EXHIBIT 99.2
Earnings Conference Call October 23, 2003
Tony Schor to introduce the call and read the Forward Looking Statements
TONY SCHOR
THANK YOU OPERATOR, AND THANK YOU EVERYONE FOR PARTICIPATING IN TODAY'S VASCO
DATA SECURITY INTERNATIONAL'S 3rd QUARTER EARNINGS CONFERENCE CALL.
MY NAME IS TONY SCHOR, PRESIDENT OF INVESTOR AWARENESS, INC., A FULL-SERVICE
INVESTOR RELATIONS AGENCY THAT PROVIDES STRATEGIC INVESTOR RELATIONS COUNSEL FOR
VASCO DATA SECURITY.
SHOULD ANYONE LIKE TO REQUEST ADDITIONAL INFORMATION ON VASCO OR BE INCLUDED ON
THE VASCO E-MAIL LIST, PLEASE CONTACT INVESTOR AWARENESS AT 847-945-2222.
KEN HUNT, THE CHAIRMAN, FOUNDER & CEO OF VASCO DATA SECURITY INTERNATIONAL WILL
FIRST DISCUSS THE COMPANY'S RECENT DEVELOPMENTS. MR HUNT WILL THEN INTRODUCE JAN
VALCKE, PRESIDENT & COO, WHO WILL GIVE AN UPDATE ABOUT VASCO'S DAY-TO-DAY
OPERATIONS. WE WILL THEN HEAR DIRECTLY FROM CLIFF BOWN, CFO WHO WILL DISCUSS 3rd
QUARTER FINANCIAL NUMBERS. AT THE END OF THE PRESENTATION, WE WILL OPEN THE CALL
UP TO QUESTIONS AND ANSWERS.
IN THE MEANTIME, I HAVE BEEN ASKED TO READ THE FOLLOWING 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.
I would now like to introduce Mr. Ken Hunt, Chairman and CEO of VASCO Data
Security International, Inc.
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GENERAL COMMENTS - KEN HUNT
Good morning everyone. For those listening in from Europe, good afternoon, and
Asia, good evening.
I would like to take this opportunity to thank all of you for participating in
today's call. Today, we would like to review 3rd quarter and YTD 2003, and give
you some expectations for 4th quarter 2003.
I am here to report again that the plans and programs we implemented in November
and December of 2002 continue to produce the results we originally expected. We
are here this morning to inform you that our plans are working, that our
execution is yielding positive results, and that our people are enthusiastic and
productive.
Our 3rd quarter was very productive, both in terms of actions completed, and
business achieved. In the 3rd quarter we:
- - Completed the sale of VACMAN Enterprise to SecureD Services,
- - Reached agreement with Ubizen to repurchase its $15 million preferred stock
investment in VASCO for $4 million in cash and 2 million VASCO common shares,
- - Completed an $8 million capital raise through a private placement managed by
investment bankers Wedbush Morgan and Gilford Securities,
- - Repaid Dexia Bank its $3.4 million loan plus interest,
- - Launched Digipass Pack for Microsoft Outlook Web Access,
- - Introduced Digipass GO3, our one-button token,
- - Signed a solutions partnership with Network Engines, and
- - Signed 8 new distributor agreements, bringing the total number of VASCO
distributors to 29.
Business-wise, we had a solid 3rd third quarter. In fact, after considering
the sale of our VACMAN Enterprise business, this was the best 3rd quarter
for revenue in the company's history. Our revenues were approximately $5.6
million; we had an operating profit of $58,000, a small net loss of
approximately $194,000, and we will report a net income of approximately
$1.3 million.
Revenues for the third quarter and first nine months were $5,599,000 and
$16,670,000, 18% and 19% higher than the third quarter and first nine months of
2002, respectively. Very importantly, we continued to control costs, reporting a
16% decrease over the same 9 month period last year, including the costs
associated with the aggressive defense of the Company's position relative to the
ActivCard patent lawsuit. Based on information gathered to-date, we remain
confident that VASCO's products do not infringe.
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 3rd quarter we sold an additional 112
new accounts, 14 new banks 97 new Corporate Network Access customers and 1 new
e-commerce customer. Over 90% of these Corporate Network Access new accounts
were generated through our distributor and reseller partners. Our reseller
Channel generates revenue. That's the way it was supposed to work. That's the
way it is working.
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Year to date, we have sold 442 new accounts of which 46 were banks and 396 were
Corporate Network Access customers. We now have approximately 250 banks as
customers, plus approximately 1150 network access accounts including
corporations, federal, state and local governments, E-commerce, and other
organizations located in over 60 countries around the world. We started the year
with approximately 1000 customers, and added approximately 400 by the end of 3rd
quarter, an increase of 40% in our customer base.
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 three quarters. Program to
date we have signed 29 distributors who, in turn, service over 1000 resellers.
Additionally, we have trained and certified over 1200 professionals from these
organizations to sell and support VASCO's products.
Another emerging channel is our Solutions Partner channel. This consists of
companies that integrate VASCO's solutions directly into their own solution or
product. An example of this is a new partner mentioned before, Network Engines.
This new partner offers an integrated "appliance" that delivers various network
and software solutions that do not need to be installed directly on a host
computer, but are offered through a stand alone appliance. Network Engines is
offering a popular radius server on its appliance, protected by VASCO's strong
Digipass authentication. As a part of this partnership, every Network Engines
Steel Belted radius appliance is shipped with VASCO's authentication software
and two Digipass security tokens. Once installed, we anticipate follow-on orders
for Digipass tokens to meet the needs of many additional users. With over 500
potential resellers of the Network Engines product line, VASCO has established
yet again an excellent channel for its products.
VASCO'S STRATEGY:
Our strategy is to identify and develop markets whose customers will generate a
sustained and recurring 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.
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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 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 will more than double by the end of 2004. VASCO, a market
leader in Identity Authentication, has sold and delivered over 10 million
Digipass by the end of 3rd quarter 2003. With only 1150 network access
customers, we have just scratched the surface of this enormous market.
Additionally, with over 50,000 banks in the world, and our penetration of
approximately 250 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.
Overall, we were satisfied with the results of our third quarter, traditionally
the weakest of all the quarters.
Despite the weak dollar, the economic crisis and the traditional weakness of the
third quarter due to the holidays, VASCO achieved a profit on operations during
Q3 and substantially strengthened our cash position due to continued cost
containment and by selling our Digipass products.
VASCO also continued its growth in the corporate network access and banking
market, by adding14 new banks and 98 new corporations to its customer list
during third quarter.
During Q3, VASCO completed the optimization of its operations and
infrastructure, allowing the company to work in a very cost effective, efficient
way.
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The next phase, which we are implementing right now, will further refine our
optimization and will result in an even more competitive and flexible VASCO,
poised for growth. VASCO started to hire staff again. During Q3, we welcomed new
recruits in Europe, the US and Asia Pacific.
In addition, we are proud to announce that VASCO's just-in-time delivery
programmed is working very well. Currently, VASCO is even able to ship small
orders the same day we receive the order! This is a very important service that
VASCO delivers to its customers, and an additional sales advantage over the
competition. Of course it means that VASCO has to work more flexibly than the
competition, but that is the price one must pay in a challenging business
climate. Those companies able to adapt to difficult conditions will be
successful.
An important evolution during the third quarter was the fact that VASCO was
working on important projects in new markets, specifically in the banking
sector. VASCO is confident that it will win important new markets in the short
to mid long term. We will inform you regarding these exciting new developments
as soon as possible.
VASCO continued to enhance the availability of its Digipass Pack product for
partner products. In Q3, VASCO added Digipass Pack for OWA to its Digipass Pack
family. VASCO also launched Digipass Go3, an ultra light one button token.
An interesting trend is the fact that more and more existing VASCO customers are
willing to communicate their satisfaction in using VASCO's products. They become
real VASCO ambassadors. During Q3, we added two renowned organizations, the
University Hospital of Leuven (Belgium) and the Goethe Institut (Germany) to our
list of success stories.
VASCO is doing well on the operational level. Every one of our employees is
determined to make this company a success. Despite the difficult business
climate, we are on the right track. 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.
Before we review the results in detail, I would like to make a comment on the
presentation of the information. With the sale of the VACMAN Enterprise business
unit, all activity related to it, including the results of its operations, the
gain on the sale of the unit and the costs associated with the sale of the unit
are being reported as discontinued operations.
As such, prior periods have been restated accordingly, and the amounts reported
as revenues, gross profits, and operating expenses include only those items
related to continuing operations.
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As many of you may have seen in our press release, revenues from continuing
operations were $5.6 million for the quarter and $16.7 million for the nine
months ended September 30, 2003.
The revenues for the quarter were $900 thousand or 18% higher than the third
quarter of 2002. The increase in revenue reflected significant increases from
both the Banking and Corporate Network Access markets.
Revenues for the nine months ended September 30, 2003 were $2.7 million or 19%
higher than the same period of the prior year. This increase is also
attributable to growth in both markets. Revenues for the nine months ended
September 30, 2003 from the Banking segment increased approximately 8% year over
year and revenues from the Corporate Network Access market increased by more
than 70% compared to the prior year.
Revenues by target market for the third quarter was approximately 81% from
banking and 19% from Corporate Network Access. Revenues by target market for
nine months ended September 30, 2003 were approximately 75% from banking and 25%
from Corporate Network Access.
Revenues by target market for both the third quarter and nine months ended
September 30, 2002, were approximately 83% from Banking, and 17% for Corporate
Network Access.
Our geographic distribution of sales for the third quarter was 85% from Europe,
6% U.S. and 9% other countries, primarily, Asia Pacific and Australia. Our
geographic distribution of sales for the first nine months of 2003 was 85% from
Europe, 7% U.S. and 8% other countries, primarily, Asia Pacific and Australia.
The gross margin rate for the third quarter of 2003 was 61.7% compared to 56.5%
in 2002 and the rate for the nine months ended September 30, 2003 was 59.6%
compared to 57.5% for the nine months ended September 30, 2002.
The margin rate was higher in both the third quarter and nine months ended
September 30, 2003 than the same periods of 2002 due to three factors: the
increase in Corporate Network Access revenues as a percentage of total revenue;
the reduction in the manufactured cost of product; and the change of the mix of
business within the Banking segment. As noted in previous quarters, margins in
the Corporate Network Access are substantially higher than in the Banking
segment. Also the margins within the banking segment vary significantly based on
the volume of Digipass units that are being purchased.
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Operating expenses for the third quarter of 2003 were $3.4 million, a reduction
of $190 thousand or 5% from the third quarter of 2002. Operating expenses for
the nine months ended September 30, 2003 were $9.2 million, a reduction of $1.8
million or 16% from the same period of 2002. The reductions in both periods were
primarily related to sales and marketing expenses with significant reductions in
compensation related expenses and marketing expenses, which includes trade shows
and publicity. Additional significant expense reductions were realized in travel
and fees paid to third party contractors. The reductions were partially offset
by in increase in the value of the Euro compared to the U.S. dollar.
As noted in previous conference calls, with approximately 60% of our operating
expenses in Euros, the strengthening of the Euro compared to the U.S. dollar
adversely affects operating expenses. For the third quarter 2003, the average
exchange rate for the Euro compared to the U.S. dollar was approximately 14%
higher than in the third quarter of 2002. For the nine months ended September
30, 2003, the average exchange rate for the Euro compared to the U.S. dollar was
approximately 20% higher in than the prior year.
Operating expenses in the third quarter of 2003 included $32 thousand of
non-cash compensation expense and included depreciation and amortization
expenses of $267 thousand. For the nine months ended September 30, 2003,
operating expenses included $40 thousand of non-cash compensation expense and
$817 thousand for depreciation and amortization expense.
Income tax expense of $225 thousand and $489 thousand is included for the
quarter and nine months ended September 30, 2003, respectively. The tax
provision in 2003 reflects the strong performance of the Belgium operating
subsidiary and the use of all net operating loss carry forwards of that entity.
Tax expense for the nine months ended September 30, 2002 was $140 thousand.
There was no tax expense reported for the third quarter of 2002.
Our earnings before interest, taxes, depreciation, and amortization (EBITDA or
operating cash flow if you will) from continuing operations was $320 thousand
for the third quarter of 2003, an improvement of $1.0 million from the third
quarter of 2002. For the nine months ended September 30, 2003 our earnings
before interest, taxes, depreciation, and amortization from continuing
operations was $1.95 million, an improvement of $4.0 million from the comparable
period in 2002.
Excluding, non-cash compensation, the make-up of our expenses for the quarter
were sales and marketing of $1.6 million, R&D of $0.7 million, and general
administrative expenses of $1.0 million. The make-up of our expense for the nine
months ended September 30, 2003, excluding non-cash compensation, were sales and
marketing of $4.6 million, R&D of $2.1 million, and general administrative
expenses of $2.5 million.
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The current makeup of our workforce is 76 people worldwide with 47 in sales and
marketing, 19 in research and development and 10 in general and administrative.
Moving to the balance sheet, I would like to make some comments on the overall
financial position of the Company at September 30, 2003 and note how the three
major transactions during the quarter impact our financial position.
The $8 million financing allowed the Company to repay its term loan to Dexia
Bank and replenish the cash that was used to repurchase the Series C Convertible
Preferred Stock from Ubizen. At September 30, 2003, the Company had no bank debt
outstanding and had improved its working capital position from both the prior
quarter and prior year-end.
The benefit from the repurchase of the Series C Convertible Preferred Stock from
Ubizen is not readily apparent on the balance sheet. As noted in the press
release, the primary benefit was to reduce the potential dilution to common
stockholders that may have occurred had the stock reached its mandatory
conversion date in July 2004. With the exception of the cash, which includes the
$3 million paid in July and the $1 million to be paid in the fourth quarter, the
transaction was recorded within the equity accounts. The $1 million balance due
to be paid to Ubizen in the fourth quarter is reflected as a current liability.
Monies due from SecureD Services Inc. resulting from the sale of VACMAN
Enterprise are recorded in two places. The current portion of the note
receivable from SecureD is included in "Other Current Assets". The long-term
portion of the note and the value assigned to SecureD's preferred stock are
included in a separate line item with the other long-term assets.
Briefly, in other key areas, our cash position at September 30, 2003 was $5.5
million, a $1.5 million increase from Q2 2003. The increase in cash reflected
several activities within the quarter including but not limited to: the
completion of an $8 million capital raise; the repurchase of the Company's
Series C Convertible Preferred Stock; the repayment of the $3.4 million term
loan to Dexia Bank and the payment of $204 thousand of related interest; cash
generated from the aforementioned operating cash flow; and the continued
reduction in the Days Sales Outstanding in accounts receivable. The DSO in net
receivables at the end of the third quarter of 2003 was approximately 45 days
compared to 59 days at the end of the second quarter of 2003.
Working capital, which is defined as current assets less current liabilities,
continued to improve in the third quarter of 2003. As of September 30, 2003 the
company had net working capital of $4.6 million, an improvement of $3.6 million
from the end of the second quarter of 2003 and an improvement of $5.2 million
from December 31, 2002.
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Finally, the Company continues to maintain its line of credit that is secured by
its receivables. There were no borrowings against the line as of September 30,
2003. While the maximum credit available under the line is 2 million Euros, the
amount available for borrowing under the line, which is limited to a percentage
of qualified receivables, was 1.6 million Euros at September 30, 2003.
NOW, I WOULD LIKE TO TURN THE MEETING BACK TO KEN
COMMENTS ON FOURTH QUARTER 2003 - KEN HUNT
We would like to comment now on 4th quarter 2003. With a successful nine months
behind us, we continue to remain optimistic about 4th quarter and full year
2003. Our programs and actions that we described earlier are producing the
results that we had expected. We continue to take a no guidance posture at this
time. However, as we did in our three previous earnings conference calls on
February 13, April 24, and July 24, we can report that we currently have firm
orders with shipments scheduled for the 4th quarter of approximately $4.4
million. Any new orders received before quarter's end and shipped during the
quarter would be additive to this number. The 4th quarter backlog of $4.4
million does not include any revenues associated with our VACMAN Enterprise
business that we recently announced had been sold.
The question again is at what point can we achieve profitability? The answer
continues to be based mainly on two factors; 1) the impact of the Euro's
strength against the Dollar; and 2) the mix of revenue and lower margins from
large volume customers vs. Corporate Network Access customers with higher
margins. Due to the divestiture of VACMAN Enterprise, which was a higher margin
business, our breakeven is between $5.4 and $5.9 million. In closing, we are
optimistic about the 4th quarter and full-year 2003.
Q&A SESSION:
This concludes our presentations today and we will now open the call for
questions. Operator
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