"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

24 January 2007

Vasco Data Services (VDSI-NAZ) - Corporate Computer Security Steps Up

Investment Thesis: Chicago-area security company Vasco Data Services (VDSI-OTC) offers a pure play on increased corporate spending on institutional data security as a provider of open standards-based hardware and software security systems. Operating from a strong European franchise, VDSI’s software business in the U.S. is accelerating due to established banking data processor Fiserv (FISV).
Key Investment Drivers:
• Leading player in online verification, the fastest growing segment (+30%) of the information security business;
• Two other competitors acquired last year at big revenue multiples (6-7x) and the industry appears to face further consolidation;
• VDSI has a strong competitive position in Europe due to smart cards and US business is growing rapidly due to alliance with bank processing leader Fiserv;
• Core banking client base has now committed to using “tokens” sold by VDSI and others for online AND mobile user (e.g. client) authentication; and
• Upcoming catalysts may come from eBay and 2007 earnings guidance (+50%).

Online Security Segments Consolidating:

The online verification industry is consolidating and recent deals suggests that corporate adoption of such systems is well underway, and will be integrated into enterprise storage and processing systems. VDSI, RSA (now part of EMC: NYSE) and Aladdin Knowledge Systems (Nasdaq:ALDN) operate in the hot field of user identification and access authorization through, among other things, special “keys” used on VPNs (corporate virtual private networks). In acquiring RSA last summer for $2.1B (6.5x revenues), EMC made a strategic entry into a complimentary field to its core storage business which it anticipates annual potential sales of $1 billion within a few years. IBM's responded last August 2006 by buying RSA competitor Internet Security Systems (ISSX), raising the stakes for other enterprise systems operators. Microsoft (MSFT), Symantec (SYMC), Hewlett-Packard Co. (HPQ), Oracle (ORCL) and SAP (SAP) could all be looking to acquire a mid-sized pure play security company. EMC’s Security Division just reported a 26% revenue gain to a $500m annual revenue run rate, incorporating the RSA acquisition, noting that the “strong performance reflected continued traction for RSA's consumer identity protection solutions as a result of federal guidelines for stronger authentication practices in online banking and concerns over credit card fraud and identity theft.”

As Microsoft prepares to release its new Vista operating system, many technology analysts are concerned about the security and privacy shortcomings in the new release. So many corporations have already become more aggressive about security of their data, especially since Symantec and other consumer security providers have been unable to prevent security breaches. However, the security business has already gone vertical- online banking and e-commerce customers are being equipped with their own digital passes (or “tokens”) to access information.

Competitors: VascoData Aladdin SafeNet SecureComput
Revs(FY06E) $ 76.5m $ 88.0m $ 290.1m $ 180.5m
Revs (FY07E) $110.0m $ 96.6m $ 316.8m $ 250.2m
EPS (FY06E) $0.33 $ 1.07 $ 0.88 $ 0.25
EPS (FY07E) $0.45 $ 1.14 $ 1.33 $ 0.24
P/E Ratio (F) 31.1x 15.3x 17.7x 26.9x
PEG Ratio .62x 1.10x .83x 1.79x
VDSI: Strong European Positioning and US Strength from Fiserv Alliance:

With a $400m market cap, VDSI is hardly an institutional name. Yet it’s emerging as a world-leader for strong user authentication, with in excess of 550 international financial institutions and approximately 3,300 blue-chip corporations and governments located in more than 100 countries. VDSI’s European business has been booming with online user identification broadly accepted, with a recent VDSI contracts with leading Belgian bank KBC and Allied Irish Banks announced in January 2007. A VDSI smart card addition last year improved its competitive standing. In May 2006, VDSI announced its acquisition of Logico Smart Card Solutions of Vienna, Austria, an authentication storage specialist with extensive experience in smart card based authentication.

New Online and Mobility Applications Compelling Additional Safeguards:
Banking via telephone and wireless mobile devices has become an important delivery channel for financial institutions. As with Internet banking, telephones and wireless devices afford great convenience for bank customers, but unfortunately they too are prone to phishing and other forms of attack. The Federal Financial Institutions Examination Council instituted regulations in late 2005 that banks need to safeguard customer data. U.S. financial institutions had dragged their feet on online authentication but now efforts to increase client protection are being used proactively for differentiation. VDSI is the leading provider of that more than 100 U.S. financial institutions have integrated VASCO solutions into their Internet banking offerings. VASCO's alliance with Fiserv, Inc. (Nasdaq: FISV), a U.S. Fortune 500 company that provides information management systems and services to 17,000 clients in the financial industry, has been a catalyst for the growth. VDSI added 29 banking customers in Q306 and is planning to double its domestic sales force in 2007. Banks represent currently 86% of sales, but a variety of businesses, governments and others use their products worldwide.
VDSI Could Move on eBay PayPal News and Upcoming Analyst Meeting:

Online authentication service and software providers are the fastest growing segment of the security business at 30% annually, with coming news flow likely to highlight VDSI. VDSI and a few other ‘industrial strength’ security providers deliver user authentication software and hardware for the financial world, remote access, e-business and e-commerce via its Digipass hardware and software security products. On January 24, eBay plans to offer PayPal users security tokens in a bid to strengthen the security of its payment service, and Vasco's authentication-token product is likely to be introduced as part of that service. And since the company has beaten analyst expectations by a third in the last two quarters and is poised to conduct a major analyst meeting on January 31, then some hedge funds and larger institutions are likely to take notice. VDSI will report Q406 earnings then and expectations are for revenue of $25.72 million and earnings of 11 cents a share, according to a consensus of First Call analysts. FY 07 earnings are slated to reach $107m in revenues and $0.43 of earnings, but guidance should be increased at the analyst meeting to $110m and $0.45 of earnings. A real catalyst would be a contract signing by a U.S. banking major, such as Citicorp which has been in discussions with VDSI since fall.

Disclosure: TMV owned a long position in VDSI as of 1/24/07


At 12:47 AM, Anonymous Corporate Security said...

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