| Delaware |
000-24389 |
36-4169320 |
| |
|
|
| (State
or other juris- |
(Commission |
(IRS
Employer |
| diction
of incorporation) |
File
Number) |
Identification
No.) |
| 1901
South Meyers Road, Suite 210 |
|
| Oakbrook
Terrace, Illinois |
60181 |
| |
|
| (Address
of principal executive offices) |
(Zip
Code) |
| Registrant's
telephone number, including area code: |
(630)
932-8844 |
| 1 | ||
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| Exhibit |
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| Number |
Description |
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| 99.1 |
Press
release, dated July 22, 2004, providing financial update of VASCO Data Security International, Inc. for the second quarter ended
June 30, 2004. |
|
| 99.2 |
Text
of script for July 22, 2004 Earnings Conference Call. |
| 2 | ||
|
|
||
| Date:
July 22, 2004 |
VASCO
Data Security International, Inc. |
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(Registrant) |
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|
| |
By:
/s/Clifford K. Bown |
| |
|
| |
Clifford
K. Bown |
| |
Chief
Financial Officer |
| 3 | ||
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||
| Exhibit
No. |
Description |
|
| |
|
|
| 99.1 |
Press
release, dated July 22, 2004, announcing financial update of VASCO Data Security International, Inc. for the second quarter
ended June 30, 2004. |
|
| 99.2 |
Text
of script for July 22, 2004 Earnings Conference Call. |
4
EXHIBIT 99.1
VASCO Reports Second Quarter and First Six Months 2004 Results
REVENUES INCREASE 21% OVER SECOND QUARTER OF PRIOR YEAR; OPERATING INCOME MORE
THAN DOUBLE SECOND QUARTER 2003 LEVEL AND BEST IN THE COMPANY'S HISTORY; CASH
INCREASES $2,183,000 FROM MARCH 31, 2004 TO $6,350,000. FINANCIAL RESULTS TO BE
DISCUSSED ON CONFERENCE CALL TODAY AT 10:00 A.M. E.S.T.
OAKBROOK TERRACE, Ill., and BRUSSELS, Belgium, July 22, 2004 - VASCO Data
Security International, Inc. (Nasdaq: VDSI) ( www.vasco.com), today reported
financial results for the second quarter and six months ended June 30, 2004.
Revenues for the second quarter of 2004 increased 21% to $7,174,000 from
$5,953,000 in 2003 and, for the first six months of 2004, increased 19% to
$13,195,000 from $11,071,000 in 2003. Net income available to common
shareholders for the second quarter of 2004 increased 106% to $888,000, or $0.03
per diluted share from $430,000, or $0.01 per diluted share in 2003. Net income
available to common shareholders for the first six months of 2004, increased
124% to $1,390,000, or $0.04 per diluted share from $620,000, or $0.02 per
diluted share in 2003.
Financial Highlights:
o Results reflect the sixth consecutive quarter of operating profit
and positive EBITDA.
o Gross profit was $5,075,000 or 71% of revenue for the second quarter
and $9,521,000 or 72% of revenue for the first six months of 2004.
Gross profit was $3,531,000 or 59% of revenue for the second quarter
and $6,490,000 or 59% of revenue for the first six months of 2003.
o Operating expenses for the second quarter and first six months of
2004 were $3,596,000 and $7,143,000, respectively, an increase of
26% from $2,848,000 reported for the second quarter 2003 and an
increase of 23% from $5,790,000 reported for the first six months of
2003.
o Operating income for the second quarter and first six months of 2004
was $1,479,000 and $2,378,000, respectively, an increase of 117%
from $683,000 reported for the second quarter of 2003 and an
increase of 240% from the $700,000 reported for the first six months
of 2003. Operating income as a percentage of revenue for the second
quarter and first six months of 2004 was 20.6% and 18.0%,
respectively, compared to 11.5% and 6.3% for the comparable periods
in 2003.
o Net income from continuing operations for the second quarter and
first six months of 2004 was $953,000 and $1,536,000, respectively,
an increase of 73% from $551,000 reported for the second quarter of
2003 and an increase of 114% from $719,000 reported for the first
six months of 2003.
o Net income from total operations for the second quarter and first
six months of 2004 was $953,000 and $1,536,000, respectively, an
increase of 32% from $721,000 reported for the second quarter of
2003 and an increase of 28% from $1,202,000 reported for the first
six months of 2003, respectively. Net income from total operations
in 2003 included the results of its VACMAN Enterprise business,
which was sold in the third quarter of 2003.
o Earnings before interest, taxes, depreciation and amortization
(EBITDA) was $1,613,000 and $2,756,000 for the second quarter and
first six months of 2004, respectively, an increase of 41% from
$1,140,000 reported for the second quarter of 2003 and an increase
of 69% from $1,630,000 reported for the first six months of 2003.
o Cash balances at June 30, 2004 totaled $6,350,000 compared to
$4,167,000 and $4,817,000 at March 31, 2004 and December 31, 2003,
respectively.
5
Operational and Other Highlights:
o VASCO wins 115 new customers in Q2 2004 and 244 for the first six
months of 2004. Year-to-date new customers include 33 new banks and
211 corporate customers.
o HSBC Brazil to use VASCO's Digipass GO3.
o VASCO launches four new products: VACMAN Middleware 2.2, Digipass
585, Digipass 850 Integration Toolkit for PKI and Digipass Plug-In
for RACF.
o VASCO's Chairman & CEO and CFO present at Rodman & Renshaw Techvest
Security Conference and AEA Microcap Conference.
o Soleil Securities Group initiates coverage of VDSI.
"I am very pleased with the results of the second quarter and first half of
2004," said Ken Hunt, VASCO's CEO, and Chairman. "Our strategy to expand our
customer base is working and has resulted in higher margins. As noted in the
first quarter, 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 results of the second quarter and first half of 2004 reflect the growing
awareness and acceptance of VASCO's strong authentication products," stated Jan
Valcke, VASCO's President, and COO. "Due to our continuing communication
efforts, organizations are becoming more aware of the value of VASCO's Digipass
products in the battle against various forms of identity theft. As a result,
more banks have started using our products. An important trend is the fact that
existing customers in the financial sector, who previously used VASCO's products
for corporate banking, are starting to introduce Digipass in large-volume retail
banking applications. As we start the third quarter, which is normally our
weakest quarter due to vacations, we have a backlog of firm orders to be shipped
in the third quarter of $5.6 million."
Cliff Bown, Executive Vice President and CFO added, "Our balance sheet continues
to strengthen as a result of the strong operating performance. Cash balances
have increased $2,183,000 or 52% from March 31, 2004 and $1,533,000 or 32% from
December 31, 2003. Our working capital increased by 19% in the second quarter,
from $6,013,000 at March 31, 2004 to $7,133,000 at June 30, 2004. Days Sales
Outstanding (DSO) in net accounts receivable decreased to approximately 58 days
at June 30, 2004 from 66 days at March 31, 2004."
Conference Call Details
In conjunction with this announcement, VASCO Data Security International, Inc.
will host a conference call today, July 22, 2004, at 10:00 a.m. EST - 16:00h
CET. During the Conference Call, Mr. Ken Hunt, CEO, Mr. Jan Valcke, President
and COO, and Mr. Cliff Bown, CFO, will discuss VASCO's Results for the Second
Quarter and First Six Months 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.
6
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenues $ 7,174 $ 5,953 $ 13,195 $ 11,071
Cost of goods sold 2,099 2,422 3,674 4,581
-------- -------- -------- --------
Gross profit 5,075 3,531 9,521 6,490
Operating costs:
Sales and marketing 2,150 1,531 4,243 3,208
Research and development 663 596 1,371 1,119
General and administrative 783 715 1,529 1,455
Non-cash compensation (recovery) -- 6 -- 8
-------- -------- -------- --------
Total operating costs 3,596 2,848 7,143 5,790
-------- -------- -------- --------
Operating income 1,479 683 2,378 700
Interest income (expense), net 25 (48) 54 (97)
Other income (expense), net (32) 180 45 380
-------- -------- -------- --------
Income (loss) before income taxes 1,472 815 2,477 983
Provision for income taxes 519 264 941 264
-------- -------- -------- --------
Net income from continuing operations $ 953 $ 551 $ 1,536 $ 719
Income from discontinued operations -- 170 -- 483
-------- -------- -------- --------
Net income 953 721 1,536 1,202
Preferred stock accretion and dividends (65) (291) (146) (582)
-------- -------- -------- --------
Net income available to common shareholders $ 888 $ 430 $ 1,390 $ 620
======== ======== ======== ========
Basic and diluted net income per common share:
Income from continuing operations $ 0.03 $ 0.01 $ 0.04 $ 0.00
Income from discontinued operations -- -- -- 0.02
-------- -------- -------- --------
Net income $ 0.03 $ 0.01 $ 0.04 $ 0.02
======== ======== ======== ========
Weighted average common shares outstanding
Basic 31,938 28,389 31,553 28,389
======== ======== ======== ========
Diluted 35,240 28,437 32,266 28,420
======== ======== ======== ========
7
VASCO DATA SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
June 30, December 31,
2004 2003
-------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 6,350 $ 4,817
Accounts receivable, net of allowance for doubtful accounts 4,566 2,523
Inventories, net 996 1,075
Prepaid expenses 375 476
Deferred income taxes 70 70
Foreign sales tax receivable 237 362
Other current assets 364 335
-------- --------
Total current assets 12,958 9,658
Property and equipment
Furniture and fixtures 1,906 1,940
Office equipment 2,194 2,221
-------- --------
4,100 4,161
Accumulated depreciation (3,349) (3,280)
-------- --------
Net property and equipment 751 881
Intangible assets, net 1,215 1,378
Goodwill 250 250
Note receivable and investment in SSI 966 1,133
Other assets 75 83
-------- --------
TOTAL ASSETS $ 16,215 $ 13,383
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,215 $ 1,698
Deferred revenue 621 386
Accrued wages and payroll taxes 1,253 1,515
Income taxes payable 757 (197)
Other accrued expenses 979 1,038
-------- --------
Total current liabilities 5,825 4,440
-------- --------
STOCKHOLDERS' EQUITY :
Series D Convertible Preferred Stock 2,878 5,786
Common stock 32 30
Additional paid-in capital 50,284 47,167
Accumulated deficit (42,304) (43,693)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (500) (347)
-------- --------
Total stockholders' equity 10,390 8,943
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,215 $ 13,383
======== ========
8
Reconciliation of EBITDA from continuing operations to net income from
continuing operations:
THREE MONTHS ENDED (UNAUDITED), SIX MONTHS ENDED (UNAUDITED),
--------------------------------- ---------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
EBITDA from continuing operations $ 1,613,000 $ 1,140,000 $ 2,756,000 $ 1,630,000
Interest expense (income), net (25,000) 48,000 (54,000) 97,000
Provision for income taxes 519,000 264,000 941,000 264,000
Depreciaton and amortization 166,000 277,000 333,000 550,000
----------- ----------- ----------- -----------
Net income from continuing operations $ 953,000 $ 551,000 $ 1,536,000 $ 719,000
=========== =========== =========== ===========
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 11 million Digipass
products sold and ordered, VASCO has established itself as a world-leader for
strong Identity Authentication with300 international financial institutions and
approximately 1,400 blue-chip corporations and governments located in more than
70 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
9
EXHIBIT 99.2
Earnings Conference Call July 22, 2004
Ken Hunt:
Good morning everyone. For those listening in from Europe, good afternoon, and
from Asia, good evening. We have some very good news to discuss with you today!
My name is Ken Hunt, and I am the Chairman, Founder & CEO of VASCO Data Security
International, Inc. I'm here with Cliff Bown, VASCO's CFO, and Jan Valcke,
VASCO's President and Chief Operating Officer, who is joining us from Brussels,
Belgium.
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
Today, we are going to review the results for 2nd quarter 2004, and give you
some expectations for 3rd quarter 2004. We will also update the Company's
guidance, 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, and our strong
execution for 1st Quarter, 2004, we have delivered a very solid and a very
profitable 2nd Quarter, 2004.
I have described in the past VASCO's sustainable, repeatable sales model. This
model is continuing to show solid and profitable results. I guess you can now
officially call it a trend. Strong gross margins from the 1st Quarter continued
into the 2nd Quarter, as we successfully sold our products directly and through
our growing reseller channel.
In a word, we had an outstanding 2nd quarter. Our revenues were $7,174,000, up
21% over the 2nd Quarter of 2003; our Gross margin as a percentage of revenue
was 71%, and our Operating Income as a percentage of revenue was 21%
We continued to grow our customer base by selling new accounts directly through
our own sales force, but particularly important through our growing distributor
and reseller channel. During 2nd quarter we sold an additional 115 new accounts,
including 15 new banks, and 100 new Corporate Network Access customers. Almost
all of these Corporate Network Access new accounts and many of the new bank
customers were generated through our distributor and reseller partners. For
2004, we have produced 244 new accounts, including 33 banks and 211 corporate
customers.
10
We now have approximately 300 banks as customers, plus approximately 1360
network access accounts including corporations, federal, state and local
governments located in over 70 countries around the world.
The distributor/reseller channel is a continued focus for our business
development staff. Program to date we have signed 30 distributors who, in turn,
service approximately 1200 resellers. Additionally, we have trained and
certified approximately 1500 professionals from these organizations to sell and
support VASCO's products. Although not a transaction in the 2nd Quarter, I am
very pleased to point out a recent press release announcing the expanded
distributor agreement with Network Engines, and access to their 500+ resellers
in North America. We expect this relationship to contribute dramatically to our
North American revenues going forward.
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.
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 very strong and recent trend in our banking market is an
aggressive move to prevent "Phishing," a hacker's attempt to steal a user's
confidential information by pretending to be a valid web site.
A second growth market for VASCO continues to be 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.
This channel is mainly responsible for our dramatic increase in new accounts and
the resulting growing customer base.
As I have commented before, our target markets are the applications and the
users who currently authenticate themselves with a "static" or fixed password.
These users number in the billion plus. Against this opportunity, VASCO has sold
and delivered approximately 11.5 million Digipass units through the end of 2nd
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 300 banks as customers, we have a significant untapped opportunity
in the banking and finance market.
Starting in 2005 we expect to see a new standard for smart cards to begin
deploying in Europe and Asia. This new standard is known as EMV, which stands
for Europay, MasterCard, Visa. VASCO has been investing in this new smartcard
standard for over two years, and recently announced with MasterCard and
Barclaycard the first commercial pilot for roll out in the UK. MasterCard
expects this new standard to dramatically decrease "card not present" fraud.
VASCO, with its unconnected smartcard reader is planning to be a major supplier
to the hundreds of millions of potential users, supplied through its traditional
banking partners. Keep an eye out for this one!
11
INTRODUCE JAN VALCKE:
At this time I would like to introduce Jan Valcke, VASCO's President and Chief
Operating Officer. Jan, congratulations to you and your team on a great 2nd
Quarter.
COMMENTS BY JAN
Thank you, Ken.
After this positive quarter, it is interesting to look back at the
accomplishments until now, and it's necessary to look ahead to VASCO's future
growth and prosperity.
Indeed, VASCO's cost reduction programs, restructuring and optimization are
behind us. Now, we must focus on the execution of the next chapter of our
business plan. Growth is the next step. Not growth for growth's sake, but growth
that makes this company more successful, more profitable.
For VASCO, growth is possible on three levels:
The first growth path for VASCO is geographical growth. VASCO can win new
customers in previously unexplored countries or work in depth within existing
markets. We are doing both.
VASCO has won new territories, bringing the total number of countries with a
VASCO presence to 70.
VASCO also works in depth in existing markets, creating a domino effect in the
local banking sector. We have experienced this when an initial bank in a new
territory starts to provide its customers with our Digipass, others will follow.
VASCO is also working in depth in existing Corporate Network Access markets, by
further developing our local network of partners. This does not only mean that
we sign new channel partners. We also make sure that our existing partners
deliver. We train them, follow them up very closely and make sure that they
create revenue.
In addition, more and more of our existing CNA customers start using VASCO's
Digipass to secure transactions with their own customers. We call this the
B-to-B market.
New applications are the second growth path for VASCO.
VASCO is the market leader as a provider of strong authentication products to
the financial sector and has built a strong position in the Corporate Network
Access market, specifically for remote access. We foresee a further growth in
both markets.
However, we have an important growth potential in new markets.
These markets are:
- Enterprise Security
- E-commerce
- E-government
In enterprise security, VASCO recently won its first contracts. We foresee that
this market will grow strongly in 2005.
12
There are two drivers for VASCO's future progress in the E-commerce market:
The first one is EMV/CAP, the chip authentication program of MasterCard where
VASCO's Digipass 800 is an approved partner product.
The second product is VASCO's own Digipass Authentication Server, perfectly
suited for the business-to-consumer e-commerce market. A typical end user would
be the customer who buys a book online a couple of times per year. Although
already started this year, the e-commerce market will really gain momentum in
2005.
Finally, the e-government market is slowly emerging. Worldwide, governments are
pondering over the introduction of electronic ID-cards. Countries like Estonia,
Belgium and Malaysia are trendsetters. Some of them conducted the first tests,
including VASCO's Digipass 850. The recently launched Digipass 850 integration
toolkit for PKI environments is VASCO's greatest asset in this market.
The development of new products in VASCO's Digipass factory is the third growth
path for VASCO. VASCO's Digipass Factory is unique due to its interoperability,
flexibility, ease of use and diversity.
Currently, VASCO is investing in the enhancement of the maturity of its existing
product line, by embedding new options. Most of these improvements are
invisible. An example is that a large number of our Digipass models already have
AES (Advanced Encryption Standard) added, the next generation standard in public
algorithms.
Next to the maturity of the products, VASCO focuses on the compatibility of its
products with the solutions of the world's leading security and software
vendors, such as Novell, Citrix, Watchguard, Netscreen, IBM, etc. The latest
evolution in this category is the launch of the Digipass Plug-In for IBM's RACF,
opening the high-volume mainframe market for Digipass.
Finally, VASCO launches new products, such as Digipass 585.
I can conclude that VASCO is doing well. At this moment we are implementing
VASCO's growth plan, in order to make the company even more successful. One
important trend will show you that VASCO's future is looking good. More and more
customers that were using VASCO's Digipass for smaller volume corporate banking
applications, are expanding their use of Digipass to large volume retail banking
applications. This is an important indication for the longer-term growth
potential of the US market, where VASCO is swiftly gaining market share in the
corporate banking area.
Thank you.
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.
13
As many of you may have seen in our press release, revenues from continuing
operations were $7.2 million for the quarter and $13.2 million for the six
months ended June 30, 2004. Revenues for the quarter were $1.2 million or 21%
higher than the second quarter of 2003 and, for the first six months, revenues
were $2.1 million or 19% higher than the same period in 2003.
The increase in revenue for the second quarter reflected a significant increase
from the Banking market that was partially offset by a decline in the Corporate
Network Access market. Revenues in the second quarter of 2004 from the banking
segment increased 30% over the second quarter of 2003 while revenues from the
Corporate Network Access market segment declined 7%.
The increase in revenue for the first six months reflected an increase in both
the banking and Corporate Network Access markets. For the first six months of
2004, revenues from the banking market increased 23% and revenues from the
Corporate Network Access market increased 7% over the same period in 2003.
In terms of total revenue for the second quarter, approximately 80% came from
the Banking segment in 2004, compared to 74% in 2003, and 20% came from the
Corporate Network Access segment in 2004, compared to 26% in 2003. On a
year-to-date basis, the split in 2004 was approximately 78% banking and 22%
Corporate Network Access versus 75% banking and 25% Corporate Network Access in
2003.
The geographic distribution of our revenues continues to change slowly. For the
second quarter of both 2004 and 2003, approximately 80% of our revenue came from
Europe, 9% came from the U.S. and the remaining 9% came from other countries,
with notable contributions from South America in 2004 and from Australia and the
Asia Pacific region in 2003. On a year-to-date basis, revenues from Europe have
declined from 84% in 2003 to 81% in 2004 while revenues from the U.S. has
increased from 7% in 2003 to 9% in 2004 and revenues from other countries have
increased from 9% in 2003 to 10% in 2004. 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.
Gross profit as a percentage of revenue for the second quarter and first six
months of 2004 was approximately 71% and 72%, respectively, and compares to 59%
for both periods in 2003. The improvement in gross profit as a percentage of
revenue was primarily related to three factors; the change in mix of sales
within our Banking segment, the lower average 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 second quarter of 2004 were $3.6 million, an increase
of $748,000 or 26% from the second quarter of 2003. Operating expenses for the
first six months of 2004 were $7.1 million, an increase of $1.4 million or 23%
from 2003. Changes in exchange rates for the second quarter and first six months
accounted for approximately $219,000 or 29% and $642,000 or 47%, respectively,
of the increase. I will comment a little further on currency a bit later.
Excluding currency, expenses in the second quarter and first six months of 2004
reflected an increase of 19% and 12%, respectively, over the same periods in
2003.
14
Excluding the impact of currency, expenses in the second quarter and first six
months of 2004 primarily reflected increases sales and marketing activities.
Research and development and general and administrative expenses were comparable
to expenses incurred in the same periods of 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. The increase also
included additional spending on trade shows and expenditures directed at helping
the reseller channel market our 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 second quarter and first six months of 2004 than in the comparable periods
of 2003. The Euro was approximately 8% stronger in the second quarter and 12%
stronger for the first six months of 2004 compared to 2003 rates. The Australian
Dollar was approximately 16% stronger in the second quarter and 23% stronger for
the first six months of 2004 compared to 2003 rates.
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 $253,000 higher in the second
quarter and $649,000 higher in the first six months of 2004 than in the same
periods of 2003 as a result of revenues being denominated in a foreign currency.
Operating income for the second quarter of 2004 was $1,479,000, an increase of
$796,000 or 117% from the second quarter of 2003. Operating income for the first
six months of 2004 was $2,378,000, an increase of $1,678,000 or 240% from the
same period in 2003. In fact, operating income for the second quarter and first
six months of 2004 exceeded the operating income reported for the full year
2003, which was $1,123,000.
Operating income as a percent of revenue, or operating margin, was approximately
21% for the quarter and 18% for the first six months and is 9 percentage points
and 12 percentage points better than the same periods in 2003. The improvement
in operating margin is primarily attributed to the improvement in gross profit
as a percentage of revenue.
Other income and expense was an expense of $32,000 for the quarter and income of
$45,000 for the first six months of 2004 and is $212,000 and $336,000 worse,
respectively, than the same periods in 2003. The decline in other income and
expense is primarily due to a reduction in exchange gains. In 2003, the Company
benefited from the strengthening of the Euro as its term loan with Dexia Bank
was denominated in U.S. dollars. That debt was repaid in the third quarter of
2003.
The Company reported income tax expense of $519,000 and $941,000 for the quarter
and six months ended June 30, 2004, respectively. For 2003, income tax expense
was $264,000 for both the quarter and the first six months. 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. The
effective tax rate for the quarter and first six months of 2004 was 35% and 38%,
respectively.
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Earnings before interest, taxes, depreciation, and amortization (EBITDA or
operating cash flow if you will) from continuing operations was $1,613,000 for
the second quarter of 2004, an improvement of $473,000 or 41% from the second
quarter of 2003. EBITDA from continuing operations for the first six months of
2004 was $2,756,000, an improvement of $1,126,000 or 69% from the first six
months of 2003. EBITDA from continuing operations for the first six months of
2004 also exceeded the EBITDA for full-year 2003, which was $2,299,000, by
$457,000 or 20%.
The current makeup of our workforce is 75 people worldwide with 46 in sales,
marketing and customer support, 18 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 second quarter of 2004, our balance
sheet has continued to strengthen. During the second quarter, our cash balance
increased $2,183,000, or 52%, to $6,350,000 and our working capital increased
$1,120,000, or 19%, to $7,133,000.
During the quarter our Days Sales Outstanding in accounts receivable declined
from 66 days at the end of the first quarter to 58 days at the end of the second
quarter. Even though the DSO is slightly above our targets, we believe that it
will come down in future periods as the flow of revenue within the quarter
becomes more evenly distributed.
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 June 30, 2004.
NOW, I WOULD LIKE TO TURN THE MEETING BACK TO KEN
COMMENTS ON 3RD QUARTER AND FULL-YEAR 2004 - KEN HUNT
We would like to comment now on 3rd quarter and Full-Year 2004. As of this date,
we have firm orders with shipments scheduled for the 3rd quarter of
approximately $5.6 million. Any new orders received before quarter's end and
shipped during the quarter would be additive to this number.
Today, we are modifying our guidance. First, we continue to project full-year
revenue growth of 15-25% in 2004 as compared to 2003. Second, we are upgrading
our guidance for Gross Margin from a range of 55-60% to 62-67%, and third, we
are upgrading our guidance for Operating Income from a range of 4-10% to 13-18%.
Last, we maintain our guidance for 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.
In summary, we are very pleased with what we have accomplished in the 2nd
quarter and first 6 months of 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
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