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VASCO DSI
Price

Technology
30 July 2013

$8.21 $324m

Investment summary: Strong pipeline

With a very strong pipeline in the banking vertical going into H2, management could retain full-year guidance despite a weak Q2 (revenues -20% y-o-y) and ongoing weakness from its Enterprise and Application business. Although at an early stage, commercialisation of SaaS-based products is progressing, positioning the company well in this emerging sector. VASCO is well positioned in the cyber-security market and growth is underpinned over the next few months. Following the Q2 miss, the share has been marked down and trades on 17.5x P/E mid of its peers.

Market cap
Share price graph

Traditional banking business pipeline strong

Enterprise and Application vertical (23% revenues, down 19%) has been affected by the poor economic climate for several quarters now, and this trend continued into Q2. Surprisingly, Q2 was also weaker than expected in the traditional banking vertical (73% revenues -20% in Q2). However, this was principally a timing issue; looking into the second half, the order pipeline is the strongest management has seen for some time, supported by the recent acquisition of Cronto (image-based cryptographic technology). With decent visibility into H2, management was able to reiterate guidance of full-year revenues in the range of $162-167m and operating margins of 12-14%. Although the banking division tends to be lumpy, the underlying trend is upwards in this structural growth sector.

Share details
Code Listing Sector Shares in issue VDSI NASDAQ Technology software 39.5m

Business description
VASCO is a global internet security company with a leading position in strong authentication and e-signature solutions. The DIGIPASS family of hardware and software products is used by more than 10,000 companies. 73% of revenues are from the banking sector; 62% of revenues are from EMEA; 7% the US; and 31% Asia-Pacific and other.

New service development progressing to final stages

Sales and marketing efforts behind DIGIPASS as a Service (DPS) and MyDIGIPASS.com have been stepped up; 69 ASPs have signed up. From here, the challenge is to 1) convert the ASPs customers to the products by increasing awareness of the risks; 2) develop customer loyalty; and 3) expand use across multiple apps. A dedicated US sales force has been put in place to drive the commercialisation of these innovative products to the revenue-generation stage.

Bull
Dominant player in financial services security. B-2-C cloud-based solutions DPS/ MDPC. Increase in e-commerce. Net cash of $85.6m.

Forecasts and valuation: Underpinned

The digital security sector is a direct beneficiary of growth in online and mobile banking and the fast-growing e-commerce sectors. Although recent quarters have disappointed compared to market expectations, the strong H2 pipeline and inaugural contributions from acquisitions should underpin estimates, which forecast mid to high single-digit growth to 2014. New services are at an early stage, but offer a degree of option value on the shares longer-term value. With a strong balance sheet and against this backdrop, the P/E of 17.5x looks undemanding. Consensus estimates
Year End 12/11 12/12 12/13e 12/14e Source: Bloomberg Revenue ($m) 168.1 154.3 161.8 173.5 PBT ($m) 25.8 21.7 20.3 23.9 EPS ($) 0.63 0.42 0.47 0.53 DPS ($) 0.0 0.0 0.0 0.0 P/E (x) 13.0 19.5 17.5 15.5 Yield (%) N/A N/A N/A N/A

Bear
Largest customer accounts for 11% of revenue,

and the top 10 for 37%.

Increasingly competitive markets. Cybersecurity hacking risks would damage

credibility or even lead to loss of licences.

Analysts
Bridie Barrett Schmidt Dan Ridsdale
[email protected]

+44 (0)20 3077 5700 +44 (0)20 3077 5729

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