark Hoyt -- Chief Financial Officer, Treasurer and Executive Vice President

Correct.

Scott M. Clements -- Chief Executive Officer and President

Right? Yeah.

Reed Motulsky -- Imperial Capital -- Analyst

All right. Thank you very much.

Scott M. Clements -- Chief Executive Officer and President

Thanks (ph), Reed.

All right. Thanks, Reed.

Operator

Thank you. Ladies and gentlemen, at this time, this does conclude today's question-and-answer session. I would like to turn the call back to Scott Clements, CEO, for any closing remarks.

Scott M. Clements -- Chief Executive Officer and President

Thanks very much, operator. Thanks to all of you for listening in and asking, I think some very, very good questions and I'm sure were beneficial to others who were on the call beyond just self. So, we are very pleased with the performance that we saw in 2018.

Two-years ago, we defined a three-year plan to transform our company and through two years of that three-year plan, I believe we have delivered on what we said we are going to do. And we're excited for 2019 and looking forward to another year of progress and contribution that really creates a shareholder value value for our shareholders, and those who are participating in the story of this company through holding our shares.

Thanks, everybody. Have a good rest of your day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.

Duration: 52 minutes

Call participants:

Joe Maxa -- Director, Investor Relations

Scott M. Clements -- Chief Executive Officer and President

Mark Hoyt -- Chief Financial Officer, Treasurer and Executive Vice President

Zack Turcotte -- Dougherty & Company -- Analyst

Joel Fishbein -- BTIG, LLC -- Analyst

Matthew Galinko -- National Securities Corporation -- Analyst

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Reed Motulsky -- Imperial Capital -- Analyst

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