Segment Information

9 Months Ended

Sep. 30, 2023

Segment Reporting [Abstract]

Segment Information

Segment Information

Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.

•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature and OneSpan Notary. This segment also includes costs attributable to our transaction cloud platform.

•Security Solutions. Security Solutions consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Security Solutions segment are largely on-premises software products and include identity verification, multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, research and development expenses, amortization expense, and restructuring and other related charges that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

Prior to 2023, the Company allocated certain cost of goods sold and operating expenses to its two reportable operating segments using a direct cost allocation and an allocation based on revenue split between the segments. During the three months ended March 31, 2023, and as a result of the ongoing strategic transformation, the Company refined its allocation methodology to better align internal and external costs more directly to where the employee efforts are being spent on each segment moving forward. As a result of this change, there was an increase in cost of goods sold and operating expenses being allocated to the Digital Agreements segment, which better aligns with the investments the Company is making to grow that segment as compared to its Security Solutions segment.

Effective with the three months ended September 30, 2022, the Company began allocating amortization of intangible assets expense to operating income (loss) for each of its reportable operating segments in order to better align the expense with the operations of each segment. The Company has updated segment operating income (loss) for the three and nine months ended September 30, 2022 to reflect the change in presentation. The allocation change had no impact on the Company's condensed consolidated financial statements.

The tables below set forth information about the Company’s reportable operating segments for the three and nine months ended September 30, 2023 and 2022, along with the items necessary to reconcile the segment information to the totals reported in the accompanying condensed consolidated financial statements.

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except percentages)	2023			2022			2023			2022
Digital Agreements
Revenue	$	13,012		$	12,200		$	36,426		$	35,955
Gross profit	$	9,808		$	9,736		$	26,839		$	27,669
Gross margin	75		%	80		%	74		%	77		%
Operating income (loss) (1)	$	(4,666)		$	2,160		$	(17,820)		$	2,823
Security Solutions
Revenue	$	45,826		$	44,947		$	135,752		$	126,429
Gross profit	$	30,861		$	28,695		$	87,410		$	82,946
Gross margin	67		%	64		%	64		%	66		%
Operating income (2)	$	15,673		$	5,711		$	39,827		$	21,399
Total Company:
Revenue	$	58,838		$	57,147		$	172,178		$	162,384
Gross profit	$	40,669		$	38,431		$	114,249		$	110,615
Gross margin	69		%	67		%	66		%	68		%
Statements of Operations reconciliation:
Segment operating income	$	11,007		$	7,871		$	22,007		$	24,222
Corporate operating expenses not allocated at the segment level	15,801			13,496			52,695			47,328
Operating loss	$	(4,794)		$	(5,625)		$	(30,688)		$	(23,106)
Interest income, net	587			179			1,675			197
Other income (expense), net	353			(1,155)			342			13,817
Loss before income taxes	$	(3,854)		$	(6,601)		$	(28,671)		$	(9,092)

(1) Digital Agreements operating income includes $0.6 million of amortization of intangible assets expense for the three months ended both September 30, 2023 and 2022 and $1.7 million of amortization of intangible assets expense for the nine months ended both September 30, 2023 and 2022.

(2) Security Solutions operating income includes $0 and $0.4 million of amortization of intangible assets expense for the three months ended September 30, 2023 and 2022, respectively, and $0 and $1.8 million of amortization of intangible assets expense for the nine months ended September 30, 2023 and 2022, respectively.

The following tables illustrate the disaggregation of revenues by category and services, including a reconciliation of the disaggregated revenues to revenues from the Company’s two reportable operating segments for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	11,807	$	14,378	$	10,321	$	11,941
Maintenance and support	995		11,276		1,693		11,158
Professional services and other (1)	210		1,333		186		2,034
Hardware products	—		18,839		—		19,814
Total Revenue	$	13,012	$	45,826	$	12,200	$	44,947

	Nine Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	32,641	$	46,485	$	30,728	$	34,632
Maintenance and support	3,121		31,914		4,453		32,522
Professional services and other (1)	664		4,002		774		5,327
Hardware products	—		53,351		—		53,948
Total Revenue	$	36,426	$	135,752	$	35,955	$	126,429

(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three and nine months ended September 30, 2023, respectively, and less than 3% of total revenue for the three and nine months ended September 30, 2022, respectively.

The Company allocates goodwill by reporting unit, in accordance with Accounting Standards Codification (ASC) 350 – Goodwill and Other. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.