OneSpan's Guidance Reset: The Market's Priced-In Slowdown

The market's reaction to OneSpan's third-quarter report was a classic case of expectations trumping the headline numbers. The stock fell sharply after the October 30 release, not because the company missed on earnings, but because the guidance reset revealed a widening gap between what was priced in and the new reality.

The actual print was a mixed bag. Revenue came in at $57.06 million, a slight miss against the $58.18 million consensus estimate. Yet, the bottom line told a different story: the company posted an EPS of $0.33, beating the $0.28 expectation. On the surface, that's a beat-and-raise scenario. But the whisper number for the quarter was likely focused on the top line, and the miss there was a red flag. The real damage was done in the forward view.

Management's new full-year revenue guidance of $239 million to $241 million was a clear cut from the previous range of $245 million to $251 million. That's a reduction of up to $10 million in the top-end outlook. For a stock trading on growth momentum, this is a significant reset. The market had priced in the higher end of that old range; the new guidance showed that trajectory was slowing. The revenue miss in Q3 was a symptom, but the guidance cut was the diagnosis.

The Guidance Shock: Sandbagging or Reality Check?

The guidance cut is not a sign of a broken business, but a clear signal of a deliberate and painful pivot. Management attributed the slowdown directly to a 20% year-over-year decline in hardware sales. This is the core of the "softening" they cited. The company is executing a long-planned transformation from legacy hardware tokens to a software-centric model, and the hardware decline is the expected headwind of that shift. In this light, the guidance reset looks less like a surprise and more like a prudent, if necessary, sandbagging to manage the transition.

The picture is not uniformly weak. The software engine is still firing. Subscription revenue grew a solid 12% year-over-year to $37.8 million, and the company's Annual Recurring Revenue (ARR) increased 10% year-over-year to $180.2 million. More importantly, the business retains its customers exceptionally well, with a net retention rate of 103%. This means existing customers are not only staying but expanding their spend, a powerful indicator of product stickiness and value. The software business is delivering double-digit growth and maintaining high profitability, with Adjusted EBITDA margins near 32%.

So the market's reaction was a binary choice: it had to decide whether the hardware decline was a temporary blip or the start of a longer, more severe deceleration. The guidance cut, by lowering the full-year top-line target, suggests management sees the hardware headwinds persisting longer than hoped, likely due to economic weakness in key regions like EMEA. The company's own note that it had already lowered 2025 revenue guidance by $6 million in the first half due to EMEA weakness supports this view. The reset is a reality check on the pace of the hardware decline, not a surprise about its existence.

The bottom line is that the guidance shock was a necessary step in a known transition. The market had priced in a smooth, accelerating software growth trajectory without fully accounting for the magnitude and duration of the hardware drag. By cutting guidance, management is resetting expectations to a more accurate, slower-growth path. For investors, the key question now shifts from "Is the business failing?" to "Can the software growth accelerate enough to fully offset the hardware decline?" The high net retention and strong ARR growth suggest the foundation is solid, but the market will need to see that software momentum gain real traction in the coming quarters.

Valuation and the Expectation Gap

The selloff has been severe, but the valuation now reflects a market that has priced in a significant slowdown. After the guidance reset, the stock fell 26.5% in a single day, amplifying a year-to-date decline of 39.5%. That's a brutal repricing. Yet, even after this drop, the stock trades at a low P/E ratio of 8.36. This is the market's clear verdict: it is discounting future earnings heavily, anticipating the growth deceleration from the hardware transition.

The disconnect, however, is in the analyst consensus. Despite the sharp price drop, the Street's view remains cautiously optimistic. The overall rating is a Moderate Buy with a $17 consensus target price. That target implies substantial upside from recent levels around $12.29. The gap between the current price and the analyst target highlights the expectation gap. The market has reacted to the guidance cut with a sell-the-news panic, but analysts are looking past the near-term hardware drag to the underlying software engine.

The business fundamentals support a more nuanced view. The software core is still growing at a solid 12% rate with high retention, and the company maintains strong profitability. The low P/E suggests the market is pricing in a multi-year growth reset, but the analyst target assumes a faster recovery. The selloff may have been excessive in its initial reaction, over-punishing the stock for a known transition. The valuation now sits at a discount, but the path to closing the gap between price and target will depend entirely on whether the software growth can accelerate enough to offset the hardware decline. For now, the market's priced-in reality is a slower path; the analyst view is a more optimistic one.

Catalysts and What to Watch

The market has reset its expectations, but the stock's path now depends on a few key catalysts. The next earnings report, scheduled for February 26, 2026, will be the first real test of the new growth trajectory. Investors will be watching for confirmation that the software engine is gaining enough traction to offset the hardware decline. A miss on the top line or any hint of further deceleration would widen the expectation gap and likely trigger another selloff. Conversely, a beat on subscription growth or a more optimistic tone on the hardware transition could begin to close it.

Specifically, watch the pace of software subscription growth. The company's ability to maintain its double-digit subscription growth is critical. Any slowdown here would signal that the software pivot is stalling. Also, monitor for updates on the integration of the Nok Nok Labs acquisition. The strategic move into FIDO2 passwordless software is a key part of the transformation, and meaningful revenue contributions from this segment are expected to materialize in 2026. Progress there will be a tangible sign that the company is successfully executing its long-term plan.

Finally, keep an eye on the company's capital return program. The initiation of a $25 million annual shareholder return program is a clear signal of management's confidence in the business's cash flow generation. Consistent execution of this program, alongside the company's already strong 32% Adjusted EBITDA margins, will demonstrate that profitability is not being sacrificed for growth. It's a vote of confidence that the software model is not just growing but also delivering on its financial promise.

These are the signals that will determine if the software pivot is gaining real traction. The market has priced in a slowdown; the coming quarters will show whether that slowdown is temporary or permanent.