VASCO Data Security International ( VDSI)

Q3 2010 Earnings Call

October 26, 2010 10:00 am ET


T. Kendall Hunt - CEO

Jan Valcke - President & COO

Cliff Bown - EVP &CFO


Andrew Abrams - Avian Securities

Ignatius Njoku - Jefferies

Josh Goldberg of G2 Investment Partners

Brian Freed - Morgan Keegan

Joe Maxa - Dougherty & Co

Scott Zeller - Needham & Company

David Ives - FBR

Fred Ziegel – Blue Water Capital Market



Ladies and gentlemen, thank you for standing by. Welcome to the VASCO Data Security International Inc. Q3 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, Chairman, Founder, 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 third 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 Q3 were $26.3 million, an increase of 19% compared to the third quarter 2009. Revenues reflected strong growth in both banking and enterprise and applications security. Our revenues from our banking market increased 20% over Q3 2009. Revenues from our enterprise and application security markets increased 17% over Q3 2009. Q3 2010 was our 31st consecutive positive quarter in terms of operating income. Our gross profit for the quarter was 71% of revenue and our operating income was 10% of revenue.

Our business mix between banking which provide higher volume, lower margin and non-banking which provides lower volume, higher margin resulted in continuing healthy gross margin of 70% for the first nine months of 2010. Non-banking revenue was 24% in Q3 and 28% for the first nine months in 2010. This compares to 25% in Q3 a year ago and 27% for the first nine months of 2009. Also contributing to the healthy gross margin was the gross of our non-hardware revenue which was 26% versus 24% in Q3 and 25% versus 23% year-to-date compared to this same period a year ago.

During the quarter, we sold an additional 387 new accounts including 50 new banks and 337 new Enterprise and Application Security customers. This compares to the third quarter a year ago in which we sold 350 new accounts including 56 banks and 294 enterprise and applications security customers. We now have over 10,000 customers including more than 1,500 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 third quarter 2010, our cash and our working capital increased 14% and 10% respectively compared with our balances at the end of the second quarter. At September 30, 2010, our net cash balance was approximately $86.4 million and we have approximately $92.3 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. In past quarters, we told you that our banking business was recovering. We also told you that the number of RFPs was growing. These RFPs are now materializing in firm orders. Our order intake from the banking business is now growing quickly.

As demonstrated by our Q3 2010, earnings report the recovery and the financial vertical is beginning to result in improved financial performance for our company. The confidence that we communicated in past quarterly earnings calls is we believe being justified today. We firmly believe that the banking market will contribute to strong growth in 2011. We also believe VASCO’s banking and enterprise and application security businesses are evolving back to normal.

Looking back, we can say that VASCO is a much stronger and robust company now than it was before the financial and economic crisis began. We have several healthy sources of revenue from different markets both vertical and geographic. We believe that there will be strong, steady growth going forward. As we stated before, our traditional banking market is in recovery. Manufacturing challenges such as scarcity of parts due to general ramp up in the recovering electronics industry still exists and may cause delays in delivery. Nevertheless, we believe that VASCO is prepared to overcome these challenges due to our know-how and experience related to large volume hardware production and assembly. We believe this situation affects all of our competitors and may even turn into competitive advantage for VASCO. We are particularly proud that we can deliver positive short term results again, while investing heavily in the longer term.

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