OneSpan Inc (OSPN) 2007 Q2 法說會逐字稿

Good morning. My name is Coretta and I'll be your conference operator today.

At this time, I would like to welcome everyone to the VASCO Data Security International, Inc. second quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the floor over to Mr. T. Kendall Hunt, founder, Chairman and 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 and I am 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 the second quarter of 2007. As always, we will host a question-and-answer session after the conclusion of management's prepared remarks.

If possible, I'd like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

First, I'd like to address revenue for second quarter 2007. It was $32.4 million, an increase of 75% over second quarter 2006 and, once again, our strongest quarter ever.

It was also our 18th consecutive positive quarter in terms of operating income and cash flow, with gross profit of 64% of revenue and an operating income of 29.1% of revenue.

Our backlog or firm business for Q3 as of today is $27.1 million. Backlog is defined as orders already shipped between July 1, 2007 and today, plus firm purchase orders scheduled to ship before September 30, 2007.

The results of Q2 2007 and the strong backlog announced today confirm once again that our strategies are working worldwide.

New accounts sold continued at a very high level. During the quarter, we sold an additional 631 new accounts, including 113 new banks and 518 new enterprise security customers.

This compares to the second quarter a year ago in which we sold 361 new accounts, including 46 banks and 315 enterprise security customers.

We now have over 850 banks and over 5,300 enterprise security and e-commerce companies, including corporations, Federal, 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. Over the past couple of years, this growth has occurred worldwide from the Americas to EMEA to Asia. It would be inappropriate to put only one region in the spotlight.

VASCO, its products and its people are finding success worldwide. In the United States, VASCO is building a substantial customer base in the banking sector and we are strengthening that presence. In Europe, our traditional stronghold, we are increasing our position. In fact, there are many countries in Europe where we have a dominant market share. VASCO is also going strong in Latin America and Asia. In brief, our market is exploding globally and our people are working hard to continue that trend.

As a Company, we tend to be a bit modest most of the time, but we are very proud of what we have accomplished over the past 18 quarters. There are very few, if any, companies in our sector that are gaining market share as fast as VASCO and we are starting to get recognition for that achievement.

Last quarter, VASCO was honored for its strong growth and performance by some of the world's leading media. BusinessWeek ranked us fourth in their top 100 hot growth companies. Fortune Small Business Magazine ranked us 11th in their America's 100 fastest growing public companies list, and Crane Chicago Business listed us in their Fast 50 list of fastest growing Chicago-based companies. In addition, I had the pleasure to represent VASCO live on Bloomberg TV.

We expect that our worldwide growth will continue, with strong contributions from all geographical areas. To support our strategic growth, we are investing in a network of offices worldwide.

Currently, we're in the process of opening offices in Tokyo, Japan and Sao Paola, Brazil. We are investing in those regions because we believe that we can generate significant business in both the banking and enterprise markets.

Importantly, we will be working with local people who know the market, the culture, the language and who possess the necessary local networks of decision-makers in the banking and enterprise worlds.

Finally, I'd like to comment about our R&D efforts. You should be aware that our R&D costs are among the lowest in our industry, contributing to the operating efficiency in our business model that I often talk about.

Last year, R&D costs were approximately 7% of our top line and this year they continue at approximately that same level. Yet, VASCO is one of the most prolific producers of new products in our industry year after year.

In fact, during the first two quarters of 2007, VASCO launched over ten new products. We can safely state that our R&D department is flourishing and that is a major factor in our rapid growth.

At this time, I'd like to introduce Jan Valcke, VASCO's President and Chief Operating Officer.

Jan, congratulations once again to you and your team on another fine quarter.

Thank you, Ken. Ladies and gentlemen, as you can see, VASCO is succeeding in combining strong revenue growth while improving its profits.

This is a great accomplishment, because VASCO invests strongly in its growth. The four pillars of VASCO's success are, as always, the products, the markets, the people and the cash.

I will give you an overview of the evolution of all four elements. The first one, the products. During the second quarter, we launched several new models of our Digipass Client e-Signature devices.

Digipass-805, an easy to use, one button Digipass card reader for mass [interloads] in e-commerce and retail banking, and the Digipass-840, a speaking card reader for the blind.

During the fall, we will launch many strong products, including our Identikey authentication server. In the enterprise security market, our strategy is clear.

We enter a Company through a remote access application in order to secure employees who work outside the corporate firewall.

We secure these people by developing plug-and-play packs and plug-ins that are compatible with the products of the world's leading internet and infrastructure vendors.

Through remote access, we also entered the network security market by securing people inside the corporate firewall with products such as our smartcard-based password management application.

Afterwards, we entered the application security market with a wide area of applications based on Vacman and Identikey. We expect that our authentication appliance, AXS Guard, will prove to be the leading product in our offering for application security.

A couple of quarters ago, we launched our Digipass Plus all source service offering. I'm proud to announce that Digipass Plus is already a success.

In the United States, Europe and Asia, banks, governments and e-commerce companies are deploying our Digipass Plus services. With Digipass Plus, VASCO proves again that it prefers business over hype.

The markets are the second pillar of VASCO's success. It is obvious that VASCO is having great success in the banking market. The maturity of a number of markets combined with some important government initiatives put VASCO in the right position to strengthen our market leadership.

Online criminal activities aimed at the banking sector are no longer due to the effort of publicity-craving individuals, fishing, farming, man-in-the-middle affects, and Trojan horses are currently used by organized crime organizations in order to make money, and their business is growing. That's why so many financial institutions turn to VASCO for protection.

We also experience a growing number of attacks against smaller banks, whereas, in the past, the big banks were the fraudster's victim of preference. We help the SME banks with our fraud protection services.

They often ask us what they can do to prevent the PCs of their customers becoming a possible security threat.

We believe that our AXS Guard authentication appliance is well positioned to solve that problem. We see that our recently launched Vacman Middleware 3.0 is very well received in the enterprise security market.

There is a lot of demand for VASCO Digipass Pack for small enterprises. With Digipass Pack, we bring banking level security to the SME market.

Our enterprise security network is getting stronger. VASCO's two-tiered distribution channel, consisting of distributors and resellers, is active worldwide. We keep investing in our channel with specialized trainings, support and counsel.

During the second quarter, we introduced the concept of VASCO's ATCs, or authorized training centers.

In order to qualify as a VASCO ATC, VASCO distributors have to follow a very intensive technical training course, resulting in the granted right to organize trainings in their home market, authorized by VASCO.

The training courses organized by VASCO ATCs prepare the reseller staff for the qualifying test to reach VASCO-certified engineering status. VASCO's certified engineers will be in direct contact with the end user, installing and maintaining VASCO products at the customer's premises.

Whereas the enterprise security channel is two-tier, our preferred partners in the business-to-business market are specialized resellers and integrators. The preferred product for large enterprises is the before-mentioned Vacman Middleware 3.0 and, soon, Identikey.

The third crucial element of the Company's success is its employees. VASCO is growing and so is our need for more skilled people to support our growth. The VASCO school is one of the initiatives we have taken to assure a steady inflow of new recruits.

We search for juniors all over the world and hire them after successful tests. They follow an intensive nine-month training at our offices in Wemmel, Belgium. Afterwards, they return to their home market in order to represent VASCO locally.

A year ago, it was not easy for VASCO to find enough skilled people and to integrate them quickly enough.

This situation has improved due to several reasons -- our VASCO school, VASCO's worldwide image as a successful Company and market leader, and our tight office network, allowing us to organize recruitment actions in many local markets.

To sustain our growth, VASCO needs to recruit. We can safely state that this process is under control.

The cash, the fourth element, (inaudible - highly accented language). All I can say is that we are able to finance our growth.

We are proud that we are able to report the most profitable quarter in VASCO's history, while we are investing strongly in the further reinforcement of our market leadership. Thank you.

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

Thanks, Ken. And welcome to everyone on the call.

As noted earlier by Ken, revenues for the second quarter of 2007 were $32.4 million, an increase of $13.9 million or 75% over the second quarter of 2006.

For the first six months, revenues were $58.8 million, an increase of 83% over the comparable period in 2006.

The increase in the revenue for the second quarter and first six months reflects significant increases from both the banking and enterprise security markets.

Revenues in the second quarter of 2007 from the banking and enterprise security markets increased 76% and 67%, respectively.

For the first six months of 2007, revenues from the banking and the enterprise security markets increased by 86% and 63%, respectively.

It should be noted that the comparison of revenues was positively impacted by the weaker U.S. dollar in 2007. We estimate that the revenues in the second quarter and first six months of 2007 were approximately $1.2 million and $2.2 million higher, respectively, than they would have been had the exchange rates in 2007 been the same as in 2006.

In both periods, revenues were 4% higher than they would have been had the exchange rates in '07 been the same as in '06.

The distribution of our revenue in the second quarter of 2007 between our two primary markets was approximately 88% from banking and 12% from enterprise security. This compares to 87% from banking and 13% from enterprise security in Q2 of '06.

For the first six months of 2007, 86% of our revenues was from banking and 14% from enterprise security, and this compares to 85% from banking and 15% from enterprise security for the first six months of 2006.

The geographic distribution of our revenue in the second quarter was approximately 65% from Europe, 8% from the United States, 15% from Asia, and the remaining 12% from other countries.

For the second quarter of 2006, 61% of the revenue was from Europe, 14% from U.S., 5% from Asia, and 20% was from other countries.

It should be noted that the revenue from each of the primary geographic areas increased in the second quarter of 2007 as compared to the second quarter of 2006. The geographic distribution of our revenue for the first six months of 2007 was similar to the distribution for the second quarter of 2007.

Gross profit as a percentage of revenue for the second quarter of both 2007 and 2006 was approximately 64%. For the first six months, gross profit as a percentage of revenue was 65% in 2007 compared to 66% in 2006.

The decrease in gross profit as a percentage of revenue for the first six months of 2007 compared to 2006 primarily reflects a change in the mix of our revenues, with a slightly 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 margin card reader business.

The decline in the margins from these two factors was partially offset by an increase in the percentage of the business coming from non-hardware products and the strengthening of the euro compared to the U.S. dollar.

Our non-hardware revenues were 14% of total revenue for the first six months of 2007 and compares to 12% of total revenue for the first six months of 2006.

Operating expenses for the second quarter of 2007 were $11.2 million, an increase of $3.5 million or 44% from the second quarter of 2006.

Operating expenses for the first six months of 2007 were $21.9 million, an increase of $7.6 million or 53% from the same period in 2006.

Operating expenses for the second quarter and first six months of 2007 included $462,000 and $905,000, respectively, related to stock-based incentive plans. Stock-based incentive plan expenses in the second quarter and first six months of 2006 were $430,000 and $712,000, respectively.

It should also be noted that the comparison of operating expenses in 2007 versus 2006 was negatively impacted by the weaker dollar in 2007.

We estimate that the expenses were $616,000 or 6% higher for the quarter and $1.3 million or 6% higher for the first six months than they would have been had the exchange rates in 2007 been the same as in 2006.

For the second quarter, operating expenses increased by $2.2 million or 49% in sales and marketing, $840,000 or 68% in research and development, and $243,000 or 12% in general and administrative, when compared to the second quarter of 2006.

The majority of the increase in the sales and marketing area were related to the Company's increased investment in sales staff, investment in marketing programs and higher depreciation costs, primarily related to the cost of training films developed in 2006.

The increase in research and development was primarily attributable to increased compensation expense, in part, resulting from the acquisitions of Logico and Able in the second and fourth quarters of 2006, respectively.

The increase in general and administrative expenses primarily reflect increased compensation expenses and recruiting costs, which were partially offset by a reduction in provisions for uncollectible accounts.

For the first six months of 2007, operating expenses increased by $4.3 million or 51% in sales and marketing, $1.8 million or 84% in research and development, and $1.1 million or 31% in general and administrative expenses when compared to the same period of 2006.

The reasons for the increases in expense for the first six months are generally the same as for the second quarter.

Operating income for the second quarter of 2007 was $9.5 million, an increase of $5.4 million or 132% from the $4.1 million reported for the second quarter of 2006. And for the first six months, operating income was $16.3 million in 2007, an increase of $9.3 million or 134% from the $7 million reported in 2006.

Operating income as a percentage of revenue or operating margin was 29.1% for the second quarter and 27.7% for the first six months of 2007.

In 2006, our operating margins were 22.1% for the quarter and 21.7% for the first six months.

The increase in operating margin is attributable to improved efficiency as reflected by the decline in operating expenses as a percentage of revenue, primarily in the sales and marketing and general and administrative line items.

The Company reported income tax expense of $2.7 million for the second quarter and $4.6 million for the first six months of 2007. The effective tax rate was 28% for both periods in 2007.

For 2006, the Company reported income tax expense of $1.4 million for the second quarter and $2.4 million for the first six months.

The effective tax rate reported in 2006, including the impact of the charge for impairment of our investment in secured services was 31.4% for the second quarter and 36% for the six months ended June 30.

The effective tax rate excluding the impact of the impairment charge was 33.2% for both the quarter and the first six months of 2006.

The effective rates for both 2007 and 2006 reflect our estimate of the full year tax rate at the end of the second quarter in each period.

The rate in 2007 is lower than 2006, as our estimate of the full year tax rate in 2007 reflects increased earnings in the United States for which we have tax loss carry-forwards. The benefit of those loss carry-forwards have been fully reserved for operating purposes in prior years.

Earnings before interest, taxes, depreciation, amortization, EBITDA or operating cash flow, if you will, was $10.2 million for the second quarter and $17.8 million for the first six months of 2007.

EBITDA was $5.6 million or 122% higher in the second quarter and $10.9 million or 158% higher than in the first six months of 2006.

The makeup of our workforce at June 30, 2007 was 210 people worldwide, with 116 persons in sales, marketing and customer support, 70 in research and development, and 24 in general and administrative.

The average headcount for the second quarter of 2007 was 64 persons or 45% higher than the average headcount for the second quarter of 2006.

The average headcount for the first six months of 2007 was 62 persons or 46% higher than the average headcount for the same period in 2006.

The strength of our operating performance is also reflected in our balance sheet. Our net cash and working capital balances both increased from the prior quarter and prior year end.

As of June 30, 2007, our net cash balance, which is defined as total cash less bank borrowings, was $26 million, an increase of $9.2 million or 55% from $16.8 million at March 31, 2007 and an increase of $13.4 million or 106% from $12.6 million at December 31, 2006.

As of June 30, 2007, our working capital balance was $37.8 million, an increase of $9 million or 31% from $28.8 million at March 31, 2007 and an increase of $15.7 million or 72% from $22.1 million at December 31, 2006.

Bank borrowings noted on the balance sheet at June 30, 2007 of $3.3 million were borrowed under the line of credit and relate solely to our hedging program. There was 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 decreased to 67 days as of June 30, 2007, from 81 days at March 31, '07 and from 72 days at December 31, 2006. The decrease in day sales outstanding was primarily related to the timing of when sales were made in the quarter.

Now, I would like to turn the meeting back to Ken.

Thank you, Cliff.

First, I'd like to comment again on order backlog for Q3 2007. As of this date, we have firm orders with shipments scheduled for the third quarter of approximately $27.1 million. Any new orders received before quarter's end and shipped during the quarter would be added to this number.

This backlog shows the strength of our order flow as it is 68% higher than the backlog going into Q3 2006. In addition, the backlog is 45% higher than the $18.7 million in revenues reported for Q3 2006.

Today we are also updating guidance for full year 2007. As in the past, we only comment on annual numbers, not quarterly numbers.

First, we are currently estimating that our full year revenue will grow from 55% to 65% over full year 2006. The current estimate represents a 20 percentage point increase from our previous estimate of 35% to 45% revenue growth in 2007 over 2006.

Second, we are maintaining our guidance that full year gross margins will be in the range of 60% to 68% of revenue.

Finally, we are currently estimating that full year 2007 operating income will be in the range of 23% to 30% of revenue. The current estimate represents a five percentage point increase from our previous estimate of 18% to 25%.

In summary, we are very pleased with our results for second quarter and first six months of 2007 and look forward to a strong performance for the remainder of the year. And as always, you can rely on VASCO's people to do their very best.

This concludes our presentations today and we'll 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). Your first question is coming from Dan Ives of Friedman, Billings. Please go ahead.

Congrats on knocking the cover off the ball.

In regards to guidance, typically the back half of the year, call it 55% to 57% of revenues, is there any reason to think that the back half is not going to be stronger than the first half based on what you guys see in the pipeline?

We don't see anything unusual in terms of what our normal expectations are for the last half of the year.

Perfect. And maybe you can talk about just what you're seeing among the U.S. banks. I mean, it seems like there's a lot of pilots and kind of mining of the install base potentially there.

What are you seeing on the U.S. market? Does it feel like it's about ready to -- I don't want to say take off, but start to see more of a revenue contribution over the coming quarters?

Well, as you know and probably everybody on the call knows, the FDIC issued guidance to all the banks and savings and loans in October of 2005 that they had to adopt some strong form of two factor authentication.

Initially, they described that as what you know, like your user name, and what you have, like a security token, like a Digipass or a smart card or a USB stick.

As time wore on and as some of the banks protested that they could not comply fast enough to meet the deadline of December 31, 2006, the FDIC started softening that definition.

And so I think that -- and I'd Jan to also comment about this, but I think that a lot of banks have simply not yet complied. They have not done anything.

I think some banks are in various forms of pilots, some banks are doing analyses, and some banks have rolled out what they call authentication, but is really risk or fraud management and/or some very simple little solution, like what's your mother's maiden name.

In terms of our success, we are seeing a building business here in the United States and we're pleased with how it's starting to shape up.

Jan, would you like to add something to that?

Yes, Ken. What we see, and we see that in all large countries in the world, is that, first of all, you need to make a big difference between cash management banking, corporate banking, and retail banking.

In the U.S., in the retail banking, they are still behind in the applications. In the U.S. retail banking, you still cannot do -- there are not a lot of banks offering the service that you can do money transfers from your banking account to a third banking account, except maybe from some pre-registered accounts, like electricity, renting and so on.

And now you see that in the rest of the world. We see that there is a strong competition coming to the U.S. to compete, U.S. bankers from Europe, from Asia.

They're coming with their technology and one of the technologies that they're going to offer more and more in the U.S. market is the ability to the consumer to also, in an electronic way, money transfer from their own account to a third party account. That is a first time in the market in the market in the U.S.

The second thing, in corporate banking, we see that the demand for two-factor authentication, you could also say real security products, is very strong. I believe that all banks have understood that it is better to protect these accounts and they offer more and more two-factor authentication to their customers.

So what I partially see is that the next thing is a very strong demand for our products or, let's say, two-factor authentication products in the corporate banking, cash management applications.

I also see that there is a change in the mentality of U.S. banks, that more and more competitors are coming in those banks and they bring applications that will need much more, let's say, two-factor authentication products than today.

Okay. And just a final question. Ken, everyone knows you're conservative and for you to ratchet up guidance like you did I think speaks to something that you're seeing in the business.

Could you talk anecdotally? What is it? Is it just pipeline, the backlog, the deals that gave you the confidence to kind of ratchet up guidance the way you did? Can you just kind of speak to that, maybe that change in philosophy from 1Q to 2Q, taking up the bar so high?

Thanks. Great quarter.

Thank you. Of course, we have a better view for the rest of the year after waiting for a quarter to assess where we are.

Generally speaking, we've been talking about the robust nature of the market into which we're selling and we've worked hard to have the right products that meet the needs of the customers.

Also, please do not forget that for years now, I've been talking about sustainable, repeatable revenue, and that's the result of banks that sign up with us, stay with us forever and roll out their individual applications over typically two to four years.

So we have this momentum that's a part of our model, a momentum from these banks that have been customers, stay customers, that continue ordering from us.

So it's really a combination of all those things that give us confidence to ratchet up the guidance as we did.

Thank you. Your next question is coming from Robert Breza of RBC Capital Markets. Please go ahead.

Hi, good morning and good afternoon, everybody.

Ken, I was wondering if you could speak to the backlog a little bit. It's down quarter over quarter and we don't normally see that and I was just wondering if you could talk about that relative to the guidance knowing that it came in slightly below last quarter's backlog.

Sure. Well, first, as you know, we really only guide for the full year. So I've always said that we're a small company and it's only appropriate for us to guide on a full year basis.

But if you look historically, retrospectively, over the years, Q2 versus Q3, as an example, Q3 we were only modestly up. I think it was probably less than 1% in our backlog that we announced for Q3 versus Q2 of last year.

This year, the difference is probably less than 3%, $28 million versus the $27.1 million in backlog for Q2 versus Q3.

So I wouldn't read anything in particular into it. It's just a point in time, nothing more, nothing less.

Okay. Then maybe just as a follow-up, when you're looking at the net number of new banks/customers that came in the quarter, was very strong -- in looking at that, has anything changed in your model when you get those customers moving from initial deployment to kind of the next level of deployment, normally the 30% which you've talked about in the past?

Has anything changed in that deployment model as you're bringing on new customers? Is it accelerating or decelerating in any geographic region or any change there you can talk about?

Jan, would you like to address that question?

First of all, what I wanted to comment that gives also a little bit of an explanation of our backlog is that to date, we see that banks, but also enterprise security customers are waiting to place their order. That is a mentality. It's a trend, let's say, in the market.

And that means that we need and we are doing that very well forecasting our production so that we can deliver very fast. That is, in fact, I will not say a new trend, it's a trend that is, in fact, increasing in that market. That's the first thing.

The second thing is due to the criminal activities, it is possible that some banks are deploying faster than the traditional model that there was in the past. It's not even a trend by region. It's more a trend by country, sometimes for competitive reasons, that the bank can increase his shipments faster than forecasted, but there is a but.

The but is that we see also that there is, even in our existing customer base, a big increase of customers who are moving from traditional accounts to electronic banking accounts. That is also a trend.

So the banks are not only growing in numbers or customer base and the bank is not only growing in quantities, there's also that, by bank, the electronic banking accounts are increasing rapidly.

Okay. I'll jump back in the queue. Thank you.

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

Yes, thanks. Congrats on a very strong quarter.

Just to follow-up on the previous question, Jan, can you talk about what is your fulfillment time right now?

In other words, clearly, the difference between backlog and revenue seems to widen and you can fulfill the orders faster. So can you kind of characterize what have you done to maybe supply chain and can you do any further improvements to it?

Yes. I should say we are improving every quarter. You see that a little bit also on our DSO.

It is just a matter of using the common sense, putting that more in procedures, making sure that we are optimizing our forecasting, we are optimizing also our production planning.

It's all a process that is going on quarter by quarter and we're getting better and better for forecasting, production, because we need to have an answer on that trend of the market.

A second thing, what I'd maybe forget to mention, as we may not forget, is that we are getting -- and you see that also in our numbers -- more and more success with our software products and, traditionally, software products are deployed very fast.

If you look at our Digipass for Web, especially in the U.S. banking community, with our zero footprint strategy, if you get an order, you can do deployment extremely fast with that. It has nothing to do anymore with hardware production.

So it's a mix of everything.

Thank you. And, Ken, can you talk about some of the traction that you guys are having with some of your partners on, I guess, notably, Verisign? What are you starting to see and what the trend is there?

Well, Verisign is a good example of where VASCO indeed tries to get leverage in its sales model. Jan has talked about our reseller channel and how well that's going. The number of new accounts is obviously speaking volumes about the success of our distribution and reseller channel.

We also feel that it is smart on our behalf to work with big and well known companies like Verisign, particularly since they're offering a service that we do not currently offer.

Verisign has the brand and the contacts and relationships that enable them to go into Charles Schwab, Pay-Pal, e-Bay, and offer their VIPNET, third-party, out-sourced authentication.

And over the last 18 months, Verisign has become a meaningful customer to VASCO. I really won't say anything more than that, but they've become a meaningful customer and a very appropriate way for us to distribute our products. We're very happy with the relationship with Verisign.

To be clear, none of your customers are still 10% of revenue, right?

We have one that is 10% of revenue. It's a different one for the quarter than it is for the six months, but we only had one in each period that was over 10% of revenue and that percentage was relatively modestly over 10%. So we don't have anybody in the 15 plus percent range.

Great. Thank you.

Thank you, Andrey.

Thank you. Your next question is coming from Scott Zeller of Needham & Company. Please go ahead.

Thanks. I wanted to first ask about gross margin trends. Could you help us out looking forward with what to expect there?

Well, we've given you the range of guidance. We feel comfortable in that range. We continue to work hard to reduce our manufacturing costs for the physical Digipasses, whether it's a standard token or a connected or unconnected smart card reader.

As Jan pointed out and as Cliff cited, in terms of percentage of revenue, 14% of our revenue was software-related in the latest period, and that's almost all gross margin.

So other than to say we feel very comfortable within that range, I don't think I have any more comment.

Okay. Then I guess I'm trying to get my arms around the percentage breakdown geographically. I think a lot of us are looking for some acceleration in the U.S. However, EMEA and the other regions remain still very strong.

What is it that's continuing the growth in EMEA, per se? I think I heard earlier from Jan that it's just expansion of existing customers into retail in certain regions.

Is that really what's making the mix stay as is rather than helping the U.S. accelerate?

Jan, would you like to add anymore comments about EMEA or Asia or any of the geographic territories?

Well, first of all, the end of quarter is hardly -- it's just a date, it's momentum, and there can be, of course, a difference if a shipment is done a couple of days later in the quarter or a couple of days earlier in the quarter.

Now, in the U.S., you need to see that, as a general comment, in the U.S., on the banking, you need to see that our strategy is not different than the strategy in our other regions.

We are trying to implement as much as possible our Vacman controller in all those different U.S. banks.

As such, in the beginning, that does not give, per se, a big sale, but that gives us the ability to switch very fast to strong two-factor authentication if the application would take like that, if the applications in the retail banking U.S. markets are coming.

That is a clearer situation in the U.S. So it's maybe not always the sales as such that is important, but there, in the U.S., it is, of course very important is the quantity, is the number of banks that are moving forward to implement banking technology.

Now, for cash management or for Digipass for retail banking, as such, that is quite important for us for the future market.

The second thing in the U.S. is that, again, there is extremely strong demand in cash management for corporate banking applications.

Retail banking is today more for our Vacman controller and our Digipass [roller], but I'm also glad that, and I believe I mentioned that already in the last quarter, that today or quite soon, one of the U.S. banks will do deployment of two-factor authentication for a retail banking application.

The rest in the regions, I don't see any difference. The market is growing. There are more and more man-in-the-middle attacks.

It is not anymore -- and that's a big change maybe in the last six months, that the man-in-the-middle attacks here are really dangerous for banks. It's not anymore for the top tier banks. It is for all banks in all regions, SME banks, large banks, but not only U.S. banks anymore.

We see a very, very increase in those criminal activities. And, again, we are doing our best and successfully, like we did in the past. We are there. We are not trying to convince banks to go for two-factor authentication. That market is too huge.

We are very fast, when a bank decides to go to two-factor authentication, to convince them to work with VASCO.

Okay. Last thing. Could I get a count, if you disclose it, on the total number of U.S. banks and maybe the increase quarter to quarter?

We don't give that number.

Thanks. Good quarter.

Thank you, Scott.

Thank you. Your next question is coming from Amit Dayal of Rodman & Renshaw. Please go ahead.

Good morning, gentlemen, and congratulations on another solid execution.

Thanks, Amit.

Most of my questions have been asked. I just wanted to touch base on how you guys are positioning VASCO to benefit from the mobile banking opportunity.

Are you talking to any players? Are there any pilots going on right now?

Well, we've had a product for quite some time that is a software version of our physical Digipass that will reside on a cell phone or a PDA or any other kind of mobile communications device.

So we're positioned and ready to support mobile banking any time it materializes. We haven't seen a tremendous demand yet for that kind of application.

I know that it's occurred in Japan. I know that cell phones are being used to pay for concessions and candy and things like that. But applications take time to gestate and actually take impact.

So all I can say is we feel like we're prepared to take advantage of that eventuality.

Great. And in terms of the banking summits, do you have any updates for us on any new summits that you are going to hold for the remainder of the year?

And, also, in addition to that, are you targeting any other verticals in terms of such marketing strategies like those banking summits? Should we expect anything to happen on that front?

Jan, why don't you address maybe some of the key cities that we have scheduled for the rest of the year for our banking summits. And his second question was do we plan on maybe health summits or e-government summits.

Right.

Just maybe a small add-on on the mobile banking. Mobile banking for us is, of course, a part of our total banking solution.

One of the solutions that we are offering to the market is that if you lose one of your hardware Digipasses, for instance, that, as a backup, the banks are offering then a one-time passport or a one-time signature that is sent over by SMS.

Secondly, we have a full product range of mobile banking products today. We have done the tests for more than 400 mobile telephones. The test has been done very successfully and we are deploying more and more mobile banking products to the market.

So more and more banks are choosing for a mixed strategy. That's where, with our Vacman controller, they can have, as well, Digipass, as well after Digipass as well mobile banking products.

So we are in the market. I don't know if you're a market leader or not. Honestly, I don't know. I've not seen any reports that are good enough to say how much deployment has been done in mobile banking in the world.

What I'm getting is that we see more products coming into this space and, over the next one or two years, there's probably going to be something very interesting in terms of the market size.

Yes, but I don't know the actual situation, honestly. I know we are getting more and more demand for that, again, sometimes as backup, sometimes, but most of the time, it is a mix of mobile banking products with other products, because it is not always good enough for -- you need to see that the banking strategy has always to do with the transaction, the value of the transaction.

You don't use a mobile telephone if that transaction value is over whatever amount that the bank decides or the security officers decide to use for it. So it's always a mix of applications.

Right.

Coming back to our successful banking summit, I believe the whole list is on our website, but, out of my head, we have one in Brazil soon, we have -- I'm just talking over the next weeks, months --Istanbul and Turkey, Madrid, London.

I know also that we have road shows in the U.S. that are going on or that will go on in the next weeks. So it's a continuous success.

Are we doing that for other markets? Yes. We have now our products that are integrating into 50 other markets. We have, of course, one, the enterprise security, which is more a horizontal market.

But in vertical markets, we have the healthcare, we have education, online gaming, the online ordering for the car manufacturers. So we have already more than 50 different applications where our products are used.

We call that our business-to-business seminar. We start very simply with that. So it's, again, basically, the application is quite similar to the banking application. It is something doing online, but for, of course, other markets.

So the answer is, clearly, yes, we are continuing or we are increasing our business-to-business seminars in parallel with our banking summits.

Thank you, guys.

Thank you. Your next question is coming from Sean Jackson of Avondale Partners. Please go ahead.

Can you talk about the global opportunity? And there's some government mandates that are out there and we're thinking of there's one in Korea at the end of this month and, also, China is becoming more serious about their online retail banking security.

Can you just comment on the footprint that you guys have in those two regions?

Jan, would you answer that?

Yes. Maybe, first of all, a little bit about our Digipass Plus strategy. Our Digipass Plus strategy is, in fact, products that can be used in a service model to do, in fact, single authentication for multiple applications.

If you ask about Korea, there is this what they call national bank or what you call in the U.S. your federal or state bank, I believe, has decided to go for a one-unit platform for authentication that the banks can use.

What does that mean? That means that a consumer, a customer of the bank can, with one strong authentication device, go to his multiple accounts, if they belong to the same bank or they belong to another bank, it doesn't matter. That is a Korea status. That is the way that the Korea banking organization will and is implementing.

And, of course, VASCO is very close to those banking organizations and we believe that the Asian market is really a very, very good market for us.

But the Chinese market, again, in the beginning of the year, eight banks have received a license to do retail banking. From these eight banks, seven are already customers for retail banking in other countries.

What I can say is that to date, some pilots are going on in the Chinese market.

Thanks. And, also, can you give an update on how the transition of your European headquarters is going? Is it complete? Are there savings already being felt from that? Just give an update on it.

I'll introduce this. This is something that we spent a great deal of thought and effort and time to discuss at the board level and plan out with a professional firm, Baker McKenzie.

We had a couple of objectives in even considering this. Number one, we wanted to roll out our second tier or middle management tier of executives and we wanted to have a location that was good for talent in various areas.

And we didn't want to hire U.S. executives that spoke a single language and really were so U.S. centric. We were looking for executives that were global executives, that spoke multiple languages and understood international cultures.

And so we targeted a CIO, a director of contracts and administration, a CTO, et cetera. So we're busy working on filling those positions. Some of the positions are already filled. Some will be filled throughout the next six to 12 months.

The second thing was we wanted to consider how to better optimize our taxes and some of you may be aware that there are certain countries around the world where taxes are reduced if you make a commitment to employment in that country.

So there were just an awful lot of things that we needed to consider. We planned this over the last 18 months. We, I think, came up with a very good strategy for implementing this plan and as of April 1 of this year, we officially opened the Zurich, Switzerland international headquarters.

Clifford Bown, our EVP and CFO, volunteered to move there and stay there for two years to make sure that this all worked and worked well.

With that, Cliff, I'd like you to add a couple of comments to it.

I would reiterate that everything is going well, according to plan, and, in fact, we've announced three senior level hires that are now up and operating in Zurich.

We've got a director of worldwide human resources that we've added to our talent pool. We've added a chief information officer to oversee our data and communications systems in Zurich. And we've added our first legal person on board, who's going to be running all of our contracts with customers, distributors, resellers, and compliance under those contract areas.

So we've got three high level people on board that are up and functioning as we speak today and doing that.

One of the things you mentioned, Sean, was your comment on the transition and I don't think it's so much a transition as it was an expansion. We've got a strong workforce in Brussels, Belgium. We don't have any immediate plans to move people from Brussels to Zurich.

We don't want to disrupt the strong momentum that the Company has and we see no reason to ask or force those people to relocate from Belgium to Zurich.

So when you think about Switzerland, think about it more as incremental as we go forward, adding a layer of professional management so that VASCO continues to grow at this accelerated pace, has a stronger infrastructure in which to integrate these new opportunities that we're seeing.

But everything is going well and over a period of time, as Ken mentioned, I do think it will have a beneficial impact on lowering our worldwide effective tax rate.

You won't see it quite as much in the first five years because we moved intellectual property to Switzerland with the move and, therefore, the Swiss company will be doing buy-ins of intellectual property from other countries around the world. But at the end of those buy-in periods, we'll see a lower effective tax rate.

Lastly, as far as the products going forward, obviously, the one-time password token has been the staple and bread and butter of your application business for a while.

What is the next one? Your software is getting more popular, but is there another form factor that you're excited about that has better growth potential than others at this point?

Well, software, in general, is something that we've been talking about pretty robustly now for several quarters. Digipass for Web is a product that effectively functions like our Digipass-260. It does one-time passwords and it also does electronic signatures.

That's a software version of the Digipass-260 and it loads down on a user's PC. And once they've gone through a registration, it's basically working behind the scene.

Jan Valcke would call that zero footprint. Jan, why don't you talk about the acceptance and the activity and momentum in that product?

All right. Let's say, as a general strategy or our general strategy, also, but also a general strategy in the market, we see -- and banks must follow that strategy -- that the banking community is the prior community that is worried about installing security.

So if you are successful in this banking community, then automatically we are also successful in this large market of business-to-business and e-commerce, and we see that that is happening. That is the first part of the strategy.

The second thing is that we are moved from a single hardware company, one token, to a complete strategy of complete authentication platform strategy, where we are combining all authentication technologies on one unique platform that we call Vacman, which is our core authentication platform, and that is now integrated or quite completely integrated in our Identikey server.

So we need to see that today we are really a software company that are deploying authentication technologies towards customers and that the hardware is an add-on to security.

So on one hand, yes, there will be form factors changing in this hardware. The devices will be lighter, will be flat, will be more flexible. That is a normal evolution of the technology.

At the other hand, we see that in this banking community, there is going to be a mix of software and hardware products. I'll give you an example.

If you have minus 12-year-old customers, you know, the students, banks are offering today electronic banking applications to those students, but the transfers they can do, the money transfers they can do are lower than a couple of hundred dollars by transaction.

So there is no need to have to really use strong or, let's say, hardware two-factor authentication. So banks are doing that by our successful Digipass for Web, online authentication.

So the nice thing about Digipass for Web is it's really zero footprint. That means you don't need to install anything, you don't need to do a deployment. It's really online. It is easy to explain and it gives a much stronger security than just a static password.

Later on, if the applications need stronger authentication due to the fact that the transaction value is higher than initially, then they can add one or other of our hardware products.

That is our strategy today. It's our software strategy, where hardware is seen as an add-on, and we are implementing that more and more, again, outside the banking.

Now, the nice thing is, for us, that our strategy also and that the banks are looking very strongly at it is it's nice to do completely a security strategy, but you still have this weak PC of your customer, this weak computer of the customer. You're not sure how this customer will treat it.

And then comes in our story this aXs Guard, where banks which have aXs Guard can also control the security of the PCs of their customers. So this is an ultimate solution. You'll start with, let's say you start with maybe fraud detection, which is just an activity to try to determine the criminal activities.

Then authentication is really to stop this criminal activity to your own -- I'm now talking as a banker -- to your own applications. And then you go really a step further and say what can we now offer to our customers to secure also those platforms.

This is really the banking strategy on the product lines that we are doing. So here the four factors will be lighter, more flexible, but basically it is a whole set of authentication technologies that are now offered to the banking community.

Operator, we have time for one more question from another individual.

Yes, sir. Your next question is coming from Joe Maxa of Dougherty & Company. Please go ahead.

This is actually Andrew Holm on the line for Joe. Congrats on the quarter, guys.

I just had one quick question about the UK market and what you guys are seeing for competition over there and what are banks looking at in terms of the unconnected smart card reader versus like the one-button token.

Jan, once again.

Again, in the UK market, we're doing the same strategy as the rest of the world. We are offering our Vacman core authentication platform, with all the techniques.

Some banks have decided to go with the EMV standards. That means that is then the unconnected reader. And some banks are choosing to go with traditional authentication products.

So it's a mix, but really you need to see that this is a first step. More and more banks are really deciding also sometimes to do a mix of products.

So it's not always easy to say will they go really for 100% reader business or will they go really 100% for a one-button token business.

I think today what most banks are doing is educating their customers to use strong authentication products to secure transactions and more and more you see that they are implementing a marketing strategy then instead of real security strategy, a marketing strategy with a mix of products towards different channels of customers.

One last comment on this. Whether it's the UK or any country around the world, what Jan is talking about, we have this strong and unique platform on which we deliver a number of different products and solutions, some 45 different products, not even including the aXs Guard appliance, with its multiple functions.

We think that that is very attractive to the buyer, because they can work with one company, VASCO, to take care of most of their authentication requirements.

It's a strategy that we've been building and working and executing very well.

At this time, I'd like to thank everybody for their participation, excellent questions. And as always, I want to thank the VASCO people around the world for their hard work, their execution, and the success that we're seeing because of their efforts.

Thanks very much, everybody.

This concludes today's VASCO Data Security International, Incorporated second quarter 2007 earnings conference call. You may now disconnect, and have a wonderful day.