VASCO Data Security International, Inc. (VDSI)

Q2 2010 Earnings Call

July 27, 2010 10:00 a.m. ET

Executives

T. Kendall Hunt - CEO

Jan Valcke - President & COO

Cliff Bown - EVP & CFO

Analysts

Brian Freed - Morgan Keegan

Joe Maxa - Dougherty & Co

Andrew Abrams - Avian Securities

Scott Zeller - Needham & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the VASCO Data Security International Inc. Q2 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to T. Kendall Hunt, Founder, Chairman, and CEO. Please go ahead, sir.

T. Kendall Hunt

Thank you, operator. Good morning, everyone for those listening in from Europe, good afternoon and from Asia, good evening. My name is Ken Hunt and I'm the Chairman, Founder, and CEO of VASCO Data Security International, Inc. On the call with me today are Jan Valcke, our President and Chief Operating Officer; and Cliff Bown, our EVP and Chief Financial Officer.

Before we begin the conference call, I need to brief all of you on forward-looking statements. Statements made in this conference call that relate to future plans, events or performances are forward-looking statements. Any statement containing words such as believes, anticipates, plans, expects and similar words is forward-looking, and these statements involve risks and uncertainties and are based on current expectations.

Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to the company's filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties in this regard.

Today, we are going to review the results for the second quarter of 2010. As always, we will host a question-and-answer session after the conclusion of management's prepared remarks. If possible, I would like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

Revenues for Q2 were $24.7 million, an increase of approximately 1% compared to the second quarter of 2009. Q2 2010 was our 30th consecutive positive quarter in terms of operating income. Our gross profit for the quarter was 70% of revenue, and our operating income was 6% of revenue.

Our business mix between banking which provides higher volume, more margin and non-banking which provides lower volume higher margin resulted in continuing healthy gross margin of 70% for the first six months of 2010. during the quarter, we sold an additional 480 new accounts including 56 new banks, and 424 new enterprise and application security customers.

This compares to the second quarter a year ago, in which we sold 350 new accounts including 44 banks and 306 enterprise security customers. We now have almost 10,000 customers including approximately 1500 banks in more than 100 countries. Although management considers the number of new customers as an indicator of the momentum of our business, and effectiveness of our distribution channel, the number of new customers is not indicative of future revenue.

During the second quarter of 2010, our cash and our working capital remain relatively constant as compared with our balances at the end of the first quarter. At June 30, 2010 our net cash balance was approximately $76 million and we had approximately $84 million of working capital. The strong cash balance gives us the flexibility to invest in our growth now that the economy seems to be improving. Over the past several quarters, we've seen a number of positive trends in our business.

VASCO's non-banking business is growing steadily. For the first two quarters of 2010, our enterprise security business grew 6%, compared to the first two quarters of 2009. Non-banking revenue was 33% in Q2 and 30% of the first six months of 2010. This compares to 32% in Q2 a year ago and 29% for the first six months of 2009. Although our banking business is recovering more slowly than anticipated the longer-term still looks bright and visibility is improving.

The RFPs that we have described to you in past calls are indeed materializing in the firm orders. Our order intake was up significantly in Q2, this is contributing to a growing backlog which will give us the visibility that we have been missing for a while. We do believe that banking market is recovering and will lead us to strong growth in 2011. The competitive landscape ahs changed dramatically, but some of our historic competitors have been acquired by private equity firms of larger corporations.

Others have shifted their attention to activities outside of VASCO's traditional markets. This is bringing growing business opportunities for VASCO particularly in the enterprise security market. Our improved product range including the IDENTIKEY Server allows us to approach markets prospects and applications that were previously out of reach. We have realized many competitive wins and replacements with our new product portfolio.

Our DIGIPASS as a service strategy looks very promising. We believe that our services offering will prove to be an important additional source of revenue and income in the longer term. Historically VASCO is not a company that likes to hide. We have always tried to under promise and over deliver. We are doing our very best to continue that tradition. Although we expect the recovery of our traditional banking market will happen, results might continue to be lumpy in the short term. This is driven not only by the timing of our customers purchasing decisions but also by manufacturing challenges such as scarcity of parts due to a general ramp up by the recovering electronics industry.

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