OneSpan Inc (OSPN) 2005 Q3 法說會逐字稿

(Operator instructions). Your first question comes from Catherine Odermann (ph) with Hamon Edit (ph).

Hello, Catherine. Hello, operator? Operator?

Yes, sir?

We can't hear Catherine's question, or she dropped off.

Okay. Okay, we'll take the next question, which comes from Jonathan Ruykhaver with Raymond James and Associates.

Hey, Ken. Nice quarter.

Hi, Jonathan. Thank you.

I've got a question related to gross margins. If you look at the trend in terms of cost of goods per token, over the last couple of years, you've seen a pretty good steady decline on a quarterly basis, each quarter, throughout last year and up until this quarter, it looks like it moved up. Was there something in COGS that resulted in that going up? Component cost higher in one factor or another?

This is Cliff, Jonathan. I'm not sure what numbers you're looking at.

If you just take COGS and you divide it by the number of tokens you shipped.

Right.

Now, that's somewhat simplistic, but that number goes up, this quarter, after showing a pretty steady decline over the last few years.

Okay. Well on a comparative basis, this quarter over same quarter last year, the total cost per unit are better, this quarter, by about 17%. If you're comparing consecutive quarters, what you'll end up with is the mix of product. As we've talked about in the past, the Go 3 has become one of our most popular consumer models, and it's one of our lower-priced models. But as we go forward with some of the EMV rollouts, you'll end up with more card readers in the mix, and those card readers are more expensive products to produce. So, when we compare quarter-over-quarter, we're still showing efficiencies and reductions in manufacturing or purchase cost, but quarter to quarter, you will see some changes due to the mix of the products sold within that quarter.

So as EMV, those readers, become more meaningful as a percent of products you're shipping, is that going to negatively impact COGS until you start really ramping up on the volume shipments for those readers?

It may increase our average cost per unit, but it will also depend upon which model the customers elect for their EMV rollout. As you may recall, the VASCO readers that we had in our product line before the acquisition of AOS were very robust, feature-filled kind of product. The AOS Smart Card readers were lower-end readers, less functionality but lower cost. So I can't say, absolutely, that that's the case from a modeling point of view. It will depend upon which of the readers the EMV customers choose.

Okay. I guess just one quick question also related to gross margins. As the volume of token shipments continues to grow and the discounts you provide based on those large volume shipments continues to increase, are we going to continue to see downward pressure on the gross margins?

I think you will, over the long run, but that's why we would sort of guide you to the concept of our leverage in the model. You'll see that our operating margin, on a sequential basis, has improved each of the last three quarters. So as the volumes have ramped up from the 1 million units to the 1.5 million to the 1.6 to the 1.8, our gross margins have, in fact, declined from about 65% to 61%, but our operating margins have improved from 16% to 19%.

So you do feel comfortable with an operating margin still in the high teens, even with the gross margin maybe going below 60%?

Absolutely.

Our guidance, again, is 13% to 18%, and we've achieved more than that in this last quarter.

Right. Okay, great. I'll get off. Thanks, guys.

Thank you, Jonathan.

Our next question comes from Michael Tieu with Southwest Securities.

Yes, good morning. Congratulations.

Hello, Michael. Thank you.

I wanted to talk about your banking customers. Could you provide us some more color as to how many have already rolled out tokens to their consumer banking customers? And at what stage of deployment are some of these banks in, right now?

Jan, why don't you handle that question.

Okay, thank you. Well, first of all, from our more than 400 banks today, the way it works is as follows; a bank normally starts to secure his corporate and looks only for to secure his retail banking afterwards, so basically, it's not easy to say how many banks are doing it today, only corporate banking and how many are doing retail banking, but we can say that, first of all, if a bank doing retail banking, we can assume or you can assume that he is also doing security for corporate banking. That's probably the first assumption that we can make.

The second thing is that or the second assumption we can make is that normally a bank, one or two years after he started to secure his corporate banking, he'll go for the security for retail banking.

And also -- Jan, have you finished?

Yes.

I'm sorry. It's also the case, the last several quarters, in terms of unit volumes, the Go 3 has been the majority of units shipped, and typically, the Go 3 is used for a consumer or retail customer.

Okay, okay, and then on the EMV side, could you give us a little more color as to the kind of traction that it's getting? I know that you mentioned that January 2006 is when the banks are going to sort of have to assume the loss if there's any fraud, so maybe just give us a little sense of the traction in the EMV and how much revenue you're getting from that, today.

Well, we don't speak to the revenue specifically for EMV. The EMV programs -- and Jan, I want you to add whatever you'd like to this -- the EMV program is going well as far as I know. One of the things that we've described in the past, or I describe on a regular basis, is that for the EMV cards to work, the retail shops have to upgrade their equipment to be able to accept the new EMV cards.

If you look at the terminal companies that are in business selling these point-of-sale terminals, you'll see that over the last year to two years, they've had a bubble in terms of replacement revenues for the old terminals. So, you can see from action in the marketplace that the replacement of these terminals has/is taking place. Once that's done, then the banks can start distributing the EMV cards to their retail customers because those cards will now work in a retail establishment. After that, then the banks buy the readers from VASCO and send those to their retail customers so they can do online Internet purchases using the EMV card with the VASCO reader.

I've heard from a pretty good source, who's probably on the phone here, that there's been as many as 300 million EMV cards shipped. So, how this all rolls out is not really in our control, and that's one of the reasons we've been so cautious in identifying forecasts or guidance regarding EMV. Jan, do you have anything else to add about that?

No, not really. As you mentioned, the only thing I can maybe add on it is that it's very much country oriented, that one country is faster than another country.

Okay, and just to follow up on that, Cliff, you mentioned that the card reader is more expensive to product, but I would assume that your gross margin on the EMV readers is still pretty favorable, right?

Oh, it's still very solid, yes.

And would that be in the 60% range, or is it lower than that?

It be like our other products, the bigger deployment, the lower margin we're willing to accept, because more and more of that margin falls directly through to our operating income.

Right.

Clearly, our gross margin, going forward, is going to depend upon, again, as Cliff mentioned before, our mix of business -- mix of business and size of deployments.

Okay. Thank you.

Thank you, Michael.

Your next question is coming from Jeff Englander with America's Growth Capital

Good morning, Ken. How are you?

Hello, Jeff. I'm sorry our Red Sox weren't in it, this year.

Hey, you know, the Red Sox, last year, the White Sox, this year. Maybe your Cubs, next year.

They ought to change their last name to Sox.

A quick question just to clarify something in your discussion with Jonathan. Even though the card reader will increase the profits a little bit, you're reaffirming your gross margin guidance for 60% to 65%, correct?

Yes, for all of 2005.

Okay, and then, you continue to feel comfortable, it sounds like, with the higher end of the operating margin guidance on a pro-forma basis of 15% to 20%.

Yes, I'd say that's true.

Okay. The other quick question is can you comment, at all, with 80% year-over-year growth, you seem to have room to raise the guidance, here, and kind of being typically conservative. Anything else that's entering into it? Anything you're seeing out there that gives you any concern?

No, I'd say just the opposite. I'd say that we're probably more optimistic than we've ever been. If you take a look at what I mentioned earlier in the conversation or remarks, the FDIC or FFIEC or whatever it is -- their announcement really had a jolting effect. We saw a tremendous amount of inquiries about how we can help address the FDIC's directive, their guidance. And so, I think, perhaps if you look at the long awaited opportunity in the banking community in the United States, I think it's here.

Great. Last quick question is can you comment, at all, about any kind of traction you're seeing? Obviously, the eBay announcement, but with the VeriSign partnership.

I'd say I cannot comment on the eBay announcement no more than I can comment on the Bank of America announcement. When we went into the relationship with VeriSign, we wanted a good partner that would offer something that we don't, which is an outsourced authentication service. They are a good partner. We communicate with them on a regular basis. They've taken a slug of Digipass Go 3s, several months ago, and they're doing what any firm would do. They're going out and demonstrating their service, along with the Digipass Go 3. They've got demos going, and the results are these announcements. So generally speaking, we're very pleased with the progress VeriSign is making.

Great. Thank you very much.

Thank you, Jeff.

Your next question comes from Alan Weinfeld with Kaufman Brothers.

Hi, Alan.

Hi. Could you speak to the expense lines, going forward? Are you going to be able to hold sales and marketing and research and development so well, as you did in the third quarter, into the fourth quarter in order to have the same type of operating margin, even though you're going to have these banking summits, I believe, in Boston and Latin America?

Alan, on the expense front, I would guide you to think in terms of operating expenses continuing to increase. The market as we see it, today, there's still a greenfield. There's tons of opportunities out there, and we need to be sure that we're investing smartly in the right areas for those opportunities, but the way that we would manage the business, as you've seen, our operating margin has increased from 16%, the beginning of this year, to 19%, today, and look back at least year, our approach to management will be somewhat similar.

Last year, in 2004, operating margins were around 15%. They grew into the low 20% range, and then VASCO decided to increase its spending on discretionary programs for sales and marketing and the like. But I think that we will continue to do that for the foreseeable future, such that our operating margins, as we go forward, will stay in that 15% to 20% pro-forma range. So, on terms of absolute dollars, we expect operating expenses to grow as we continue to invest it in the business, but we'll manage it in such a way that the operating margins will still be very strong.

Your next question comes from Amy Feng with JMP Securities.

Yes, question for you about revenue linearity, as well as deferred revenues. Could you give us a sense of what kind of linearity you expect to see in the fourth quarter? How does that track with the third quarter? And then, with the sequential decline of about 24%, due to probably some seasonality in the third quarter on deferred revenues, where can we expect deferred revenues to come in, in the fourth quarter?

Amy, I wouldn't recommend that you look at deferred revenue to any great degree. Our model is not like many of the others out there that are selling forward or receiving in orders that are involving software that come off over time. Our deferred revenue are really are deposits that we've received from banks on future orders, and so, our deferred revenue is really a function at any point in time as to what the 12-month PO is and whether or not there was a deposit on that 12-month PO. And generally, we try to get a deposit of 20% to 30% on those POs as they come in but there isn't any linearity to be found in that particular line item because it really is a function of the deals that are being done in that quarter, whether it's a new deal for the next 12 months or not and whether or not there's a deposit received.

Amy, when we normally ask for deposit, it's when we're dealing with a company or a bank that we've not done business with before, or perhaps, we're in a new country where we're not absolutely, 100% confident, and so we're prudent, as Jan would say. In those situations, when we have a new customer and we get a 12-month PO, we typically ask for 30% to 40% down payment or we'll ask for a wire-transfer payment that will prepay the shipment before even being shipped to the customer.

Okay, and then, just one quick question on the competitive ramp. Where do you see ultimately pricing to be on your ASPs, going forward, as well as what kind of competitive displacements did you see, either from RSA, Aladdin, Secure Computing, for example?

Well, I get that question, a lot. In terms of competition, there's such a greenfield out there. We're not expending our energies going after RSA's install base, nor are we going after really anybody else's install base. Now, having said that, we do have this reseller channel, and they call on all kinds of small, medium, and large businesses, and if they find an opportunity where perhaps that competitive customer isn't happy with their solution or their products, those resellers absolutely will sell into a competitive situation. So, we do have competitive wins, but that's not our focus. The market is growing so rapidly, the opportunity is so huge, there's so many low-hanging fruit. That's what we're going after, and that's how we continue to grow. What was the other part of your question, Amy?

ASP.

Oh, ASP. I'll let Cliff handle that.

Hi, and Jan also, feel free to chime in. But, Amy, the ASPs going forward will be a function of the mix of our business in a number of ways. One of the first ways is to consider what is coming from the corporate network access side or large banking deployments. As we talked about in the past, the historical average selling price in corporate network access has been in the mid-30s. The average selling price in the banks, obviously, has been below 7, given that that's our average of the two, combined. But as we go forward, too, and as Jan talks about the vision for the future, we do see ourselves having more authentication programs that are oriented to the software as opposed to hardware units. So over time, that may not be an apples-to-apples comparison on ASP.

So I guess, long story short, there is no simple answer to the question. There will be pressure on ASP on the hardware token side going forward. As we get into larger and larger deployments, bigger and bigger competitive deals, we are very well positioned given our cost of product to be substantially below where we are, today, and still make very strong margins, both gross and operating margins. But that ASP -- the pressure on the ASP will be somewhat mitigated by our growth, which this quarter, was 61% in corporate network access over the prior quarter, and it will also be mitigated to some degree by more and more software authentication methodologies being deployed.

And then, just to make sure that I do understand the differed revenue questions I asked. Basically, if deferred revenues do decline on a sequential basis, as a trend, that means that you're probably receiving more and more moneys from established customers or countries that you have done business with in the past?

Yes, if the deferred revenue, in fact, is declining, quarter to quarter, generally it means that we're not asking for the deposits on the orders we're receiving for the 12-month POs.

Okay. Thank you.

Your next question comes from Edward Ching with Rodman and Renshaw.

Good morning, guys. Ken, how much visibility do you have to see with the VeriSign business in order for you guys to sort of start to include that in your guidance?

Well that's a good question. I think we'd like to see some very large orders coming over the transom so that we see a pattern. I think some of the announcements that you've heard, Bank of America, PayPal, eBay, etc. and the same on our side of the ledger, sometimes when you see big announcements, it takes time to get ready to deploy, and in some cases, you have a fairly quick deployment, and I think HSBC in Hong Kong is a good example of fairly quick deployment. You have other examples where even after a company makes a decision, they might not do anything for six months because they've got to write their interfaces or write their online application before they can start rolling.

Well, can you give us a little bit on how much the business of VeriSign has grown over the last couple of quarters? I mean, percentage-wise, has it started off at 10%? Is it growing 10%, 20% in the last couple of quarters?

The third quarter, Ed, is really the takeoff quarter with VeriSign. I think we mentioned at the last conference call that the first significant, meaningful shipments, would be this quarter so that the percentages aren't particularly relevant, today, because this is the first quarter with anything that significant. But going forward, I don't think we'll talk to specific revenue by customer unless they get to be one of those customers that's greater than 10%. And then, under SEC rules, we're required to tell investors about concentrations of business, so if they become so large that they're in that category, then we'll disclose it according to SEC rules, but otherwise, we prefer not to disclose specific numbers by customer.

Okay, great, and another question is I guess, Ken you mentioned going up if there's a lot of low-hanging fruit out there. What's the strategy, though, at the point in time when that little hanging fruit's gone. Where do you go from there?

Well, as you know, Ed, we sold now 420 banks. There's over 50,000 banks in the world. We've got around 2,100 corporate clients and growing, and there's hundreds of thousands of small and medium businesses in the United States, alone, so I don't know. It's forever, I guess.

Well, we're starting to see some new players out there with a sort of virtual logons when you were on the website and then they popup sort of a virtual keyboard so that you can't get the keystrokes and such.

Yes.

Which seems to be probably the cheaper alternative or more of a low-cost alternative than sort of what is out there existing, so I was just wondering have you guys looked at sort of expanding the portfolio with some of these new technologies coming out?

Sure. The answer is yes. We're always looking for new technologies to fill out our technology or product portfolio, and we do realize that there are areas in our banks, as an example, where we don't have a solution, a very high-end solution, that might be interesting. We might have a lower-end solution that is really, really simple, but it's been our experience that a lot of these simpler solutions, and we've been replacing handless for a long time in Asia and Europe where years ago, I mean years and years ago, banks would think, "Well, let's have something safer than a fixed password, so let's pass out a printed list of random passwords that we'll send to each user, and every time they sign on, they'll use the next password sequentially on the list". Over time, those tended to be troublesome in terms of support, were not really what they were looking for. So, even if some of these simpler solutions are installed for the very low-end retail customers or consumers, I think there's always an upgrade possibility in the future.

Great. Thanks, guys. Good quarter.

Thanks, Ed.

Your next question comes from Horacio Zambrano with Wedbush Morton Securities.

Thank you. Congratulations, guys.

Thanks, Horacio.

I'm looking at the geographic mix. I think there's some interesting stuff going on there. Can you comment on the -- it looks like Q3 of last year, the U.S. sort of had a spike up in revenue. It looks like it's doing that, this year, as well. Is that sort of -- last year, it also went down in Q4. What can we expect, going forward, here? And is this just a reflection of your investments in the U.S.? And then, Asia, also, went up significantly. Can you talk about what's helping drive that?

Yes. We've said, in the past, that we were investing our sales and marketing moneys in the U.S. and in Asia and that we expected that Asia and the U.S., as a percentage growth, would be higher than Europe because it's kind of an untapped market opportunity. So, what's happening is something that we expected and we've invested in. As far as projecting further for the U.S. or for Asia, we'd prefer not doing that other than just making that general statement that the markets in Asia are huge. This market, here in North America, is huge and relatively untapped, and we'll continue to invest sales and marketing dollars to grow those markets more rapidly than Europe.

Horacio, I would add that you will see some variability in terms of the numbers from each of those markets, quarter to quarter, because the U.S. market and the Asia markets, have been small, historically. And therefore, any particular large order will skew the percentage in that given quarter. But as the U.S. gains momentum, and as I said in my prepared remarks, we had substantial growth in all of our geographic regions, both for the quarter and year-to-date, over the prior year. So to me, that tells us that we're making progress expanding that customer base in each of those, and that will start to level out some of that variability because the lack of size and substance in the past, but I think it serves us well as we go forward in terms of nwhat the future holds, as Ken said.

Okay, and then, last question. I guess with respect to your banks, in talking to them have you noted whether they would -- banks that you've already captured that may be rolling out one-time password tokens -- would they also issue EMV Smart Card readers, maybe for home use, to the same consumers for having a double effect on captured banks, or do you think it's going to be more like the banks you captured will make a choice and go with you for one or the other, going forward?

Jan, why don't you answer that question? I have an opinion but I'd like to hear yours.

First of all, as I've mentioned in my expose, as an authentication company, we are doing or we have a vision of products in all kinds of technologies, being the passwords, the one-time passwords, the certificate, and the biometrics. Now, what is our strength at VASCO, if you're talking about banks our strength is that our total cost of ownership is probably the lowest in the market. And therefore, that is the reason why we are making two new banks a week.

Now to answer more directly to your question is one of the propositions that you're making to banks is that they can start with one of our authentication products, basically software, maybe a Go 3, maybe a 250, 260, whatever. And if they are ready, they can smoothly go to EMV type of technology. So, we are not offering either tokens or either readers or either that. No, we are really, truly an authentication company where customers see us much more as a partner than a vendor of products and next year they're going to do another RFP to see what the market is. No they see as a partner. So, it depends on the countries, depends on the strategy of the banks, but with our proposition on the market, they can smoothly go from one technology to another one.

Okay. Thank you.

Your next question comes from Joe Maxa with Dougherty and Company.

Good morning.

Hi, Joe.

Hi. Just looking at the geographic revenue, and I know Cliff had indicated the lumpiness potential in some of these regions, it looks like we might be seeing that in Asia, now I would expect that a majority of that revenue was from HSBC and you might see that for a quarter or two, and therefore, you may see that drop off unless you can replace it?

I think given the information within the market about HSBC this quarter, it is apparent that they are a significant customer in that region, today. I think as you look forward, we see a significant opportunity yet to be tapped. With Asia being a very large region, when you look at some of the southern Asia part of the region, penetration's been pretty strong. When you start to look at middle and north and China and those regions, we still see very, very large opportunities there. So it's a market that even with HSBC in our fold today, we think there's substantial growth opportunities beyond that. So we'll be certainly looking to add new customers and continued growth in that region.

Okay, and then, a question to follow up on that FDIC letter. Sounds like you're getting a lot of inquiries related to that. Are these banks? Are they talking about piloting, or what are they asking you at this point?

Jan, why don't you answer that question?

Sorry. The questions you're asking is about our products, is about the piloting, is about the regulation of the FDIC? It's a mix of questions, and yes.

Would you expect when VeriSign had a question similar to this, they expect to see maybe a number of pilots in maybe the first half of next year with deployments in the second half. Is that how you would look at this opportunity, as well?

Well if you look at what they are saying in that letter, they're saying they would like to see strong authentication at the end of next year. That means that you need to pilot during the first half of the year.

Okay. Thank you.

Your next question comes Fred Ziegel (ph) with Soleil.

Hi guys.

Hi, Fred.

Let me see. What interest, if any, are you guys seeing for corporate desktop strong authentication replacing the Windows logon screen?

Jan, why don't you answer that question, too?

I'm sorry. I didn't get the question.

The question was -- are we seeing strong interest in a Windows logon strong authentication?

Yes. That is in our CNA market. We see a strong interest in everything that has to do with the network security. We started, in fact, two and a half years ago, with our first products which were oriented for the remote access people. People who were traveling. More and more were doing business, also, purely on the network, and the Windows logon is certainly a great interest for that, yes.

So, there's been within your corporate revenues, there's been somewhat of a shift from remote to the desktop?

That's right.

Okay.

Not a replacement, but just adding that, because we're adding more and more new products to the network security, in general.

Okay, and I think Cliff talked a little bit about going forward, maybe some more software versus hardware-oriented authentication. Are you referring to what? Wireless? What are you talking about when you talked about software only?

Well, Fred, you know that we've had in our arsenal, for some time, we've had a software Digipass, right? And you can put that software Digipass on a PC and that Digipass makes that PC a Digipass, just like -- not just portable. A graphic shows up on the screen and operates like a Digipass. We have software that you can download to a PDA or cell phone. We have a virtual Digipass where you can store the equivalent of a Digipass on the user's record on the host computer, so when the user signs on, the host can generate a one-time password and send it, one time, to their cell phone. The number pops up on the screen of the cell phone and that's what the user uses wherever they are in the world for their one-time password giving access to the online application.

Do you know, off the top of your head, the mix between hardware and software-based authentication?

Today, Fred, software is still a very small component.

Okay.

There hasn't been any material change in what we've disclosed or discussed in the past.

Okay. Thanks.

Thanks, Fred.

Your next question comes from Jeff Osher with Harvey Opportunity (ph).

Hey, guys. Nice quarter. To Jonathan's question, on the ASP and then the cost-per-token front, I guess if the EMV readers carry similar gross margins and the mix was shifted towards EMV readers, wouldn't that suggest ASPs would've risen, as well, in line, which are cost per token, sequentially?

I'm not sure I understand the question, Jeff. You're saying --

Well, if your COGS per token went down to $2.68 from $2.85. I know that's a bit simplistic to just divide your COGS by number of tokens, but if we look at it like that as far as, literally, your COGS divided by your tokens, wouldn't the ASP have had a -- if your COGS actually rose from $2.68 to $2.85, based on a mixed shift of EMV readers that carry the same margins with higher ASPs, wouldn't your ASPs have seen a similar increase?

Our strategy is not to charge a significant differential in price, necessarily, depending on the product. Certainly if somebody's looking at a sophisticated reader versus a simple Go 3, that could be part of the discussion on what the final selling price is. But once you get into the very large volumes, you'll see some minor shifts in the COGS as it goes up, based on the specific mix of products, but you won't necessarily see a direct relationship on the selling price side.

Our philosophy really is given that the infrastructure costs are not incrementally different for those larger orders, we could be happy with a lower margin because the majority of that margin is going to fall through to the operating income line. So, we're not managing it, specifically, within gross margin and at some point, I expect that we'll probably start to drop that from our guidance, because the true guidance that we're driven by is the revenue growth and maintaining those operating margins as opposed to the gross margins.

Okay, I'm going to circle up with you quick, offline. I think I'm confused, somehow, of why those two would be dislocated. You guys have done a fantastic job leveraging your OpEx. Is that $900,000 of R&D? Is that going to be sufficient to continue to stay ahead of the ever-changing curve of the authentication market? That seems like a number, just given all the success you guys have had, that you may need to ramp to stay in the same competitive environment with the RSAs of the world.

Yes, I'd say that our R&D budget has been more than sufficient. If you look at our PowerPoint presentation, you will see one screen that shows a page full of different Digipass models, and built into those Digipass models are multiple functions, many of which are still waiting for a market to materialize. As an example, we've had host authentication for a number of years where the DigiPass can be programmed, so that once a user is authenticated by the host, the user can actually authenticate the host, in reverse, and make sure that they're talking with the right host website.

As we continue to look at growing our portfolio, I personally think that we will continue to look at a make versus buy. If we can buy a company that has technology and has expertise, that gets us into the game faster, that's what we will do. As evidenced or demonstrated by our acquisition of AOS-Hagenuk that we announced in February, earlier this year. That was a buy decision instead of a make decision. We'll continue to consider that, going forward.

Okay. Great, guys. Again, congratulations. What is headcount in R&D, Ken?

It was approximately 27.

Okay, great. Thanks, guys.

Thank you.

Your next question comes from J. Hingorani with Thompson Davis.

Gentlemen, congratulations.

Thank you, J.

Pretty much all of my questions have been answered. I just wanted to ask a quick question of Cliff. All the statistics on the geographic breakdown and the market segment, am I going to have to wait for the Q or -- couldn't write fast enough as you were talking.

I'd be happy to give those to you, again, offline.

Offline, great. And then, a real quick question, Ken, just to kind of come back to the whole EMV VeriSign and now the contending U.S. market, what could you look forward to in terms of just things you've been discussing or seeing -- kind of broad points. Because at the beginning of the year, we talked about VeriSign. We're very excited about it. We all know EMV was just a matter of how things are going to shape up. We've got the MasterCard chip authentication protocol, and we're still waiting for that significant EMV deal, so just a little color there.

Well, we're still optimistic. We haven't waned in our optimism at all. As I said, earlier, in response to another question, we're very happy with the VeriSign relationship. We've got a good dialogue communication going on an ongoing basis. We're aware of their activities, generally speaking, and they're doing the right things to grow their business, their services business, and so, we're very happy there. When that will be a 10% or more, there's nothing I can tell you. As Cliff had mentioned before, that's when we would report it, as they became a 10% customer or higher.

As far as EMV is concerned, again, I don't know what else to say other than what I have said. We're very enthusiastic about that. All the dynamics that have to get into place are getting into place that I mentioned before. The shop owners are upgrading their equipment, the banks are starting to distribute the EMV cards. You know, everything's lined up for success in the future, but in the meantime, we're not going to bet our company on either one of those. We're out building our business on a very aggressive organic basis, and we're doing very well with that. And so, we look at the other opportunities as a tremendous upside.

Any idea what the 300 million Smart Card shipments translate to in terms of card reader potential or market potential?

I do not.

Okay, and you also mentioned there was a number of -- on the VeriSign side, in terms of a number of tokens ordered or shipped?

Yes, we shipped a number of units. I won't tell you how many that is, but we've shipped a number of units in the last three months, and the purpose of those units were to be used as demo tokens and for pilots, and they're being used that way.

And they're direct? Not through distributors?

They're through the VeriSign organization.

Okay, great. One of the bad things about going last is that most of your questions are answered, but I look forward to catching up with you guys, offline. And, Cliff, if you can forward me that information, that'd be great.

Yes, we'll actually file all of the prepared remarks, along with a copy of the press release on Form 8-K, in the next day or two.

Great. Thanks so much, and congratulations, again.

Thank you.

Your next question comes from Brad Lehl (ph) with Jefferies.

Hi, Brad.

Hi guys. How are you?

Good.

Congratulations on another good quarter.

Thank you.

Just a couple things, real quick. I guess I want to go back to the guidance, a little bit, and not to knock the guidance or anything but it just seems very conservative if you have a number of potential catalysts lining up here with VeriSign and EMV and this banking initiative? It just seems to be pretty cautious on the Q4 guidance. Can you just go into maybe why that is, or what you guys are seeing out there on the market?

Yes, it has to do with, I guess, my experience in running businesses. I tend to be very conservative. I like it that way. I'd rather under-promise and over-deliver, and that's the explanation. You can see that if you look at our year-to-date revenue through the third quarter and you add to that the backlog, you can see we're already at the low end of our guidance for the whole year. I just don't want to change the guidance. It's my approach.

Okay, fair enough.

Brad, one of the other things to consider in the equation, a little bit, is since we're announcing or talking about guidance and we're in the third of fourth week of this quarter itself, there's going to be some limits on how quickly we can place orders on manufacturing and get those shipped and delivered. So part of the benefit of our strategy is in getting the 12-month POs to give us the visibility so that we can really schedule manufacturing, schedule production, schedule the shipment and be more of a just-in-time kind of shop in terms of delivery of those products. So if you'd go back through our history, you'll be able to map out some of the differences between what the backlog was and what the final quarter ended up to be. And then, I think the guidance that we've issued is not out of line with what some of those historical trends.

Okay, fair enough. On the banking regulations that were announced, what's the strategy there to attack that market? Is it primarily through VeriSign or do you go at it with a direct sales force? What's your strategy there to attack that market?

We have a direct sales force. We have our sales, marketing, support, business development in our office in Boston, and indeed, we're directed towards the top 50 banks in North America. That's what we're focused on. So you bet, we're very aggressively going after every major bank. In fact, I do believe that somewhere we just announced, we've secured half of the top ten banks as customers in North America, and we expect that we'll continue to work hard to get more business in North America, so although we are very pleased with the relationship with VeriSign. They're offering an outsource on authentication service, we're offering a product that the customer installs, internally, and we're going very aggressively after every bank and every service organization, every banking service organization.

Okay, so it sounds like a two-fold strategy with your direct sales force and also through the channel and then, also through VeriSign?

Absolutely. Correct.

Okay, and then, as we look out on the EMV front for those Smart Card readers, who do you see as being the primary competitors there that you guys are going to go up against in terms of selling those readers?

Well, there have been a few companies that have announced solution. I think Gen Plus, Jinploo (ph) has a solution. There's a small company in France called Xiring (ph). SCS Microsystems is an OEM provider to a number of companies for different types of connected and unconnected Smart Cards. They also have a model that's also EMV compliant. There are not a whole lot of announced vendors out there.

Okay, great. That's all I have. Thanks, guys.

Alright, thank you.

(Operator instructions).

Sorry. Operator, if there are no more questions, we'll take this opportunity to thank everybody for your attention. Thanks for your great questions, and we'll be talking to you in about 90 days. And thanks again to the VASCO group around the world. You're doing a great job and I'm so proud of you, I can't stand it. Bye, everybody.