VASCO Data Security International Inc. Q2 2009 Earnings Call Transcript

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VASCO Data Security International Inc. (VDSI)

Q2 2009 Earnings Call

July 23, 2009 10:00 am ET

Executives

T. Kendall "Ken" Hunt – Chairman and Chief Executive Officer

Jan Valcke – President and Chief Operating Officer

Clifford K. Bown – Executive Vice President and Chief Financial Officer

Analysts

Brian Freed – Morgan, Keegan & Company

Daniel Ives – Friedman Billings Ramsey

Fred Zeigel – Mackinac Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the VASCO Data Security International, Inc. second quarter earnings conference call. (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 "Ken" Hunt

Good morning everyone, for those listening in from Europe, good afternoon, and from Asia, good evening. My name is Ken Hunt. I'm the Chairman, Founder and CEO of VASCO Data Security International, Inc. On the call 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 of the second quarter of 2009. As always, we will host a question and answer session after the conclusion of management's prepared remarks. If possible, I'd like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

Despite today's challenging economic climate, VASCO is pleased to report that the first two quarters of 2009 were profitable quarters. Revenues for Q2 were $24.5 million, a decrease of 31% compared to second quarter 2008 and up approximately 6% over Q1 2009.

Q2 2009 was our 26th consecutive positive quarter in terms of operating income. Our gross profit for the quarter was 68% of revenue and our operating income was approximately 6% of revenue. During the quarter, we sold an additional 350 new accounts including 44 new banks and 306 new enterprise security customers.

This compares to the second quarter a year ago in which we sold 560 new accounts including 79 banks and 437 enterprise security customers. We now have approximately 9,000 customers, including almost 1,300 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.

Our revenue for Q2 was up only slightly when compared to Q1 2009. This compares to past second quarters that were historically much stronger than the first quarter. We expect the third quarter, which has historically been weaker than the second quarter, to continue to be challenged by the economic headwinds we've been experiencing over the last three quarters.

However, we are very encouraged by an increase in RFPs, requests for proposals, and an improvement in our weighted forecast, both signs that the financial crisis is bottoming out and that VASCO's business model is holding up in these difficult times.

As you know, we began to diversity our business model approximately six years ago. VASCO has diversified its business on several levels, its technology, its targeted vertical markets, its targeted geographic markets and its customer concentration.

In the technology field, VASCO has invested in software, PKI or public key infrastructure and services. These technologies are now part of our market offerings and are creating significant revenues. In 2002, we decided to increase our investment in businesses outside of the banking market.

In order to diversity our business we increased our focus on selling through the reseller channel in order to bolster our enterprise and application security business. We have been successful with this strategy, and in 2008, we reported $24 million in revenue for enterprise and application security compared to only $3.2 million in revenue for 2002. This $24 million actually exceeded all of our revenue for 2003.

We have also diversified geographically. Our global reach is another strong point for VASCO. We have a worldwide presence and customers in over 100 countries. Regions such as Southeast Asia, Latin America and the BRIC countries in general have grown significantly in importance for VASCO.

VASCO's recognized as a market leader in those countries. This was illustrated by strong attendance at recent VASCO marketing event, including the Banking Summit in Beijing, China and the CIAB, Brazilian Federation of Banks Conference in Sao Paulo, Brazil.

Last, our customer concentration has improved. In 2002, our top ten customers accounted for 67% of our revenue. In 2008, our top ten customers accounted for 44% of our revenue. In 2003 we had two 10% customers. We have had no 10% customers since 2006. This means that today our business has a much broader customer base and is less exposed to the decisions of a concentrated customer group.

I'm very pleased to report that Q2 produced a positive cash flow of over $10 million. This positive cash flow and our cash balance of over $67 million give us the flexibility to manage our business intelligently and to look for investments in growth opportunities.

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