Note: This is an earnings call transcript. Content may contain errors.

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DATE

Thursday, Oct. 30, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Victor Limongelli
  • Chief Financial Officer — Jorge Martell
  • Head of Investor Relations — Joe Maxa

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RISKS

  • The company lowered its revenue and ARR guidance for fiscal year ended Dec. 31, 2025. Jorge Martell stated this was due to "higher headwinds with respect to our hardware business" and "lower activity in net expansions and new logos, primarily net expansions," in the security business, especially in EMEA, as discussed on the Q3 2025 earnings call.
  • Security segment operating income declined to $16.7 million, or 41% of revenue, from $20.2 million, or 49% of revenue, in the prior year period. This was primarily due to increased operating expenses including Knock Knock acquisition costs, higher share-based compensation, and advisory expenses.
  • Hardware revenue is expected to continue declining, with fiscal year 2025 guidance of $49 million–$50 million and representing an approximate 16% decrease in hardware revenue for fiscal 2025, as customers in EMEA and APAC shift to mobile-first authentication solutions.

TAKEAWAYS

  • Total Revenue -- $57.1 million, an increase of 1% compared to Q3 2024. Driven by double-digit subscription revenue growth, partially offset by a continued decline in hardware sales.
  • Subscription Revenue Growth -- Subscription revenue grew 12% year-over-year, with 10% organic growth, including 13% growth in security and 11% growth in digital agreements.
  • Annual Recurring Revenue (ARR) -- $180 million, up 10% year-over-year. Net retention rate (NRR) increased sequentially to 103%.
  • Adjusted EBITDA -- $17.5 million, or a 30.7% margin. Compared to $17 million, or 30.2%, in the same period last year.
  • GAAP Operating Income -- $8.2 million versus $11.3 million last year, reflecting higher operating expenses, Knock Knock acquisition dilution, and nonrecurring items.
  • GAAP Earnings Per Share -- 17¢ compared to 21¢ last year; Non-GAAP earnings per share was 33¢, flat year-over-year.
  • Security Segment ARR -- $115.5 million, up 11% year-over-year. Subscription revenue grew 13%. Overall segment revenue declined 1% due to hardware decreases.
  • Digital Agreements Segment ARR -- $65 million, up 8% year-over-year. Segment revenue grew 9%. Subscription revenue rose 11% year-over-year. Maintenance/support revenue was negligible due to on-premise product sunsetting.
  • Gross Margin -- 74%, in line with Q3 2024. Digital agreements segment posted a 72% gross margin, also flat year-over-year.
  • Cash & Capital Allocation -- Ended quarter with $85.6 million in cash. Used $6.3 million for share repurchases. $4.7 million for dividends. $1.9 million for Knock Knock acquisition-related payments. Returned over $20 million to shareholders in the first nine months of 2025.
  • Updated Guidance -- Fiscal year 2025 revenue guidance revised to $239 million–$241 million (down from $245 million–$251 million) for the full year. ARR guidance reset to $183 million–$187 million from $186 million–$192 million. Software/services revenue is guided to $190 million–$192 million for the full year, with hardware expected to decline approximately 16%.
  • Software Mix -- Software now comprises approximately 80% of total revenue. This reflects the ongoing transition from hardware.
  • M&A and Investment -- Completed acquisition of Knock Knock, adding the S3 (FIDO2) product and two new six-figure customers in the first four months following the June 2025 acquisition. A strategic investment (15% equity stake) in ThreatFabric was executed after Q3 2025 to support mobile threat intelligence and fraud analytics expansion.
  • Geographic Revenue Mix -- Americas contributed 46% of revenue. EMEA represented 38% of revenue. APAC contributed 17% to total revenue. Growth in North America was driven by eSignature and mobile application expansion, while regional declines were led by hardware trends in Europe and APAC.
  • Board Actions -- Another 12¢ per share dividend was authorized to be paid in Q4 2025. The company continues to focus on balanced capital allocation across shareholder returns, internal investment, and targeted M&A.

SUMMARY

OneSpan (OSPN 26.50%) reported modest revenue growth of 1% for Q3 2025. This was highlighted by double-digit gains in subscription revenue (up 12%) and ARR (up 10%) as the company accelerates its software transition. Segment performance was mixed, as digital agreements achieved higher income and gross margin stability, while security margins contracted due to planned investments and acquisition-related costs. The company returned substantial capital to shareholders, deploying over $20 million through buybacks and dividends in the first nine months of 2025. Management addressed the softening fiscal 2025 guidance by pointing to hardware declines and slower security expansion, particularly in EMEA, but emphasized that software initiatives and recent acquisitions are expected to drive growth in future periods. The introduction of S3 from Knock Knock and investment in ThreatFabric form part of a broader push to increase the software mix and future-proof the business.

  • Victor Limongelli said, Our software business, now over 80% of the overall business, delivered double-digit subscription revenue and ARR growth.
  • Jorge Martell cited "higher headwinds with respect to our hardware business, about a couple of million dollars," as a key factor in lowering annual revenue and ARR guidance for fiscal year 2025.
  • Management stated that the acquisition of Knock Knock is expected to be accretive to earnings beginning in Q4 2025, and that initial S3 customer adoption closely followed the closing of the deal.
  • The team highlighted that ThreatFabric's impact will largely materialize in 2026, with ongoing internal investments in product development and sales enablement for new offerings.

INDUSTRY GLOSSARY

  • FIDO2: An open authentication protocol focused on passwordless login using public key cryptography, supporting technologies such as passkeys and hardware security keys.
  • Passkey: A passwordless login credential based on standards enabling secure cross-device authentication without knowledge-based authentication.
  • ARR (Annual Recurring Revenue): The value of recurring revenue components of subscriptions normalized to a one-year period.
  • NRR (Net Retention Rate): A measure reflecting the percentage of recurring revenue retained from existing customers over a period, including contractions and expansions.
  • S3: OneSpan's FIDO2-based authentication software product acquired through the Knock Knock acquisition.

Full Conference Call Transcript

Joe Maxa: Thank you, operator. Hello, everyone. And thank you for joining the OneSpan Third Quarter 2025 Earnings Conference Call. This call is being webcast and can be accessed on the Investor Relations section of OneSpan's website at investors.onespan.com. Joining me on the call today is Victor Limongelli, our Chief Executive Officer, and Jorge Martell, our Chief Financial Officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our third quarter 2025. To access a copy of the press release, and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions.

Please note that statements made during this conference call that relate to future plans, events, or performance including the outlook for full year 2025, and other long-term financial targets, are forward-looking statements. These statements involve risks and uncertainties and are based on current assumptions. 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 U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. Also 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 for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is October 30, 2025. Any forward-looking statements and related assumptions are made as of this date. Except as required by law, we undertake no obligation to update these statements as a result of new information, or future events, or for any other reason. I will now turn the call over to Victor.

Victor Limongelli: Thank you, Joe. Hello, everyone. And thank you for joining us today. Before turning to our results, I would like to recap our progress in the transformation of OneSpan. 2024 was about fixing the cost structure of the business, ensuring that we could operate both business units in a profitable manner. The OneSpan team did a great job working through those challenges, and we entered this year in a much improved operating position. In fact, that improved operating position will enable us to return about $25 million to shareholders between dividends and buybacks by the end of this year. In addition, we also completed an acquisition and made a strategic investment, all funded by cash generated by the business.

In 2025, as we have discussed previously, has been about putting the pieces in place while continuing to operate with strong profitability to enable growth. It has been a remarkable year in that respect. Indeed, today, we announced that our software business, now over 80% of the overall business, delivered double-digit subscription revenue growth and ARR growth. Turning to the specific components that we have been putting in place to drive growth. First, right before the year started, we hired a new CTO, Ashish Jain, to lead our R&D efforts and improve our internal development efforts. Second, in June, we acquired Knock, bringing the best FIDO2 software product called S3 to our portfolio.

I am happy to report that in the first four months since the acquisition, we have already closed two new logos for S3, both in the low six-figure range, and we have built additional pipeline for Q4. We believe that there is a large opportunity in the coming years for S3 as FIDO2 becomes more widely adopted. Initially, we see the U.S. and Japan as the leading markets for FIDO2, but over the coming years, we expect passkeys to become the standard around the world. Third, in October, we announced a strategic investment in and partnership with ThreatFabric to further enhance our value proposition to customers by offering mobile threat intelligence and fraud risk insights.

We are in the midst of sales enablement so that our team can effectively sell the ThreatFabric products and are optimistic that those products will add to growth in 2026. Finally, you should not in any way consider OneSpan to be finished in our efforts to improve the value that we provide to customers and enhance our growth prospects as a business. We are working on additional initiatives. While there might not be announcements each and every quarter, we will never be done improving our value proposition to customers, whether through internal development, through acquisitions, or through strategic partnerships.

We expect these efforts to drive growth, particularly in our software business, as we continue to work towards achieving a rule of 40 performance low. Turning to our results, I am pleased with the team's efficiency, which drove another strong quarter of profitability and cash generation, including $17.5 million of adjusted EBITDA or 31% of revenue and $11 million in cash from operations. I am especially proud that over the first nine months of the year, we generated record adjusted EBITDA of $58 million, representing 32% of revenue and $47 million in cash from operations. We ended the quarter with annual recurring revenue of $180 million, up 10% year over year.

In regards to revenue, we have seen strong bookings in certain regions, including our security business in North America, our Latin America business, and the Southern portion of our EMEA region. I am also heartened by the progress in APAC, and our DA business grew subscription revenue by double. As I mentioned a few minutes ago, we are encouraged by the progress we have seen with our new S3 product acquired as part of the Knock deal. With respect to hardware, as we have discussed many times, there has been a long-term secular shift away from consumer banking tokens to the point that in the first nine months of the year, hardware was less than 20% of our overall business.

That trend is part of what drives us to broaden and strengthen our product offering. In the quarter, total revenue grew 1% to $57 million, driven by double-digit organic subscription revenue growth. This growth was primarily offset by a reduction in security hardware revenue due to the shift described earlier in consumer banking strategies in EMEA and APAC, where banks continue adopting mobile-first authentication approaches. Subscription revenue grew 12%, led by 13% growth in security and 11% growth in digital agreements. The increase in security subscription revenue was driven by both cloud and on-prem authentication software, along with mobile app shielding software.

Both business units remained solidly profitable at the segment level, with digital agreements delivering record high segment operating income. Security absorbed a modest cost impact from the Knock business in Q3, although we expect it to be accretive to securities operating income in Q4. As I mentioned earlier, we continue to generate significant cash from operations, $47 million in the first nine months of the year, and we ended the third quarter with $86 million in cash on hand. In Q3, we used $6 million to repurchase shares of our common stock, and combined with our quarterly dividend payments, we returned more than $20 million to shareholders in the first nine months of 2025.

We also used cash to make the strategic acquisition of Knock and after the third quarter ended, to obtain a 15% equity stake in ThreatFabric. Our investment in ThreatFabric, as well as our acquisition of Knock in Q2 and our internal development efforts, are designed to enhance our product portfolio and move faster to deliver great products that provide additional value to our customers. To that end, we will continue investing in internal R&D and pursuing targeted technology-driven investments with proven market fit to enhance our product portfolio. Our board remains committed to a balanced capital allocation strategy, weighing shareholder returns, organic investments, and targeted M&A.

Accordingly, the board will consider additional share repurchases and has approved another 12¢ per share dividend to be paid in the current quarter. In summary, we are making solid progress in building the foundation for growth in our journey towards achieving Rule of 40 performance. At the same time, we remain committed to driving efficient revenue growth while maintaining strong profitability and cash generation and returning capital to shareholders. With that, I will turn the call over to Jorge.

Jorge Martell: Thank you, Victor, and good afternoon, everyone. I am pleased that we reported another strong quarter of adjusted EBIT and cash generation, and that we are making good progress in building our long-term growth foundation. Before I review our third quarter results, I want to remind you that our acquisition of Knock Labs, which closed in June 2025, modestly contributed to our Q3 operating results this year but did not contribute to the same period in 2024. ARR increased 10% to $180 million, and NRR, our net retention rate, increased sequentially to 103%. Third quarter revenue was $57.1 million, an increase of 1% compared to last year's Q3.

Subscription revenue grew 12%, including 10% organically, and was largely offset by the secular decline in our hardware token business, which is directly related to banks continuing with a mobile-first authentication approach, and to a lesser extent, maintenance and professional services revenues. Third quarter gross margin was 74%, consistent with last year's Q3. GAAP operating income was $8.2 million compared to $11.3 million in Q3 of last year. The change in operating income primarily reflects an increase in operating expenses, including share-based compensation, and other nonrecurring items, along with the expected dilution related to our acquisition of Knock. As a reminder, we expect the acquisition of Knock to be accretive to earnings in Q4 2025.

GAAP net income per share was 17¢ as compared to 21¢ in the same period last year. Earlier this year, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework to better reflect our profitability trajectory and to ensure consistency across interim periods in 2025 and in future years. Please refer to our 2025 quarterly earnings releases and investor presentations for additional details. Non-GAAP earnings per share was 33¢ in both 2025 and 2024. This metric excludes long-term incentive compensation and related payroll taxes, amortization, restructuring charges, and other nonrecurring items, and the impact of tax adjustments.

Adjusted EBITDA and adjusted EBITDA margin was $17.5 million or 30.7% compared to $17 million or 30.2% in the same period of last year. Turning to our cybersecurity business, ARR increased 11% to $115.5 million. Revenue decreased 1% to $40.3 million. Subscription revenue grew 13%, driven by cloud and on-prem authentication software, including a modest contribution from Knock and AppShield in software. This growth was offset by the expected decline in hardware revenue and, to a lesser extent, maintenance and professional services revenues. Subscription revenue primarily benefited from expansion of licenses and, to a lesser extent, new logos, the acquisition of Knock, and conversion of customer contracts to multiyear terms.

Gross margin was 74.4%, similar to last year's third quarter gross margin of 74.7%. The change in gross margin was primarily driven by product mix. Operating income was $16.7 million or 41% of revenue compared to $20.2 million or 49% of revenue in the prior year quarter. The year-over-year change primarily reflects increased operating expenses related to the Knock acquisition, higher share-based compensation, and other nonrecurring expenses, such as advisory-related expenses. Turning to digital agreements, ARR grew 8% to $65 million. Revenue grew 9% to $16.7 million. New SaaS contracts, expansion of the renewal contracts, and an increase in one-time revenue was partially offset by reduced maintenance revenue from the sunsetting of our on-prem eSignature products.

Subscription revenue grew 11% year over year to $16.7 million. Maintenance and support revenue was negligible compared to $300,000 in Q3 of last year. The year-over-year decline is attributed to the sunsetting of our on-premise eSignature solution. As mentioned previously, we have substantially completed the transition to a SaaS business model in a digital agreement business. Gross margin was 72%, consistent with last year's third quarter. Segment operating income was $4.2 million or 25% of revenue compared to $3.4 million or 22% of revenue in Q3 of last year. The year-over-year increase in operating income was driven by increased revenue.

Now turning to our balance sheet, we ended the quarter with $85.6 million in cash and cash equivalents compared to $92.9 million at the end of Q2 and $83.2 million at the end of 2024. We generated $11 million in operating cash flow during the quarter. Uses of cash in the quarter included $6.3 million to repurchase approximately 450,000 shares of common stock, $4.7 million to pay our quarterly cash dividend, and $1.9 million deferred consideration payment related to our acquisition of Knock, among other items. We have no long-term debt as of the end of Q3 2025. Geographically, our revenue mix was 46% from The Americas, 38% from EMEA, and 17% from APAC.

This compares to 39%, 40%, and 21%, respectively, in the third quarter of last year. The year-over-year changes by region were primarily driven by growth in the eSignature business and mobile application in North America, the acquisition of Knock in June 2025, which has its largest presence in North America, growth in hardware revenue in Latin America, and a decline in hardware revenues in both Europe and Asia Pacific, consistent with mobile-first trends in those regions. Moving to some modeling notes and our financial outlook, we are very pleased with our Q3 profitability and cash generation and the progress we have made in positioning the company for long-term growth.

As Victor mentioned, we are seeing strong bookings in both geographic regions but have also seen challenges in some regions, largely due to the secular shift away from consumer banking hardware tokens. We are working hard to improve our sales momentum in all regions and believe the steps we have taken this year, combined with our continuous focus on improving the value proposition we provide our customers, better positions us for stronger growth in future years. For the full year 2025, we are updating our revenue guidance to be in the range of $239 million to $241 million, as compared to our previous guidance range of $245 million to $251 million.

We expect software and services revenue to be in the range of $190 million to $192 million, representing an increase of between 34% in 2025. We also expect hardware revenue to be in the range of $49 million to $50 million, representing an approximately 16% decline from 2024. As Victor mentioned previously, OneSpan as a business is approximately 80% software and 20% hardware. We are updating our ARR guidance to be in the range of $183 million to $187 million, up from $180 million at the end of the third quarter, as compared to our previous guidance range of $186 million to $192 million.

And we are maintaining our adjusted EBITDA guidance in the range of $72 million to $76 million. That concludes my remarks. I will now turn the call over to Victor.

Victor Limongelli: Thanks, Jorge. To recap, we are making progress in strengthening our foundation for long-term growth while continuing to deliver strong profitability and cash generation and returning capital to shareholders. We are working hard to deliver greater value to our customers and to create value for our shareholders. Jorge and I will now be happy to take your questions.

Operator: Thank you. At this time, we will conduct a question and answer session. And as a reminder, to press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Anja Soderstrom with Sidoti. Your line is now open.

Anja Soderstrom: Hi. And thank you for taking my questions. I am just curious. What are you seeing now compared to last quarter that leads you to scale back on the revenue ARR guidance? If you can just double click on that a bit more.

Jorge Martell: Yeah. Anja, can you repeat the question? I think she dropped it. Did she drop, operator?

Operator: I am here.

Jorge Martell: Okay. Anja, can you sorry. There were some feedback. So can you repeat your question for me?

Operator: Yeah. Can you just sort of double click on what you are seeing now compared to last quarter that leads you to scale back on the revenue and ARR guidance for the year?

Jorge Martell: Yeah. I can start, and then Victor can chime in as well. So there are a couple of things, Anja. First is, you know, we saw a little bit of higher headwinds with respect to our hardware business, about a couple of million dollars. I think the other large component was on the security business specifically. We saw lower activity with respect to net expansions and new logos, primarily net expansions. We have a large market share in our business outside of North America. So I think EMEA and APAC have some of that, primarily EMEA. Now I feel like I think it is important to understand a couple of things.

One is when we think about I am getting some feedback. One is when you think about where we are with our updated guidance of, say, you know, $240 million at the midpoint. That is modestly lower versus prior year, about 1% lower, Anja. And I think we need to take a step back in terms of understanding the position of the company today versus what it was, say, you know, twelve months ago. You know, we have done a lot of good work, as Victor mentioned in his remarks, with respect to building the foundation for growth, you know, the Knock acquisition that we did, you know, very, very good capabilities that we are adding to our product portfolio.

The ThreatFabric strategic investment that we are very excited about as well. So we are looking at enhancing we have been enhancing our product portfolios this year to deliver that software. And it is really when you think about what we have done, primarily on the software areas. Right? So we really enhanced our software product portfolio and capabilities to really position the company for future growth in the next few years. And so more and more as the hardware sector, the client continues, so that is going to be less and less impactful to us. And we mentioned this. Software is about 80% of our business. Hardware is 20% and potentially lower in the next few quarters.

And all of this with, obviously, the strong cash flow generation and profitability that we should expect to continue. And so I just want to take a step back and walk you through it because what we are doing is really transforming the product capabilities for the organization. And so the decline in the guide, although, you know, due to partly due to hardware and also a little less activity, we are really thinking about 2025 as a foundation year, the building blocks from our product capability. I do not know if you have any additional thoughts.

Victor Limongelli: Yeah. Let me just add to what Jorge said. So, obviously, the specifics you gave are correct, but if I zoom out a little bit, and just think about the business from when I joined, it is almost two years. In a few months. And two years ago, about a third of our revenue was hardware. And now it is about 20%. We ended 2023, two years ago, with ARR of $155 million. And the midpoint of our guidance for the last quarter would have us ending up at $185 million. So $155 million to $185 million. And a couple of years ago, from a product standpoint, we had not introduced any new capability in quite some time.

In fact, you saw sunsetting products. So it was important for us to, first of all, build the foundation of profitability so that we could invest back in the business while returning capital to shareholders. And we have started to do that, just with the acquisition and the strategic investment, but also internally with the hiring of a new CTO and internal investment. And so that is what we are working on to transform the business. And keep in mind, that the Knock acquisition happened in June. The ThreatFabric strategic investment was October. So we will get some positive impact from Knock, but we expect more in the future, and ThreatFabric is largely a 2026 story.

So and we are continuing to work on other things as we continue to try to improve the value proposition that we are offering our customers.

Anja Soderstrom: Okay. Thank you. And then in terms of the hardware, do you see that being shipped out to the right, or is it just a sort of a decline in demand overall?

Victor Limongelli: Well, you know, if you talk to our customers, ten to twelve years ago, customers in EMEA and APAC, they might have had 100% of their consumers using consumer banking tokens to log on to authenticate. I was in Europe last month, and we had a meeting with eight banks. And we were surveying them. What percentage are using hardware now? It was about 20%. So most of their customers have moved over to mobile authentication. And we see that in our business. Look at our business ten years ago to what it is now on the hardware side. You know, it is probably 20% of the size.

We do not think that number is going to zero, by the way. There are people who prefer hardware, and we do not and maybe that goes down to 15% of their consumers or 12%, but we do not think it is going to zero. But that has been a long-term trend. And it is important for us to manage around that not only with our mobile authentication offerings that we introduced years ago, but also with newer protocols like FIDO that we acquired through the Knock acquisition.

Anja Soderstrom: Okay. Thank you. And then in terms of the margin, how should we think about that? It seems like even though we will have more hardware in the fourth quarter, this compared to last year's fourth quarter, the gross margin is going to be higher. I get it right here. But how should I think about the gross margin altogether? And then also on the operating expenses, please? See that now after you have done all your tough should we think about growth in that in the coming years?

Jorge Martell: Yeah. I can answer that, Anja. That is a good question. So from a hardware perspective, I think it is probably going to be even with last year, Anja, the hardware revenue, we mentioned that during the last call in terms of the split. And that is the distillery we have today. And then from a gross margin perspective, it is going to be, I would say, probably similar to last year's Q4. And so, you know, that will put the full year gross margin in around 73% ish. Slightly higher than last year's, which I think was 72.

And then from an operating expense perspective, you know, one thing to keep in mind in the year over year is the Knock acquisition. So, you know, for the quarter, it is around I am just going to do around numbers. It is around $2 million on a run rate basis that we will be adding year over year. And then, obviously, we have done some also incremental investments in R&D and things like that. Now I do not expect this sequentially to increase or but there will be a maybe modest increase because of that. Dramatically compared to what you saw in Q3.

Anja Soderstrom: Okay. Great. Thank you. That was all for me.

Operator: Thank you. Our next question comes from the line of Catharine Trebnick with Rosenblatt Securities. Your line is now open.

Catharine Trebnick: Oh, thanks for taking my question. Can you just in a snapshot, your product roadmap, where you feel that the deficiencies, you know, these headwinds that you have been experiencing, you know, just really what are the two or three products you think in the next twelve to twenty-four months are going to make up for this gap we have been having. Thanks.

Victor Limongelli: Yeah. Sure. Let me talk a little bit about that. I do not know that I would describe it as a deficiency. We have very good mobile authentication technology. But as you know, multifactor authentication has been around for a long time. Everyone is familiar with getting in the U.S., you get an SMS or a text message with it, or you might get an email. And overseas, one-time passcodes are widely used as well, although not via SMS. So everyone is very familiar with multifactor authentication. So that protocol or approach has been widely adopted. And as Jorge mentioned, we have good market share there.

And even our NRR in security in Q3, I think, was 101 or it will be about 101 for the year. So it is very solid. But over time, technologies change, and we are seeing that with the adoption of passkey. With FIDO2, we are going to see much broader adoption of passkeys as we move through the rest of the decade. And we think it is important for us to broaden our offering so that we have not just the mobile authentication, on top of the hardware authentication that existed, you know, many years ago and still exists for a portion of their customers, but also enables passkeys at a very, very scalable level.

It also has very good latency. And we have proven it out at scale with many different customers. So we think that is going to be a very interesting area for growth.

Catharine Trebnick: Thank you. That was very helpful. And then anything you can add on digital agreements and what you are seeing there and how you expect growth there to pan out in the next twelve months.

Victor Limongelli: Yeah. We have been doing pretty well there. I think if you look at the growth, it has been in the mid to upper single digits, and we expect, you know, it is October 30, so you cannot be too certain about how Q4 is going to go, but we feel pretty good about the Q4 pipeline. And we think we have an opportunity to not just expand with customers we already have, but also to land some new ones. And that is an area where our internal developments I mentioned internal development, and that is an area where we will be using AI in the product more in the coming twelve months.

That is an area for us a focus area for us in the coming months. So we think that is going to be a strong product, continue to be a strong product. And, obviously, we are always trying to do better and have better results, but I think we are making very good progress on the DA business. And the other piece, Catharine, on the DA business, Jorge mentioned this, is record operating income this quarter, I think 25%. So when you layer that on top of the growth there, the numbers start to that business starts to look more and more appealing.

Catharine Trebnick: Alright. Thank you very much.

Operator: Thank you. The next question comes from the line of Eric Zaprager with B. Riley Securities. Your line is now open.

Eric Zaprager: Yes. Thanks for taking the question. First off, you are taking a lot of steps this year to start accelerating growth as you get into 26. And it is mostly on the software side. Can we assume that your subscription revenue growth in '26 should accelerate over '25? If we anticipate double-digit growth in '25, can it accelerate from there in '26?

Victor Limongelli: I do not know if you want to talk about the specifics, but that is absolutely our aim is to continue to improve the software business. I think software as a percentage of revenue, you know, we are at 80% now, and it probably gets to, I do not know, 82 or 83% next year. Jorge, I do not know if you want to talk to any of the specifics.

Jorge Martell: Yeah. So I think just the one thing that I would add is, Eric, is the I think the subscription, yes, I think when you look at the different components of revenue for security, you have to take into account maintenance. And some of those dynamics in terms of the professional term, so may be a little bit choppy. Right? But I think if you focus on the subscription security, I think that is a fair assessment.

Eric Zaprager: Okay. Good. Good. I know you do not have much exposure to federal, but any comments on federal and if the shutdown is giving you any pause?

Jorge Martell: We do not have a ton of exposure. Yeah. Go ahead, Jorge. So I think there is a ton of exposure. Go ahead, Jorge. Sorry for your I would say no. I think we are lucky in that sense, Eric, that we really felt it. You know, we have a little bit of exposure in our digital remittance business. But it has not been anything material at all, roughly. Not the wood. And so I think from that standpoint, the shutdown has been a nonevent for us.

Eric Zaprager: Okay. And then lastly, just follow-up on Catharine's question. What is there any change or any has there been any intensity of competition, or has the market dynamics changed at all in terms of software solution software authentication for banks? Is there any change in that market?

Victor Limongelli: No. I think you actually look at our business, we have been doing quite well in North America. We started a North American security sales effort about fifteen months ago, July '24. But that is a small, you know, historically, a small portion of our business. So although there has been good progress, it is from a small base. So we are doing well there. We have mentioned on previous calls, quite a few times, I think, that the economic environment in Europe was a little bit more challenging for us. And I think that, you know, that has historically been a very large part of our business.

So I think that has impacted us, you know, to a certain extent. It has not been the strongest economy there.

Eric Zaprager: Okay. But it is not there is no particular change from a competitive perspective?

Victor Limongelli: No. No. If anything, I think we are becoming more competitive. As we add new capabilities, you know, I have mentioned that pretty a few times, but it has some large customers that we are going to start rolling out. I think it overall helps our competitive position. Compared to six months ago.

Eric Zaprager: Okay then. Then last question. Terms of the FIDO2 push, what progress have you made with channel partners? Have you been what progress have you made with channel partners on that front?

Victor Limongelli: Well, I want to talk in general about FIDO2 push and the S3 product. I mentioned we got our first two new logos, which is good within a, you know, within four months of closing the deal. And we have others in line, some of which are from channel partners. One of those two actually was from a channel partner. One of those two new logos I mentioned. And we think that is obviously going to be an important method for sales of the in, you know, heading into 2026. That product, I mean, just to FIDO2 is an open protocol. Right? So you can stand up your own FIDO2 server with want.

But what you get from S3 is extreme scalability, where you can scale it up to millions and millions and millions of users. I alluded to this earlier. You get excellent performance with respect to latency. A great management console, make it easy to administer, and also flexible deployment. This is something that we are well known for. You can deploy it in the cloud or on-prem, and there are customers with both deployment modes. So it is a very appealing offering. I think, in the financial services world because some banks, as everyone knows, some large banks still prefer on-prem. So we give them maximum flexibility.

Eric Zaprager: Are those customers buying the tokens from you as well? The FIDO2 tokens?

Victor Limongelli: So the FIDO2 tokens, this is an interesting another area. Right? So we started developing those internally. That was internal development. And we feel good about that business as we move forward. We have quite a bit of pipeline. We are expecting orders. We have gotten some orders. Already. And we expect that to be a more meaningful revenue contribution in 2026 than it is today. So if you think about consumer banking tokens, you know, if that continues to decline, the FIDO2 security keys could perhaps offset some of the secular consumer banking token decline.

Eric Zaprager: Very good. Thank you.

Operator: Thank you. The next question comes from the line of Gray Powell with BTIG. Your line is now open.

Gray Powell: Okay. Great. Thanks for taking the questions. Hey. Look. I only have one question but I am going to break it down into 27 parts. Is that okay?

Victor Limongelli: Yeah. Gotcha. Sure, Gray. Go ahead.

Gray Powell: Alright. No. I just okay. So just really just two questions on my side. And you more or less hit on this. When a customer elects to not renew hardware tokens, I am going to assume it creates an opportunity to upsell your mobile security suite. And then I just treat, like, is that the case? Like, it is a direct shot, or is there more of a jump ball situation where you have to fend off that customer from comp? From other competitors.

Victor Limongelli: Well, it could be a jump ball situation, but in a lot of these cases, I alluded to saying they have 20% of their consumers using hardware. So in many cases, it has already happened. They were a dozen years ago at 100% of their consumers using hardware, and now they have moved over to mobile for the majority of their consumers. Younger consumers, new accounts, and they might have been five years ago, 40% of their consumers using hardware, and that so that number has been declining over time. It does tend, by the way, to have heavier use cases in the corporate banking market. Where you might see 50% of consumers not consumers, but companies using hardware tokens.

Why is that the case? Well, corporate banking very often still happens in front of a large screen, in front of a computer, not on a mobile phone. The more you are using a mobile phone, the more mobile authentication is likely to be used. So Gray, when you see a bank go from 40% consumer banking token to 20%, it is not really a jump ball situation. Yes. There is more opportunity for mobile authentication licenses. But we are not getting as much revenue, you know, upfront from those as we are from the hardware token.

Gray Powell: Understood. That is helpful. And I guess maybe the bigger question for me personally is just on the ARR side. Can you talk about the visibility you have on late-stage deals and pipeline? Just like the overall confidence level you have in the Q4 ARR guide? Just because it does imply a decent uptick in the pace of net adds from what we have seen the last four or five quarters. And, look, I know it is Q4, which is some seasonality. But any color there would be greatly appreciated.

Jorge Martell: Yeah. I can start. Or if you want to talk about the why do not you can talk about the model. I am happy to talk about the, you know, the outlook. So go ahead and I will let you start.

Jorge Martell: Well, my I think so from a model perspective, so we obviously take into account is going to renew. Right? What is the potential expansion based on opportunities that we see in pipeline? And, obviously, talking to our sales leaders and all that. So we have weekly calls. We have visibility to that. And that is part of how we build our ARR forecast. Okay? You know, what is the risk? Is there any slippage going in it? Obviously, as you know, with term and something falls, you know, out of it for more than ninety days, we take it out of ARR.

And so all that it is an active it is an active discussion that comes with the sales leader to what is the potential risk, what is the potential expansion, and this applies to both business units, digital agreements as well as security. And it is an active dialogue. And so it is sort of like a bottoms-up, if you would, where we try to when we model a forecast, it is when it is a Q plus one or the same quarter, it is sort of like a bottoms-up. Gray. It is all about just execution, making sure that we can close those. And, you know, not everything is going to be perfect. Like everything else.

Sometimes it is art. It is not a science. But, you know, we try to so we do have, I would say, within the course, some visibility. Right? There are some bloopers that happened that we do not anticipate. You know, like we mentioned the HDFC situation last quarter, and sometimes we did some contraction, and that is because our sales leader or the client does is not they do not know yet. Right? And so those who have less visibility, but for the most part, I think within the quarter, we have a fair amount of.

Victor Limongelli: So I will turn to you to talk about the other component. Yeah. I mean, we feel pretty good about it. I mean, it is October 30. So you know, we have pretty good visibility. Do not know for sure what is going to close. I think our sales team, if you could go back in time twelve months to now, feels a lot better. About our competitive position. I mean, we have introduced the FIDO security keys. We bought Knock. We have the partnership with ThreatFabric. There is a lot of exciting stuff happening. And a lot of good conversations happening. You know, you cannot you cannot book exciting conversations.

And people feeling good about things, but it is definitely an optimistic vibe.

Gray Powell: Understood. Thank you very much.

Operator: Thank you. The last question comes from the line of Rudy Kessinger with D.A. Davidson. Your line is now open.

Rudy Kessinger: Hey. Thanks. Kind of just a follow-up to some questions that have been asked. Just with respect to the cut for this year specifically on revenue and ARR, is that more so related to gross churn? Is it more so related to, you know, lower than previously expected new logo? Or lower than expected than previously expected cross-selling upsell. Thank you. Jorge can give you the details.

Jorge Martell: Go ahead, Jorge. Yeah. Thank you. Thank you, Victor. So it is primarily related to lower activity in that we did have, I would say, this score in Q3 that impacted one contraction. But I think overall, taking a step back, Rudy, it is primarily the lower activity for a first. Extensions. New level was is to a lesser extent, but it is primarily more than that expansions.

Victor Limongelli: Well and also hardware, right, to a certain extent. For sure. $2 million of hardware, lower than.

Jorge Martell: For sure. On the revenue side. Yes.

Rudy Kessinger: Yeah. Okay. And I guess as we think about, you know, maybe '26, I mean, do you feel like I guess, could you give us maybe kind of a timeline maybe for when you think you might start to see some more traction with some of these newer products and maybe you might be able to reignite growth here?

Victor Limongelli: Yeah. So let me talk a little bit about I think we are going to see traction in '26 with S3. I think we have already seen traction. With a couple of deals closing and more pipeline for Q4. But keep in mind, that if that business grows 30% or 40% next year, that will be a vast acceleration over what they were doing prior to the acquisition. But that will have a $3 or $4 million impact on our business in terms of bookings.

So, the scale of it will take a little bit of while to build even if we can accelerate growth to a much faster growth rate than the business was before or than we have been as a business, you know, over the past number of years. ThreatFabric is our partnership and an investment. And that is going to it is a little bit harder to tell because it has only been three weeks. But we think that will contribute not as meaningfully as Knock. But for our business, like, every bit of improvement helps. If we pick up $3 million or $4 million of ARR somewhere, I think that is a real positive. For us overall.

And, of course, we are not and we alluded to this on the prepared remarks, we are not just doing one thing. We are working on lots of different things, trying to get lots of can score a bunch of runs by hitting a bunch of singles. It does not all have to be a home run.

Rudy Kessinger: Thank you.

Operator: Thank you, Rudy. This does conclude the question and answer session. And I would now like to turn it back to Joe Maxa for closing remarks.

Joe Maxa: Thank you, everyone. Glad you could join us today. We look forward to sharing our results with you again next quarter. Have a great night.

Operator: Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.