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): October 21, 2004
VASCO Data Security International, Inc.
(Exact name of registrant as specified in charter)
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
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
1
Section 2.02 - Results of Operations and Financial Condition
Item 2.02 Results of Operations and Financial Condition
On October 21, 2004, VASCO Data Security International, Inc. (VASCO) issued a
press release providing a financial update for the third quarter ended September
30, 2004. The full text of the press release is attached as Exhibit 99.1 to this
Current Report on Form 8-K.
On October 21, 2004, VASCO held a conference call with investors to discuss
VASCO's third quarter earnings and results of operations for the first nine
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 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 specific reference in such a
filing.
Section 9 - Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits
(c) Exhibits
Exhibit
Number Description
- ------ -----------
99.1 Press release, dated October 21, 2004, providing financial update of
VASCO Data Security International, Inc. for the third quarter ended
September 30, 2004.
99.2 Text of script for October 21, 2004 Earnings Conference Call.
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: October 21, 2004 VASCO Data Security International, Inc.
---------------------------------------
(Registrant)
By: /s/ Clifford K. Bown
-------------------------------------
Clifford K. Bown
Chief Financial Officer
3
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
99.1 Press release, dated October 21, 2004, announcing financial update of
VASCO Data Security International, Inc. for the third quarter ended
September 30, 2004.
99.2 Text of script for October 21, 2004 Earnings Conference Call.
4
EXHIBIT 99.1
VASCO Reports Results for Third Quarter and First Nine Months of 2004
Revenues increase 32% over third quarter of prior year; Operating income best in
the Company's history; Cash increases $2,598,000 from June 30, 2004 to
$8,948,000. Financial results and guidance for full-year 2004 to be discussed on
conference call today at 10:00 a.m. E.S.T.
OAKBROOK TERRACE, Ill., and BRUSSELS, Belgium, October 21, 2004 - VASCO Data
Security International, Inc. (Nasdaq: VDSI) ( www.vasco.com), today reported its
financial results for the third quarter and nine-months ended September 30,
2004.
Revenues for the third quarter of 2004 increased 32% to $7,400,000 from
$5,599,000 in 2003 and, for the first nine months of 2004, increased 24% to
$20,595,000 from $16,670,000 in 2003.
Net income available to common shareholders for the third quarter of 2004 was
$1,150,000, or $0.03 per diluted share and compares to a loss of $2,500,000, or
$0.08 per diluted share in 2003. Net income available to common shareholders for
the first nine months of 2004, was $2,540,000, or $0.08 per diluted share
compared to a loss of $1,879,000, or $0.06 per diluted share in 2003. Net income
available to common shareholders in 2003 included a charge of $3,720,000 for the
beneficial conversion option associated with the Series D 5% Cumulative
Preferred Stock issued in the third quarter of 2003.
Financial Highlights:
o Results reflect the seventh consecutive quarter of operating profit and
positive earnings before interest, taxes, depreciation and amortization
("EBITDA").
o Results reflect the third consecutive quarter-over-quarter increase in
revenue.
o Gross profit was $5,156,000 or 70% of revenue for the third quarter and
$14,677,000 or 71% of revenue for the first nine months of 2004. Gross
profit was $3,453,000 or 62% of revenue for the third quarter and
$9,943,000 or 60% of revenue for the first nine months of 2003.
o Operating expenses for the third quarter and first nine months of 2004
were $3,475,000 and $10,618,000, respectively, an increase of 2% from
$3,395,000 reported for the third quarter 2003 and an increase of 16% from
$9,185,000 reported for the first nine months of 2003.
o Operating income for the third quarter and first nine months of 2004 was
$1,681,000 and $4,059,000, respectively, an increase of $1,623,000 from
$58,000 reported for the third quarter of 2003 and an increase of
$3,301,000 from the $758,000 reported for the first nine months of 2003.
Operating income as a percentage of revenue for the third quarter and
first nine months of 2004 was 22.7% and 19.7%, respectively, compared to
1.0% and 4.5% for the comparable periods in 2003.
o Net income from continuing operations for the third quarter and first nine
months of 2004 was $1,201,000 and $2,737,000, respectively, and compares
to a net loss of $194,000 reported for the third quarter of 2003 and a net
income of $525,000 reported for the first nine months of 2003.
o Net income from total operations for the third quarter and first nine
months of 2004 was $1,201,000 and $2,737,000, respectively, a decrease of
7% from $1,287,000 reported for the third quarter of 2003 and an increase
of 10% from $2,490,000 reported for the first nine 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.
5
o Earnings before interest, taxes, depreciation and amortization from
continuing operations was $1,806,000 and $4,562,000 for the third quarter
and first nine months of 2004, respectively, an increase of 464% from
$320,000 reported for the third quarter of 2003 and an increase of 134%
from $1,951,000 reported for the first nine months of 2003.
o Cash balances at September 30, 2004 totaled $8,948,000 compared to
$6,350,000 and $4,817,000 at June 30, 2004 and December 31, 2003,
respectively.
Operational and Other Highlights:
o VASCO wins 103 new customers in Q3 2004 (15 banks and 88 corporate
customers) and 347 for the first nine months of 2004. Year-to-date new
customers include 48 new banks and 299 corporate customers.
o Bendigo Bank (Australia) and ABN Amro (Singapore) to use Digipass for
Retail Banking;
o VASCO Launched Digipass Host Authentication to Tackle Phishing;
o Network Engines and VASCO Announce Extended Distribution Agreement (USA);
o VASCO Strengthens Indirect Sales Network in Europe by Signing Leading
Distributors in UK, Denmark, Switzerland, Belgium, The Netherlands, France
and Italy;
o VASCO & Protocom Development Systems Launch Digipass Pack for Microsoft
Windows.
"Our strategies to expand the market's awareness of our products are working as
evidenced by our year-over-year and quarter-over-quarter growth in revenue and
the continued expansion of our customer base," said Ken Hunt, VASCO's CEO, and
Chairman. "The improvement in operating margins as a percent of revenue also
demonstrate the leverage we have with our operations. With the strong results of
the third quarter and first nine months of 2004, we have begun to increase our
investment in sales and marketing programs, including expanding our sales staff.
With the added investment, we are confident that our strong growth will
continue."
"The results of the third quarter reflect the strong growth of the business in
markets outside of Europe and the stable revenue in Europe during the quarter,"
said Jan Valcke, VASCO's President and COO. "Traditionally, Q3 is our weakest
quarter, due to the seasonality that slows down the Corporate Network Access
market. Nevertheless, in total, the third quarter of 2004 is stronger than Q1
and Q2 of this year. This clearly proves the growing demand for our products,
which is also demonstrated by the growth in our backlog. As we start the fourth
quarter, we have a backlog of firm orders to be shipped in the fourth quarter of
$6.8 million, which is 54% higher than the $4.4 million backlog we had, entering
the fourth quarter of 2003. VASCO is quickly growing its business, and is ready
for the next episode in its growth cycle."
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 $2,598,000 or 41% from June 30, 2004 and $4,131,000 or 86% from
December 31, 2003. Our working capital increased by 22% in the third quarter,
from $7,133,000 at June 30, 2004 to $8,700,000 at September 30, 2004. Days Sales
Outstanding (DSO) in net accounts receivable decreased to approximately 43 days
at September 30, 2004 from 58 days at June 30, 2004."
Conference Call Details
In conjunction with this announcement, VASCO Data Security International, Inc.
will host a conference call today, October 21, 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 Third
Quarter and First Nine Months of 2004.
6
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.
7
VASCO Data Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30 September 30
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues $ 7,400 $ 5,599 $ 20,595 $ 16,670
Cost of goods sold 2,244 2,146 5,918 6,727
------------ ------------ ------------ ------------
Gross profit 5,156 3,453 14,677 9,943
Operating costs:
Sales and marketing 1,975 1,713 6,218 4,921
Research and development 677 613 2,048 1,732
General and administrative 855 1,037 2,384 2,492
Restructuring costs (32) -- (32) --
Non-cash compensation 0 32 0 40
------------ ------------ ------------ ------------
Total operating costs 3,475 3,395 10,618 9,185
------------ ------------ ------------ ------------
Operating income 1,681 58 4,059 758
Interest income (expense), net 34 (22) 88 (120)
Other income (expense), net (45) (5) (0) 376
------------ ------------ ------------ ------------
Income before income taxes 1,670 31 4,147 1,014
Provision for income taxes 469 225 1,410 489
------------ ------------ ------------ ------------
Net income (loss) from continuing operations $ 1,201 $ (194) $ 2,737 $ 525
Income from discontinued operations -- 1,481 -- 1,965
------------ ------------ ------------ ------------
Net income 1,201 1,287 2,737 2,490
Preferred stock accretion and dividends (51) (3,787) (197) (4,369)
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ 1,150 $ (2,500) $ 2,540 $ (1,879)
============ ============ ============ ============
Basic net income (loss) per common share:
Income (loss) from continuing operations $ 0.04 $ (0.13) $ 0.08 $ (0.13)
Income from discontinued operations -- 0.05 -- 0.07
------------ ------------ ------------ ------------
Net income (loss) $ 0.04 $ (0.08) $ 0.08 $ (0.06)
============ ============ ============ ============
Diluted net income (loss) per common share:
Income (loss) from continuing operations $ 0.03 $ (0.13) $ 0.08 $ (0.13)
Income from discontinued operations -- 0.05 -- 0.07
------------ ------------ ------------ ------------
Net income (loss) $ 0.03 $ (0.08) $ 0.08 $ (0.06)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 32,578,124 30,391,827 31,897,037 29,211,293
============ ============ ============ ============
Diluted 35,171,801 31,222,297 35,216,524 29,210,033
============ ============ ============ ============
8
VASCO Data Security International, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, December 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash $ 8,948 $ 4,817
Accounts receivable, net of allowance for doubtful accounts 3,534 2,523
Inventories, net 1,180 1,075
Prepaid expenses 668 476
Deferred income taxes 70 70
Foreign sales tax receivable 403 362
Other current assets 368 335
-------- --------
Total current assets 15,171 9,658
Property and equipment, net 743 882
Intangible assets, net 1,134 1,378
Goodwill 250 250
Note receivable and investment in SSI 879 1,132
Other assets 77 83
-------- --------
Total assets $ 18,254 $ 13,383
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,124 $ 1,698
Deferred revenue 549 386
Accrued wages and payroll taxes 1,428 1,515
Income taxes payable 1,246 (197)
Other accrued expenses 1,139 1,038
-------- --------
Total current liabilities 6,486 4,440
-------- --------
Long-term deferred warranty 103 --
Stockholders' equity:
Series D Convertible Preferred Stock 2,806 5,786
Common stock 33 30
Additional paid-in capital 50,360 47,167
Accumulated deficit (41,153) (43,693)
Accumulated other comprehensive loss -
cumulative translation adjustment (381) (347)
-------- --------
Total stockholders' equity 11,665 8,943
-------- --------
Total liabilities and stockholders' equity $ 18,254 $ 13,383
======== ========
9
Reconciliation of EBITDA from continuing operations to net income from
continuing operations (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
(Unaudited) (Unaudited)
EBITDA from continuing operations $ 1,806 $ 320 $ 4,562 $ 1,951
Interest expense (income), net (34) 22 (88) 120
Provision for income taxes 469 225 1,410 489
Depreciaton and amortization 170 267 503 817
------- ------- ------- -------
Net income (loss) from continuing operations $ 1,201 $ (194) $ 2,737 $ 525
======= ======= ======= =======
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 12 million Digipass
products sold and delivered, VASCO has established itself as a world-leader for
strong Identity Authentication with over 300 international financial
institutions and over 1,400 blue-chip corporations and governments located in
more than 80 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
10
EXHIBIT 99.2
Earnings Conference Call October 21, 2004
Ken Hunt:
Good morning everyone. For those listening in from Europe, good afternoon, and
from Asia, good evening. We have continuing 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 3rd quarter 2004, and give you
some expectations for 4th 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 turnaround in 2003, and our strong
execution for the first six months of 2004, we have again delivered a very solid
and profitable 3rd Quarter, 2004. In a word, we had another outstanding quarter.
Our revenues were $7,400,000, up 32% over the 3rd Quarter of 2003; our Gross
margin as a percentage of revenue was 70%, and our Operating Income as a
percentage of revenue was 22.7%. What really pleases me personally is the strong
contribution margin that we are generating from our business. Cliff Bown will
comment further on this during his prepared remarks.
This performance is particularly impressive in that the 3rd quarter has
historically been the Company's slowest quarter. In spite of fewer selling days
due to European holidays and vacations, order intake and shipments were strong
in other VASCO markets, reflective of the robust and growing demand for the
Company's cost-effective products and solutions outside of Europe.
New accounts continued to grow during the 3rd quarter. During the quarter we
sold an additional 103 new accounts, including 15 new banks, and 88 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 347 new accounts,
including 48 banks and 299 corporate customers.
11
We now have over 300 banks as customers, plus over 1,400 network access accounts
including corporations, federal, state and local governments located in over 80
countries around the world.
The distributor/reseller channel is a continued focus for our business
development staff. Program-to-date we have signed 36 distributors who, in turn,
service a network of approximately 1400 resellers.
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.
VASCO's strongest vertical market is banking and finance. These banks choose
applications that will help them reduce their internal costs, offer more value
to their customers, and attract new customers to the bank. These applications
typically take years to deploy, giving VASCO the sustainable, repeatable revenue
flow that I often describe. Within these same 300 banks, we have the opportunity
to increase our penetration by securing additional applications and audiences
not yet served. In summary, we still have a lot of room for growth in our
existing customer base. Another interesting fact is that our total market
opportunity is for over 50,000 banks that do business every day around the
world.
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.
Once these reseller partners are trained by VASCO, we support their efforts by
participating with them at conventions, trade shows, and seminars. They do the
selling and first line support. A continuing flow of their orders results in the
sustainable, repeatable revenue flow that I often describe.
Last, an emerging market is E-commerce, with business and consumer audiences
that the Company is well suited to serve. We have products with the price-point,
ruggedness, and lifespan that are ideal for this market.
Our strong business continues, with approximately 12 million Digipass units sold
and shipped through the end of 3rd quarter 2004. We expect that our unit sales
will actually accelerate as we develop new markets and identify new audiences
for the Company's products.
We are optimistic that, starting in 2005, a new standard for smart cards will
begin deploying in Europe, and in Asia and South America starting in 2006. 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. VASCO's
partner, 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!
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 another great
Quarter.
Comments By Jan
Thank you, Ken
After the best third quarter in VASCO's history, we will start the next phase in
VASCO's growth plans. In 2005, VASCO will grow its number of employees, its
presence in geographical and vertical markets, its product range and its
position in existing markets. We have made a business plan by country and by
market that we will execute from now.
People
People are the number 1 asset of a company. VASCO will grow its staff in the
future, with the emphasis of hiring the right people in the right regions, and
in the right departments. This will allow the company to take advantage of
business opportunities in both new and existing markets at the same time. In
total, VASCO plans to grow its number of employees from 87 right now to over 120
during 2005. VASCO will also investigate the opening of offices and branches in
the world's leading business hubs. During 2004, VASCO opened two new offices.
The Boston office was opened in Q1, whilst the Shanghai office opened its doors
a couple of days ago. Besides its existing network of distributors and
resellers, VASCO has signed tight partnership agreements with agents in over 10
key countries. With regards to the number of people that are working for VASCO,
it is worthwhile mentioning that over 250 people are fulltime assembling
Digipass tokens in the production plants of VASCO's Chinese subcontractors.
12
Markets
With regards to markets, VASCO distinguishes geographical markets and vertical,
application driven markets. Geographically, VASCO has developed a "hub"
strategy, meaning that it will focus its business on the world's most important
IT and Banking business hubs. This does not mean that VASCO will open an office
in every one of these cities, but that there should be a - direct or indirect -
presence of VASCO. At this moment, VASCO is already present in more than 80
countries with customers, distributors and resellers. VASCO has offices in
Chicago, Brussels, Boston, Sydney, Brisbane, Bordeaux, Singapore and Shanghai.
VASCO has business agents in 10 key countries. Vertical markets for VASCO are
Banking, Business to Business e-commerce, Corporate Network Access (remote
access, windows/web access, ID Management), Business to Consumer e-commerce,
online transactions involving a credit card and e-government. VASCO has
established itself as the nr 1 vendor of strong user authentication products to
the financial sector, with over 300 banks as customers. 80% of the banks with
the largest deployments of strong authentication tokens in the world, are VASCO
customers. This sector keeps evolving positively for VASCO. More and more new
banks have started using VASCO's products and some of the initial orders for
Digipass are larger than ever before. VASCO has started a "VASCO business club",
where banks that have deployed VASCO's product are discussing the benefits of
deploying the Digipass Factory with prospects and new customers. The VASCO
Banking Summit that has recently taken place in VASCO's European offices, was a
first activity of the Business Club. And a successful activity, with more than
80 representatives of the world's leading banks present. From next year onwards,
VASCO will localise its Banking Summit, and will organise this event in all of
its key geographical markets. VASCO believes that its growth in the financial
market will last, and even accelerate during the next years.
B-to-B deployments of VASCO tokens are popping up worldwide. We are typically
talking about companies distributing tokens amongst their customers, who will be
granted access to the database of the e-commerce company with Digipass.
Corporate Network Access has become an important market for VASCO, accounting
for 17 % of its revenue during Q3. In this market, VASCO works together with the
world's leading security solution vendors, such as Microsoft, IBM, Netscreen,
Watchguard and many others. Digipass is perfectly suited for the Remote Access
market, including the Windows/Web market. We will elaborate on this subject in
the products chapter. The Corporate Network Access market can grow faster for
VASCO in countries where Digipass is already used in large quantities in the
banking world. This generally means that an important part of corporate decision
makers and employees are acquainted with Digipass via e-banking, and that they
will be easier convinced to use VASCO's products in a corporate environment.
In the business & consumer e-commerce market, VASCO has longstanding and trusted
partnerships with the world's leading credit card issuers such as Mastercard,
Europay, Visa and others. We expect that this market will begin to evolve in
2005 and to begin strong growth in 2006 E-government is a market that will be
important for VASCO in the future. Right now, development and acceptance of e-ID
cards and other large volume e-government markets is rather slow. However, we
expect strong growth from that market sometime in the future. VASCO is ready for
this (r-evolution with the right products, the right partnerships and its
priceless know-how of the implementation of large volume authentication
deployments. In brief, we can say that the b-to-b market, including banking, and
C.N.A. are VASCO's existing sources of revenue right now. We expect these
markets to contribute even stronger growth going forward. The b-to-c and
e-government markets will happen in the future, starting in2005.
Products
VASCO is a product company. The quality of VASCO's products and the meticulous
attention for production and are some of the main reasons for VASCO's success.
VASCO's hardware Digipass production processes are subject to the highest
quality standards. VASCO's production partners in China offer high quality work,
and have the highest ISO standards. This results in a very trustworthy product,
with an extremely low fall-out rate. VASCO is ahead of the evolutions with
regards to environment friendly and ethical production. As an example, VASCO
will start the lead free production of its tokens in the very short term. On the
server side, VASCO has development centres in Brisbane (Australia) and Bordeaux
(France). In order to enhance its server product offerings, VASCO has started to
look for interesting partnerships in this field. The Digipass Pack for Windows
Networks, a joint product of VASCO and Protocom, is a recent and successful
example of this approach. As a token of VASCO's dedication to R&D in this field,
I can tell you that VASCO has launched VACMAN Middleware 2.3 earlier today.
VACMAN Middleware is the backbone of VASCO's Digipass Pack, the off-the-shelve
product for the Remote Access market. We believe that the new version of VACMAN
Middleware will strengthen our position in this market. VASCO will do more than
just look for interesting partnerships in the Corporate Network Access market.
VASCO will also implement a "make or buy" strategy. This means that it will
investigate the possibility of acquiring companies and products that might
complement VASCO's product offerings in the server field.
13
Cash
Seven consecutive quarters of positive operating cash flow have dramatically
strengthened VASCO's cash position. VASCO has an operating margin of about 22%.
This means that VASCO can invest in growing its business. As we mentioned
before, VASCO will grow its business by strengthening its staff, tackling
existing and new geographical and vertical markets and complementing its product
range. One thing is for sure. VASCO will not invest just for the pleasure of
investing. If VASCO invests money in a project, the project has been thoroughly
studied. VASCO will only spend cash if it is convinced that it will generate
more revenue by doing so.
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.
As many of you may have seen in our press release, revenues from continuing
operations were $7.4 million for the quarter and $20.6 million for the nine
months ended September 30, 2004. Revenues for the quarter were $1.8 million or
32% higher than the third quarter of 2003 and, for the first nine months,
revenues were $3.9 million or 24% higher than the same period in 2003.
In addition to the year-over-year improvement in revenues, the revenues for the
third quarter of 2004 also reflected the third consecutive increase in quarterly
revenues, with the third quarter revenue exceeding the second quarter revenue by
3%.
Compared to 2003, the increase in revenue for the third quarter reflected a
significant increase from both the Banking market and the Corporate Network
Access market. Revenues in the third quarter of 2004 from the banking segment
increased 35% over the third quarter of 2003 and revenues from the Corporate
Network Access market segment increased 21%.
Compared to the second quarter of 2004, revenues from the banking market
increased 6% while revenues from the Corporate Network Access market declined
9%. The decline in revenues from the Corporate Network Access market, albeit
less than the decline in the quarter-over-quarter results in 2003, was due to
the seasonal factors as noted previously.
For the first nine months of 2004 compared to 2003, revenues from the banking
market increased 27% and revenues from the Corporate Network Access market
increased 11%.
In terms of our two primary markets, Banking and Corporate Network Access,
approximately 83% of our total revenue in the third quarter of 2004 came from
the Banking segment with 17% coming from the Corporate Network Access segment.
In the third quarter of 2003, approximately 81% came from the Banking and 19%
came from the Corporate Network Access segment. On a year-to-date basis, the
split in 2004 was approximately 80% banking and 20% Corporate Network Access
versus 77% banking and 23% Corporate Network Access in 2003.
14
The geographic distribution of our revenues continues to change. In the third
quarter of 2004, approximately 72% of our revenue came from Europe, 16% came
from the U.S. and the remaining 12% came from other countries, with notable
contributions from South America in 2004. For the third quarter of 2003, 84% of
the revenue was from Europe, 6% was from the U.S. and 10% was from other
countries.
On a year-to-date basis, revenues from Europe have declined from 84% in 2003 to
78% in 2004 while revenues from the U.S. has increased from 7% in 2003 to 12% 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 third quarter and first nine
months of 2004 was approximately 70% and 71%, respectively, and compares to 62%
and 60% for third quarter on first nine months in 2003, respectively. 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. As noted in previous
quarters, 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 third quarter of 2004 were $3.5 million, an increase
of $80,000 or 2% from the third quarter of 2003. Operating expenses for the
first nine months of 2004 were $10.6 million, an increase of $1.4 million or 16%
from 2003. Changes in exchange rates for the third quarter and first nine months
resulted in an increase in expense of approximately $178,000 and $820,000,
respectively. Excluding currency, expenses in the third quarter declined $98,000
or 3% and increased $614,000 or 7% for the first nine months of 2004 over the
same periods in 2003. I will comment a little further on currency a bit later.
Excluding the impact of currency, expenses in the third quarter and first nine
months of 2004 primarily reflected increases sales and marketing and with
smaller increases in research and development expenses. General and
administrative expenses declined compared 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.
The increase in research and development expense was primarily related to
compensation.
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 third quarter and first nine months of 2004 than in the comparable periods
of 2003. The Euro was approximately 7% stronger in the third quarter and 11%
stronger for the first nine months of 2004 compared to 2003 rates. The
Australian Dollar was approximately 6% stronger in the third quarter and 17%
stronger for the first nine 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 $116,000 higher in the third
quarter and $765,000 higher in the first nine 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 third quarter of 2004 was $1,681,000, an increase of
$1,623,000 from the $58,000 reported in the third quarter of 2003. Operating
income for the first nine months of 2004 was $4,059,000, an increase of
$3,301,000 or 436% from the $758,000 reported for the same period in 2003. In
fact, operating income for the third quarter and first nine months of 2004 both
exceeded the operating income reported for the full year 2003, which was
$1,123,000.
15
Operating income as a percent of revenue, or operating margin, was approximately
23% for the quarter and 20% for the first nine months and is 22 percentage
points and 15 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 but has also benefited from a reduction
in operating expenses as a percentage of sales.
The improvement in operating margin, as Ken has mentioned previously, reflects
the fact that our operating model is highly leverageable. We have been
successful in growing revenue and gross margins without a commensurate increase
in operating expenses. Under our model, the contribution margin from incremental
revenues has resulted in significantly higher operating margins.
As we look forward, and as has been mentioned by Jan, we plan to invest a
portion of our increased operating profit in discretionary programs that will
increase our sales and marketing capability, and over time, are expected to
generate incremental revenues from new geographic regions or increase our
penetration in existing markets.
Other income and expense was an expense of $45,000 for the quarter and breakeven
for the first nine months of 2004 and is $40,000 and $376,000 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 $469,000 and $1,410,000 for the
quarter and nine months ended September 30, 2004, respectively. For 2003, income
tax expense was $225,000 for the third quarter and $489,000 the first nine
months. The effective tax rate for the quarter and first nine months of 2004 was
28% and 34%, respectively. The effective tax rate declined from prior quarters
as income is projected to be realized in countries where the Company can use its
net operating loss carryforwards to offset taxable income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA or
operating cash flow if you will) from continuing operations was $1,806,000 for
the third quarter of 2004, an improvement of $1,486,000 or 464% from the third
quarter of 2003. EBITDA from continuing operations for the first nine months of
2004 was $4,562,000, an improvement of $2,611,000 or 134% from the first nine
months of 2003. EBITDA from continuing operations for the first nine months of
2004 also exceeded the EBITDA for full-year 2003, which was $2,299,000, by
$2,263,000 or 98%.
The makeup of our workforce as of September 30, 2004 was 82 people worldwide
with 53 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 third quarter of 2004, our balance sheet
has continued to strengthen. During the third quarter, our cash balance
increased $2,598,000, or 41%, to $8,948,000 and our working capital increased
$1,552,000, or 22%, to $8,685,000. Looking forward, we do not expect our cash
balances to grow at a similar rate in the fourth quarter, as the Company will be
making scheduled tax payments in Belgium.
During the quarter our Days Sales Outstanding in accounts receivable declined
from 58 days at the end of the second quarter to 43 days at the end of the third
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 September 30, 2004.
Now, I would like to turn the meeting back to Ken
16
Comments on 3rd Quarter and Full-Year 2004 - Ken Hunt
We would like to comment now on 4th quarter and Full-Year 2004. As of this date,
we have firm orders with shipments scheduled for the 4th quarter of
approximately $6.8 million. Any new orders received before quarter's end and
shipped during the quarter would be additive to this number.
Today, we are again modifying our guidance. First, we are upgrading full-year
revenue growth of 15-25% to 23-27% in 2004 as compared to 2003. Second, we are
upgrading our guidance for Gross Margin from a range of 62-67% to 65-69%, and
third, we are upgrading our guidance for Operating Income from a range of 13-18%
to 17-20%. Last, we maintain our guidance for DSO's to range from approximately
45 to 55 days.
We will publish our guidance for 2005 at our 4th Quarter earnings call in
February 2005. As in the past, we expect to only comment on annual numbers, not
quarterly numbers.
In summary, we are very pleased with what we have accomplished in the 3rd
quarter and first 9 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
17