May 17, 2022 - 4:15pm EST by
2022 2023
Price: 11.00 EPS -0.1 0.2
Shares Out. (in M): 40 P/E N/M N/M
Market Cap (in $M): 441 P/FCF N/M 63x
Net Debt (in $M): -95 EBIT -20 -7
TEV (in $M): 346 TEV/EBIT N/M N/M

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Long recommendation: OneSpan (NASDAQ: OSPN)

Unprofitable SaaS companies such as OneSpan are very much against the current market consensus, however I believe there is a clear path to a 20%+ 5-year IRR as the company revamps its lagging go-to-market strategy and its topline accelerates to match the historical 20%+ ARR growth. We are currently paying close to 12x 2025E FCF on management's numbers guided in today's Investor Day, for a company that should be growing 10-15% (ARR 20%+) by then with low churn.

OneSpan has been written up once before, by ATM in 2018. It is a small cap provider of authentication solutions for financial institutions, that has also nurtured an e-signature business acquired in 2015. Its legacy authentication tokens (hardware pieces that allow bank clients to authenticate transactions) have been declining, masking 30%+ annual growth on the digital signature side. In addition, a shift from permanent to term licenses has further muted topline growth, despite ARR growing at a healthy 20%+ with 115%+ net retention. The company particularly distinguishes itself in e-signature through its advanced security functionality, which is superior to all other providers (admitted by a Docusign employee that I have interviewed, in addition to multiple large banking clients), and global coverage of regulations. 

Shares are down ~30% since the previous write up (from $15 to $11), but this masks a rise to $30 / share when the market gained confidence on the company’s return to growth. Since then, a couple of bad quarters and overall selling pressure on tech have sent the shares down.

However, a new CEO (Matt Moynahan) has been hired after former management was pushed out by activist Legion Partners in 2021. Matt has experience revitalizing mature security software businesses - he did exactly that at Forcepoint, leading to the sale of the business to Francisco Partners. He is also highly incentivized to bring the share price back to $30 / share and/or sell the company - this image shows our estimate of the sensitivity of the CEO’s comp to the share price based on the disclosed comp package, and compares with the former CEO:

The company held an Investor Day today, and despite the stock reaction, the guidance and overall feel were in my opinion positive. OSPN is targeting 20%+ ARR growth 22-25, with 10-12% revenue CAGR under the same period and reaching 8-10% EBITDA margin in 2025. Considering this, we are paying ~12x 2025 EBITDA right now (and EBITDA converts almost 100% to cash flow given an increasingly negative NWC balance due to the SaaS shift and de minimis capex). Extending to 2026, we get the following expected returns:



We believe OSPN should be able to achieve these projections without much difficulty, generating a ~20% IRR over 4-5 years. It is obvious that the current GTM is very inefficient - in 2021 OSPN spent $60m in sales & marketing and grew ARR ~$20m, for a ~3x CaC ratio, which compares with a typical <2x for efficient SaaS businesses. Apart from the CaC, unit economics are likely very good - gross margins are ~70%, NRR is high at 120%+ (guidance, historically 115%+), and we believe gross retention is very low - customers we have spoken with are happy with the product and talk about high switching costs (needing more than a 20-40% price discount to switch providers across both authentication and e-signature). This results in an estimated ~2x LTV/CaC, which should rise to ~3x as CaC improves, inline with management’s stated strategy to focus on improving S&M.


We also believe that our exit 5% FCF yield is conservative - it implies a ~2-3x ARR multiple, for a business that should be at a 25-30 on a rule of 40 basis by then (the CEO believes it could reach 30 - I am modeling that for 2026). The next few quarters may not be the best, as the company will invest this year to generate growth going forward, but we believe this to be a likely double or more over our projection period. Finally, both financial players (e.g. Providence Equity) and strategics (Adobe) would likely want to get their hands on OSPN’s strong security-driven e-sign offering at the current discounted valuation of <3x ARR and we wouldn’t be surprised to see a bid at $30 / share.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Overall topline growth accelerates starting in 2023, as e-sign becomes a larger portion of the total and EBITDA passes the breakeven level, so that OSPN no longer screens as a flat and unprofitable company.


Potential takeover by strategic or software-focused financial player.

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