EXHIBIT 99.2
EARNINGS CONFERENCE CALL FEBRUARY 12, 2004
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 4th QUARTER AND FULL YEAR 2003 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 4th
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.
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 4th quarter and full year 2003, and
give you some expectations for 1st quarter 2004. We will also comment on the
Company's expectations, presented in a range of percentages for revenue growth,
gross margin, and operating income for 2004.
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I look back on 2003 with satisfaction and pride. When I was asked by VASCO's
Board to return as CEO in late November of 2002, I was frustrated that we had
not been able to achieve profitability. I was frustrated that we were burning
cash, and in fact, it appeared that we would soon run out of cash. Our people
were also frustrated. They welcomed a leadership change, and were anxious to
work hard to contribute to VASCO's success. I am proud of all of VASCO's people.
No one gave-up, no one thought we couldn't succeed.
A key promotion in late November of 2002 was the appointment of Jan Valcke to
President and Chief Operating Officer. Under Jan's leadership, the Company
further lowered its operating costs, increased its revenue production,
introduced new products, added a significant number of new accounts, and
achieved positive operating income, and positive EBITDA, or operating cash flow,
in all of the quarters of 2003.
Looking back over 2003, we achieved a lot! And I am not just referring to our
financial performance. In 2003 we:
- Completed the sale of VACMAN Enterprise, a unit no longer core to
VASCO's business,
- 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 term loan plus interest,
Launched Digipass Pack for Microsoft Outlook Web Access and Lotus Domino
Covering Over 80% of Web Mail Access, Introduced Digipass GO3, our entry level
one-button token, the most easy to use and cost effective one-time password
device in the market, Sold and shipped 2.4 million Digipass tokens for a total
of 10.4 million program to date, Signed 10 new distributor agreements, bringing
the total number of VASCO distributors to 29, and Settled the Activcard lawsuit.
Business-wise, we had a solid 4th quarter. Our revenues were $6, 196,000, up 83%
over 4th Quarter of 2002; and we had Net Income From Continuing Operations of
$235,000. Revenues for the full year 2003 were $22,866,000, 32% higher than full
year 2002. We also had Net Income from Continuing Operations for full-year 2003
of $761,000. Very importantly, we continued to control costs, reporting a 15%
decrease over the same 12 month period last year, including the costs associated
with the aggressive defense of the Company's position relative to the ActivCard
patent lawsuit.
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 4th quarter we sold an additional 130
new accounts, including 23 new banks, and 107 new Corporate Network Access
customers. Approximately 90% of these Corporate Network Access new accounts were
generated through our distributor and reseller partners. We are very pleased
with the development of our distributor channel.
For full year 2003, we sold 572 new accounts of which 69 were banks and 502 were
Corporate Network Access customers, and 1 E-commerce customer. We now have
approximately 262 banks as customers, plus approximately 1145 network access
accounts including corporations, federal, state and local governments, 15 in
E-commerce, and 1 in E-government located in over 60 countries around the world.
The distributor/reseller channel is a continued focus for our business
development staff. The reseller channel is extremely important to VASCO because
it broadens and stabilizes our customer base, and allows us to leverage our
sales through established, productive sales and support organizations. We have
communicated the positive impact of this channel by reporting significant new
accounts produced through this channel over the past full year. Program to date
we have signed 29 distributors who, in turn, service over 1000 resellers.
Additionally, we have trained and certified over 1250 professionals from these
organizations to sell and support VASCO's products.
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VASCO'S STRATEGY:
Our strategy has been, and continues to be, to identify and develop markets
whose customers will generate a sustainable and repeatable revenue stream to
VASCO. These are organizations that have large audiences, including employees,
customers, partners, suppliers, or other associated parties. As revenue is
created from these VASCO customers, the cost of supporting the production of
these revenues is expected to decrease as a percentage of the revenues.
One such market is VASCO's strongest vertical market, banking and finance. We
typically sign a bank, assist them in a pilot application, then help them roll
out their application to thousands or even millions of users over multiple
months or years.
A second growth market for VASCO is Corporate Network Access (CNA). Working
through growing Reseller and Solutions Partner networks that I mentioned before,
VASCO is able to reach hundreds of thousands of end customers. We support and
train our resellers' professionals, who, in turn, train others in their
respective firms. These resellers sell VASCO's Digipass Pack solutions to
long-standing customers and new accounts. They sell to small and medium accounts
that VASCO could not feasibly reach directly. They sell first in small pilots
then follow up with add-on sales. As VASCO selects, signs, then trains and
supports these resellers, our cost for supporting these revenues is also
expected to decrease as a percentage of the revenues.
More broadly speaking, our target markets are the applications and the users who
currently authenticate themselves with a "static" or fixed password. Industry
reports identify over a half a billion users worldwide who rely on fixed
passwords. This number is expected to more than double by the end of 2004.
VASCO, a market leader in Identity Authentication, has sold and delivered over
10.4 million Digipass by the end of full year 2003. We have just scratched the
surface of this enormous market. Additionally, with over 50,000 banks in the
world, and our penetration of approximately 262 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.
2003 was a very special year for VASCO. Even a historical year.
Three issues made it a challenging year on the business level.
The first issue was the fact that a lot of operational issues had to be solved
during the year 2003. Solving these problems absorbed a lot of the management
team's energy and bandwidth. The second issue was the worldwide economical
crisis. The third issue was the low dollar price.
Despite all those difficulties, VASCO succeeded in being profitable throughout
the year. VASCO has fought hard to win its place in midst of the leading - and
flourishing - companies in its sector.
We can clearly state that the focus on authentication works! Authentication is
our core business and we are extremely good at it. We achieved profitability and
the 572 new customers we won during 2003 prove that claim.
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VASCO shows a clear dedication to R&D.
During 2003 we launched over 15 new products, such as Digipass Go3, Digipass
260, 560, 580 and Digipass Authentication Server. In addition, VASCO has
invested in the maturity of its existing products, for example by adding the new
AES algorithm to its Digipass Products.
This is all I will say about 2003. It was a good year, but it is the past.
2004 is our current focus. In 2004, we will go further in optimising VASCO's
internal and external structure, procedures, and costs. This does not only mean
that we will solely concentrate on cost cutting. VASCO will invest to grow in
specific areas, where we are convinced that we can gain substantial market share
and become even more profitable. The opening of our North American sales and
support headquarters in Boston is a first important step. For a company like
VASCO it is very important to have a physical presence in the northeast of the
United States. We have a large number of customers and prospects on the east
coast and it is of utmost importance to continue our expansion and provide our
customers and partners with the highest level of support. I am convinced that
our Boston office will prove to be successful.
I am also convinced that VASCO will prove to be successful throughout 2004. We
have state of the art products, the right market vision and, above all, great
people.
Thank you very much and I am looking forward to speaking to you again in three
months time.
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 remind everyone that,
with the sale of the VACMAN Enterprise business unit in the third quarter, 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 have been
reported as discontinued operations. As a result, prior periods have been
restated, and the amounts reported as revenues, gross profits, and operating
expenses include only those items related to continuing operations.
As many of you may have seen in our press release, revenues from continuing
operations were $6.2 million for the quarter and $22.9 million for the full year
ended December 31, 2003.
The revenues for the quarter were $2.8 million or 83% higher than the fourth
quarter of 2002. The increase in revenue reflected significant increases from
both the Banking and Corporate Network Access markets.
Revenues for the full year ended December 31, 2003 were $5.5 million or 32%
higher than the same period of the prior year. This increase is also
attributable to growth in both markets. Revenues for the full year ended
December 31, 2003
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from the Banking segment increased approximately 22% over 2002 and revenues from
the Corporate Network Access market increased by more than 75% compared to the
prior year.
As suggested by the differences in the year-over-year growth rates, the mix of
our revenues between our target markets, Banking and Corporate Network Access,
continues to change. In 2003, approximately 75% of our revenues for the fourth
quarter and full year came from the Banking segment with the remaining 25%
coming from Corporate Network Access. In 2002, approximately 82% of our revenues
came from Banking with the remaining 18% coming from Corporate Network Access.
We believe that the higher growth rate in revenues for the Corporate Network
Access market reflects the growth in our distributors, resellers and solution
partners.
The geographic distribution of our revenues has not changed significantly over
the last year. For the full year 2003, 84% of our revenue was from Europe, 7%
from the U.S. and 9% from other countries, primarily, Asia Pacific and
Australia. In 2002, 84% of our revenues were from Europe, with 8% from the U.S.
and from 7% other countries.
The gross margin rate for the fourth quarter of 2003 was 63.2% compared to 63.9%
in 2002 and the rate for the full year ended December 31, 2003 was 60.6%
compared to 58.8% for the full year ended December 31, 2002. The margin rates in
the fourth quarter of 2003 and 2002 were generally comparable with the benefit
from a stronger Euro being offset by a change in the mix of the revenues within
the banking segment. The improvement in the gross margin for full year ended
December 31, 2003 as compared to full year 2002 was primarily related to two
factors; the increase in Corporate Network Access revenues as a percentage of
total revenue, which as previously noted increased from 18% in 2002 to 25% in
2003, and the stronger Euro.
Operating expenses for the fourth quarter of 2003 were $3.5 million, a reduction
of $627 thousand or 15% from the fourth quarter of 2002. Operating expenses for
the full year ended December 31, 2003 were $12.7 million, a reduction of $2.2
million or 15% from the same period of 2002.
The reductions in expense in the fourth quarter were primarily related to
adjustments to restructuring reserves recorded in the fourth quarter of 2002 of
$320 thousand and a reduction in general and administrative expenses of
approximately $425 thousand. Reductions in general and administrative were
achieve in a broad group of expenses including, but not limited to, services
purchased from outside parties, rent, bad debts, travel and telephone which were
partially offset by increased legal expenses, in part attributable to the
defense of the Company's patents associated with the ActivCard litigation.
The reduction in expense for the full year were due, in large part to the issues
previously noted for the fourth quarter, but also reflected reductions in sales
and marketing expenses as well as in research and development expenses. The
reduction in sales and marketing expenses was primarily attributable to reduced
spending on trade shows, advertising, and travel. The reductions in R&D expenses
reflected the benefit from consolidating a number of our research facilities in
2002 and reduced spending for third party services. The reductions in both the
fourth quarter and full year 2003 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 fourth quarter and full year 2003,
the Euro, compared to the U.S. dollar, was approximately 20% stronger than in
the same periods of 2002. As noted in previous calls, we attempt to balance our
currency exposure in expenses by denominating a portion of our sales in Euros.
Operating expenses in the fourth quarter of 2003 included a nominal amount of
non-cash compensation expense and included depreciation and amortization
expenses of $244 thousand. For the full year ended December 31, 2003, operating
expenses included $41 thousand of non-cash compensation expense and $1.1 million
of depreciation and amortization expense.
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For the fourth quarter of 2003, the Company reported an income tax benefit of
$92 thousand. The benefit reflects the impact of finalizing the 2002 tax return
and updating the tax provision for actual full-year 2003 results. For the full
year 2003, the Company income tax expense of $397 thousand. The expense reflects
the strong performance of the Belgium operating subsidiary and the use of all of
its net operating loss carry forwards. Tax expense for the full year ended
December 31, 2002 was $140 thousand. There was no tax expense reported for the
fourth quarter of 2002.
Earnings before interest, taxes, depreciation, and amortization (EBITDA or
operating cash flow if you will) from continuing operations was $348 thousand
for the fourth quarter of 2003, an improvement of $1.95 million from the fourth
quarter of 2002. For the full year ended December 31, 2003, earnings before
interest, taxes, depreciation, and amortization from continuing operations was
$2.3 million, an improvement of $5.8 million from the comparable period in 2002.
Excluding, non-cash compensation, the make-up of our expenses for the quarter
were sales and marketing expense of $2.4 million, R&D expense of $0.2 million,
and general administrative expenses of $0.9 million. Amounts reported for sales
and marketing and R&D reflect a reclassification of approximately $420 thousand
of expense from R&D to sales and marketing. The reclassification of expense was
made to report the activities in our Australian operations on a basis consistent
with other subsidiaries. The make-up of our expense for the full year ended
December 31, 2003, excluding non-cash compensation, were sales and marketing
expenses of $7.0 million, R&D expenses of $2.3 million, and general
administrative expenses of $3.4 million.
The current makeup of our workforce is 73 people worldwide with 46 in sales and
marketing, 16 in research and development and 11 in general and administrative.
I would now like to make a few comments on the balance sheet. I am sure that as
you have followed us through the year that you have notice the substantial
improvement in the balance sheet. As a result of our strong operating
performance, which includes four consecutive quarters of profitability and
positive operating cash flows, and transactions closed in the third quarter,
such as the $8 million equity financing and the repurchase of the Series C
Preferred Stock from Ubizen, we have strengthened the balance sheet
substantially in 2003. The balance sheet at December 31, 2003 reflects:
Higher cash balances: The Company had $4.8 million of cash at December 31, 2003,
an increase of $2.2 million from the $2.6 million at December 31, 2002. Lower
days sales outstanding in receivables: We have decreased our DSO from 73 days at
December 31, 2002 to 37 days at the end of 2003.
No debt: All term debt has been repaid.
Increased working capital: Working capital increased approximately $5.8 million,
from a deficit of $0.6 million at the end of 2002 to a surplus of 5.2 million at
the end of 2003. The corresponding current ratio has improved from a deficit of
..93 to a positive 2.18.
Increased stockholders' equity: Stockholders' equity has increased $6.1 million
or over 200% from $2.8 million at December 31, 2002 to $8.9 million at the end
of 2003. The Company continues to maintain its line of credit for up to 2
million Euros that is secured by its receivables. There were no borrowings
against the line as of December 31, 2003.
Finally, I would also like to comment on the statement in our press release
related to revising our third quarter results and filing an amendment to the
third quarter 10-Q. The underlying issue relates to the beneficial conversion
option included in our Series D Convertible Preferred Stock. Under EITF 98-5:
Accounting for Convertible Securities with Beneficial Conversion Features, we
were required to compute the fair value of the beneficial conversion option and
report the value of the option as a deemed dividend. In the 10-Q currently on
file, in accordance with the EITF, we computed the value of the conversion
option, disclosed its fair value in the footnotes and reflected the dividend in
the stockholders' equity section of the balance sheet. We did not, however,
report the amount of the deemed dividend on the face of the income statement or
include the dividend in the calculation of earnings per common share. As noted
in the press release, the amount of the deemed dividend was $3.7 million and the
third quarter 10Q will be amended to reflect the deemed dividend as a reduction
in earnings per common share for the quarter and nine months ended
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September 30, 2003. The adjustment will reduce earnings per share as previously
reported by $0.12 per share. It is important to note that the deemed dividend is
a non-cash charge. It did not and will not affect the operating results reported
by the Company. The correction being made is to conform the Company's reporting
to comply fully with EITF 98-5.
Now, I would like to turn the meeting back to Ken
Comments on First Quarter and Full-Year 2004 - Ken Hunt
We would like to comment now on 1st quarter and Full-Year 2004. With a
successful 2003 behind us, we are optimistic about 1st quarter and full year
2004. Our programs and actions that we described earlier are producing the
results that we had expected. We currently have firm orders with shipments
scheduled for the 1st quarter of approximately $5.2 million. Any new orders
received before quarter's end and shipped during the quarter would be additive
to this number. The Company further expects to achieve full-year revenue growth
of 15-25% in 2004 as compared to 2003. We also expect to achieve Gross Margins
in the 50-60% range, and Operating Income in the 4-10% range. Our DSO's have
improved from 73 days at the end of 2002 to 37 days most recently. Going
forward, we expect our DSO's to range from approximately 45 to 55 days.
As far as quarterly guidance is concerned, we do not feel it is yet appropriate.
Our business is becoming more predictable over the horizon of 12 months, but
remains somewhat uneven due to the impact of some very large orders and general
seasonality, including holidays or vacations in the 3rd quarter of each year. As
a result we expect that the growth in some quarters will be lower than the
full-year ranges while others will exceed the range. Should our expectations
change for the full year, we will advise you in a timely manner.
In summary, we are pleased with what we accomplished in 2003. We will not,
however, 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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