OneSpan Inc (OSPN) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Joe, and I'll be your conference operator today. At this time, I would like to welcome everybody the VASCO Data Security International, Inc. 2007 first quarter earnings. It is now my pleasure to turn the floor over to T. Kendall Hunt, Chairman and Founder, CEO. Sir, you may begin your conference.

Thank you, operator. 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 Founder, Chairman 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 performance are forward-looking statements.

Any statements 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 discussion of such risks and uncertainties in this regard.

Today, we are going to review the results of the first quarter of 2007. As always, we will host a question-and-answer session after the conclusion of management's prepared remarks. If possible, I would like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

First, I would like to address the revenue for first quarter 2007. It was $26.4 million, an increase of 93% over first quarter of 2006 and, once again, our strongest quarter ever. It was also our 17th consecutive positive quarter in terms of operating income and cash flow, with gross margins of 66% of revenue and a very satisfying operating income of 26% of revenue.

As you may recall, however, the first quarter of 2006 was lower than it would normally have been, because customers had requested early delivery of product, which resulted in approximately $2 million of revenue having been reported in the fourth quarter of 2005. If we normalize the Q1 2006 revenue for the first quarter of 2007, it would represent an increase of 68% over Q1 2006.

Our backlog or firm business for Q1 as of today is at $28 million. Backlog is defined as orders already shipped between January 1, 2007 and today, plus firm purchase orders scheduled to ship before March 31, 2006. The results of Q1 2007 and the strong backlog announced today confirm once again that our strategies are working worldwide. New accounts sold continue at a very high level. During the quarter, we sold an additional 619 new accounts, including 94 new banks and 525 new enterprise security customers.

This compares to the first quarter of a year ago in which we sold 341 new accounts, including 34 banks and 307 enterprise security customers. We now have close to 750 banks and over 4,800 enterprise security and e-commerce companies, including corporations, federal and state and local governments as customers, located in over 100 countries around the world.

Since the first quarter of 2003, VASCO has experienced steady, controlled growth and continued growing profitability. It is important to note that this growth is not a concentrated phenomenon. It is happening worldwide from the Americas to EMEA to Asia. We expect that our worldwide growth will accelerate with strong contributions from all geographical areas mentioned before and beyond the banking sector.

To support our growth strategically, we are investing strongly in our market presence through increased manpower. In many of our key markets, we welcomed new recruits during Q1. Please understand that we intend to continue this investment pace without jeopardizing our profitability.

Commitment to shareholder value is a VASCO tradition, a focus that we will maintain. We will accomplish this pledge with the right strategies, the right product development actions and the right acquisitions. During Q1, VASCO established its European headquarters in Switzerland. VASCO Data Security International GmbH, which, with the United States, will jointly own and manage all the company's technology-related intellectual properties.

VASCO is continuously looking for ways to improve profitability by becoming more efficient. As our growth rate accelerated, we were looking for a location where the work and regulatory environment were favorable for businesses. We believe that Switzerland is such a place. We also believe that Switzerland not only offers the good market for our product, but is also centrally positioned in Europe, with strong gateways to eastern Europe, Germany and southern Europe.

It is my pleasure to report that our recent acquisitions have been a great success. Logico, the password management company that joined us in May of '06, has contributed strongly to a number of our latest enterprise security products, such as Digipass basic pack for secure password storage and Digipass advanced pack. We see a rising interest in this type of product. In fact, we signed a very nice deal with a U.S.-based healthcare organization during Q1.

Our most recent acquisition of the Belgian company, Able N.V., brought us our access AXS GUARD product line. By investing strongly in R&D for AXS GUARD, we were able to position it as a best of breed authentication appliance, with over 20 different Internet communications services based on our VACMAN core authentication platform.

I'm pleased to report that a meaningful number of our Q1 new accounts were obtained through sales of the AXS GUARD authentication appliance using VACMAN and Digipass for strong authentication. As you can see, we are consistent in building our full option all terrain authentication machine.

Since last year, we expanded the capabilities of our VACMAN core authentication platform. We launched fraud detection and analysis services. We presented AXS GUARD, with all its related services, and we launched Digipass Plus. Currently, we are close to launching our Identikey server. With Identikey, we will add full server functionality to our VACMAN product line. That way, our customers will have the choice between installing VACMAN controller or middleware on their own server or to buy a full-blown Identikey server from VASCO.

In less than one year's time, we've expanded our product offerings from two product lines, VACMAN and Digipass, to five product lines. I'm very proud that we were able to diversify our offerings without losing our focus. To the contrary, our VACMAN's strong authentication is more than ever the central piece in our product and market strategy.

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. Ladies and gentlemen, the first quarter of 2007 showed once again that the VASCO strategy is working. We maintain and maximize our growth that was started four years ago in the first quarter of 2003. The main reason for our success is our consistent implementation and execution of our three-step private offering strategy.

Number one, we commit to offer to financial institutions the full array of authentication solutions and services at the lowest total cost of ownership. Two, we are putting banking authentication solutions to other markets, such as enterprise security, e-commerce and e-government.

Three, we add products and technologies to VASCO's offering that suit the specific needs of customers within non-banking markets. Based on VACMAN's controller, VASCO's core authentication platform, we have identified five product lines that allow us to service all of our vertical market. This way, VASCO stays dedicated to its full option all terrain strategy.

The five private clients are, one, VACMAN, our core authentication platform, combining all authentication technologies on one unique platform. Two, Identikey will be available later this year. Identikey combines VACMAN with full server functionalities.

Three, AXS GUARD, VASCO's authentication appliance, combining Identikey with a wide variety of Internet communication solutions. Four, Digipass, VASCO's client e-signature software. E-signature has become an ever more important Digipass functionality due to the growing number of Trojan horses and man-in-the-middle affects.

And, five, Digipass Plus authentication services combines VASCO's complete product offerings in an outsource service offering. This proves that we clearly are the world's leading software company specializing in Internet security. It is important to note how quickly VASCO has evolved during the last period.

A while ago, we were a high tech company, selling products to customers primarily in the banking sector. Now we are software company selling products in a per-user-per-year-based business model to a wide variety of companies and corporations. In the future, we will offer our products in an outsource service model to replace the billions of static passwords in the world by dynamic e-signature codes. This will be offered in a per-user-per-year application business model.

About our markets. We see that the corporate brand awareness of VASCO is rising worldwide. This is due to our events worldwide, over 100 per year, our business success in key markets, our satisfied customers, our aggressive communication approach, and our swift growth as a company.

In the first quarter, we won customers on the six continents, a clear proof of our worldwide success. In addition to the banking sector, we are gaining more and customers in enterprise security and e-commerce. Our new case studies with companies such as SD Worx, Soccer Association, [Satka], EZ Computers and others are a clear proof of this. We are very happy with the fact that our VACMAN Digipass and AXS GUARD for the clients are widely used in a multitude of sectors.

The authentication sector is booming worldwide. To give you an example, in the beginning of '07, eight foreign banks have received a retail banking license in China. Amongst these banks, there are seven that are already VASCO customers. This will have an important impact on the Chinese banking market. We believe that many Chinese banks will implement a strategy focusing on those market leading foreign banks, with positive effects on VASCO's sector.

It is of the utmost importance that VASCO stays close to its customers and prospects in key markets. Therefore, we actively investigate the opening of new local sales offices and the strengthening of our presence in key countries. Recently, we invested strongly in our sales force in the United Kingdom, a strategy market for VASCO with regards to banking, enterprise security and e-commerce.

About our people. A positive side effect of a positive corporate image is the growing number of highly skilled professionals that are willing to work for VASCO. In addition, we are currently training almost 20 juniors and professionals in our own VASCO school. During their training, these VASCO employees gain experience and receive education to become real VASCO experts.

A couple of quarters ago, we were struggling to fill in our vacancies. People are crucial to allow us to sustain our growth. Therefore, we are very glad that this situation is improving drastically. The cash. With regard to the company's financial situation, I can only stress that we are extremely proud that VASCO is not only a growth company, but also a very profitable company.

Our market mix of banking customers with large volume and smaller margin orders plus enterprise security customers with smaller volume and higher margin orders allow us to maintain a healthy cross-margin. Cost control, creative thinking and our search towards software are other important tools to maximize VASCO's profitability.

I conclude, ladies and gentlemen, by saying that VASCO is doing well. We are gaining new customers worldwide and we are successful both in new and existing markets. This company has become the market leader in this sector and it is very determined to expand that leadership position. Thank you.

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

Thank you, Ken. And welcome to everybody on the call. As noted earlier by Ken, revenues for the first quarter of 2007 were $26.4 million, an increase of $12.7 million or 93% over the first quarter of 2006.

Compared to 2006, the increase in revenue for first quarter reflected significant increases from both the banking and the enterprise security markets. Revenues in the first quarter of 2007 from the banking and enterprise security markets increased 101% and 59%, respectively.

It should also be noted that the comparison of revenues in Q1 2007 to Q1 2006 was positively impacted by the weaker U.S. dollar in 2007. We estimate that revenues were $996,000 or 4% higher than they would have been had the exchange rates in the first quarter of 2007 had been the same as they were in the first quarter of 2006.

The distribution of our revenue in the first quarter of 2007 between the two primary markets was approximately 85% from the banking market and 15% from the enterprise security market. In the first quarter of 2006, approximately 82% came from the banking market and 18% came from the enterprise security market.

The geographic distribution of our revenue in the first quarter of 2007 was approximately 61% from Europe, 9% from the United States, 16% from Asia, and the remaining 14% from other countries. For the first quarter of 2006, 70% of our revenues came from Europe, 6% came from the United States, 9% from Asia, and 15% from other countries.

It should be noted that revenue from each of the primary geographic areas increased in the first quarter of 2007 as compared to the first quarter of 2006. Gross profit as a percentage of revenue for the first quarter of 2007 was approximately 66% and compares to 69% for the first quarter of 2006.

The decrease in gross profit as a percentage of revenue in 2007 compared to 2006 reflects a change in mix of our revenues, with a higher percentage of the revenues coming from the banking market than from the enterprise security market and a decline in the gross margins of our lower priced card reader business, primarily in the banking market.

The decline in the gross margin from these two factors was partially offset by an increase in the percentage of our business coming from non-hardware products. Our non-hardware revenues increased from 10% of revenue in the first quarter of 2006 to 12% of revenue in the first quarter of 2007.

As mentioned earlier, revenue from our enterprise security market, which generally has margins that are 25 to 30 percentage points higher than banking market, was 15% of our total revenue in 2001 compared to 18% in Q1 2006. Operating expenses for the first quarter of 2007 were $10.7 million, an increase of $4.1 million or 63% from the first quarter of 2006.

Operating expenses for the quarter included $442,000 related to stock-based incentive plans in the first quarter of 2007 compared to $257,000 in the first quarter of 2006. It should also be noted that the comparison of operating expenses in Q1 '07 versus Q1 '06 was negatively impacted by the weaker U.S. dollar in 2007. We estimate that expenses were $690,000 or 7% higher than they would have been had the exchange rates in the first quarter of '07 been the same as they were in the first quarter of '06.

Operating expenses increased by $2.1 million or 53% in sales and marketing, $1 million or 104% in research and development, and $853,000 or 56% in general and administrative, when compared to the first quarter of 2006. The majority of the increase in the sales and marketing area were related to the company's increased investment in sale staff, increased investment in marketing programs, and higher depreciation costs, primarily related to the cost of training films that were developed in 2006.

The increase in the research and development costs were primarily attributed to increased compensation expenses resulting from the acquisitions of Logico and Able in the second and fourth quarters of 2006, respectively. The increase in general and administrative primarily reflected higher professional fees, in large part, related to the setup of our headquarters operation in Switzerland, increased compensation expenses and increased recruiting costs.

Those costs were partially offset by the collection of aged receivable balances that had been previously reserved. Operating income for the first quarter of 2007 was $6.9 million, an increase of $4 million or 137% from the $2.9 million reported in the first quarter of 2006. Operating income as a percentage of revenue or operating margin was 26% in the first quarter of 2007 and it's 4.8 percentage points higher than the first quarter of 2006.

The increase in operating margin is attributable to improved efficiency as reflected by a decline in operating expenses as a percentage of revenue, primarily in the sales and marketing and the general and administrative line items. As has been mentioned previously, we believe that our operating model is highly leveragable.

The company reported income tax expense of $1.9 million for the first quarter of 2007 compared to $1 million for the first quarter of 2006. The effective tax rate was 28% for the first quarter of 2007 and compares to 45% as reported for the first quarter of 2006 or to 33% for the first quarter of 2006 when the tax effect of nonrecurring items are excluded.

The effective rates for both periods reflect our estimate of our full year tax rate at the end of each respective period. The rate in 2007 is lower than 2006, as our estimate for the full year tax rate in 2007 reflects increased earnings in the United States for which we have a tax loss carry forward. Those loss carry forwards have been fully reserved for reporting purposes in prior years.

Earnings before interest taxes, depreciation and amortization, EBITDA or operating cash flow, if you will, was $7.6 million for the first quarter of 2007 and is 231% higher than the $2.3 million reported for the first quarter of 2006. The makeup of our workforce as of March 31, 2007 was 200 people worldwide, with 180 people in sales, marketing and customer support, 68 people in research and development, and 24 people in general and administrative categories.

The average headcount for the first quarter of 2007 was 63 persons or 48% higher than the average headcount for the first quarter of 2006. The strength of our operating performance is also reflected in our balance sheet. Our net cash balance and working capital balance both increased from the prior quarter.

During the first quarter of 2007, our net cash balance, which is defined as total cash less bank borrowings, increased by $4.2 million or 33% to $16.8 million from December 31, 2006. Our working capital increased $6.9 million or 31% to $29 million from $22.1 million at December 31st of '06.

Bank borrowings that are noted on the balance sheet of $3.1 million were borrowed under the line of credit and relate solely to our hedging program. As mentioned before, there is no impact on working capital from the hedging program, as the additional cash was offset by short-term debt.

During the quarter, our day sales outstanding and accounts receivable increased from 72 days at December 31, 2006 to 81 days at the end of the first quarter. The increase in DSO was primarily related to the timing of when sales were made in the quarter. We do not believe that the increase in DSO will result in higher write-offs of uncollectible accounts in future quarters.

Now, I'd like to turn the meeting back to Ken.

Thank you, Cliff. First, I would like to comment again in order backlog for Q2 2007. As of this date, we have firm orders with shipments scheduled for the second quarter of approximately $28 million. Any new orders received before quarter's end and shipped during the quarter would be additive to this number. This backlog shows the strength of our order flow, as it is 75% higher than the backlog going into Q2 of 2006.

In addition, the backlog is 51% higher than the $18.5 million in revenues actually reported for Q2 2006. Today we are also reaffirming guidance for full year 2007. As in the past, we only comment on annual numbers, not quarterly numbers.As stated in February of 2007, we estimate that our full year revenue will grow 35% to 45% in 2007 over 2006.

We expect that full year gross margins will be in the range of 60% to 68% of revenue. Finally, we are projecting that operating income will be in the range of 18% to 25% of revenue on a U.S. GAAP basis. In summary, we are very pleased with our results for Q1 2007 and look forward to a strong performance for the remainder of 2007. And as always, you can rely on VASCO's people to do their very best.

This concludes our presentations today and we will now open the call for questions. As I mentioned earlier, as a courtesy to others on the call, I would appreciate it if you would limit your questions to 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?

[OPERATOR INSTRUCTIONS]

Our first question comes from Robert Breza from RBC Capital Markets.

Good morning, and good afternoon, everybody. Congratulations on the great quarter, guys.

Thank you, Rob. You were up early this morning.

Yes. I guess one quick question, Ken, for you. Obviously, you have a great backlog number and very strong Q1 performance. At a high level, is there anything out there that you see in the macro environment that's concerning to you? Clearly, you guys seem to have the wind at your back.

And maybe as a follow-up for Cliff, could you give us a split on the banks between international and U.S.?

I'll answer the first question regarding anything on a macro level that would concern us. No. I think the authentication market is robust. We're in a good position, a good place. People normally ask me what keeps me up at night and I say not much. The only thing that I worry about is execution, because I know that works, and our people are very good at executing their respective responsibilities.

And in terms of the number of banks, new banks, international versus U.S., Rob, we really don't break that down on a quarter-by-quarter basis. Suffice it to say that we're showing good progress in the United States and I think we'll probably follow our past practice. From time to time, we'll issue a press release talking about the aggregate number of banks that we have in the market, but we won't do it on a quarter-by-quarter basis.

Great. I'll reenter the queue. Thanks.

Thanks, Rob.

Our next question comes from Jonathan Ruykhaver from Raymond James.

Congratulations on the quarter.

Thanks, Jonathan.

Are you going to disclose the number of Digipasses that were shipped in the quarter?

No. We announced at the last earnings call that that's a practice that we've discontinued, since we're really focusing on software. It just doesn't mean anything. It's not a good metric to even follow.

Okay. Can you give us some color on activity that you're experiencing with the fraud detection service?

Jan, would you answer that question? He's asking about our fraud detection services.

Yes. Fraud detection, we see that there's a bit -- like we have made that comparison with physical security, like in a bank, where you put cameras, trying to detect the criminals. Authentication is rather stopping the criminal activity.

In the fraud detection, as you know, as an authentication company, we go in the banking market, we go market direct our business, some banks through channels, but we knock ourselves a lot on the doors and we are asked from time to time to offer, also, our fraud detection services. As such, again, our business is, in the first place, authentication and we see fraud protection as an add-on service.

Do you see a preference in North America for fraud detection as opposed to pure token authentication?

Not at all, not at all. I think, for us, we see the same activity in all regions for fraud detection and we don't see more in the West than the rest of the world.

Okay, great. Thanks, guys.

Our next question comes from Andrey Glukhov from Brean Murray.

Congratulations on the quarter.

Thank you, very much.

Ken, first of all, as far as the guidance is concerned, historically, the second half of you guys' fiscal year is about 55% of total revenue, so significantly better than the first half. Is there anything that would lead us to believe that seasonality right now is changing?

No. I don't think that we anticipate anything will change. If you're asking why haven't we changed our guidance for the year based upon this strong first quarter, we see no upside in doing that, to be honest with you. We'd like to get further into the year before we make that assessment.

That's helpful. And then, Cliff, can you clarify your comments on the tax rate? So am I inferring correctly that you expect 28% tax rate for the remainder of the year? And maybe just generally talk about what do you expect the tax rate to do beyond '07.

Well, I can certainly clarify a little bit. The answer is yes, we do expect that our full year effective tax rate, excluding discreet items or one-time items, would be 28% for the full year 2007. That rate can vary up or down depending upon the distribution or where our earnings occur. The greater the earnings in the U.S., the lower the tax rate.

Now, the second part of the comment, in terms of future years, also plays a little bit into this year. As we go through 2007 and as we demonstrate consistent profitability in the United States, we will reach a point where we'll have to make a decision from an accounting point of view as to whether we continue with the reserve that we have for the U.S. NOL or whether or not we need to reverse a portion of that reserve and bring it back into income.

If that happens, from an accounting point of view, we will treat it as a discreet item this year, apart from our full year effective tax rate. So it would be a one-time gain reduction in tax expense, but it may well be recorded late in 2007. If that happens, obviously, that will have an impact on the 2008 rate because we won't have the NOL to benefit against those earnings in 2008 and beyond.

But in terms of the trend of tax rates, we do believe, with our restructuring of our intellectual property, the setup of the international headquarters in Switzerland, that we do see that we have opportunities to continue to reduce that effective rate in the years ahead.

That's very helpful. Thank you.

Our next question comes from Daniel Ives from Friedman, Billings.

Congrats on the quarter. With Entrust coming on the low end with their token, has there been any change in the environment? I know you don't like to talk about competitors, but maybe just talk about pricing and just your thoughts there, Ken.

Certainly. This question came up, I believe, at the last earnings call and regularly comes up. Entrust is not a very large direct competitor of VASCO. You know that they're primarily in the PKI business. They do some enterprise business.

So if we were to find any competition, it would be in the enterprise through our channel. They did announce a $5 token and I don't think that makes any difference to us at all, because we're not selling only tokens. We're selling a complete solution. We're selling a platform called VACMAN Controller that supports many, many different products and solutions.

And so that is very attractive to the customer, to the buyer, and that's the way we sell our products and services, as a total solution.

Okay. And just a last question. A lot of software companies have problems with consistency. You guys just do not. I mean, Ken, what do you think it is internally that gives you guys the ability to predict things so accurately and have consistent performance in what is a very inconsistent sector? Thanks.

Sure. Daniel, this is a song that I've been singing for a while. It's called sustainable repeatable revenue and what allows us to do this is that now we have approaching 750 banks as clients. We've never lost a bank. They continue ordering from us year-in year-out.

A typical application rollout is two to four years. And so that's why we have the visibility and that's why we have the sustained revenue flow. We've got good customers that like our products, like VASCO and continue ordering from us year-in year-out.

Hey, Ken, if you guys exceed guidance for the year, are you going to start flying on first class next year?

No.

Thanks.

Our next question comes from Jordan Roberts of Jeffries.

Hi, it's Katherine Egbert. Can you give us something on Digipass for web, what successes you've had to date there? And then I have a follow-up.

I don't know that we can give you specific numbers on that, Katherine, but it is going well. It is a product that is software only. It resides on the user's PC. Once installed, it's kind of invisible to the user, but it has the capability of doing one-time passwords as the method of authenticating the user and then it has the capability of doing electronic signature, which is the method by which you can securely authenticate and secure a transaction.

So it is going well. It's growing in popularity and it is making a difference in terms of our software revenue.

Katherine, I might add that you will see that revenue in the non-hardware numbers that we talk about. So to the extent that non-hardware revenues in the first quarter of '06 were about 10% of our revenue, in the first quarter of '07, they're about 12% of our revenue. Digipass for web is one of the elements that's driving that increase.

Okay, sure. And then as a follow-up, so you've given, again, a wide range of gross margin guidance for the year. You're already tracking to the higher end of that. I'm trying to get at software as a percentage is going up. Will you, do you think, stay on the higher end throughout the rest of the year? What does this look like?

Well, we give the range because we don't really know the answer to that question. The variables that play into it is the more we have software content, the higher the margin. The more that we have success in the lower end card reader business, the EMV card readers, where there isn't an element of VASCO's proprietary authentication included, those are lower margins.

So it really will depend on how those play out through the year and the nexus of the business between our enterprise security and banking markets. So we are at 66% and the range was up to 68%. So we're tending to trend toward the higher number. We hope that it continues and if our business plans work as we expect, I guess within the context of the safe harbor, we would say we expect to be at the higher end, but we gave the range because it could easily be anywhere in that range.

Thank you, very much.

Thank you, Katherine.

Our next question comes from Amit Dayal from Rodman and Renshaw.

Just one question, guys. How many days into the quarter, should we assume 26-27 days into the quarter for the backlog number that you've given out?

It's as of today, Amit.

Right. And how should we look at -- this is one follow-up. How should we look at the software sales or the non-hardware sales in the backlog? Can you give some percentage of the mix?

We actually won't go that direction, Amit, in terms of breaking down backlog in terms of those kinds of items.

We give annual guidance because we want everybody to continue to focus on the long term and we give the backlog as a proxy for where we stand within the quarter, but we really don't want to start breaking down the quarter to start to allow people to move the numbers in terms of the margins for the quarters or those kinds of things. So we would prefer not to provide that data at this time.

And I'm trying to get to the revenue expectations that we can build into our models. If the backlog is weighed more heavily toward the hardware sales, then perhaps the percentage of revenues in terms of backlog that we see could probably be lower, which means that your quarter numbers could come in higher. I'm just trying to get a sense of where we should base our estimates off of these numbers.

Amit, I would really suggest that the best place to look at that is our history and the difference between the backlogs that we've announced and the actual results for the historical quarters. We've been doing it now for the better part of four years. So each of those quarters is out there with what we reported at that time versus what we ended up with.

I would also add that as you think about the non-hardware components and the hardware components, it's not at all uncommon to have both involved in the same deal. So when we talk about backlog, it wouldn't be unusual to have that backlog have both in it, where the order is going to be a certain percentage of hardware Digipasses plus a certain percentage of software. So the backlog will include both, but we just won't talk to the specifics of how that breaks.

Right. I understand. Thanks. I'll get back in the queue.

Thanks, Amit.

Our next question comes from Joe Maxa from Dougherty and Company.

Thank you and congratulations.

Thanks, Joe.

Can you break out for us what the contribution from Logico and Able was during the quarter?

Well, their primary contributions, Joe, were in the product development arena. As Ken and Jan mentioned, they were very important to us in expanding our product line, bringing high quality engineers to our group to allow us to increase our product portfolio.

In terms of the revenues, they were not significant. They were less than 5% of the revenue for the quarter. And so we probably won't go further in terms of disclosing the specific numbers.

But they accounted for, I think Ken said, a fair amount of the new customer wins, if I understood it correctly.

Yes. I said a meaningful amount of meaningful number of the new accounts. You have to understand that the AXS GUARD is a combination of a product and a service. So it's a subscription kind of model.

So it has longstanding or longer-term impact on the revenue and profits associated with that business. So anything they do is good, because it gives us, again, another form of that continuing revenue that's driving our business so well.

Right. And then, Cliff, can you just give us any comfort on what we should be looking for in Q2 in terms of operating expenses, how we should be looking at that given the strong backlog, and where we should be maybe putting some numbers?

Again, we prefer not to get into giving guidance by the quarter. I would suggest that you look back at our history and the history would say that we always have a step-up in Q2 operating expenses over Q1.

The history of the OpEx is first quarter of the year is often consistent with the fourth quarter of the prior year. The second quarter, you do see a bump up in OpEx over first quarter. Third quarter is generally flat again with second quarter and then you see another increase in fourth quarter. I don't know of any particular situation that would suggest our trend line is going to be any different than that.

Thank you.

And, Joe, if I could, just to circle back to your question on Able and Logico, part of the reason that it's difficult to break those out, as you know, when we do our acquisitions, we are often introducing their products into our channel.

And as a result, as we look forward, we expect to have great success with those products, but it'll be because we're putting it through our distribution channel. Those were attributes of those acquisitions where they came with strong technology, but didn't have necessarily the breadth of the distribution that we do.

So what you would be asking if we went further with that question would be to sort of break down revenues by product and I don't foresee is doing that in the foreseeable future. So I don't know if that also helps put into context a little bit the answer to your question on the revenues from those two.

It does. Thank you.

Our next question comes from Sean Jackson from Avondale Partners.

On the $28 million backlog number, were there any unusually big deals included in that?

Jan, would you address that question?

Yes. A part of our [business is] of course big deals. I believe in 2005 we got the first customer, new customer ordering one million Digipasses. Today that's not an exception anymore. But there is nothing exceptional in that backlog. That is your question.

Okay. And, also, I guess from the non-hardware sales, what's a good number to think about, say, 12 months out as to what percentage of your business is going to be software?

Sean, again, that's a question we prefer not to answer. Certain things we cannot predict. We expect that software will continue to be an ever bigger portion of our revenue and our profits. That's our plan. That's our direction. That's our focus. But it's not something that we'll give you guidance on.

Okay. And just one more quick question. You mentioned in your prepared remarks something a little bit about China and an opportunity that's stirring there. Can you just repeat those again, please?

Yes. Jan, go ahead and review that again.

Yes, sure. In the beginning of '07, the Chinese government has given licenses to eight foreign banks to enter in the Chinese market for retail banking. From these eight banks, seven are already VASCO customers.

Okay.

The second thing is if you know a little bit of the Chinese market or Chinese people or Chinese industry, they're looking very much to upper class companies, certainly foreign companies, and we believe that it is possible that Chinese banks will look at these foreign banks, how they do their electronic banking, that they will adapt themselves to that way of doing banking.

Okay. Thank you.

Our next question comes from Fred Ziegel from Soleil Securities.

Hi, guys.

Hi, Fred.

Let's see, a couple of things. One for, I guess, Jan and one for you, Ken. To Jan, if we look at the new enterprise customers, it was running in the kind of mid 300s for all of '06. Now we're suddenly in the low 500s. I'm curious what's caused that uptake and is it for certain products more than others.

And a question to Ken or maybe it's to Cliff, if I look back historically at the relationship of backlog to ultimate revenue, it would suggest Q2 revenues are 30 million or thereabouts and if we just run that out at no change for the rest of the year, you're talking growth rates not 35 to 45, but more in the mid 50s. So to an earlier question, is there something out there or is this just the normal conservatism?

Jan, do you want to answer the first question about new account mix?

Sure. A couple of quarters ago, we were still in the enterprise security a remote access security vendor. That means that there are all the software needed to be used in interpolation with one or the other software vendors.

Today, with the announcement of the VACMAN software, a couple of quarters ago, the acquisitions of Logico and Able, we are offering a lot more functionalities. We not only are offering today remote access, also network security, together combined gives us enterprise security. And with AXS GUARD, we have an excellent platform to secure environments for the employees, maybe.

So it is our product offering that gives us, A) more new customers and, B) I believe, also, that today we are ready, our software, our products are ready to have more users by license than it was in the past. So our software is more mature, more stronger.

So in the enterprise market, then, as it's broadened from the remote access kind of only business, are the new activities a heavier software content versus hardware than was the case in the past?

I believe, in the future, it's awfully difficult business-wise. I'm not saying accounting-wise. But business-wise, it's not easy to split software by hardware, as today we are more today a software company than it was in the past. But hardware is still important for us due to the fact that it is an add-on to our software.

So both are increasing, but, of course, our software has a lot more functionality than it had in the past. Our business model today is a business model of per-user-per-year model. So it is increasing, yes.

Thanks. Ken?

Yes, let me add something to that answer. It's interesting, there are some naysayers out in the market that say that tokens were not going to be popular, are not going to be popular and they deny the fact that we've sold a lot of those physical tokens to people that actually carry them around in their pocket.

We recognize, however, that there's a huge market out there where the token is not appropriate and that's why we've introduced our software products and solutions. So what Jan is saying is I think the acceleration is because we offer both. We offer a choice and we offer it all on one platform.

The other question, Fred, that you asked, the backlog to revenue, we are still, relatively speaking, a small company. You can go back, as Cliff said, and look at history over the last 17 quarters now and you can look at when we had our earnings call, you can look at the backlog that we announced as of that time, and by doing some analysis based upon the number of days we were into the quarter when we had the earnings call, you can get some assumptions and produce your own projections.

But beyond that, I don't think there's anything that we can say about the backlog.

My question was really that if we do that analysis and then arrive at a Q2 revenue number and just flat-line that for the rest of the year, which would not be the typical scenario, you end up with a full year growth rate that's well above your guidance. I'll just put it that way.

Well, we don't see anything for the rest of the year that's negative, but we also are -- again, we're a small company and we don't feel like there's any payback in adjusting our guidance at this time.

We want to get further into the year. We'll make that assessment at that time.

Okay. Thanks.

Our next question comes from Ruchir Lahoty from Thomas Weisel.

Congratulations, guys, on a great quarter.

Thank you.

I have two quick questions. One would be the revenues from the U.S. actually declined sequentially from Q4 '06 to Q1 and, again, it declined as a percentage of overall revenues.

Is there a reason you're looking at?

I'll let Jan comment on this, but, again, we're a small company. You can't judge us on a quarter-to-quarter basis. So if the U.S. is down sequentially, I would not read anything in that at all, other than we are a small company. We don't guide by the quarter for that reason.

Jan, do you have any further comments?

No. I think it's the exact answer, Ken. It is not always easy to predict what the company will do, but it's certainly not easy what a [region] will do. I think that's the exact answer you have given, Ken.

Okay. Thank you.

A follow-up, and that's related with China -- the banks in China. Have those banks actually started deploying the VASCO tokens in the Chinese market?

Jan?

Well, I will not comment on a lot of that on competitive reasons. I just repeat by saying there are today eight foreign banks who have received a license to go for retail banking and seven are customers. And the second thing is Chinese banks have a trend to look at upper class banks to see what they are doing and we believe that those banks can do the same thing like these foreign banks.

And I guess that we could say that we are indeed excited about the opportunity in the Asian market.

Okay. Just a quick follow-up. These banks that are customers, are they customers at the corporate level or are they customers at the retail banking level, also, in other markets?

Both [markets].

Okay. Thanks, so much.

Our next question comes from Andrew Abrams from Avian Securities.

I wonder if you could talk just a little bit about the formalization of the Fundtech relationship that you announced and whether this was just the fact that they've got it totally built into their product.

And, also, if you have any feel for any change in the attitude of U.S. banks toward using either tokens generally or other forms of identification as a result of FFIEC or just some change in their perspective.

Well, as far as Fundtech is concerned, I'll let Jan answer the second question about U.S. banks and their adoption and their attitude. As far as Fundtech is concerned, it was their press release, not ours. They are the ones that wanted to release this relationship that they have with us and the success that that partnership or relationship is generating.

Fundtech is a well respected company with banking and financial software and they're very pleased with the relationship we have with them and the value-add that we give to them when they go into their existing and new bank customers.

Jan, would you answer the question on U.S. bank adoption, as far as we're concerned?

What we have seen in the U.S. is with the FDIC guidance is that the banks have like a mentality, saying, "Well, if we need to do something, we go for the easiest way." And that was the first trend we have seen in the U.S.

Today we see one in corporate banking, that a lot of banks are not only thinking, but deploying seriously strong authentication products, hardware and software to their customers. They believe that they need to do that. They believe also that this is not only a must, but also giving a positive effect to their customers.

In the retail banking, as you know, most of the banks started to do some testing, some fraud detection systems, some software-based systems. Today that is, again, changing and I'd also say that there's already a first bank in the U.S. that will also deploy hardware devices for retail banking.

Thank you.

Operator, we have time for one more question.

We have a follow-up question from Robert Breza from RBC Capital Markets.

Just a quick follow-up, Ken. As you look at the sales force, and I know, in the prepared remarks, you talked about some of the training you were doing with bringing on new recruits, what kind of sales capacity or any kind of color you can talk to towards driving further sales growth?

Is there anything from a sales capacity perspective that prohibits you from continuing the growth projection you're on?

No, I don't think so. Jan, you can add your comments, too. But in terms of finding good experienced salespeople, that's not a problem. If we have any challenges in finding good people, it's on the support area.

But in terms of salespeople, experienced, senior people, we have a regular flow of those. They know what we're doing in the marketplace. We have a very good brand. We have a very good reputation.

They see us at different conferences. There's a buzz, I think, going on in the market about VASCO and its products, its growth, its success, and I think that's the kind of company that people want to work for.

And so in terms of sales people, we have no problem getting them hired and getting them productive very quickly. Because of the leverage in our model and the sustainable repeatable revenue from our existing and new customers, the new banks that continue coming on, that gives us great leverage to go and sell the next bank.

We also get leverage from our reseller channel, where we add more and more products and our reputation grows. It makes it easier for our reseller channel partners to sell to their customers.

Jan, do you have anything else you'd like to add?

No. I just want to strengthen your words, Ken. It's true that we are on the radar screen. So we have a lot of candidates for the sales positions. For the support, we're anticipating a lot of hiring with juniors, training them, but, also, with our school, I believe at the end of the year, with our online training programs, probably 1,000 people will be trained, not only VASCO employees, but also the employees of our resellers, distributors and so on.

So I think with that tool, we have really found the right solution to what was a problem for VASCO, finding the right technical commercial people.

Thank you, very much.

Thank you. With that, I'd like to close the meeting and I'd like to thank VASCO people everywhere in the world for their hard work and their enthusiasm. I'm very, very proud of all of you. Good day, everybody.

Thank you. This does conclude today's conference call. You may disconnect your lines.