High-growth companies can be difficult to find in the information technology security business, but Vasco Data Security International ( VDSI), which makes online authentication products, could prove to be an exception. With growth rates well above the industry standard, an ascending stock and a federal directive for banks to strengthen their online banking security, Vasco is poised for an interesting year. The company, which has a market cap of $495 million, has already started the year with a bang: Vasco's stock has risen about 17% in the first four days of trading and is up by nearly two-thirds in the past six months. Shares of Vasco were recently up 68 cents, or 5%, to $14.35. Vasco's momentum is partly based on a set of guidelines issued by the Federal Financial Institutions Examinations Council in 2005, asking U.S. banks to strengthen their online banking security by using "two-factor authentication" -- a process in which a user would have to be offered an added layer of security in the form of a smart card or token in addition to his password. The FFIEC is a group that includes the Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency. Banks are expected to adopt some form of two-factor authentication by the end of 2007, the FFIEC said.
And while banks have fulfilled some basic requirements to keep them compliant, there's plenty more to come, says T. Kendall Hunt, chairman and CEO of Vasco. "Until recently, banks in the U.S. were not serious about strong authentication," says Hunt. "But the FFIEC has changed that, and it has definitely increased the amount of activity in the space." And fortunately for Wemmel, Belgium-based Vasco, the company can feel that pace accelerating. Some 2.9 million units of its biggest authentication product, Digipass, were shipped in its most recent fiscal third quarter, an increase of 60% from same time last year. In addition, Vasco said it added 29 new U.S. bank customers in the quarter. Revenue increased 41% to $18.7 million from $13.3 million a year earlier, while profit nearly doubled to $3.3 million from $1.8 million. That kind of growth rate is much more than what its peers have been delivering, says Frederick Ziegel, principal with Soleil Securities. "I would expect to see 40% revenue growth in 2007, and that's at least three times what the industry overall is growing," he says. Soleil Securities does not hold shares or have an investment banking relationship with Vasco. A significant chunk of that growth will come as banks ramp up their deployment of software authentication products to better fulfill the FFIEC's requirements this year. Most U.S. banks have rolled out pilot deployments and are likely to increase their scale over the course of this year and next.
That should translate into significant revenue gains for Vasco, says Ziegel. "They have signed up more than 100 new banks in the U.S., but if you compare that to the amount of revenue they are generating in the U.S. it is still a small percentage," he says. "I would expect to see a much bigger percentage of their revenue come from the U.S. market as banks move from small pilots to large deployments." Currently, nearly 93% of Vasco's revenue comes from the international market, primarily Europe, where banks have adopted greater standards of IT security. Meanwhile, Vasco has strengthened its direct sales force and has formed partnerships to penetrate deeper into the financial services market, says Hunt. "It should be a big positive for our revenue," he says. Vasco's focus on financial institutions also helps it score over rival RSA, now a part of storage company EMC ( EMC). "Vasco goes after big-volume deals, which are the banks, and they have competed very effectively against RSA for the last two to three years," says Ziegel. All of this makes for an "excellent" long-term story, says Martin Yokosawa, senior vice president and portfolio manager for Oberweis Asset Management, which holds Vasco in its portfolio. "They have shown rapid growth in sales and earnings, and the management does what they say they are going to do," he says.