VDSI ==> The ALCS Winner!

[skiracer]

Don't look now, but VDSI is up 40% off of its recent low...pretty nice bounce if you ask me.

Only if you bought it at it's bottom and rode the 40% up. Otherwise meaningless.

[New-born baby]

Don't look now, but VDSI is up 40% off of its recent low...pretty nice bounce if you ask me.

Its got a price target of $37. Nice recovery so far. I wish I'd been watching it more closely, because I could have entered the stock for a nice run.

[Karel]

Only if you bought it at it's bottom and rode the 40% up. Otherwise meaningless.

Well, that run-up makes a 1% difference on my bottom line for my total portfolio. I wouldn't call that meaningless.

Regards,

Karel

[skiracer]

Well, that run-up makes a 1% difference on my bottom line for my total portfolio. I wouldn't call that meaningless.

Regards,

Karel

I guess I wasn't clear enough Karel. My point was that it would be meaningful only if you owned it from some point earlier than where is started that 40 % move. But if someone had bought it in the $42/$45 range and held it through that move down, which is almost incomprehensible to me but people do that sort of thing, and were down almost 50% with the play then the 40% bounce off the bottom would be meaningful but they would still be out a pile of cash on the play.
So if you bought it at $43.27 where Ernie did and were still holding you would still be down .346% with the play. I could see where that bounce would make a difference in anyone's portfolio but clutching at straw is not what I do and to think that it is going to recoup another 15 points anytime soon is a big Christmas wish. But for all you guys that are still in there from that $43 level I do hope that it recovers all of it and more.

[mrmarket]

I guess I wasn't clear enough Karel. My point was that it would be meaningful only if you owned it from some point earlier than where is started that 40 % move. But if someone had bought it in the $42/$45 range and held it through that move down, which is almost incomprehensible to me but people do that sort of thing, and were down almost 50% with the play then the 40% bounce off the bottom would be meaningful but they would still be out a pile of cash on the play.
So if you bought it at $43.27 where Ernie did and were still holding you would still be down .346% with the play. I could see where that bounce would make a difference in anyone's portfolio but clutching at straw is not what I do and to think that it is going to recoup another 15 points anytime soon is a big Christmas wish. But for all you guys that are still in there from that $43 level I do hope that it recovers all of it and more.

it will. And as long as one is diversified, it's ok to get punished now and then.

[skiracer]

it will. And as long as one is diversified, it's ok to get punished now and then.

Just as long as you don't begin to enjoy the pain and punishment.

[rookietrader]

Is anyone still in this one?

[stenzrob]

Not me. Been out of VDSI since last Thanksgiving.
This is my history with VDSI, which was close to leading the 2007 Pick O' The Year until it crashed in October.

11/27/07 Sold VDSI @ $21.675 Played a bounce for +3%
11/21/07 Bought VDSI @ $21.04
08/16/07 Sold VDSI @ $27.00 Played a bounce for +3%
08/16/07 Bought VDSI @ $26.15
08/09/07 Sold VDSI @ $31.43 My best VDSI trade 31.43/23.09 = +36%
06/01/07 Bought VDSI @ $23.09 Missed some gains before buying again here
01/09/07 Sold VDSI @ $14.35 My first VDSI trade 14.35/12.00 = +19.6%
12/13/06 Bought VDSI @ $12.00 Timely buy here, for sure, just before a great run for most of 2007.

[mrmarket]

yup....


Still Feeling Secure About VASCO
By Anders Bylund February 21, 2008
4
Recommendations

I told you before the VASCO (Nasdaq: VDSI) earnings report that the stock was undervalued and belonged in your portfolio. With the results in hand, and the subsequent 34% share price crash, I'm hoping that you subscribe to the "buying in thirds" philosophy, so you can take advantage of an even better value proposition.

Here's what happened, and why I still believe in the data security specialist.

Fourth-quarter revenue came up a bit light at $31.2 million, about $5 million below the analyst consensus. With fixed costs escalating as VASCO goes through a growth spurt, the slow sales resulted in a large miss on the bottom line. So far, so bad.

But management explained that most of the top-line letdown was because of three large orders that were delayed for various reasons. That netted out to a $3.6 million hit, all of which should show up in the first quarter and beyond. While the tardy threesome weren't named, the usual suspects would include major customers like mega-banks HSBC (NYSE: HBC), Citibank (NYSE: C), and Wachovia (NYSE: WB), or truck makers Daimler (NYSE: DAI) and Volvo.

CEO Ken Hunt reminded us that his company doesn't try to smooth out its quarterly trends, but that "we do our best to accommodate the wishes of our customers." Indeed, one of the delays was on request from the customer, to fit into its deployment schedule. It should also be noted that the company hit its own guidance, which was reaffirmed in late October, so much of the disappointment was with unrealistic Street expectations and not the business itself.

You're looking at a small-cap business with lumpy earnings, subject to the whims of a few clients. Hunt is a straight shooter who doesn't pander to short-sighted Wall Street expectations but manages his company for long-term success -- even if it makes the numbers look bad on occasion. Unpredictable numbers are part and parcel of small-cap investing -- and Mr. Market's mood swings are amplified manifold when he's dealing with smaller businesses.

This is still a risky stock, no doubt. But the business is still going great and the revenue shortfall will be made up in the next couple of quarters. I don't see that the future looks any dimmer than it did one day ago. In other words, the time to jump on this opportunity is now, before a first-quarter blowout erases some of today's generous discount.

[New-born baby]

PnF price target: $1.

Don't buy shares. Buy puts instead. Or sell calls. But don't buy shares.

[mrmarket]

VDSI Conference Call

VASCO Data Security International, Inc. (VDSI)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

T. Kendall “Ken” Hunt - Chairman and Chief Executive Officer

Jan Valcke - President and Chief Operating Officer

Clifford K. Bown - Executive Vice President and Chief Financial Officer


Analysts


Jonathan Ruykhaver - ThinkEquity Partners

Daniel Ives -Friedman Billings Ramsey

Robert Breza - RBC Capital Markets

David Keith – Morgan Stanley

Rob Owens - Pacific Crest

Ed Ching - Rodman & Renshaw

Sean Jackson - Avondale Partners, LLC

Scott Zeller - Needham & Co.

Brian Freed - Morgan, Keegan

Andrew Holmes - McKinsey & Company

Andrew Abrams - CWH Associates

Katherine Egbert – Jefferies

Presentation


Operator


Welcome everyone to the VASCO Data Security International first quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host T. Kendall Hunt, Founder, Chairman and CEO.

T. Kendall “Ken” Hunt

My name is Ken Hunt and I’m Chairman, Founder and CEO of VASCO Data Security International, Inc. On the call with me today are Jan Valcke, our President and Chief Operating Officer; and Cliff Bown, our EVP and Chief Financial Officer.

Before we begin the conference call, I need to brief all of you on forward-looking statements. Statements made in this conference call that relate to future plans events or performances are forward-looking statements. Any statement that contains 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 US Securities and Exchange Commission for a discussion of such risks and uncertainties in this regard.

Today, we are going to review the results for the first quarter of 2008. As always, we will host a question-and-answer session after the conclusion of management’s prepared remarks. If possible, I’d like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

First, I would like to address revenue for the first quarter of 2008. In general, we were not satisfied with our first quarter results. However, our order backlog and our forecasted business for the rest of the year are very strong and we believe that 2008 will be another year of significant growth.

Revenues for Q1 were $28.9 million, an increase of 10% over first quarter of 2007. It was our 21st consecutive positive quarter in terms of operating income and cash flow. Our gross profit for the quarter was 69.3% of revenue and our operating income was 20.2% of revenue.

New accounts sold continued at a very high level. During the quarter, we sold an additional 591 new accounts, including 71 banks and 520 new enterprise security customers. This compares to the first quarter a year ago in which we sold 619 new accounts including 94 banks and 525 enterprise security customers.

We now have approximately 7,100 customers, including almost 1,100 banks and 6,000 enterprise security customers in more than a 100 countries around the world. In addition to banking, our enterprise security companies include corporations, federal, state and local government and a variety of Internet, B2B, and B2C companies.

As VASCO grows, I believe this metric becomes less of an indicator of the health of our business. A large portion of our revenues come from existing customers ordering additional products from VASCO.

Operational highlights for Q1 ‘08 include the following: we announced the leading banks such as Mizuho Bank of Japan, Arab Bank of the United Emirates and Sweden’s Swedbank had selected VASCO’s products for retail banking.

We announced the launch of Identikey 3.0 and Digipass 110. VASCO’s Security Competence Center launched its e-banking security consultancy business. We announced that Audema would represent VASCO’s products in the Spanish Enterprise Security market, and VASCO won the prestigious European Seal of e-excellence.

I’d also like to emphasis the importance of new products that we announced in the first quarter of 2008, such as the Digipass 110 to VASCO’s future growth. Digipass 110 combines the functionality of VASCO’s Digipass for Web software product with the portability of a hardware Digipass. Digipass 110 is a zero-footprint solution, for the wide variety of functionalities, including one-time password and e-signature, and is a clear example of the out-of-the-box creative thinking by VASCO’s R&D department.

It is a very small and convenient form factor that folds up like a small pocketknife. We expect the Digipass 110 and Digipass for Web will mean a competitive advantage for VASCO in the large volume e-commerce sector.

Ladies and gentleman, we believe the company has significant business opportunities in 2008, despite the realities of a challenging global economic climate. Later in this call, I will be reaffirming the full guidance for 2008 that I gave in our earnings conference call on February 21.

VASCO has a clear view of its future business prospects. The company has a market plan and strategy for each country in which it does business. We also have our purchase order backlog that we track regularly. This enables us to early-detect changes in the business climate.

Currently, we do not see a reason to change our outlook for the full year of 2008. We believe that business momentum is good and that business opportunities are available globally. Nevertheless, we will not hesitate to modify our strategy if changes occur to the international business climate or our order flow. Shareholder value is and will be a main focus for VASCO.

At this time I would like to introduce the Jan Valcke, VASCO’s President and Chief Operating Officer.

Jan Valcke

I would like to address the first quarter of 2008. As Ken already mentioned, we are not happy with the results of the first quarter. But as we have commented before, we do not believe that we have lost any business due to the sub-prime mortgage loan crisis. Actually, we expect it to help our business. However, we did sense a general slowdown in the approval process within our banking customers that affected our first quarter results.

As noted in our February conference call, we expect 2008 to be a period of investment in VASCO’s infrastructure. Given our accelerated growth in the past several years, we need to invest in our people and systems to support our future growth. A key path of that investment is new staff and we are pursuing an aggressive hiring plan for 2008. VASCO’s strategic plans for a sustained long-term growth are gaining momentum. VASCO is reinforcing its leadership position with the VASCO people, products and markets.

In the product field Q1 saw a continued increase in the number solutions offered to the market. On the service side, VASCO added Identikey and aXs GUARD Authentication Appliance to our VACMAN’s offerings. We believe that our served offerings are well suited to address most company’s authentication needs regardless the size of industry focus. We are seeing the first positive results of this approach. Indeed, we have already sold the first Identikey licenses. In the future we intend to sell our Identikey via the channels; therefore we are training the first generation of Identikey 75 resellers.

We enhanced our appliance authentication product family by adding Digipass 110, a unique combination of hard and software authentication. We strengthened our services by launching e-banking security consultancy services, an initiative of VASCO Security Competence Center. With regards to the geographic market, we can state that the reputation of VASCO in Internet security is growing worldwide.

In addition to our traditional banking market, we are seeing encouraging signs in the e-commerce and e-gaming sector. VASCO’s enterprise security business is also benefiting from our strong product brand name Digipass, and our corporate brand VASCO.

It is a part of our strategy to tackle the enterprise security markets once we have earned a strong position in a country’s banking environment. These strong brand names help our resellers to be successful with small and medium enterprises, in the same markets where VASCO has been successful with the banking customers.

Recently, we started pilots to reach new markets with our existing products. In a couple of countries such as Belgium and the United Kingdom, we are building a direct and indirect sales channel to sell our products to end users. The Digipass for retail campaign brings banking level security such as the connected Digipass 905 smart card reader to web shops and IT stores. We believe that this approach can be an additional source of revenue for VASCO.

VASCO’s people are the company’s number one asset. Training programs are bringing our existing staff to a high level, where our target recruitment actions are adding welcome reinforcements to our hands. We will keep opening new offices and strengthen existing VASCO offices. There are three steps connected with VASCO’s evolution in the market.

First, we get a foothold in the local banking market. Secondly, we hire people to reinforce our position in the banking market. Thirdly, we open an office and add people who concentrate on other verticals. This strategy has served our company well. We will continue grow our business based on these and other time-tested and successful strategies.

T. Kendall “Ken” Hunt

I would like introduce you to Cliff Bown, VASCO’s Chief Financial Officer.

Clifford K. Bown

As noted earlier by Ken, revenues for the first quarter of 2008 were $28.9 million, an increase of $2.5 million or 10% over the first quarter of 2007. The increase in revenue for the first quarter reflected a 3% increase in the banking market, and a 48% increase in the enterprise security market. The comparison of revenues in Q1 2008 to Q1 2007 was positively impacted by the weaker US dollar in 2008.

We estimate that revenues were $2 million or 7% higher than they would have been, had exchange rates in the first quarter of 2008 been the same as they were in the first quarter of 2007. The distribution of our revenues in the first quarter of 2008 between our two primary markets was approximately 80% from the banking market and 20% from the enterprise security market. In the first quarter of 2007, approximately 85% came from banking and 15% came from enterprise security.

The geographic distribution of our revenue in the first quarter of 2008 was approximately 67% from Europe, 8% from the United States, 11% from Asia and the remaining 14% from other countries. For the first quarter 2007, 61% of the revenue was from Europe, 9% was from the United States, 11% from Asia and 19% was from other countries.

Gross profit as a percentage of revenue for the first quarter of 2008 was approximately 69%, in comparison to 66% for the first quarter of 2007. The increase in gross profit as a percentage of revenue reflects the positive impact of currency, an increase in non-hardware revenue as a percentage of total revenue, and a change in the mix of our revenues with the higher percentage of the revenues coming from enterprise security market than from the banking market. Our non-hardware revenues increased from 15% of revenue in Q1 2007 to 20% of revenue in Q1 2008.

As mentioned earlier, revenue from the enterprise security market which generally has margins of 25 to 30 percentage points higher than the banking market was 20% of our total revenue in 2008, compared to 15% in Q1 2007.

Operating expenses for the first quarter 2008 were $14.2 million, an increase of $3.5 million or 33% from the first quarter of 2007. Operating expenses for the first quarter 2008 included approximately $670,000 related to stock-based incentive plans in the first quarter of 2008 and compares to $440,000 in the first quarter of 2007. The comparison of operating expenses in Q1 2008 to Q1 2007 was also negatively impacted by the weaker US dollar in 2008. We estimate that expenses were $1.2 million, or 9% higher then they would have been had the exchange rates in the first quarter of ‘08 been the same as they were in the first quarter of 2007.

Operating expenses increased by $1.6 million or 26% in sales and marketing, $800,000, or 40% in research and development; and $1.1 million, or 48% in general and administrative, when compared to the first quarter of 2007. The majority of the increase in the sales and marketing area were related to the company’s increased investment in sales staff, including the cost of opening our sales offices in Brazil and Japan.

The increase in research and development was primarily attributable to increased compensation expenses. And the increase in general and administrative expenses primarily reflected increased compensation cost and higher professional fees both in large part related to the setup of the headquarters operation in Switzerland.

Operating income for the first quarter of 2008 was $5.8 million, a decrease of $1 million or 15% from the first quarter of 2007. Operating income as a percent of revenue, or operating margin was 20.2% from the first quarter of ‘08, and is 5.8 percentage points lower than the first quarter of 2007. The decrease in operating margin was expected, and is attributable to increased investment in the infrastructure needed to support the expected future growth of the company.

The company recorded income tax expense of $1.5 million for the first quarter of 2008, compared to $1.9 million for the first quarter of 2007. The effective tax rate was 23% for the first quarter of 2008, and compares to 28% as reported for the first quarter of 2007. The effective rates for both periods reflect our estimate of our full year tax rate at the end of each respective period. The reduction in the tax rate is primarily attributed to the benefits expected from our new structure related to the company’s ownership of its intellectual property.

Earnings before interest, taxes, depreciation and amortization, EBITDA, or operating cash flow if you will, was $6.9 million for the first quarter of 2008, and is 9% lower than the $7.6 million reported for the first quarter of 2007. The make up of our workforce at March 31, 2008 was 248 people worldwide with approximately 143 people in sales, marketing, and customer support function, 71 in research and development, and 34 in general and administrative classification. The average headcount for the first quarter of 2008 was 52 persons or 27% higher than the average headcount for the first quarter of 2007.

The strength of our operating cash flow is also reflected in our balance sheet. Our net cash balance and working capital balances both increased from December 31, 2007. During the first quarter of 2008, our cash balance increased by $9 million, or 23% to $47.8 million from $38.8 million at December 31, 2007. Our working capital increased $6.5 million over 13%, to $59 million from $52.4 million at December 31, 2007. We had no debt outstanding at either March 31, 2008 or December 31, 2007.

Finally, our days outstanding in accounts receivable decreased from 76 days at December 31, 2007 to 67 days at March 31, 2008. The decrease in DSO was primarily related to the timing of when the sales were made in the quarter.

I would now like to turn the meeting back to Ken.

T. Kendall “Ken” Hunt

At this time, I am reaffirming the guidance that I gave in our 2007 conference call held on February 21. As in the past we will only comment on annual numbers not quarterly numbers.

First, we expect our full year 2008 revenue to grow from 25% to 35% over full-year 2007. Second, we believe that full-year 2008 gross margins will be in the range of 60% to 68% of revenue. And finally, we believe that full-year 2008 operating income will be in the range of 20% to 25% of revenue.

This guidance reflects the company’s strategy to continue its aggressive growth by investing in its people and the infrastructure necessary for long-term profitability. It also reflects our evolution to a more software centric company with a focus on reoccurring revenues and, in some cases, the recording of deferred revenue over multiple years.

Ladies and gentlemen, thank you for your attendance today. I look forward to your participation in the next earnings conference call for Q2 2008. As always, you can rely on VASCO’s people to do their very best.

This concludes our prepared presentations today. And we will now open the call for questions, as I mentioned earlier, as a courtesy to others on the call, I would appreciate it if you would limit your questions to initial question plus follow-up. If you have additional questions get back in the queue for later queries.


Question-and-Answer Session


Operator


Your next question comes from Daniel Ives -Friedman Billings Ramsey.

Daniel Ives -Friedman Billings Ramsey


In regards to guidance, Ken, what are you seeing that we are not? It’s been three quarters in a row that have been disappointing relative to Street? You reiterated the year guidance. Why should investors have confidence in that year number and it’s not just going to continue to play out as it has?

T. Kendall “Ken” Hunt


Well, we know things you don’t know, that’s one way of saying it. We do have our backlog that we can always take a look at over the next 12 months, that’s firm purchase orders for scheduled shipments. We have that. We have a forecasting system that is weighted based upon the competence level of different transactions. We’ve seen that.

So, it’s really those two things that we look at and make judgments about. A safe way of judging whether we know what we are talking about is to stay on the sidelines until after the second quarter. We’ve been running this business for a while; we came back and turned the business around little over five years ago. I think, we are doing a good job overall when we say we are disappointed with the first quarter, I think that’s a relative statement. We are disappointed in the first quarter based upon some pretty lofty, aggressive goals.

Daniel Ives -Friedman Billings Ramsey


Do you feel any less confident about hitting the year number today than you did three months ago?

T. Kendall “Ken” Hunt


No.

Daniel Ives -Friedman Billings Ramsey


Just by what happened in 1Q?

T. Kendall “Ken” Hunt


Well, by what happened in 1Q, that the results are what they are. And, as I said we have the comfort of looking at our firm PO backlog and our forecast to help us judge what the rest of the year is going to look like.

Daniel Ives -Friedman Billings Ramsey


I know you only give in year numbers, but when you look at the ramp sequentially, can you give us some comment on that in regards to hitting that 25% number, just to have a comfort level. Is there just going to be some ridiculous ramp in the second half, can you just talk to that, because the model, the 25% growth, it has to be a really back-end loaded year to hit that?

Clifford K. Bown


We don’t give quarterly guidance, so we would very much limit our comments on any given quarter, but given the order flow that Ken referred to, and given our comments at the conference call in February and this conference call, or at least in the press release, we do expect the growth rate to accelerate in the second half.

Every analyst will have to do his own computation as to what that ramp looks like or how steep the curve is, but right now, as Ken stated, we are comfortable with the full year guidance, that we can hit that 25% to 35% revenue growth over ‘07.

Operator


Your next question comes from Robert Breza - RBC Capital Markets.

Robert Breza - RBC Capital Markets


If you look at the year playing out, and expecting an acceleration in the back half of the year, at least an acceleration from Q1 on up what’s going to cause that, is it new products, is it the shift to more enterprise away from banking, I would think a shift towards more software actually hurts you in terms of accelerating growth, just because it goes to deferred revenue versus in recognizing the period. Can you just talk about what you are seeing in your pipeline in terms of shift given this, I think, your acknowledgment a tougher banking environment?

Clifford K. Bown


I do a fair amount of the underlying data for the forecast that Ken looks at. What we actually see is a combination of things. First, the backlog that we have, as Ken mentioned, is strong. What we also mentioned in terms of the first quarter is that we saw a slowdown in the sales order process. But, that slowdown affects the current quarter, but it gives us a stronger view of the subsequent quarter.

So, and I’m not articulating this very well, but we had a strong order flow, but because of the slowdown in the order process, it didn’t happen in Q1, but it is stronger for Q2, 3 and 4 than we’ve seen in previous periods. So, while there was a slow down; it did affect Q1; we think it gives us good visibility in the second half.

So, it’s not necessarily a change in any of the fundamentals of the business as VASCO operates it, it’s more the visibility of what we see in terms of the order flow, the pipeline, the forecast Jan and his sales team have on their numbers.

I would also point out in terms of your question you commented that the non-hardware portion would be amortized over time. That’s not necessarily the case, if it’s the sale of software, depending upon the structure of the contracts and how it’s bundled with the rest of our product, it may or may not get deferred. The accounting standards are very precise in terms of whether or not we can demonstrate that we have specific objective evidence of the value of the undelivered items.

If we do, only the undelivered elements are deferred, all of the rest of the transaction can be taken in the current period. So don’t get hung-up too much on the fact that a higher percentage of our revenue is non-hardware. That should help support higher margins, but it doesn’t necessarily directly mean that deferred revenue is going to grow.

Robert Breza - RBC Capital Markets


I know you talked about, back on your Q4 conference call February that some deal slipped. You talked about the slowdown in process this quarter, so I would assume that indirectly means that some deals slipped that you thought would close, can you maybe quantify what you saw in Q1 here relative to what that slowdown in process impacted your business this quarter?

T. Kendall “Ken” Hunt


What we’ve seen is longer approval cycles, and there is a phenomenon that, I’m not sure why it’s there but in the past with some of our bank customers our order process was simply a purchase order from the customer, and us manufacturing and shipping to that customer.

What we’ve seen over the last several months, maybe even stretching back into last year, is a lot of the customers are now requesting or requiring an actual agreement, or terms and conditions contract, and I think that has slowed down the process, it has been instrumental in some of the slowdown that we’ve seen in the process.

Robert Breza - RBC Capital Markets


Is there a way to quantify what that impacted, the results?

Clifford K. Bown


No, I don’t think we are going to try to explain that publicly, Rob. What we are looking to do is really explain what happened within the quarter, and then provide the annual guidance as to where we think the full year comes out. Each analyst will have to make their own judgment on whether they agree that we can do what we say we are planning to do or not, and as Ken mentioned before, if our view of the market changes as we go through the year, as we have in the past, we will explain that to the market on subsequent conference calls.

Operator


Your next question comes from David Keith – Morgan Stanley.

David Keith – Morgan Stanley


From what you said about the exchange rates, it sounds as if this is the only reason you do not need to downwardly adjust your ‘08 forecast. Is that a true statement?

Clifford K. Bown


Well, the exchange rates certainly have had a positive impact on the revenue, and they have had a negative impact on the operating expenses, so net-net, we’ve had some marginal gains from currency. But that doesn’t necessarily mean that we would adjust down the targets, we have to give guidance based on the facts that exist in the market place at the time we are giving that guidance.

David Keith – Morgan Stanley


And, of course from when you made your forecast three months ago the exchange rates, the dollar certainly has depreciated considerably, so that wouldn’t have a positive effect on your revenues for the entire year, correct?

Clifford K. Bown


It does, yes. At the end of the year the dollar, it took about $1.47, $1.48 US dollars to buy a Euro, today it takes closer to a $1.58, so certainly that is a factor.

David Keith – Morgan Stanley


What happened to the three large transactions that were missed in Q4?

T. Kendall “Ken” Hunt


They, as we announced, they moved into 2008, some were shipped in the first quarter and the rest will be shipped later in the year.

David Keith – Morgan Stanley


Okay, so there was some affect in Q1?

Clifford K. Bown


Yes.

David Keith – Morgan Stanley


And, can you quantify how much it was?

Clifford K. Bown


I cannot.

Operator


Your next question comes from Rob Owens - Pacific Crest.

Rob Owens - Pacific Crest


So, in order to hit this guidance for the year, do you need to see the approval process, then, normalize, because you’ve talked about the slowdown? If I go back to the last call, you told us that backlog was no longer a reliable predictor, and you saw some slippage there. Now you are telling us that there is a slowdown in the approval process, so does a lot of this have to normalize to see that reacceleration, I am a little confused?

Clifford K. Bown


I think, the answer to that is, I am not sure what normalize means.

Rob Owens - Pacific Crest


Well, if it continues to slip, the last question was effectively if you back out the currency benefit, you showed almost no growth in Q1 and now you are expecting that to massively accelerate. So, just trying to get some comfort around your comment, “we see other things than you guys do”.

Clifford K. Bown


Yes, the information that we are providing and the forecast that we are seeing is based on the environment as we see it today. I am not sure, if the word “normalize” is the term that I would use, if the economies around the world go into recession, an accelerated recession, the order process could slowdown further. In some cases it could stop, and those would obviously have a detrimental affect on our full-year outlook.

But our forecast right now is based on the order process as it exists now, and if that order process continues to operate as it does today, we believe that we are could achieve the 25% to 35% growth. If it deteriorates, if the impacts of the recession become more pronounced, certainly we will have more difficulty hitting those revenue targets.

Jan Valcke


Maybe I could add something to this slowdown process. It is true, what Ken is saying, that we have more negotiations than ever before, certainly with banks, to have the contract. And before, like Ken was saying, it’s was not a simple PO that was sent over today, it was contract. On the other hand, you need to see all that as a positive way that once we have a contract, that contract stands for many, many years and once our negotiations are done we don’t need to repeat that work every time that we have a new order for an existing customer.

Operator


Your next question comes from Ed Ching - Rodman & Renshaw.

Ed Ching - Rodman & Renshaw


Backlog and firm purchase orders, how are they looking to you as opposed to last year? Are they stronger, weaker, about the same?

T. Kendall “Ken” Hunt


Ed, it is absolutely stronger, much stronger.

Ed Ching - Rodman & Renshaw


So, if it’s stronger than last year, and you are up 10% in first quarter year-over-year, is 25% to 35% a little bit conservative there on the top line, you did almost what 57% last year, 58% revenue growth last year. Are you being ultra conservative here?

T. Kendall “Ken” Hunt


Well, we, as you may recall, we always try to under-promise and over-deliver, we are not always successful in that credo but that’s what we try to do. History has shown that, in the past if we had seen a year that is stronger than we originally predicted, we come out and adjust the guidance. We have done that three years ago, we did it last year. For now what we see, we are confident in maintaining the current guidance.

Clifford K. Bown


Ed, I think there is a couple of things to consider in this. One, our base of revenue has grown substantially so it is much tougher to achieve the same percentage growth in ‘08 as ‘07.

Second, as we have commented many times before, VASCO is still a relatively small company, and some of these very large orders can have a significant impact on the results of a period, and as Ken has often explained on his road shows, the cycle for the shipment of goods in a bank is generally over a 4-year period for the rollout.

So, we had periods where we have big rollouts, followed by periods of smaller rollouts, and it’s not uncommon when you look at our history over the last five years to have a year of 50% growth followed by a year of 30% to 40% growth or a year of 80% followed by a year of 40%.

So at this stage, I wouldn’t characterize the guidance as ultra-conservative or otherwise. It is our current best estimate of what we think we can do. It is a range of 25% to 35% to allow for some of the upsides that we see, but it’s really our best estimate at this time, and I would not encourage any analyst to make projections that go well beyond that.

Ed Ching - Rodman & Renshaw


You mentioned the series of GMs were up, the gross margins were up. What percentage of those effects was related, how much did the increase in the software sales account for the increase there in the gross margins?

Clifford K. Bown


Well and that becomes a mathematical computational Ed and it’s a question of whether you consider the impacts of currency first or you take the impacts of currency out. So I can’t really quantify for you those individual components. What I can say is the non-hardware revenue has margins that are better than the enterprise security margins, but they are commingled.

What you see is in the enterprise security we have-non hardware, in the banking we also have non-hardware. So it’s affecting those comparisons as well. So it’s one of those variance analyses that the answer depends upon which items you strip out first.

Ed Ching - Rodman & Renshaw


And headcount 52, what were the net adds and where were the adds this quarter?

Clifford K. Bown


The overall ads will be about eight people, I believe, from 240 to 248, sequentially. Many of those adds were in sales and marketing. If you compare to the same time a year ago, Q1 ‘07, there were substantial adds in both sales and marketing and adds in F&A. The finance administration or G&A adds were largely related to establishing the new headquarters operation in Switzerland, and they deal with increasing the staff focused on human resources, information systems, and legal, all core activities that we’ll need to support our expected future growth.

Ed Ching - Rodman & Renshaw


Can you give me some more color on this Japanese bank retail distribution? It sounds pretty promising. And where do you see that market opportunity being?

Jan Valcke


Japan is, of course, an extremely mature market. It’s probably together with U.S. and Sweden, the highest mature market when it comes to Internet, mobile telephone and so on. They, in that market, that’s very consequent to our strategy.

We have three out of five top banks in Japan that are customers. As a consequence, and as well as then more typically for Japanese market, we opened an office, hired local people, Japanese people, to ensure the maintenance and of course the continuation of our prospection in the banking.

At the same time, we hire people that are again consequent to our strategy, to the enterprise security market. So Japan it includes 200 million people, I believe. So it’s a very attractive market for us and we are ready to tackle that market.

Operator


Your next question comes from Sean Jackson - Avondale Partners, LLC.

Sean Jackson - Avondale Partners, LLC


The approval process seems to be critical, and it sounds like simply that the banks are requiring an additional step here, regarding negotiations. Why do you think that is, amongst the banks? Are they seeing just a degradation in their own finances and they are just being more careful? And why are they seeing it, and is there a chance that that extra step will gradually go away as the banks’ finances get better.

Jan Valcke


Yes. I think it has nothing to do as such with the banking finance. It has more to do with compliance rules that like SOX in US. Everywhere in the world they have, now, those complying rules, where the purchasing department and the legal department are much more active, taking more power in such a process. That’s the first thing.

The second thing is we may not forget that in the past, just as an example, we were dealing with $100,000 orders, today we are dealing million dollar orders, and that we have reached that level where legal and purchasing is, I should say, more active than with smaller orders. I think it’s nothing to do with the finance situation or this crisis. I think it has everything to do with, one larger orders, secondly, more compliance.

Again, you may not forget that the negotiations with those banks, we only need to do it once. Those contracts stays for many, many years and it’s the concept that is foreseen in the contracts make assure that we could then do business as usual with those banks in the future.

Sean Jackson - Avondale Partners, LLC


And with the first quarter numbers, were there are any larger deals that you did expect to get approved in the first quarter that are slipping?

Jan Valcke


Well again, you need to see that we from operations and, let’s say on the other side than the banks, the business people, we want, of course, that all those contract negotiations go faster. It is just I think again the nature of this contract negotiation business that makes -- that it takes longer to finalize that contract.

T. Kendall “Ken” Hunt


Sean, there was really no specific contract or deal or transaction that we would comment that impacted the first quarter.

Sean Jackson - Avondale Partners, LLC


And just lastly the 23% tax rate, is that something that you expect for the rest of the year?

Clifford K. Bown


The answer is obviously yes. Under U.S. GAAP, we have to do our best estimate of the full year, and use that rate in each of the quarters. So we’ll continue to monitor where our taxable income is, what the tax rates are in each of those jurisdictions, and the U.S. accounting principles will require us to update that each quarter.

At the end of last year we had a bump in the tax rate from 28% which we had used for the first three quarters to 33% or so, and that was reflective of the fact that at the end of the year we had those deal that slipped. Those were in low tax jurisdictions, and therefore our overall effective rate went up. So when we look at the 23% rate today, is there volatility on both sides where it could be higher, it could be lower? The answer is absolutely yes. But right now that’s our best estimate of where we’ll end up for the full year.

Operator


Your next question comes from Scott Zeller - Needham & Co.

Scott Zeller - Needham & Co.


Could you give us an update on the Azlan-Tech Data business in EMEA?

Jan Valcke


Tech Data/Azlan is the largest, or at least one of the largest, distributors in the world. We have a general contract for Europe, and now we are looking with all local Tech Data/Azlan dealers to train them, to motivate them to work with the VASCO products. It’s an ongoing process.

Scott Zeller - Needham & Co.


Could you tell us if there are going to be any material revenue contributions in the next quarter or two?

Jan Valcke


I think we cannot comment on that.

T. Kendall “Ken” Hunt


I can just say that they were a contributor in the first quarter and their volume did pick up as we expected it would once their group was trained. What the overall long term volume will be is hard to tell, but we did notice a positive contribution from Azlan-Tech Data in Q1.

Scott Zeller - Needham & Co.


Could you give us a sense for the June quarter if you will roughly be adding the same number of people? You went from 222 to 248, quarter-to-quarter, just now. Could you tell if it will be the same step up for June?

T. Kendall “Ken” Hunt


We do expect to continue our aggressive hiring plan. Whether it will be the same total number of hires or net number obviously will depend upon how fortunate we are in finding the people with the right qualifications, but our hiring plan continues to be aggressive in each quarter for the remainder of 2008.

Scott Zeller - Needham & Co.


Should we just assume that it will somewhere in the 25 head range, net-add?

T. Kendall “Ken” Hunt


You can make whichever assumption that you like. We had targeted, I think, 100 positions when we communicated in February. We haven’t had any substantial changes in that outlook.

Jan Valcke


You should know that there is a difference, certainly in Europe, between the date that you sign a contract with a new employee and the effective date of starting for an employee within the company.

Operator


Your next question comes from Brian Freed - Morgan, Keegan.

Brian Freed - Morgan, Keegan


If you look at the firm commitments you have in your backlog, how firm are they? Is there any consequence to these customers if they back away other than that they lack the infrastructure that you keep providing?

T. Kendall “Ken” Hunt


Well the purchase orders typically are from the banks, not the reseller channel, and a great majority of our business comes from banks. One of the advantages that VASCO has is that we help the bank brand their online services by manufacturing these different devices in the color of the bank, the corporate color of the bank, with their logo. So when they sign a purchase order and send it to us, it’s serious business.

So they are not cancelable. In some cases, if the bank asks us to accelerate an order, we do so. We did that in the fourth quarter of 2005. We added $2 million in revenue, unexpected revenue, in the first quarter of 2005. In some cases, a bank might say “Look, we have too much inventory on site right now. We haven’t distributed all the ones you’ve manufactured for us. Can we delay our next shipment by a month or two months or whatever?” And we will try to comply with that, but as far as the purchase orders are concerned, they’re firm.

Brian Freed - Morgan, Keegan


As you look at historic trends, last year when you were giving backlog numbers, your revenue tended to be a multiple event slightly above that backlog, was that the effect of banks rolling out to more tokens than they’d initially plan, so purchasing over and above the firm commitments? And have you see a shift to bank dishonoring the level of a commitment, but not going over it, what I am looking for is there is shift in the purchasing pattern relative to those firm commitments that’s notable and measurable as of yet.

T. Kendall “Ken” Hunt

When you look historically the difference between the actual results we’ve reported and the firm backlog that we announced earlier in the quarter, there is some incremental banking business in that, but in fact there is a lot of enterprise security business in that. The enterprise security business is much more of a turns business where we get an order one day and we ship it within the next 24/48 hours to that customer.

So, we do not have a lot of visibility into the channel as to what the resellers are ordering or planning to order for that enterprise security business. So, when you look that spread historically, a lot of it has been enterprise security.

Within the banking business, given the order process, we do have a number of banks today that, since it takes them longer to get trough their internal process, they are very anxious to get the product once they’ve signed the contract and there that is a function of production planning and whether or not we can turn that around in the timeframe that they really want for those initial orders. Once the contract is signed we can schedule the production, but whether or not it will hit current quarter or be in a subsequent quarter depends on the specifics of each case.

Brian Freed - Morgan, Keegan


Do you have any intention to resume providing any backlog number as times goes on and you get more color into how the close rates relative to those commitments are going to look?

T. Kendall “Ken” Hunt


We have no plans to change the nature of our guidance going forward.

Operator


Your next question comes from Andrew Holmes - McKinsey & Company.

Andrew Holmes - McKinsey & Company


At the end of ‘07 you had roughly $40 million in backlog. Can you give us any indication if it’s up or down after the first quarter?

T. Kendall “Ken” Hunt


Actually, no Andrew because as we announced in a full year conference call in February, we announced that we were moving away from that backlog number because we think point-in-time measurements weren’t that meaningful. We did put the number in the 10-K because it is a requirement of the Securities and Exchange Commission to disclose that, but we disclosed that with that caveat that, since it is a point-in-time measurement, we can receive a large order the next day that would completely change the color of that order.

So I think that the key issue for the management team is actually having orders in hand, but it’s also that pipeline of deals and then what we need to do to get that next deal closed, so we don’t plan to update that number other than as required under the SEC rules on an annual basis.

Operator


Your next question comes from Andrew Abrams - CWH Associates.

Andrew Abrams - CWH Associates


Could you give a little more detail on the negotiations that you are talking about with the banks? Is this going to change your pricing model since you are now looking out further than you probably normally would have on the smaller orders, and are you going to be renegotiating price on a fairly regular basis as time goes through the order?

Is price locked in for a two or three year period, or is that only going to change because the device order changes, meaning they have decided to change the particular device that they are working on? Can you give a little color on that?

T. Kendall “Ken” Hunt


What Jan was saying before was that, in the past when we just accepted the purchase orders, it gave rise to more constant negotiations of pricing. With a firm terms and conditions agreement or contract in place, he anticipates little to none of that, because the terms and conditions are in place, the pricing is in place, and the banks simply order via a purchase order and refer to the contract dated X-date, so I would say that there will be less of the negotiation of pricing on an ongoing basis.

Jan Valcke


Yes, this is also the advantage that the banks are more and more negotiating global contracts. Like in the past, if you could come from that bank from one country, then the same bank but from another country were different with all-the-time negotiation on pricing today it’s more a global contract, and again once the concept is done, then the day-to-day business starts again as usual.

Andrew Abrams - CWH Associates


What feedback are you getting from your banking customers, actually and your enterprise customers, but more from the banking side, just in terms of their attitude for spending in general. I know the theory that other people have proposed that when things slow down in the credit side, the retail side gets more dollars spent and therefore your business could increase. Do you get those comments from banks or they are just saying “Look, we are just in negotiations, we are not going to talk about this at all?” What color do you get from them?

T. Kendall “Ken” Hunt


Well, historically, let’s talk about history. We have always driven our business or our business has been driven by managers, heads of corporate banking, or heads of retail banking that are running a profit center, deciding to do online Internet banking because they are trying to reduce their costs and thereby increase their profits in their profit center.

So, our success, moreover, has never really been driven by rules or regulations or edicts, it’s been more of a business decision by the heads of corporate and the heads of retail banking to do online banking, electronic banking, and move away from paper and personnel based services. So, that’s what’s driven our business historically. I don’t think that has changed recently, and I don’t think its going to change going forward.

Jan Valcke


Well, I think you are right, Ken, we are doing the same way the business as we did in the past. There has been no change in attitude.

Andrew Abrams - CWH Associates


But when you are dealing with a global contract, you are dealing with a different set of managers rather than more regional type of managers or more lower-level managers, you are now dealing with somebody who said “This is where the dollars are going to the bank.” That’s more where I’m going. Are you seeing a change in attitude, or is it just we’re spending money where we know we can make a profit, or where we know we can?

T. Kendall “Ken” Hunt


I’d say it’s a country-by-country decision. Jan mentioned that we are doing more and more global contracts with banks, that sets the terms and conditions and pricing, almost like an umbrella under which Brazil as an example, or Japan or pick whatever country where there’s a local wholly own subsidiary of a global bank, they are making those decisions independently.

Operator


Your last question comes from Katherine Egbert – Jefferies.

Katherine Egbert – Jefferies


Have you noticed historically that your business is in anyway tied to employment at the banks that you sell to?

T. Kendall “Ken” Hunt


Is it tied to employment you mean reduced employment?

Katherine Egbert – Jefferies


Or increased, yes, have you notice any cycles in the past?

T. Kendall “Ken” Hunt


I don’t personally have any experience, or I haven’t noticed that. Jan have you?

Jan Valcke


The question is that the bank, if they do electronic banking, is reducing the employees?

Katherine Egbert – Jefferies


Yes.

Jan Valcke


The answer is no, with a ‘but’. The ‘but’ is that employees are moving, or getting more and more targets and they’re moving from the paper-based work that they did in the past and they need to do more on the road. They’re changing their job description basically, reducing employees, its tough in a bank with unions.

Katherine Egbert – Jefferies


Does it make sense at these levels to consider maybe backing back some stock? Do you have a program and place to do that?

T. Kendall “Ken” Hunt


That, along with the number of other things the Board of Directors continues to consider. It has been our judgment in the past and it’s still our judgment that we want to keep our capital, keep our cash, for growing the business and for acquiring other small technology tuck-in companies that historically we always bought for cash. We don’t feel like we have enough cash that we could actually have a program that would have that much impact, to be honest with you, but the main reason is that we want to keep our cash for operations, and keep our cash for these technology acquisitions.

Ladies and gentlemen, at this time we’ll say good-bye. I appreciate your attention and your attendance, and your great questions today. And I also, at this time, want to thank VASCO’s people around the globe for their hard work, their diligence, their loyalty. Have a good afternoon and evening everybody.

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