SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 22, 2004
VASCO DATA SECURITY INTERNATIONAL, INC.
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(Exact name of registrant as specified in charter)
Delaware 000-24389 36-4169320
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(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
1901 South Meyers Road, Suite 210
Oakbrook Terrace, Illinois 60181
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 932-8844
N/A
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(Former name or former address, if changed since last report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit
Number Description
--------- -------------------------------------------------------
99.1 Press release, dated April 22, 2004, providing
financial update of VASCO Data Security International,
Inc. for the first quarter ended March 31, 2004.
99.2 Text of script for April 22, 2004 Earnings Conference
Call.
ITEM 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On April 22, 2004, VASCO Data Security International, Inc. (VASCO) issued a
press release providing a financial update for the first quarter ended March 31,
2004. The full text of the press release is attached as Exhibit 99.1 to this
Report.
On April 22, 2004, VASCO held a conference call with investors to discuss
VASCO's first quarter earnings and results of operations for the first three
months of 2004. A script read by officers of VASCO during the conference call is
furnished as Exhibit 99.2 to this Current Report on Form 8-K.
The press release and the comments by VASCO during the conference call contained
a non-GAAP financial measure within the meaning of the Securities and Exchange
Commission's Regulation G. For purposes of Regulation G, a non-GAAP financial
measure is a numerical measure of a registrant's historical or future financial
performance, financial position or cash flows that excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the statement of income, balance sheet or statement of
cash flows (or equivalent statements) of the issuer; or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and presented.
The press release contained a reference to EBITDA from continuing operations and
provided a reconciliation of EBITDA from continuing operations to net income
(loss) from continuing operations on the face of the Consolidated Statement of
Operations. EBITDA is used by VASCO for comparisons to other companies
within its industry as an alternative to GAAP measures and is used by investors
and analysts in evaluating performance. EBITDA, which is earnings before
interest, taxes, depreciation and amortization, is computed by adding back net
interest expense, income tax expense, depreciation expense, and amortization
expense to net income as reported. EBITDA should be considered in addition to,
but not as a substitute for, other measures of financial performance reported in
accordance with accounting principles generally accepted in the United States.
EBITDA, as defined above, may not be comparable to similarly titled measures
reported by other companies.
The information in this report shall not be treated as "filed" for purposes of
the Securities and Exchange Act of 1934, as amended, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, except as shall be expressly set forth by the specific reference in
such a filing.
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: April 22, 2004 VASCO Data Security International, Inc.
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(Registrant)
By: /s/Clifford K. Bown
-----------------------------------
Clifford K. Bown
Chief Financial Officer
3
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Press release, dated April 22, 2004, announcing financial
update of VASCO Data Security International, Inc. for the
first quarter ended March 31, 2004.
99.2 Text of script for April 22, 2004 Earnings Conference Call.
4
EXHIBIT 99.1
VASCO Reports First Quarter Results
Fifth consecutive quarter of profitability and positive operating cash flow;
Revenue of $6,021,000, an increase of 18% over first quarter of prior year;
Operating income of $899,000 is best in the Company's history; 129 new customers
added, 18 banks and 111 corporate network access customers
OAKBROOK TERRACE, Ill., and BRUSSELS, Belgium, April 22, 2004 - VASCO Data
Security International, Inc. (Nasdaq: VDSI) (www.vasco.com), a global provider
of security products that enable e-business and e-commerce, today announced its
financial results for the first quarter ended March 31, 2004. Revenues for the
three months were $6,021,000, an increase of $903,000 or 18% over the first
quarter of 2003.
Operating income for the first quarter of 2004 was $899,000 compared with an
operating income of $17,000 for the first quarter of 2003. Gross margins for the
first quarter of 2004 were $4,446,000 or 73.8% of revenues compared to
$2,959,000 or 57.8% of revenues for the same period in 2003. Operating expenses
for the first quarter of 2004 were $3,547,000, an increase of 21% from
$2,942,000 in the first quarter of 2003.
Net income from continuing operations for the first quarter of 2004 was $583,000
compared with $168,000 for the same period of 2003. Net income from total
operations for the first three months of 2004 was $583,000 compared with
$481,000 for the first three months of 2003. Net income from total operations in
2003 included the results of its VACMAN Enterprise business of $313,000. The
VACMAN Enterprise business was sold in the third quarter of 2003.
Income per basic and diluted common share from total operations was $0.02 for
the first quarter of 2004 and compares to income per basic and diluted common
share of $0.01 for the first quarter of 2003.
Earnings before interest, taxes, depreciation and amortization (EBITDA) from
continuing operations was $1,143,000 for the first quarter of 2004 compared with
earnings before these items of $490,000 in the first quarter of 2003. Cash
balances at March 31, 2004 were $4,167,000 compared to $4,817,000 at December
31, 2003.
"I am pleased with the results of the first quarter of 2004," said Ken Hunt,
VASCO's CEO, and Chairman. "The increase in revenue was particularly satisfying
as it appears our strategy to expand our customer base is working. The increase
in gross margins, as a percentage of revenue, indicates that the revenue growth
came from our new customers in the Banking segment and in the Corporate Network
Access market segment, both of which have lower volumes and higher margins than
our larger strategic banking customers."
"The first quarter of 2004 was one of the best first quarters in our history,"
stated Jan Valcke, VASCO's President, and COO. "Revenue in the first quarter,
which is generally weaker than the preceding fourth quarter, was strong and
reflected the benefit of our productive reseller channel. As our reseller
channel has grown, we have seen an increase in both the market's knowledge of
our products and in the number of new accounts. We were able to add 129 new
customers, 18 banks and 111 corporate network access, in the first quarter of
2004. While our large banking customers are and will continue to be important,
the gross margin in the first quarter is a reflection of new customers being
added. New customers typically order small quantities of our products and
generate higher margins. As the new customers learn more about the benefits of
strong user authentication and the ease with which our products can be deployed,
their orders increase. As we start the second quarter, we have a backlog of firm
orders to be shipped in the second quarter of $4.9 million and we are seeing a
high level of interest in our authentication products."
Cliff Bown, Executive Vice President and CFO added, "Our balance sheet continues
to strengthen as a result of the strong operating performance. Our working
capital increased by 15% in the first quarter, from $5.2 million at December 31,
2003 to $6.0 million at March 31, 2004. Operating cash flow, or EBITDA, for the
first quarter of 2004 increased $650,000 thousand or 133% compared to the first
quarter of 2003. Days Sales Outstanding (DSO) in net accounts receivable,
however, increased to approximately 66 days at March 31, 2004 from 37 days at
December 31, 2003. DSO at March 31, 2004 was 8 days, or 12% lower than at the
end of the first quarter in 2003. The increase in the DSO from the end of the
year reflects the buying pattern within the first quarter with more of the
revenues coming in the last month of the quarter. Revenues in the first quarter
generally increase each month as businesses start executing their plans in the
new year."
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
Net revenues $ 6,021 $ 5,118
Cost of goods sold 1,575 2,159
------------ ------------
Gross profit 4,446 2,959
Operating costs:
Sales and marketing 2,093 1,677
Research and development 708 523
General and administrative 746 740
Non-cash compensation -- 2
------------ ------------
Total operating costs 3,547 2,942
------------ ------------
Operating income from continuing operations 899 17
Interest income (expense), net 29 (49)
Other income, net 77 200
------------ ------------
Income from continuing operations before income taxes 1,005 168
Provision for income taxes 422 --
------------ ------------
Net income from continuing operations 583 168
Income from discontinued operations -- 313
------------ ------------
Net income 583 481
Preferred stock accretion and dividends (81) (291)
------------ ------------
Net income available to common shareholders $ 502 $ 190
============ ============
Basic and diluted net income per common share:
Income from continuing operations $ 0.02 $ --
Income from discontinued operations -- 0.01
------------ ------------
Net income $ 0.02 $ 0.01
============ ============
Weighted average common shares outstanding:
Basic 31,168 30,392
============ ============
Diluted 31,898 31,222
============ ============
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 4,167 $ 4,817
Accounts receivable, net of allowance for doubtful accounts 4,394 2,523
Inventories, net 1,186 1,075
Prepaid expenses 404 476
Deferred income taxes 70 70
Foreign sales tax receivable 558 362
Other current assets 373 335
------------ ------------
Total current assets 11,152 9,658
Property and equipment
Furniture and fixtures 1,903 1,940
Office equipment 2,191 2,221
------------ ------------
4,094 4,161
Accumulated depreciation (3,296) (3,280)
------------ ------------
Net property and equipment 798 881
Intangible assets, net 1,297 1,378
Goodwill 250 250
Note receivable and investment in SSI 1,021 1,132
Other assets 83 83
------------ ------------
TOTAL ASSETS $ 14,601 $ 13,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,446 $ 1,698
Deferred revenue 1,169 386
Accrued wages and payroll taxes 1,399 1,515
Income taxes payable 219 (197)
Other accrued expenses 906 1,038
------------ ------------
Total current liabilities 5,139 4,440
------------ ------------
STOCKHOLDERS' EQUITY:
Series D Convertible Preferred Stock 4,043 5,786
Common stock 32 30
Additional paid-in capital 49,066 47,167
Accumulated deficit (43,192) (43,693)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (487) (347)
------------ ------------
Total stockholders' equity 9,462 8,943
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,601 $ 13,383
============ ============
Reconciliation of EBITDA from continuing operations to net income from
continuing operations:
THREE MONTHS ENDED (UNAUDITED),
----------------------------------------------------------------------
MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
------------------- ------------------------ -------------------
EBITDA from continuing operations $ 1,143,000 $ 348,000 $ 490,000
Interest (income) expense, net (29,000) (39,000) 49,000
Tax provision 422,000 (92,000) --
Depreciaton and amortization 167,000 244,000 273,000
------------------- ------------------------ -------------------
Net income from continuing operations $ 583,000 $ 235,000 $ 168,000
=================== ======================== ===================
Highlights of the Quarter - VASCO:
o VASCO Strengthens Presence in US by Opening North American Sales and
Support Headquarters in Boston
o VASCO Prominently Present with 3 Booths at CeBIT 2004
o VASCO Showcases Digipass Pack for Novell at CeBIT 2004
o VASCO and Netilla Announce Joint Product
o VASCO Recognizes MasterCard Germany, DG Verlag, SRC and Otto as First
VASCO EMV Award Winners
o VASCO Presents Anti-Phishing Platform for E-Commerce in Collaboration With
Banksys, STMicroelectronics and Element
Please join us during our upcoming conference call on April 22, 2004, at 10:00
a.m. EDT - 16:00h CET.
During the Conference Call, Mr. Ken Hunt, Chairman & CEO, Mr. Jan Valcke,
President and COO, and Mr Cliff Bown, CFO, will discuss VASCO's Results for the
First Quarter of 2004. To participate in this Conference Call, please dial one
of the following numbers:
USA/Canada: +1 888-424-5801
International: +1 973-409-9258
And mention access code: VASCO to be connected to the Conference Call.
The Conference Call is also available in listen-only mode on www.vasco.com.
Please log on 15 minutes before the start of the Conference Call in order to
download and install any necessary software. The recorded version of the
Conference Call will be available on the VASCO website 24 hours a day.
ABOUT VASCO: VASCO designs, develops, markets and supports patented "Identity
Authentication" products for e-business and e-commerce. VASCO's Identity
Authentication software is delivered via its Digipass security products, small
"calculator" hardware devices carried by an end user, or in a software format on
mobile phones, other portable devices, and PCs. For user access control, VASCO's
VACMAN products guarantee that only designated Digipass users get access to the
application. VASCO's target markets are the applications and their several
hundred million users that utilize fixed passwords as security. VASCO's
time-based system generates a "one-time" password that changes with every use,
and is virtually impossible to hack, or break. With over 10 million Digipass
products sold and ordered, VASCO has established itself as a world-leader for
strong Identity Authentication with 270 international financial institutions,
approximately 1400 blue-chip corporations, and governments in more than 60
countries.
Forward Looking Statements
Statements made in this news release 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.
Reference is made to the Company's public filings with the US Securities and
Exchange Commission for further information regarding the Company and its
operations.
For more information contact:
Jochem Binst, +32 2 456 9810, jbinst@vasco.com
EXHIBIT 99.2
EARNINGS CONFERENCE CALL APRIL 22, 2004
Ken Hunt:
Good morning everyone. For those listening in from Europe, good afternoon, and
from Asia, good evening.
My name is Ken Hunt, and I am the Chairman, Founder & CEO of VASCO Data Security
International, Inc. Today, I will first discuss the Company's recent
developments. I will then introduce Mr. Jan Valcke, VASCO's President & COO, who
will give an update on VASCO's day-to-day operations. We will then hear from Mr.
Cliff Bown, VASCO's CFO, who will discuss 1st Quarter, 2004 financial results.
At the end of the presentations, we will open the call up to questions and
answers.
However, before we begin the conference call, I need to brief all of you on
"Forward Looking Statements."
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 SECURITIES AND
EXCHANGE COMMISSION FOR A DISCUSSION OF SUCH RISKS AND UNCERTAINTIES IN THIS
REGARD.
GENERAL COMMENTS - KEN HUNT
Now, I would like to take this opportunity to thank all of you for participating
in today's call. Today, we are going to review the results for 1st quarter 2004,
and give you some expectations for 2nd quarter 2004. We will also update the
Company's expectations, presented in a range of percentages for revenue growth,
gross margin, and operating income for full-year 2004.
I am pleased to report that, building on our results of 2003, we have delivered
a solid and profitable 1st Quarter, 2004.
I have described in the past, VASCO's sustainable, repeatable sales model. This
model is beginning to show solid and profitable results. Gross Margins were up
significantly in the first quarter, as we sold our products directly and through
our growing reseller channel.
Business-wise, we had a sound 1st quarter. Our revenues were $6,021,000, up 18%
over the 1st Quarter of 2003; and we had Operating Income of $899,000 vs.
$17,000 for the 1st Quarter of 2003. We continued to control costs, reporting a
modest 7% increase in operating expenses, excluding effects of currency, over
the same 1st Quarter period last year. However, on an absolute basis, our
investment in sales and marketing was up 25% over 1st quarter of 2003, and our
investment in R&D was up 35%, while holding Admin expenses flat.
We continued to grow our customer base by selling new accounts both directly
through our own sales force, but particularly important through our growing
distributor and reseller channel. During 1st quarter we sold an additional 129
new accounts, including 18 new banks, and 111 new Corporate Network Access
customers. Almost all of these Corporate Network Access new accounts were
generated through our distributor and reseller partners. We continue to be
pleased with the development of our distributor channel.
For full year 2003, we sold 572 new accounts of which 69 were banks and 503 were
Corporate Network Access customers. We now have approximately 280 banks as
customers, plus approximately 1260 network access accounts including
corporations, federal, state and local governments located in over 60 countries
around the world.
The distributor/reseller channel is a continued focus for our business
development staff. The reseller channel is extremely important to VASCO because
it broadens and stabilizes our customer base, and allows us to leverage our
sales through established, productive sales and support organizations. We have
communicated the positive impact of this channel by reporting significant new
accounts produced through this channel over the past full year, and the past
quarter. Program to date we have signed 29 distributors who, in turn, service
over 1100 resellers. Additionally, we have trained and certified approximately
1400 professionals from these organizations to sell and support VASCO's
products.
VASCO'S SUSTAINABLE, REPEATABLE SALES MODEL:
Our strategy has been, and continues to be, to identify and develop markets
whose customers will generate a sustainable and repeatable revenue stream to
VASCO. These are organizations that have large audiences, including employees,
customers, partners, suppliers, or other associated parties. As revenue is
created from these VASCO customers, the cost of supporting the production of
these revenues is expected to decrease as a percentage of the revenues.
One such market is VASCO's strongest vertical market, banking and finance. We
typically sign a bank, assist them in a pilot application, then help them roll
out their application to thousands or even millions of users over multiple
months or years.
A second growth market for VASCO is Corporate Network Access (CNA). Working
through growing Reseller and Solutions Partner networks that I mentioned before,
VASCO is able to reach hundreds of thousands of potential end customers. We
support and train our resellers' professionals, who, in turn, train others in
their respective firms. These resellers sell VASCO's Digipass Pack solutions to
long-standing customers and new accounts. They sell to small and medium accounts
that VASCO could not feasibly reach directly. They sell first in small pilots
then follow up with add-on sales. As VASCO selects, signs, then trains and
supports these resellers, our cost for supporting these revenues is also
expected to decrease as a percentage of the revenues.
More broadly speaking, our target markets are the applications and the users who
currently authenticate themselves with a "static" or fixed password. Industry
reports identify over a half a billion users worldwide who rely on fixed
passwords. This number is expected to more than double by the end of 2004.
VASCO, a market leader in Identity Authentication, has sold and delivered
approximately 11 million Digipass units by the end of 1st quarter 2004. We have
just scratched the surface of this enormous market. Additionally, with over
50,000 banks in the world, and our penetration of approximately 280 banks as
customers, we have a significant untapped opportunity in the banking and finance
market.
INTRODUCE JAN VALCKE:
At this time I would like to introduce Jan Valcke, VASCO's President and Chief
Operating Officer. Jan and his team are doing a great job executing our business
plan. I know all of you want to hear more from Jan. Jan.
COMMENTS BY JAN
Thank you, Ken. It's a pleasure being here.
For the fifth consecutive quarter, VASCO has proven that its focus works. Our
core markets: the financial world, the corporate network access, and the b-to-b
e-commerce - all grow steadily. VASCO is ready for a year of consolidation and
steady organic growth.
The optimizing process is finalized. We set up internal structures that have
proven to be efficient and we are ready to grow. Our costs are under control, we
have very well defined markets, our Digipass factory of mature and interoperable
strong authentication products, loyal existing customers and a swiftly growing
contingent of new customers.
Our focus is working. The market is really starting to accept VASCO as THE
authentication company, THE specialist for strong authentication. This brings us
many new customers. The high margin in this quarter proves that the share of new
customers in VASCO's revenue is becoming ever more important. New banks and CNA
customers typically order smaller amounts of Digipass, with a higher margin. We
expect that the share of "traditional" customers in our revenue will be higher
the following quarters. We are on the right track to win new markets, in new
regions, with new applications and new products. VASCO is broadening its
customer base, in the banking market and beyond.
In 2004, VASCO is active in three main markets.
First we have the banking market, our traditional stronghold.
Secondly, the corporate network access market, a growing market VASCO started to
develop a couple of years ago and
thirdly, the b-to-b market, a fairly new market. The corporate network market
and the b-to-b market combined is already responsible for 25% of our revenue,
Currently, VASCO is able to attract more banks and corporations than ever
before. This is a very good sign, when we take into account the fact that the
vast majority of VASCO's new banking customers place new and larger orders later
on.
VASCO's revenue in the Corporate Network Access sphere grows steadily. We have
become an important player in that field and are planning to enhance our market
share in CNA even more. b-to-b e-commerce promises to become an important
emerging market in 2004.
Revenue from EMV (Europay, MasterCard, Visa) -related b-to-c e-commerce will
increase slightly during the year 2004. This market is expected to increase
substantially in 2005, when the roll out of EMV credit cards will be on full
speed.
VASCO will maintain a very disciplined cost control approach. VASCO will also
invest in regions and products worth investing in. This means that VASCO will
invest in countries and markets where it can boost its revenue and profit. The
opening of the Boston office was a first important step in this direction. And
we can already say that our new Boston office is giving a new impulse to our
sales efforts in the America's. We are actively investigating similar projects
in other regions. VASCO can count on the valuable advice and support of Export
Vlaanderen, the export services of the Flemish government.
During Q1, VASCO was prominently present at CeBIT 2004 in Hanover, Germany.
VASCO had three booths at CeBIT, a main booth in the security hall, and smaller
booths in the finance and banking hall and in the networks hall. We were pleased
with the quality and quantity of leads we generated there. At CeBIT, we offered
an award to four companies that have contributed to the development of the
German market for EMV (Europay-Mastercard-Visa). One of the awardees was Otto, a
German-based mail order company that is amongst the largest worldwide. Otto is,
together with Barclaycard in the UK, one of the first companies to have
developed an EMV-driven e-commerce application in conjunction with VASCO's
Digipass 800.
On the R&D side, VASCO concentrates on the maturity of its Digipass factory,
making them truly interoperable and fully compatible with an increasing number
of solution partner products. In addition, VASCO will keep developing new
products. The recently announced Digipass 585 was a first example of VASCO's
dedication to R&D.
The year 2004 has had a good start. Our current goal is to train our staff to
support future growth, to maintain profitability and to realize organic growth
in key areas.
Thank you for your attention.
INTRODUCE CLIFF BOWN:
At this time I would like to turn the call over to Cliff Bown, our Chief
Financial Officer.
CLIFF:
Thank you Ken.
As many of you may have seen in our press release, revenues from continuing
operations were $6,021,000 for the quarter ended March 31,2004. Revenues for the
quarter were $903,000 or 18% higher than the first quarter of 2003. The increase
in revenue reflected significant increases from both the Banking and Corporate
Network Access markets. Revenues in the first quarter of 2004 from the banking
segment increased 15% over the first quarter of 2003. Revenues from the
Corporate Network Access market segment were up 25% over the comparable period
in 2003. For reporting purposes, we combine the results from the Corporate
Network Access market and the e-commerce market previously mentioned by Jan.
Both markets are sold primarily through the reseller channels and have similar
financial profiles in terms of order size and gross margin rate.
In the first quarter of 2004, approximately 75% of our revenues came from the
Banking segment with the remaining 25% coming from Corporate Network Access. In
the first quarter 2003, approximately 77% of our revenues came from Banking with
the remaining 23% coming from Corporate Network Access.
The geographic distribution of our revenues reflects a broader distribution of
our products. For the first quarter 2004, 82% of our revenue was from Europe,
10% from the U.S. and 8% from other countries, with notable contributions from
Australia, the Asia Pacific region and South American countries. In 2003, 89% of
our revenues were from Europe, with 5% from the U.S. and from 6% other
countries, primarily Asia Pacific and Australia. For reporting purposes, we
include sales made by the U.S. sales force to customers in Canada as part of the
U.S. sales numbers.
The gross margin rate for the first quarter of 2004 was 73.8% compared to 57.8%
in 2003. The improvement in gross margin as a percentage of revenue was
primarily related to four factors; the change in mix of sales within our Banking
segment, the increase in revenues from Corporate Network Access market as a
percentage of total revenue, the lower cost of product produced, and the
stronger Euro. Sales to new customers, both in the Banking and Corporate Network
Access segments, are generally for smaller quantities and, therefore, have
higher margins than sales to our larger customers in the Banking segment.
Operating expenses for the first quarter of 2004 were $3.5 million, an increase
of $604,000 or 21% from the first quarter of 2003. Changes in exchange rates
accounted for approximately $420,000 or 70% of the increase. I will comment a
little further on currency a bit later. Excluding currency, expenses in the
first quarter of 2004 reflected an increase of 7% over the first quarter 2003.
Expenses in the first quarter of 2004 for both sales and marketing and research
and development increased while administrative expenses decreased slightly
compared to Q1 2003.
The increases in sales and marketing expenses primarily reflected costs
associated with staff focused on increasing our penetration in existing markets
and agents that can help establish a presence in new markets.
As previously noted by Jan, the increase in R&D spending was related to the
introduction of new products and the continuing efforts to ensure that our
products are fully interoperable and compatible with an increasing array of our
solution partners' products.
As discussed in prior conference calls, changes in currency exchange rates can
have a significant impact on our results. Approximately 80% of our operating
expenses are denominated in currencies other than the U.S. Dollar. Two primary
foreign currencies, the Euro and the Australian Dollar, were both stronger in
the first quarter of 2004 than in the first quarter of 2003, with the Euro being
approximately 17% stronger and the Australian Dollar being approximately 30%
stronger. Also, as noted in previous calls, we attempt to balance our currency
exposure in expenses by denominating a portion of our sales in Euros and
Australian Dollars. We estimate that our sales were approximately $400,000
higher in the first quarter of 2004 than in the first quarter of 2003 as a
result of revenues being denominated in a foreign currency.
Operating income for the first quarter of 2004 was $899,000 an increase of
$882,000 from the first quarter of 2003. Operating income as a percent of
revenue, or operating margin, was 14.9% for the quarter.
For the first quarter of 2004, the Company reported income tax expense of
$422,000. We did not report any income tax expense in the first quarter of 2003.
The expense in 2004 reflects the strong performance of the Belgium operating
subsidiary and the fact that its net operating loss carry forwards were fully
utilized in 2003.
Earnings before interest, taxes, depreciation, and amortization (EBITDA or
operating cash flow if you will) from continuing operations was $1,143,000 for
the first quarter of 2004, an improvement of $653,000 or 133% from the first
quarter of 2003.
The current makeup of our workforce is 74 people worldwide with 46 in sales,
marketing and customer support, 17 in research and development and 11 in general
and administrative.
I would now like to make a few comments on the balance sheet. As a result of our
strong operating performance during the first quarter of 2004, our balance sheet
has continued to strengthen. While our cash balance declined $650,000 to
$4,167,000 during the quarter, our working capital increased $795,000 to
$6,013,000.
The most significant reason for the decline in cash was the increase in
receivables. Accounts receivable increased $1,871,000 to $4,394,000 during the
quarter. Days Sales Outstanding in receivables increased from 37 days to 66
days. The increase in receivables, and related DSO, was primarily due to the
timing of sales in the quarter. Consistent with the pattern of revenues in the
first quarter of 2003, which ended with a DSO of 74 days, sales start slowly in
the January and build through the end of the quarter, with the month of March
being the largest sales month of the quarter.
Finally, I would like to note that the Company continues to have no term debt
and maintains a line of credit for up to 2 million Euros that is secured by its
receivables. There were no borrowings against the line as of March 31, 2004.
NOW, I WOULD LIKE TO TURN THE MEETING BACK TO KEN
Comments on Second Quarter and Full-Year 2004 - Ken Hunt
We would like to comment now on 2nd quarter and Full-Year 2004. With a
successful 1st quarter 2004 behind us, we are optimistic about 2nd quarter and
full year 2004. Our programs and actions that we described earlier are producing
the results that we had expected. We currently have firm orders with shipments
scheduled for the 2nd quarter of approximately $4.9 million. Any new orders
received before quarter's end and shipped during the quarter would be additive
to this number. The Company further expects to achieve full-year revenue growth
of 15-25% in 2004 as compared to 2003. We also expect to achieve Gross Margins
in the 50-60% range, and Operating Income in the 4-10% range. Our DSO's have
increased from 37 days at the end of 2003 to 66 days most recently. Going
forward, we expect our DSO's to range from approximately 45 to 55 days.
As far as quarterly guidance is concerned, we continue to maintain a
conservative position, and do not feel it is yet appropriate. Our business is
becoming more predictable over the horizon of 12 months, but remains somewhat
uneven due to the impact of some very large orders and general seasonality,
including holidays or vacations in the 3rd quarter of each year. As a result, we
expect that the growth in some quarters will be lower than the full-year ranges
while others will exceed the range. Should our expectations change for the full
year, we will advise you in a timely manner.
In summary, we are pleased with what we accomplished in 1st quarter 2004. As in
the past, we will not rest on our laurels and be satisfied with past performance
as a measurement of our future achievements. You can rely on VASCO's people to
do their very best, always!
Q&A SESSION:
This concludes our presentations today and we will now open the call for
questions. Operator
