OneSpan Inc (OSPN) 2006 Q1 法說會逐字稿

Good morning. My name is Eduardo, and I will be your conference facilitator today. At this time I would like to welcome everyone to the first quarter 2006 VASCO Data Security International conference call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, T. Kendall Hunt, founder, chairman and CEO. Sir, you may begin your conference.

Thank you, Eduardo. Good morning, everyone. For those listening in from Europe, good afternoon, and from Asia, good evening. We have continuing good news to discuss with you today. My name is Ken Hunt. I'm the 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 containing words such as believes, anticipates, plans, expects, and similar words is forward-looking and these statements involve risks and uncertainties and are based on current expectations. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to the company's filings with the Securities and Exchange Commission for a discussion of such risks and uncertainties in this regard.

Today we're going to review the results for first quarter 2006. 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 greatly appreciated.

First, I'd like to address for first quarter 2006. It was 13.7 million, an increase of 20% over first quarter 2005 and our strongest first quarter ever. It was also our 13th consecutive positive quarter in terms of operating income and cash flow. But yes, it was down sequentially from the 17.5 million in fourth quarter 2005. In fact, we had an outstanding fourth quarter in which we exceeded the top end of our 2005 revenue guidance of 65 to 75% and growth over 2004. Our actual results were 83% revenue growth over 2004 or approximately $2 million in revenue over the high end of our revenue guidance for the year.

Let me remind you that in February 2003 in that conference call we announced our Just in Time delivery program. This program was meant to assure that in no way would the company do anything to attempt to pull revenue into a current quarter or push revenue into a following quarter. In other words, we do not attempt to manage our quarterly revenue results.

Of course, this also means that we cannot promise linear growth quarter to quarter. The facts are that in fourth quarter 2005 we were able to accommodate some customers' urgent request to turn around their orders of short notice with shipments in December 2005. Yes, we did so. That resulted in an extraordinary December and fourth quarter 2005, but it impacted results for first quarter 2006.

We considered this fact in the guidance we issued on February 21st. Instead of waiting until the end of our comments today, I wish to reaffirm our revenue guidance for 2006, which is 35 to 45% revenue growth over 2005. Our backlog or firm business for Q2 as of today is 16 million. Backlog is defined as orders already shipped between April 1st, 2006 and today, plus firm purchase orders scheduled to ship before June 30, 2006. The results of Q1 2006 and the strong backlog announced today confirm once again that our strategies are working worldwide.

New accounts continued to grow during the first quarter. During the quarter we sold an additional 341 new accounts, including 34 new banks and 307 new corporate access customers. Comparatively for all of 2005, we produced 821 new accounts, including 89 banks and 732 corporate customers. We now have over 470 banks and over 2,600 network access accounts including corporations, federal, state and local governments as customers, located in over 100 countries around the world. Almost all of these corporate network access new accounts and some of the new bank customers were generated through our distributor and reseller partners. Program to date, we've signed 45 distributors who in turn service a network of over 1,500 resellers.

VASCO's sustainable, repeatable sales model. For 13 quarters now I've sung the same song, namely that VASCO's developed a sustainable, repeatable sales model. Nothing has changed. In fact, the 34 new banks closed in Q1 is a record for a quarter. These and other bank customers launch multiyear projects that are supported by our strong authentication products. These projects are directed towards large corporate and consumer audiences and are rolled out over two to four years. This has created the layering or stacking effect that I often speak about and it's driving our top line revenue and guidance.

We introduced our All-Terrain strategy in the first quarter of 2006 to further penetrate and protect our existing and growing customer base. We will build on our strategy of being the high volume, high quality, low cost producer by expanding our flexible platform to support a growing array of authentication products. Some of those products, like our Digipass for Web, which we announced this quarter, will allow customers to implement a strong authentication solution as a complement to or as an alternative to deploying hardware authentication devices.

Our platform, which allows any of our forms of authentication to be used simultaneously, will allow customers to deploy an appropriate cost effective method of authentication for each user of their application by selecting the appropriate Digipass product, including Digipass for Web. We believe that Digipass for Web will provide a seamless noninvasive way to authenticate users that goes well beyond today's fraud detection products. With the addition of Digipass for Web, VASCO will be able to serve and authenticate every audience that needs stronger authentication from people buying a book online once a year to CFOs and companies transacting millions of dollars on a daily basis.

We will also be looking to acquire companies that can expand our authentication products offerings and product development capabilities. We sold and shipped approximately 1.8 million Digipass units during Q1 2006, once again demonstrating the effectiveness of our strategies, focus and execution. Program to date, approximately 25 million Digipass units have been sold and shipped, including the units sold by AOS-Hagenuk prior to our acquisition. We expect that our unit sales will continue to accelerate as we develop new markets and identify new audiences for the company's products.

As everyone is aware now, a very strong banking industry directive was issued on October 12th last year here in the United States by the FFIEC, an umbrella group of regulators that includes the FDIC. The FDIC has distributed guidance to all its supervised banks, that's commercial and savings and loans. This guidance by the FDIC has definitely stirred up the market. Every bank in the United States, either directly or through its third party service provider, like Fiserv/ITI, is investigating how to interpret and meet this guidance.

VASCO's first quarter announcement of our new strategy, Full Option All-Terrain Security, is an acknowledgement that the banking market will adopt a wide range of security solutions. With our broader discrete layers of security, we are prepared to meet security requirements of the banks at the level they believe is appropriate.

At this time I'd like to introduce Jan Valcke, VASCO's president and chief operating officer. Jan, congratulations to you and your team on another fine quarter.

Thank you, Ken. Our 13th consecutive, profitable quarter proves once again that our business model works. As a Full Option All-Terrain authentication company, VASCO will prove that it will be able to do even better.

With regards to the market, the first quarter of 2006 has given the proof that VASCO becomes quickly stronger in vertical markets, in and beyond the financial sector. Ken already mentioned the record number of new customers won by VASCO last quarter, both in the banking and corporate networking access markets. Orders received in the CNA market during the first quarter include local governments, hospitals, schools, oil companies, sports organizations, beer breweries, companies active in the manufacturing industry, and many others. The majority of these companies plan to start using Digipass not only for CNA, but also for the business-to-business application.

VASCO has become a true All-Terrain authentication company, which benefits our profit margins and worldwide growth. We keep penetrating new markets and strengthening existing markets with our own sales and marketing events and by attending trade shows and partner events worldwide. If you have a quick look at the events section on VASCO's website, you will see that we are doing this well. As an example, VASCO will organize two banking summits in the month of May. On May 11th VASCO will present before an audience of Turkish banks in Istanbul. On May 30, VASCO will conquer Moscow. I will talk about our marketing efforts in the U.S. later on.

Q1 2006 was of strategic importance for VASCO's product strategy. We already informed you about the adopted product strategy during last call. I am pleased to be able to inform you that VASCO's conversion into the Full Option authentication company is proceeding as planned. Our new client authentication products are on track. The development of Digipass for Web goes as planned and we see a lot of worldwide interest n this product, both for banking and for the business-to-business market as a standalone solution or in conjunction with other Digipass models. We are convinced that Digipass for Web will be an important asset to VASCO worldwide and in the United States.

Digipass 300 Comfort Voice, the Digipass for the blind, is doing extremely well with positive effects on VASCO's profit margin and corporate image. The same can be said for VASCO's end user products in the password, USB and PKI environments. VASCO will keep reinforcing its products offering and R&D capacities both by our own developments and by acquisition of interesting companies. This is a duty of a market leader.

VASCO's people are without any doubt the company's strongest asset. VASCO grows quickly, so do the people, both in quantity and in quality. It is a pleasure to state that the loyal, longstanding employees are evolving very positively within VASCO's new leadership approach, while we are reinforced with enthusiastic competent newcomers on a weekly base. Here, too, we expect to gain new people from acquisitions and our own recruitment.

To invest in growth the company must be profitable, at least that is VASCO's approach. VASCO can use its own cash to invest in people, markets and products. We expect to be able to tell you more about this in the short to mid long-term.

Now I would like to add some remarks about fraud schemes, so-called solutions and VASCO's strategy and products. Beside the classic well-known fraud techniques, there are currently four major fraud schemes, phishing, pharming, man-in-the-middle attacks, and Trojan horses.

Everyone knows what phishing is and that the education of the end user can already have positive results. Phishing is fought in different ways, like fraud detection services, which are after the fact and never solve the problem 100%. VASCO's answer to the problem is our well-known Digipass that has many different authentication methods and electronic signatures capabilities. Phishing is a low-budget fraud scheme with low technical requirements.

Pharming is a bit more complex than phishing. Again, fraud detection services are after the fact and never solve the problem for 100%. With Digipass with its many authentication methods and electronic signatures, pharming is not feasible. In the hype of the last months caused by certain companies we may not forget that man-in-the-middle attacks are booming. Fraud detection and the typical software authentication technologies are insufficient. The solution against man-in-the-middle attacks are Digipass electronic signatures and host authentication.

The Trojan horses. The Trojan horses are in a very different league. Technically they are of a very high level and they are sneaky. The end user will not know that something is wrong, so education is simply not possible. Trojans have emerged in some countries but will be widespread in the next months. Of course, as with the case with phishing, U.S. banks will be a main target. Classic fraud detection systems are useless against Trojans. VASCO's solution exists since 15 years. VASCO's Digipass and VACMAN products deliver harnessed anti-Trojan capabilities, certainly with the proven and widely used electronic signature technology.

Of course, VASCO's products are only a part of the solution for a bank. VASCO will help banks to understand and to solve that problem in a total concept. VASCO is working to set up a service platform on our well-known VASCO Trust Forum and together with some renowned partners and bankers from more than 100 countries. A platform that can solve the Trojan danger, automatically solves phishing and pharming schemes. Don't forget that VASCO, the number one in banking authentication, has gathered knowledge, competence and experience that will be available on VASCO's trusted platform.

Our business strategy. In every market we aim first at the commercial banking because the need of security is the highest. This mean that VACMAN Controller, VASCO's full-option service side product, is integrated into the bank's infrastructure. Full option means that all authentication technologies can be activated on a simple request. Every bank that is using Digipass for commercial banking is ready to deploy Digipass for consumer banking. We may not forget that security for online banking is only a first step into the most profitable business for a bank, being e-commerce. It is obvious that VASCO is the leader in that market.

I would like to repeat VASCO's solution one more specific -- and more specific, sorry, our solution for the U.S. market. Our core product is VACMAN Controller that combines all authentication technologies on one unique platform. VACMAN Controller can be integrated in the bank's infrastructure, is already integrated in all bank software banking platform that we know, and is an integration phase in our own Identikey Server.

On the client security side we offer today more than 40 Digipass products. Some are designed for commercial banking and are by principle, hardware based. Others are for consumer banking and are soft and/or hardware based. On this consumer banking side we offer Digipass products that can be put on a lot of existing platforms, such as mobile telephones, PDAs, SIM cards, smart cards, USBs, laptops, PCs, et cetera, et cetera. On the other hand, we have launched our Digipass for Web, which has a complete range of Digipass functionalities and is completely transparent for the end user.

The result of our strategy is that over 470 banks are using one or more of those Digipass products for business banking and most of them also for the consumer market. Between five to 10 percent of these banks are US banks, including five of the top 10 financial institutions in the United States of America. All of these banks have installed VACMAN Controller.

On the sales and marketing side we see that the request for information to use our products in consumer banking are increasing everyday. Our sales people are providing the needed information face to face to numerous bankers in US. More over we will organize structured marketing actions including web analysis, road shows, summits, and forums.

We are convinced VASCO will succeed in winning US customers for retail banking too. Regardless of fact if the client authentication product will be a hard or software Digipass. With our software Digipass range, VASCO is well armed to win the software authentication battle with in-house developed products. We see a lot of traction for these products and recently we won important deals with software Digipass both in the Americas and Europe. This is only the beginning. Thank you.

Thank you Jan, thank you very much. At this time I'd like to turn the call over to Cliff Bown, our Chief Financial Officer, Cliff.

Thanks Ken, and hello to everyone. As noted earlier by Ken, revenues in the first quarter 2006 were $13.7 million an increase of $2.2 million or 20% over the first quarter of 2005. Compared to 2005 the increase in revenue for the first quarter reflected significant increases from both the banking and corporate network access markets. Revenues in the first quarter 2006 from banking and corporate network access markets increased 15% and 46%, respectively. It should also be noted that the comparison of revenues in Q1 2006 to 2005 was negatively impacted by the strong US dollar in 2006. We estimate that revenues would have been $794,000 or 6% higher had the exchange rate in the first quarter 2006 been the same as in the first quarter 2005.

The distribution of our revenue in the first quarter 2006 between our two primary markets was approximately 82% from banking and 18% from corporate network access. In the first quarter 2005 approximately 85% came from banking and 15% from corporate network access. The geographic distribution of our revenue in the first quarter 2006 was approximately 70% from Europe, 6% from the United States, 9% from Asia, and the remaining 15% from other countries. From the first quarter 2005, 87% of the revenue was from Europe, 7% was from the US and 6% was from other countries. It should be noted that revenue from each of the primary geographic areas, except Europe, increased in the first quarter 2006 as compared to the first quarter 2005.

As Ken noted earlier we believe the results from the first quarter 2006, especially in Europe, were negatively impacted by the higher demand from customers in the forth quarter of 2005. Based on the strong order intake experienced in the first quarter of 2006 we expect the results in subsequent quarters will increase over the results reported in 2005.

Gross profit as a percentage in the first quarter of 2006 was approximately 69% in comparison to 63% in the first quarter of 2005. The increase of gross profit as a percentage in 2006 compared to 2005 reflects both an increase in the average selling price and a decrease in the average cost of product produced. The higher average sale price reflects a change in the mix of the business between the banking and corporate network access markets. As mentioned earlier revenue from our corporate network access market, which generally has margins that are 25 to 30 percentage points higher than the banking market, was 18% of our total revenue in Q1 2006 compared to 15% in 2005.

VASCO shipped approximately 1.8 million Digipass units in the first quarter of 2006, which is 16% greater than the first quarter 2005. The average selling price for Digipass, including related software, was approximately $7.81in the first quarter of 2006 compared to $7.60 in the first quarter 2005. The average cost per Digipass unit sold in the first quarter 2006 declined 14% from the first quarter of 2005. The decline in the average cost per unit reflects better pricing obtained from manufacturers as a result of our higher unit volumes and a change in mix where our lower cost units are a larger percentage of total units sold.

Operating expenses for the first quarter of 2006 were $6.6 million an increase of $1.3 million or 24% from the first quarter of 2005. Operating expenses for the first quarter included 282,000 related to stock based incentive plans. It should be noted that the comparison of operating expenses in Q1 2006 to Q1 2005 was positively impacted by the stronger US dollar in 2006. We estimate that expenses would have been $519,000 or 8% higher had the exchange rates in the first quarter 2006 been the same as the first quarter 2005.

Operating expenses increased $640,000 or 19% in sales and marketing, $133,000 or 16% in research and development and $560,000 or 57% in general administrative when compared to the first quarter of 2005. The majority of the increase in sales and marketing were related to the company's increased investment in sales staff and marketing programs. The increase in general administrative categories were primarily related to stock based incentive program, increased compensation with the most significant portion of the compensation expense being related to increased head count, increased insurance cost and increased professional service cost.

Operating income for the first quarter of 2006 was $2.9 million and increase of $1 million or 51% from the $1.9 million reported for the first quarter of 2005. And operating income as a percentage of revenue or operating margin was 21.2% for the first quarter of 2006 and is 4.4 percentage points higher than the first quarter 2005. The increase in operating margin is attributable to the higher gross margin, partially off set by an increase in operating expense as a percentage of revenue.

Other income expense was expense of $27,000 for the first quarter of 2006 compared to income of $216,000 for the first quarter of 2005. The decrease in other income expense was primarily attributable to differences in exchanges, gains and losses. As discussed in previous conference calls we initiated a program in the second quarter of 2005 to hedge the income statement exposure to transaction gains and losses resulting from changes in currency rates.

The company reported income tax expense of $974,000 for the first quarter of 2006 and $758,000 for the first quarter of 2005. The effective tax rate was 33% for the first quarter of 2006 and 35% for the first quarter of 2005. The effective tax rate for both periods reflect our estimate of the full year tax rate at the end of each respective period. The rate in 2006 is lower than 2005 as our estimate of full year tax rate in 2006 reflects increased earnings in countries in which we have tax loss carry forwards. Those loss carry forwards have been fully reserved for reporting purposes in prior years. Earnings before interest, taxes and depreciation, EBITDA, or operating cash flow if you will from continuing operations was $3.1 million from the first quarter of 2006, 29% higher than the $2.4 million reported from the first quarter of 2005.

The make up of our work force as of March 31, 2006 was 131 people worldwide, with 81 in sales and marketing and customer support, 32 in research and development and 18 in general administrative. The average head count for the first quarter of 2006 was 28 persons or 27% higher than the average head count for the first quarter of 2005.

I'd now like to make a few comments on the balance sheet. Our net cash balance and working capital balances increased from the prior quarter as a result of the company's strong operating performance. During the first quarter of 2006 our net cash balance which is defined as total cash less bank borrowings increased by $500,000 or 4% to $14.5 million from December 31, 2005.

Our working capital increased $2.6 million or 16% to $18.9 million from $16.3 million at December 31, 2005. Bank borrowings noted on the balance sheet of $776,000 were borrowed under the line of credit and related solely to our hedging program. There was no impact on working capital from the hedging program as additional cash was off set by short term debt.

During the quarter our day sales outstanding and receivable increased from 63 days at December 31, 2005 to 76 days at the end of the first quarter. The increase in DSO was primarily related to temporary payment processing issues at a limited number of our customers. We do not believe that the increase in DSO will result in higher write-offs of collectable accounts in future quarters. The company continues to have no term debt. And the company has approximately $2.7 million as of March 31, 2006, available for additional borrowings under its line of credit that is secured by receivables. Now I would like to turn the call back to Ken.

Thank you, Cliff. First I'd like to comment of order backlog for Q2 2006. AS of this date we have firm orders with shipments scheduled for the second quarter of approximately $16 million. Any new orders received before quarters end and shipped during the quarter will be additive to this number. This backlog shows the strength of our order flow as it is 48% higher than the backlog going into Q2 2005. In additional the backlog is 30% higher than the $12.3 million in revenues reported for Q2 2005.

Today we are reaffirming guidance for full year 2006. As in the past we only comment on annual numbers, not quarterly numbers. We estimate that our full year revenue will grow 35 to 45 percent in 2006 over 2005. We expect that full year gross margins will be in the range of 58 to 63 percent of revenue. Finally we are projecting that operating income will be in the range of 13 to 18 percent of revenue in a US GAAP basis. Excluding amortization costs and the non cash cost associated with the company's equity and long term incentive compensation plans we expect that operating income will be between 15% and 20% on a Pro-forma basis.

In summary we are very pleased with our results for Q1 2006. And look forward to a strong performance for the remainder of 2006. And as always you can rely on VASCO's people to do their very best. This concludes our presentation today and we'll now open the call for questions. As I mentioned earlier as a courtesy to others on the call I'd appreciate if you'd limit your questions to an initial question plus a follow up. If you have additional questions please reenter the queue after the answers to your initial questions have been given. Operator?

Thank you.

[OPERATOR INSTRUCTIONS]

Thank you our first question is coming from Ranjini Chandirakanthan from Think Equity. Please go ahead.

Good morning. I just wanted to know if I could get some additional cover, color excuse me on Digipass for the web? You mentioned it is in both the Americas and Europe, I'm curious if it's in pilots or actually in use?

Jan would you address that please.

Most of them are in pilots, but it's firm orders. But it's in the pilot stage.

There are firm orders for use or firm orders for pilots?

I'm sorry?

Are the firm orders for a pilot or for actual use?

I can not comment on that.

Okay, great. And when was the product released?

The product will finally be released somewhere in the second quarter.

In the second quarter. And will it be available to channels as well or is it something just direct?

It will be available also to channels.

Thank you, so much.

Thank you, our next question is coming from Jonathan Ruykhaver with Raymond James. Please go ahead.

Hey, Ken.

Hi Jonathan.

Hey, RSA has commented that they feel risk based authentication and other software alternatives seem to be generating higher interest levels from banks in North America, United Kingdom relative to tokens. But outside those territories tokens still seem to be the preferred form factor for authentication. Would you agree with that comment?

Well I guess we have our own comment. First of all risk based fraud detection is not authentication. It's finding problems after they have occurred. And our solutions whether they're token based or software based or Digipass for web, they prevent them from happening. So it's a totally different product and there seems to be some confusion in the market about that. Jan do you have anything else to say about that?

No, not really. It's a different market.

Okay, but just I think getting back to token adoption in terms of what we might see going forward beyond 2006, what is your sense for the market in North America?

We'll I think it's very strong as Jan pointed out we have our Vacman Controller installed in, I won't give the precise names, but in well over 30 US banks. And that's a platform on which they can order and install a variety of VASCO's strong authentication products and solutions. So we're very optimistic. Of course because the FDIC guidance, I mentioned in my prepared comments they've really stirred up the market. It's an order of magnitude in terms of the numbers of banks that are interested in doing something compared to what they were before the announcement in October of last year. So just the shear volume of interest has gone up by many many factors. Most of the interest right now seems to be in RFIs, where they're investigating different solutions. So we're in the education mode right now.

Okay, what would you think those deals actually start to get deployed? Later this year?

Some later this year and strongly into 2007.

Okay, I guess just a quick quick question related to the backlog. Can you give any color as it relates to what in that in terms of international verses domestic? And then does it reflect major new customer deployments or is it mostly follow on orders from customers you've been doing business a long time? Or not a long time say the last year or two.

I don't care to comment on the mix, international verses the US. But the backlog we have is our traditional backlog of banks. When we define our backlog, it's what has already shipped and we've invoiced from the first of the quarter April 1 through the 27th, plus firm PO's from our banks. A lot of our incremental business between today and the end of the quarter will be from the channel. You saw the very very strong results we had in the first quarter from the channel.

But just in terms of the mix should we expect to shift back more towards corporate from banking?

Not necessarily. No.

Okay, so we shouldn't necessarily assume gross margins decline either then? If you've got a healthy mix of corporate.

No as I think as you look at our full year numbers that the guidance we've given is for our margins to come down to the 58 to 63 percent. So over the course of the second, third and forth quarters the mix will be more heavily weighted back towards banks.

Okay.

And the banks with larger quantities per order.

Okay, good that's just what I was trying to get some color on. Okay, thanks guys.

You welcome.

Thank you.

Our next question is coming from [Alan Winefield] of [Colson] Brothers. Please go ahead.

Hi Alan.

Hi, do you expect then if the Vacman Controllers are in 30 US banks that you could possibly have maybe half them as customers by the end of the year?

Well, they are all customers now Alan. They are all customers and that's our point. Historically around the world when we've gone into a bank we've typically gone in with the cash management or treasury management function calling on the EVP of the bank that controls the business banking segment. And then we make our in roads there, we install our platform, our Vacman Controller. And then once that project is up and running we go over and speak to the EVP of retail or consumer banking and make that sale.

There were some exceptions last year world wide and there were some banks that actually reversed and had their first project being retail or consumer. But again we went into that bank we installed Vacman controller and our expectation is that later we'll go from that retail application over to the business application. So the point that Jan was making was once we get into a bank whether it was on the business side or the retail side and install our platform we're good to go.

As HSBC North America.

I'm sorry we have some noise in the background, you'll have to speak up Alan I can barely hear you.

HSBC North America is the tenth largest bank in North America and you're already in HSBC around the world.

Well HSBC is one of our clients, yes. And as of now we've not announced anything in the United States. It's our practice not to comment on banks' locations unless we've issued a press release. We've issued press releases on our relationship with HSBC elsewhere like Brazil, Hong Kong and elsewhere but as far as the United States I have no comment.

Okay, thanks a lot.

Thanks Alan.

Thank you. Our next question is coming from Andrey Glukhov of Brean Murray. Please go ahead.

Yes, thank you very much. Just to follow up on Alan's question. Can maybe, can you address how easy it is for you to get the consumer banking side of a bank once you have an internal reference from the corporate side.

Oh, it makes it tremendously more productive. And that's been our strategy for many years, is to make an entry point somewhere in a bank. In fact, I've said this many times, our strategy globally is to make an entry in a global bank somewhere in the world, anywhere in the world, whether that's for the business side or the consumer side. A good example of that success was HSBC Brazil, where we competed against everybody on the planet in a competitive request for a proposal in Sao Paulo, Brazil. We won that deal, and then we went to corporate headquarters and negotiated a worldwide enterprise pricing agreement. And then we went from there, introduced by corporate, to their sites around the world. And we've made some announcements already about our success in HSBC in different part of the world.

So, yes. Does it make it easier for us once we're in a bank and we've got internal references and the bank already knows that our platform is installed and it's an easy segue to add their consumer application? You bet it. It makes it, not fall off the back of the truck easy, but it certainly helps us.

Ah, that's helpful. And then, Jan with this [forward] momentum in the corporate network [inaudible] business, can you speak to any further expansion of the distribution steps that you are undertaking?

I'm sorry; can someone maybe repeat the question? My line is very bad, here.

Yes. So, basically, the corporate network [access rating] is growing very strongly. Can you talk about any additional expansion of the distribution that you are undertaking?

Yes. Thank you. First of all, our product line has changed in the last months. That means that the products that we have today, a corporate customer can handle much more client or employee security than it [was] in the past. That means that they have a more mature, stronger software, and that we have a stronger [record] in business in that channel. That's the first thing.

The second thing, like always, is when you start in such a market, you start with the distributors you get. And more and more, we are getting stronger and stronger distributors to distribute our products to their resellers. We are setting up programs with our resellers through the distributor channel. We are setting up seminars so that a CNA customer, a customer who is using DIGIPASS for the network superiority, that those customers can see that those DIGIPASS can also be used for business to business applications. And that is, relatively speaking, a large share installation.

Thank you.

Thank you. Our next question is coming from Jay Hingorani of Thompson Davis. Please go ahead.

Hi Ken, Hi Cliff, Hi Jan.

Hi, Jay.

Congratulations. Just had a quick question on the 30 banks in the U.S. Can you give us, again, from I think the first question, kind of an idea of how many are in pilot, how many in production? Rough numbers, just an approximate feel?

Yes. Most of them now are in production.

Most of them are in production in the U.S.?

Yes.

Okay. Also, going back to another question that was asked, how many of those 30 are maybe the top 10 banks in the U.S.? Again, just rough numbers, not specifics.

About five of the top 10.

Five of the top 10 U.S. banks are among the 30 banks that you serve in the U.S. right now?

The 30-plus banks.

30-plus banks. Certainly. And then one more time - I'd just like to - I think there was some- I think it was Jan that was talking about the all-terrain aspect of the product. Can you just tell us, just one more time, real quick, about how you can serve basically any implementation that comes out of this FFIEC/FDIC eventual possible rule making or mandate?

[Inaudible]

My line is so bad. Maybe Ken can you repeat the question?

The question was with our all-terrain strategy, how is it that we feel that we can serve the audiences across the board as a result of the FDIC guidance. In other words, the FDIC guidance is broad, it's sweeping, it's not that well-defined, and if you look into a bank you've got the corporate clients, and those corporate clients are at different levels, you've got retail and consumer clients, they are at different levels. And the point is we have, as Jan mentioned, over 40 models of our DIGIPASS, either software or hardware, that all run on the VACMAN controller and can be chosen by model for the specific audience of the bank.

So if you have a high end customer that does PKI, we've got a hybrid token that will do PKI plus one time passwords. We have card readers that will support PKI, that will support EMV. We have multiple models of the DIGIPASS token, from the single button DIGIPASS Go 3, which is response only, and then another mode can actually authenticate the host in the very simplest models that we have. And then we have software that will run on mobile phones, PDAs, and most recently the DIGIPASS full web, which, once installed through a very simple registration process, unbeknownst to the user, all the user has to do is to sign on with their traditional username, a PIN or a password, and in the background our system generates a secure, one-time password and sends it to the host for authentication. The user does nothing. The user uses their familiar user ID and their password or PIN, and they dramatically increase their security over their username and password.

Okay.

Maybe I can add something on that, because, about the all-terrain, you need to see that the bank today is not anymore, or is not doing anymore just online banking transactions. There are a lot of more applications. Some banks are travel agencies, brokers, name it, they have a lot of applications. Think also about the credit card companies. So the main objective of our full option is to offer now and know that we have a platform that can be a solution for all those applications. Because like Ken mentioned originally is that you need to have a different security level for someone who is buying a book once a year than for a CFO who is transferring $100 million every day. That's a different way of using security. So our platform is offering that. So it's really beyond just the online banking that we are doing.

Okay. And then the other thing. One of the challenges for somebody like myself in tracking the company and the successes you have or wherever you can get your product is being able to identify the solutions, especially with all the different products you have. A token, you can see a token, whether you announce it or not, it looks like a DIGIPASS, a Go, you can pretty much make that assumption, or at least you can surmise that it's a VASCO token. But how do you, in your banking summits and so on and so forth, how do you plan to disseminate some of that information? Especially when it's, something that you can't talk about? How are we going to find out that you really are getting that penetration?

Well, we are limited. We love the banks. They give us a lot of good business. But for competitive reasons, in many cases, they of course control what we're able to communicate to the market. And even though we might say well, look, Mr. Bank, you're here in the U.S. and you already have the VASCO product on your website, you're promoting it, you're distributing it to your business clients, and we need to issue a press release so that we can talk about it openly, sometimes they still will not allow us to do that. But we're a professional firm. We live up to our agreements with our clients, and so that is a restriction. We always talk about what we're allowed to talk about. We never talk about what we're not allowed to talk about.

But in terms of dissemination, certainly the banking summits, our meetings with the press, their featuring us in product comparisons and product write-ups, is our way of disseminating the information. We're planning on doing more webinars on the internet as time goes on. We're going to redouble our efforts to better communicate the products and services that we have that we are confident are more, and superior that some of the things that you hear about bandied about day to day.

Okay. And the 35 to 45% still doesn't include any expectations from a possible VeriSign partnership in the U.S.?

We do not include incremental opportunities. That's the way I like to describe it. Anything that we have in our backlog, anything that we have in a strong pipeline that we can identify, we put in our guidance. What is not included in our guidance is incremental opportunities under which we have no control.

Okay. Very good. I'll catch up with you later. Thank you.

Alright, thank you.

Thank you. Our next question is coming from Edward Ching of Rodman & Renshaw. Please go ahead.

Hey guys. Can you follow up on the DIGIPASS for web. What's the pricing going to be on that?

It's going to depend upon the client. It's going to take many different forms. It can be an annual license, it could be a perpetual license with a big client based upon the number of users, it could be by the transaction in the case of a big e-commerce company that's dealing with buyers of that book that Jan mentioned before where a buyer buys a book once a year, or theater tickets once a year. It'll be a variety of pricing, Ed.

So the target market would be sort of online retail, or banks, or--?

The target market is really any lower-end, infrequent user. Like a consumer in a bank. Like the low end consumers, retail consumers in a bank. One that has a small bank account. One that doesn't do very many transactions. For e-commerce it could be, you know, fill in the blank. It's anybody that's buying something over the internet. You know how it works with these portals. People are invited to sign up to become a member, they create their own username, they create their own password, their own identity, and they would go through a registration process, as I described before.

They would be guided through entering their username, their password, they have to answer a few questions that only they would know for future registration purposes, and then from there on every time they sign back on that auction site to identify themselves, all they have to do is enter their username and their password. And that secure one time password goes from their PC to the host to strongly authenticate them.

I've seen some of your competitors are actually making some acquisitions in this space. Would you guys actually be open to that as well, if you could get, sort of, you know?

Well, at VASCO we're always looking for new products to fill out our product set. New technologies to fill out our product set. And because of the world in which we live, mainly driven by Sarbanes-Oxley and the restriction that that creates for IPOs, we have a tremendous number of inbound inquiries about "take a look at our products, take a look at our technology, we think it would fit your channels very well. Take a look at us. Maybe you ought to think about buying us." And so we're always in that mode and we try to do what is responsible and prudent in that regard. Sometimes it's better, rather than buying a company with a technology that's interesting, it's better to build it ourselves. So it's always a make vs. buy. It's always an ongoing task for us to look at what's available in the marketplace.

Ken, there's been a lot of talking about the competitive landscape. Can you give us some more color on what you're seeing when you go up, who you're going up against? Have you lost any deals to that bigger player out there yet?

I'll address it first, and then I'd like Jan to come in. You know, I've heard from different parties - and I don't have any problem with anybody having their opinion, that's okay with me - but I've heard that we're losing deals left and right. And we're losing a lot of deals, or deals are being delayed. That's not true. It's just not true. Thirty-four new banks in the first quarter alone! A record for us. 371 new accounts. Excuse me, 341 new accounts! That's a record for us.

So there's nothing wrong with our business. Our business is robust. It is true that more and more competitors have popped up on the scene. I like to describe it as mushrooms in a field, with different technologies and different capabilities. And we'll continue to look at those with interest to see if it fits our expanded product set. Jan, do you have any other comments on that?

Well, maybe I can add that we will certainly not change our strategy. Our strategy [has been] working for so many years. And that is very successful. We may [not forget] 34 banks in the first quarter. That is almost three banks a week, three new banks a week that are entering in our customer portfolio. That is huge. It's working, it's successful. And yeah, I'm hearing also, we're hearing also about those lawsuits, yeah. It's [paper based token].

Of the 34 banks in the first quarter, how many of them were in the U.S.?

I have no comment on that.

[inaudible]. Can you give us, last question, can you give us an update on what's going on with [EMV]?

Jan, any additional information on EMV? I can say this, that we had a substantial amount of shipments last year for EMV. And we continue to expect that it will grow.

Where do you see it hitting, I mean, where is this going to build? I've been hearing the UK, but I've also been hearing somewhere in France as well. So could you let us know where do you see it building quickly?

Well, let me try to explain how it's working. It's normally a organization, a banking organization in a country that decides to go for EMV. You have all those kinds of organization in those countries, they look at the market, they do some technical survey, sometimes they issuing a, like saying platform that needs respected, and so on and so on. And that is happening in more and more countries, and it's then upon to the banks to follow that standard platform which is basically a country-based standard platform. It's upon to the banks to follow that standard or to do something else. So EMV is going forward in some countries. And getting more and more success on the market.

Ok great. Thanks, guys.

Thank you, Ed.

Thank you. Our next question is coming from Fred Ziegel with Soleil. Please go ahead.

Hi, Fred.

Hi, guys. Let me see, what can I ask you. On the new banks signed in the quarter, and I know you referenced this a little earlier, Ken about sometimes it starts on one side of the bank and then moves to the other. Of the 34, can you talk about where it's primarily starting? Is it on the business side, corporate side, or the consumer side? And as part of that, then, what seems to be their authentication technology that they're most interested in? Is it hardware, is it software, combinations, or? Just talk about that activity if you would.

Did you get that question, Jan?

Yes, I got that question. It's a good like, Fred. First of all, [our] banks are interested in our VACMAN Controller platform. Because you need to understand that a bank, they know why to and how to do authentication today, but they don't know how authentication will be tomorrow. Let me give you an example. Maybe we never, we don't talk so much about in the market, but suppose that in the U.S. that your government will decide to issue an ID card that will be SmartCard based. That is a typical, nice platform that can be used to do authentication. Suppose that banks, whatever, because the VISA, the Mastercard, [that are] pushing anyway EMV also in the U.S. Suppose that banks [all] decide to go to EMV and so on and so on.

So what I mean to that is a bank wants to have in the first place a platform that is serving his needs today, but also due to the fact that he is not master of what will happen in the market or in his local market in the future, he wants to have products that will be compatible with what he will need in the future. So the VACMAN Controller is an [ID] platform. So in the first place a bank chooses for a VACMAN Controller.

Second place, he will choose them for the kinds of DIGIPASS he wants to use. And we may not forget, when he has chosen, for the VACAMAN Controller automatically, he has already a whole set let's say, software-based authentication products that he can use. So, basically today he will chose for the VACAMAN Controller platform, some software-based authentication, and probably he will save for 30% or 35% of my customers [inaudible] use a hardware device. That is the way it is going more and more today.

And Fred, I will follow-up. If you can imagine that with our 470 banks, where we ourselves have very low penetration into the two audiences that we primarily go after, the corporate clients and the resell clients. That certainly is one of our highest priorities is to go back to our current banks and introduce Digipass for web for their lower end consumer clients.

Did they need to - if they're already running VACMAN Controller to do Digipass for web, what does that require in terms of upgrading the middleware?

It is all built into VACMAN Controller for the capabilities there.

So, it is already there?

Yes.

Okay. So, there is nothing they need to add to VACMAN to support --?

They don't have to add a new module, and all that capability is built into VACMAN Controller and supports all our different models.

Second question and last question. Are you, this is probably more to Jan, are you involved in any way shape or form in a lot of these National ID Cards programs that seem to be popping up all over the place?

Yes, and we are well placed Belgium is the only country in the world that has issued a National ID Card, with a full [PTI] certificate on it. So, we are - we can thank our government that they have now the experience and know very well how it will work in the rest of the world.

So, you supply the Belgium ID Card?

I'm not saying that. I'm not saying that we are supplying the National ID Card, the National ID is a smart card, we are not in the smart card business. But - or not in the, let's say in the manufacturing of smart cards as such, but we are of course in the smart card application business more and more, we are in the smart card reader business and so and so on.

I got one more short question. Have they in the UK, back to I think it was Ed's question on EMV, have they decided yet in the UK about the EMV readers standard? Where does that stand?

There is no official - there has been no publication of that.

Okay. Thank you.

Your next question is coming from Horacio Zambrano, with Wedbush Mortgage Securities. Please go ahead.

Thank you, guys. Congratulations on the backlog there. A question real quick with your relationship with Barclays and who there - if they've actually made a decision for authentication on the consumer side, versus sort of fraud services in --? If you could talk a little bit more about what that particular customer of yours you had in the past.

Jan, would you like to comment about that?

Well again, we need to understand very well what a fraud detection is. It's first role as you mentioned, it's a service. And to my knowledge, a service is in a - is a outsourced business. So as such, I think we can say that this is not really authentication. Now Barclay as mentioned before has done a pilot with the EMV card and for the e-commerce market. And a little bit - to answer also or as a follow-up to the answer to what Fred is asking, today to my knowledge I asked a couple of weeks ago to the sales people to my knowledge there has been no official publication, how the EMV [card] or what will be the precise specifications of the EMV card in the UK.

Okay, most of my questions have been answered. Thank you, I'll catch up with you guys offline. Thanks.

Operator just a couple more questions, please.

Thank you, our next question is coming from Chris Hovis of Morgan Keegan. Please go ahead.

Hey good morning, and afternoon. Just - most of my questions have been answered. But if you could recap the geographical of revenue, and indirect versus direct.

Did you say the breakdown of direct and indirect? You mean our banking and our corporate network access?

No. Reseller driven business. If you disclosed that.

No, we didn't disclose that Chris. But generally, what happens as we think about the model is 100% of the corporate network access business comes from the channel. And then somewhere around 50% to 60% of the [leads] and banking business my first arise in the channel, but then the direct sales force of VASCO follows up on the majoritiy of those, especially if it's a sizeable account. And the geographic distribution of the revenue in the first quarter is 70% from Europe, 6% from the US, 9 from Asia and 15% from other countries.

Okay and certainly encouraging to see the strength in the corporate network access side of the business. Can you talk about what is driving that? Whether it is particular types of veriticals deploying this, whether it is building out the channel? And then more specifically, any help that you've seen from VeriSign in driving that business?

Jan why don't you address, what's driving the CNA business as an example in the first quarter.

The way it works or the way we are doing it as follows; in the first place we are looking at CNA the network security market. That is a lot of market -- [name] it and somewhere we are going to have a customer. The second place, we look at our customer base, and there we go then more than vertical markets, the healthcare, the automotive, government, media and to an [inaudible] we have about 50 verticals in that market.

And we try to upgrade, let's say the network security application to a business to business application, what means that then the Digipass was also used, not only for the employees of that customer, but also for that reseller network that customer base. That is a bit the way it's working. So training in the first place, [inaudible] is just for the network security, looking at vertical markets and then try to sell in the business to business applications.

Okay great, any comment on your reseller relationships, in the US particularly with VeriSign and where we are for the rollout, the penetration for C&A in the US?

Well, in CNA it was the same way. Let's say that resellers - that if you go to the typical and network security applications it is mainly a business that is owned by resellers - so upfront we don't know the prospects. Afterwards, together with resellers we go to these big customers and again, try to do them in a - and trying to sell the Digipass in the business applications. Now if the reseller is whatever or is [inaudible] it is the same strategy that we are doing there. So we are knocking on the doors of customers ourselves, well we do that a lot.

Okay. Great thanks, I'll follow-up with a few other questions offline.

Okay Chris, thanks. One more question operator.

The last question is from Joe Maxa of Dougherty & Company. Please go ahead.

Joe Maxa; Thanks. I made it.

Hey, Joe.

Just - follow-up on the banks in the US, 30 plus banks. Are any of those using your solutions for retail banking at this point?

Joe, I'm not aware that any banks are using on the consumer retail side as yet, in a full deployment.

And then, would so 30 banks are they all using it for some type of corporate banking or some of it for internal use?

It's almost all for their corporate business clients.

Great. And just to be clear on your - for example PayPal's expected to start rolling out some [tokens] in [Q2 or Q3] that would not be included in their guidance, if they were to come out and use some of the VASCO tokens?

That is correct. That will be incremental. That is outside our control, that's a deal between VeriSign our OEM partner, and PayPal.

And then one question here for you Cliff. On the stock based comp, is that expense expected to maintain with current levels for the rest of the year?

No, it will probably be 150 to $200 thousand higher in Q2 through Q4 than what it was in Q1, under FAS 123R we certainly had to take the expense that was related to historical options. But as the company has looked forward, we look more toward a long-term incentive plan and we [weren't] under FAS 123R not able to book that amount of expense in Q1. So, we should expect to see that in Q2 to be a 150 thousand or $200 thousand higher than what it was in Q1.

Just in Q2 or also in Q3 and Q4?

For the remaining quarters of the year, all of the remaining quarters of the year it will be higher.

Okay, thank you.

All right, at this time I'd like to thank everybody for their attendance, for the excellent questions. And always, I want to thank the VASCO staff, employees around the world for their hard work. I appreciate it very much. And everybody, have a nice day. Bye.

This concludes today's First Quarter 2006 VASCO Data Securities International Conference Call. You may now disconnect.