OneSpan (OSPN) Q3 2025: Software Mix Hits 80% as Hardware Revenue Falls 16%

October 30, 2025 | By EarningsIQ Research

OneSpan’s software-first pivot accelerated in Q3, with software now comprising over 80% of revenue and driving double-digit subscription growth, even as hardware sales continued to contract sharply. Strategic acquisitions and new product launches are reshaping the business mix, but near-term revenue guidance was trimmed amid persistent hardware headwinds and sluggish expansion activity in legacy security. Investors should watch execution on new product ramp and the durability of high-margin software growth as the company targets improved Rule of 40 performance.

Summary

• Software Transformation Outpaces Hardware Decline: Over 80% of revenue now comes from software, reshaping the business mix.
• Product Expansion: S3 and Threat Fabric: Recent acquisitions and partnerships are positioned to drive growth in 2026 and beyond.
• Guidance Reset Reflects Hardware Drag: Full-year outlook lowered as hardware contraction and slower security upsells weigh on near-term results.

Performance Analysis

OneSpan’s Q3 results reflected a decisive shift toward recurring software revenue, with subscription revenue up 12% and annual recurring revenue (ARR) climbing 10% year-over-year to $180 million. The shift was most apparent in the business mix: software and services now account for more than 80% of total revenue, while hardware has dropped below 20%—a marked change from two years ago when hardware comprised a third of the business. This secular decline in hardware, driven by global banking’s move to mobile authentication, offset otherwise healthy software momentum and led to only a modest 1% total revenue increase.

Profitability remained robust, with adjusted EBITDA margin at 31%, and cash generation continued, supporting both shareholder returns and strategic investments. Segment details showed digital agreements (DA) delivering 9% revenue growth and record operating income, while security’s subscription revenue rose 13%, fueled by both organic growth and the addition of Knock Knock’s S3 product. However, operating income in security dipped due to acquisition-related costs and higher compensation expenses.

• Hardware Revenue Contraction: Hardware sales fell approximately 16% year-over-year, now under 20% of the business, reflecting the mobile-first shift in banking authentication.
• Subscription and ARR Growth: Subscription revenue grew double digits, with ARR gains concentrated in software segments and a net retention rate (NRR) of 103%.
• Margin and Cash Flow Strength: Gross margin held steady at 74%, and $11 million in operating cash flow was generated in the quarter, supporting buybacks, dividends, and acquisitions.

Despite these positives, lower-than-expected expansion activity and hardware headwinds led management to reduce revenue and ARR guidance for the full year. The company’s capital allocation remains balanced, with no long-term debt and continued investment in R&D and targeted M&A.

Executive Commentary

Strategic Positioning

1. Software-Led Model and Mix Shift

OneSpan’s business model is now predominantly software-driven, with recurring subscription and ARR representing the core of revenue and profit. The company’s push to sunset legacy on-premise products and invest in SaaS (Software-as-a-Service, subscription-based software delivery) has enabled margin expansion and greater predictability, insulating the business from hardware cyclicality.

2. Product Portfolio Expansion via Acquisition and R&D

The acquisition of Knock Knock Labs and its S3 FIDO2 authentication product has already produced new customer wins and pipeline growth, positioning OneSpan to capture demand as passkeys and passwordless authentication proliferate globally. The recent investment in Threat Fabric, a mobile threat intelligence provider, adds fraud risk insights to the portfolio, with sales enablement underway and expected revenue contribution in 2026. These moves supplement internal R&D led by a new CTO, targeting both security and digital agreements innovation.

3. Capital Allocation and Shareholder Returns

Management’s capital allocation strategy is balanced between organic investment, M&A, and shareholder returns. In 2025, over $20 million was returned via buybacks and dividends, with further repurchases and a quarterly dividend planned. The company’s strong cash flow and debt-free balance sheet provide flexibility to pursue additional acquisitions or organic growth investments as opportunities arise.

4. Geographic and Segment Diversification

Revenue mix continues to shift geographically, with the Americas now at 46% of revenue, up from 39% a year ago, largely due to growth in e-signature and mobile security. EMEA and APAC remain pressured by hardware declines but are targeted for future expansion as mobile and FIDO2 adoption accelerates. Digital Agreements (DA) is increasingly profitable, with SaaS penetration nearly complete and AI development flagged as a future differentiator.

Key Considerations

This quarter marked a pivotal inflection point in OneSpan’s transformation, as software overtook hardware as the clear engine of growth and profitability. The company’s focus is now on scaling new software products and deepening customer value via innovation and strategic partnerships.

Key Considerations:

• Hardware Decline Remains a Drag: The secular shift away from hardware tokens in banking continues to weigh on total revenue, with hardware now only a small and shrinking portion of the mix.
• Execution on New Product Ramps: S3 (FIDO2) and Threat Fabric represent material growth levers, but their scale-up and integration must deliver to offset legacy headwinds.
• Profitability and Cash Flow Sustainability: Strong margins and cash generation support both reinvestment and shareholder returns, providing a buffer as the business transitions.
• Geographic and Segment Variability: North America is gaining share, while EMEA and APAC face greater hardware contraction; DA’s SaaS transition is largely complete and now focused on AI-driven differentiation.

Risks

Persistent hardware revenue contraction, especially in EMEA and APAC, could continue to offset software gains if new product adoption lags. Slower expansion activity in security, particularly among large installed base customers, presents a risk to ARR acceleration. Integration risk from acquisitions and the need to prove out new product-market fit, especially for S3 and Threat Fabric, remain material. Macroeconomic softness in Europe and potential delays in customer decision cycles could further dampen near-term growth.

Forward Outlook

For Q4 and full-year 2025, OneSpan guided to:

• Revenue of $239 million to $241 million (down from previous $245 million to $251 million guidance)
• Software and services revenue of $190 million to $192 million (up 3% to 4% year-over-year)
• Hardware revenue of $49 million to $50 million (down ~16% year-over-year)
• ARR of $183 million to $187 million (prior guide: $186 million to $192 million)
• Adjusted EBITDA of $72 million to $76 million (unchanged)

Management highlighted:

• Hardware headwinds and softer security expansion activity as drivers of the guidance reduction
• Expectations for S3 and Threat Fabric to drive incremental growth in 2026, with continued margin discipline and capital returns

Takeaways

OneSpan’s transformation to a software-led, recurring revenue model is firmly underway, but the legacy hardware drag and slower-than-expected security expansion have forced a near-term reset. The company’s ability to scale new product lines and maintain margin strength will be critical to achieving its Rule of 40 ambitions and reigniting sustainable growth.

• Business Model Shift: Software and services are now the clear drivers of growth and margin, with hardware’s influence diminishing each quarter.
• Strategic Bet on FIDO2 and Threat Intelligence: The S3 acquisition and Threat Fabric partnership are central to future ARR acceleration, but require flawless execution and customer adoption.
• 2026 Will Be the Proof Point: Investors should monitor the ramp of new products and the persistence of high-margin software growth as key signals for long-term value creation.

Conclusion

OneSpan’s Q3 showcased the accelerating pivot to software and recurring revenue, with solid profitability and cash flow providing stability during the transition. Near-term revenue softness was acknowledged, but the strategic foundation is now in place for a return to stronger growth—if execution on new product adoption delivers in the coming year.

Industry Read-Through

The secular decline in hardware authentication tokens is a cautionary signal for security vendors reliant on legacy products, as mobile-first and passwordless protocols like FIDO2 become the norm in banking and enterprise authentication. Recurring software models and bolt-on acquisitions are proving essential for resilience and margin expansion in the cybersecurity and digital agreements space. The focus on AI and threat intelligence integration is likely to intensify across the sector as vendors race to differentiate and defend wallet share. Investors in authentication and digital trust companies should closely track product mix evolution and the speed of SaaS adoption as leading indicators of durable growth and profitability.

OSPN Technology Cybersecurity Recurring Revenue Software Authentication Digital Agreements Acquisition