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Ishan Majumdar
Ishan Majumdar
Articles (105)  | Author's Website |

OneSpan: A Promising Cybersecurity Small Cap

The company's transition to a software model and the new European regulations are likely to propel the stock to new highs

April 09, 2020 | About:

OneSpan (NASDAQ:OSPN) is a company in transition. The online identity verification solutions provider caters to the large global market of banks, securities markets and all forms of financial institutions. These institutions are facing daily threats in the form of increasing fraud, identity theft and security breaches. Financial institutions cannot compromise on their security and are on constant lookout for high-quality solutions to minimize the risk of losing customers and data due to these risks. OneSpan provides both hardware and software solutions into this marketplace. Over the last several years, the company has migrated its solutions to more of a software-as-a-service (SaaS) recurring model, away from the hardware business.

Company overview

OneSpan Inc. was founded in 1991. Its core offerings include the DIGIPASS hardware (authenticators that supports authentication and digital signatures for applications run on all forms of devices ranging from laptops to smartphones), OneSpan Sign (an eSignature service), Mobile Security Suite, mobile authentication and identity verification applications. Formerly known as VASCO Data Security International, the company adopted the name OneSpan in May 2018. Over the years, it has built a wide network for the distribution of its software and hardware systems across the globe through distributors, sales personnel and OEMs.

The company has a long list of top banking clients across the globe, which provides a solid foundation for their business. More than half of the world’s top 100 global banks use OneSpan’s digital identity and anti-fraud solutions. OneSpan has also been able to acquire non-financial clients such as BMW, Mercedes Benz and IBM, to name a few, and has a wide client base across the globe.

Increasing identity theft

Organizational dependence on digital platforms has increased exponentially over the years resulting in a significantly higher scope for identity theft. The Federal Trade Commission (FTC) collects data on all forms of identity theft, and it has reported an increase in all types of identity theft, involving around 2.9 million cases of fraud. This form of identity theft can target any personal platform ranging from one’s credit card to their corporate email account, bank account, social media, insurance, medical services, securities accounts and more. Cybercrime losses as reported by U.S. financial institutions have been as high as $17 billion.

This is one of the biggest reasons why a company like OneSpan, which builds technologically robust solutions to counter such issues at a corporate level, is bound to witness a rising demand for its products. Its products are not only relevant across banking, insurance and securities markets, but for all forms of corporations looking towards fraud prevention.

Stable diversified revenue

OneSpan’s main sources of revenue are license fees, maintenance and support fees, and subscription fees, which are all paid consistently on a periodic basis. Since the requirement for its products is ongoing, the revenue stream is rock solid and could result in a much higher valuation.

OneSpan’s single-digit top-line growth does not communicate the full story to investors which is why it becomes important to understand the revenue split. The company’s hardware business revenues are slowing down, but there is a significant shift to the software portion. In fact, the software solutions business is experiencing double-digit growth. The company is gradually transitioning into the SaaS model, which is why the revenue fluctuations may seem erratic, but there is immense potential for value unlocking as soon as the model is fully implemented.

Another big positive that is worth highlighting is that OneSpan’s revenue is spread across a wide variety of product offerings. Its clients are based across the globe in Europe, the Middle East and Africa, the United States and the Asia-Pacific region. There is minimal risk associated with product concentration or geographical concentration, which is another factor that lends robustness to OneSpan’s revenue model.

Good recovery

Despite the Covid-19 market crash, the company's stock recovered rapidly, though it still trades below its 52-week-high. The company is currently trading at an enterprise-value-to-revenue ratio of 2.3, which is very low for a cybersecurity player.

In my view, OneSpan’s valuation is low because of the company’s weak and unclear investor communications. The management has not been able to successfully highlight the future potential of its software business which forms its core as of today. This is the reason why most investors continue to perceive OneSpan as a hardware company with a high customer concentration. This is the main reason why investors are unable to accurately value the business of OneSpan. The lack of a clear picture is likely the reason why OneSpan is so cheap, and it is only a matter of time before the management can fix this and make the price shoot up again.

Key takeaways

Except hardware, all of OneSpan’s core markets are rapidly, growing whether it is the core Trusted Identity Solutions platform, the mobile security business or the e-Signature business. The company is investing consistently in R&D to build its Artificial Intelligence related capabilities in order to move ahead of the market in terms of its security solutions.

Also, security regulations such as the GDPR (General Data Protection Regulation) and the PSD2 EU Directive, administered by the European Commission (Directorate General Internal Market) to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA), are further benefitting its business. Based on all these factors, I believe OneSpan clearly has a bright future ahead.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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