VASCO Data Security International Q4 2008 Earnings Call Transcript

Feb.19.09 | About: VASCO Data (VDSI)

VASCO Data Security International, Inc. (NASDAQ:VDSI)

Q4 2008 Earnings Call

February 19, 2009 10:00 AM ET

Executives

T. Kendall Hunt - Chairman and Chief Executive Officer

Jan Valcke - President and Chief Operating Officer

Clifford K. Bown - Executive Vice President and Chief Financial Officer

Analysts

Daniel Ives - Friedman, Billing, Ramsey & Co.

Andrew Abrams - Avian Securities

Katherine Egbert - Jefferies & Company

Rob Owens - Pacific Crest Securities

Brian Freed - Morgan, Keegan & Company, Inc.

Scott Zeller - Needham & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Vasco Data Security International, Inc. Q4 and Full Year 2008 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

I'd now like to turn the conference over to Mr. T. Kendall Hunt, Chairman, Founder and CEO. Please go ahead, sir.

T. Kendall Hunt

Thank you, operator. Good morning everyone. For those listening in from Europe, good afternoon; and from Asia, good evening. My name is Ken Hunt, I'm the Chairman, Founder and CEO of VASCO Data Security International, Inc. On the call with me today are Jan Valcke, our President and Chief Operating Officer, and Cliff Bown, our EVP and Chief Financial Officer.

Before we begin the conference call, I need to brief all of you on forward-looking statements. Statements made in this conference call that relate to future plans, events or performances are forward-looking statements. Any statement containing words such as believes, anticipates, plans, expects, and similar words is forward-looking, and these statements involve risks and uncertainties, and are based on current expectations.

Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to the company's filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties in this regard.

Today, we're going to review the results for our fourth quarter and full year 2008. 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.

The fourth quarter of 2008 was not an easy quarter for Vasco due to the combined financial crisis and the worldwide recession. Nevertheless, we were able to stay profitable in Q4; as a result 2008 was the best year in the company's history in terms of the revenue and net income.

Revenues for the quarter in the year were 28.9 million and $133 million, an increase of 7% compared with the fourth quarter of 2007 and an increase of 11% compared to full year 2007.

Q4 2008 was also our 24th consecutive positive quarter in terms of operating income and cash flow. Our gross profit was 65% for the quarter and 69% for full year 2008. Operating income was 6% of revenue for the quarter and 21% for the full year 2008.

During the quarter, we sold an additional 355 new accounts, including 37 new banks and 318 new enterprise security customers. This compares to the fourth quarter a year ago in which we sold 651 new accounts including banks and enterprise security customers. We now have over 1200 banks and approximately 7000 enterprise security customers in more than 110 countries.

Despite and even deeper recession looming and an increasing uncertainty about the short to mid-term business climate in general, we believe that VASCO is well positioned to weather the storms that might be ahead and to be successful in these difficult times. Our business strategy for 2009 is clear. We communicated the strategy on our January 6th conference call regarding our full year 2008 revenue.

VASCO's management is taking decisive action to be successful in 2009. For us, VASCO is increasing its focus on its more productive markets. These include the growing financial markets of Brazil, Russia, India and China, known as the BRIC countries, and the more mature markets of EMEA and South East Asia where we continue to sell to the financial and non-financial industries.

Second, VASCO's initiating a cost containment program intended to respond to these difficult economic times and to maintain a profitable business. VASCO is a solid, stable and strong company and we have several advantages that we believe reduce risk in a period of economic recession. For example, our business mix allows us to develop several sources of revenue. The banking sector brings us high volumes with lower margins while the enterprise and application security markets bring us lower volumes with higher margins.

Additionally, the geographic diversity of our revenue is an important advantage for VASCO. We are truly a global company with customers in more than 110 countries. That means we can focus our efforts on markets that are not impacted as much by the current global economic challenges.

This makes us less vulnerable to local or regional events. Thanks to our business mix and our global spread, we can focus on markets that are less impacted by the crisis. Here are some examples. Our success in eGaming demonstrates our ability to win business in new verticals. Our focus on the banking market in the BRIC countries allows us to continue our success within the financial sector.

Over the past few years, VASCO has dramatically reduced its dependency on one or more very large customers in order to make its numbers. Cliff Bown can give you more detail figures but for both the full year 2008 and 2007 no one customer contributed more than 10% to VASCO's overall revenue.

Our balance sheet has never been stronger. Our assets grew significantly in 2008. At December 31, 2008 we have over $57 million in cash, an increase of almost $19 million for the year. Our cash position combined with no debt provides us with a solid base to invest in our success to overcome difficult times and to strengthen our leadership position. I believe that VASCO's corporate culture will be the key to our success in 2009. And we don't need to reinvent ourselves, we're still trying (ph).

Our execution flexibility and focus are important attributes in these times of economic challenge. We will continue to focus on the execution of our strategy, control of our cost and invest intelligently as opportunities arise. Our main objective for 2009 is profitability. We believe, we are well prepared to achieve that objective.

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

Jan Valcke

Thank you, Ken. Ladies and gentlemen, the fourth quarter of 2008 was a difficult quarter for VASCO due to the financial crisis and the recession. Nevertheless, it was a profitable quarter.

As you are all aware, the financial sector was in a state of uncertainty during the last months of last year. For that reason, we experienced important delays in orders from banks in an unprecedented high number of our key markets. This does not mean that these orders are lost. We expect to receive most of them during the year 2009.

In addition to the financial crisis, there is a worldwide recession. Our U.S. business was hit especially hard by the combination of the financial crisis and the recession. As a reaction, VASCO has implemented a cost containment program and a strategic focus on a number of key markets; VASCO's mature markets and the so called BRIC countries.

VASCO's mature markets are markets in which VASCO is successful in retail banking, servicing a high number of the markets crosshaul with secure online banking. In these markets, we use the high profile, we enjoy thanks to the banks to bring banking level security to all the sectors including enterprise and application security and eGovernment.

We have these kinds of markets primarily in EMEA and South East Asia. In the so called BRIC countries; Brazil, Russia, India and China, we aimed primarily at the banking market. Also, we are making fast progress in some of the BRIC countries in enterprise security too.

With regards to people, we have slowdown our hiring process and we are focusing on people that are directly available and immediately so to speak. Currently, we have not planned any structural layoffs.

Despite the cost containment efforts, we are planning more events than ever. We spent our money smartly and aim at cost effective and low budget events that generate business.

In the first quarter, VASCO has planned over 30 external events. The vast majority of these events are organized by VASCO, although we are present at events such as the mobile conference in Barcelona and CeBIT in Hanover.

As always, VASCO has got interested in art for art sake. If you organize an event or participate in a trade show, it is to do business. You want to do more with less money. We have been there before and we are good at it, thanks to our willing to earn mentality and the flexibility of our organization.

If you look at the full year 2008, we can only state that this was a good year. The percentage of non-hardware revenue was never this high. Enterprise security is growing quickly in our matured markets. We broadened our products range tremendously.

In the fourth quarter alone, we launched a re-brand products such as Digipass for mobile, the Digipass Id/Digipass Q1 PKI solution. Digipass 835 and Digipass 865. aXs Guard Identifier and aXs Guard Gatekeeper. In addition, we expand SEAL e-learning academy.

We expect that all these investments will contribute to VASCO's business during the year 2009. They also enable us to tackle market segments we weren't able to enter before. Despite challenging market conditions, our vision works. We are determined to keep this company successful in 2009. Thank you.

T. Kendall Hunt

Thank you, Jan. At this time, I'd like to introduce Cliff Bown, Vasco's EVP and Chief Financial Officer. Cliff?

Clifford K. Bown

Thanks Ken, and welcome to everyone on the call. As noted earlier by Jan, revenues for the fourth quarter of 2008 were $28.9 million, a decrease of $2.2 million or 7% from the fourth quarter of 2007. For the full year, revenues were $133 million, an increase of $13 million or 11% over the comparable period in 2007.

In the fourth quarter of 2008, revenues from both the banking and enterprise security markets were 7% lower than in the fourth quarter of 2007. The increase in revenue for the full year 2008 however reflected a 9% increase over the prior year from the banking market and a 22% increase over the prior year from the enterprise security market.

Changes in currency rates, especially the euro versus the U.S. dollar continue to affect the comparison of revenues. In the fourth quarter of 2008, the U.S. dollar compared to the euro was approximately 8% stronger than in the fourth quarter of 2007. Conversely, for the full year 2008, U.S. dollar compared to the euro was approximately 8% weaker than for the full year 2007.

We estimated revenues in the fourth quarter were $1.6 million lower than they would have been if rates not changed. For the full year 2008, we estimate that revenues were approximately $4.2 million higher than they would have been at the exchange rates in 2008 than the same year in 2007.

Excluding the estimated impact of currencies, revenues were approximately 2% lower in the fourth quarter and approximately 7% higher for the full year than in the comparable period of 2007. The distribution of our revenue between our two primary markets; banking and enterprise security was approximately 82% from banking and 18% from enterprise security in the fourth quarter of both 2008 and 2007 as well as for the full year 2008.

For the full year 2007, approximately 84% of our revenues came from banking and 16% came from the enterprise security market. Our revenues continue to come predominantly from outside the United States. The geographic distribution of our revenue in the fourth quarter was approximately 69% from EMEA; Europe, Middle East, and Africa, 5% from United States, 6% from Asia Pacific and the remaining 20% from other countries with the largest contribution coming from South America.

The geographic distribution of our revenue for both the full year of 2008 and 2007 was approximately 67% from EMEA, 6% from the United States, 8% from Asia Pacific and the remaining 19% from other countries.

Gross profit as a percentage of revenue for the fourth quarter and full year 2008 was approximately 65% and 69% respectively. The rate in 2008 compares to 69% and 66% reported for the fourth quarter and full year of 2007 respectively. The decrease in the gross profit as a percentage of revenue for the fourth quarter of 2008 compared to 2007 is primarily attributable to four factors. Two, that had a negative impact and two that had a positive impact.

The two negative factors included an impairment charge of $1.3 million related to the development cost of a project that did not result in revenues as expected in 2008. And the strengthening of U.S. dollar versus the euro in Q4 2008 compared to Q4 2007 impacted our gross margin rate negatively. We estimate that the change in currency rates reduce our gross margin percentage by approximately 1.9% points.

These two factors were partially offset by the following two positive factors; our non-hardware revenues increased to 32% of our total revenue in Q4 2008 versus 17% in Q4 2007. And our current leaders which have a lower gross margin than our other product lines with approximately 11% of total revenue in Q4 2008 compared to approximately 25% of our total revenue in Q4 2007.

For the full year 2008 versus 2007, the increase in gross profit as a percentage of revenue is primarily attributed to four positive factors, partially offset by the above mentioned impairment charge. The four positive factors were on a non-hardware revenue was 25% of our total revenue in 2008 versus 14% of total revenue in 2007.

Card readers as a percentage of total revenue were 14% in 2008 versus 25% in 2007. Revenue from the enterprise security market which has gross margins of approximately 20 percentage points higher than revenues from banking market increased from 16% of total revenue in 2007 to 18% of total revenue in 2008. And the U.S. dollar versus euro is approximately 8% weaker for the full year 2008 compared to full year 2007. We estimate the change in the currency rates resulted in a 1 percentage point improvement in gross profit as a percentage of revenue.

Operating expenses for the fourth quarter of 2008 were $16.9 million, an increase of 2.3 million or 16% from the fourth quarter of 2007. Operating expenses for the full year of 2008 were $63.8 million, an increase of $15.6 million or 32% from full year 2007. Operating expenses for the fourth quarter and full year 2008 included $833,000 and $3.1 million respectively related to the stock-based incentive plans.

Stock-based incentive plan expenses in the fourth quarter in the full year 2007 were $688,000 and $2.2 million respectively. It should also be noted that the comparison of operating expenses in the fourth quarter of 2008 to 2007 was positively impacted by changes in currency rates while the comparison of full year 2008 versus 2007 were negatively impacted by changes in currency rates.

We estimate that expenses were $1.1 million or 6% lower for the quarter and $3.2 million or 5% higher for the full year than they would have been at the exchange rates in 2008 have been the same as in 2007.

For the fourth quarter, operating expenses increased by $1.5 million or 19% in sales and marketing, $19,000 or 1% in research and development, and $861,000 or 26% in general and administrative expense, when compared to the fourth quarter of 2007.

The majority of the increase in sales and marketing is related to the company's increased investment in sales tax, the increase in non-cash compensation and cost associated with opening sales offices in Brazil, Japan, and India, partially offset by the benefit and change in currency rates.

The slight increase in R&D costs reflected increased compensation related to increased head count largely offset by the change in currency rates. And the increase in general and administrative expenses primarily reflected the increased head counts and related compensation expenses, increased non-cash compensation, professional fees, travel expenses and recruiting costs partially offset by the benefit of change in currency rates.

For the full year 2008, operating expenses increased $8.2 million or 30% in sales and marketing, $2.2 million or 23% in research and development and $5.7 million or 54% in general and administrative when compared to the same period in 2007.

The reasons for the increases in the expense for the full year are generally the same as of fourth quarter, except that the difference in currency rates increased expense for the full year compared to 2007.

Operating income for the fourth quarter of 2008 was $1.8 million, a decrease of $4.5 million or 71% from the $6.3 million reported for the fourth quarter of 2007.

For the full operating income was $28.1 million, a decrease of $2.8 million or 9% from $30.9 million reported in 2007. Operating income as a percentage of revenue or operating margin was 6% for the fourth quarter and 21% for the full year 2008. In 2007, our operating margins were 20% for the fourth quarter and 26% for the full year.

The decrease in operating margin in the fourth quarter of 2008 compared to 2007 reflected the combination of lower than expected revenues combined with the increased investments in our infrastructure which were planned prior to the quarter. The decline in operating margins for the full year 2008 compared to 2007 is attributed to our planned and previously discussed increased investment in our infrastructure that is needed to support future growth.

The company recorded an income tax benefit of $411,000 for the fourth quarter and income tax expense of $4.6 million for the full year 2008. The tax benefit in the fourth quarter reflected the adjustment on a year-to-date basis of our full year effective tax rate from 19% to 16%. The reduction in rate was primarily due to a benefit of $776,000 recorded to reverse a reserve recorded in previous periods related to the benefit of a tax to net operating loss carry forward or in well of one of our foreign subsidiaries.

During the fourth quarter and part due to cash management strategies that we implemented in the fourth quarter, we determined that it is more likely than not, that the benefit of the analog would be realized.

Earnings before interest, taxes, depreciation and amortization, EBITDA or operating cash flow if you will was $2.9 million for the fourth quarter and $31.3 million for the full year of 2008. EBITDA was $4.1 million or 58% lower in the fourth quarter and $2.2 million or 7% lower for the full year of 2007.

The make-up of our workforce as of December 31, 2008 was 310 people worldwide with 176 people in sales, marketing and customer support, 87 in research and development and 48 and general administrative.

The average head count for the fourth quarter of 2008 was 69 persons or 30% higher than the average head count for the fourth quarter of 2007. And the average head count for full year 2008 were 60 persons or 28% higher than the average head count for the same period of 2007.

On the balance sheet our cash and working capital balances increased during the fourth quarter of 2008. As of 31st of December 2008, our cash balance was $57.7 million, an increase of $7 million or 14% from $50.7 million at September 30th of 2008, an increase of $18.9 million or 49% from $38.8 million at December 31, 2007.

As of December 31, 2008 our working capital balance was $76.7 million, an increase of $2.0 million or 4% from 73.8 million at September 30th, an increase of 24.2 million or 46% from 52.4 million at December 31, 2007. We had no debt outstanding during the fourth quarter of 2008.

During the quarter, our day sales outstanding and accounts receivable increased to 79 days as of -- 279 days and that compares to 69 days at September 30th of 2008 and 76 days at December 31st of 2007. The increase in DSO was primarily attributed to the timing of when sales were made in the quarter.

For your attention, I'd like to now turn the meeting back to Ken.

T. Kendall Hunt

Thank you, Cliff. Summing up, 2008 was a remarkable year that ended in economic turmoil. Overall it was the best in the company's history in terms of revenue, net income and cash flow which was almost $19 million for the year.

The year ended roughly with the world falling into recession and orders delayed into 2009. Given the uncertainty created by the continued turmoil in the worldwide economy VASCO has decided to temporarily discontinue its practice of providing annual guidance. While the outlook for 2009 is uncertain, we expect to be profitable in 2009 and we believe that our strong balance sheet and our business model put us in a strong position to continue to move our business forward in 2009.

Ladies and gentlemen, thank you for your attendance today. I look forward to your participation in our next earnings conference call for Q1 2009. As always, you can rely on VASCO's people to do their very best. Operator?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instructions). And our first question comes from the line of Daniel Ives from Friedman Billings. Please go ahead, sir.

Daniel Ives - Friedman, Billing, Ramsey & Co.

Yes, couple of questions. Hey, guys. So the first, obviously the uncertainty -- the top-line is going to be great right, given orders. And I guess, what I'm trying to understand is with given your guidance for '09 what's specific on the expense side? I mean you guys have always had double-digit operating margins even in the teens. I mean is there an operating margin is unacceptable. I mean how should we kind of think how you running the business for 2009? I mean you do have controls on the cost sides. I'm just trying to understand that if you could help?

T. Kendall Hunt

So your question is what's an acceptable operating margin?

Daniel Ives - Friedman, Billing, Ramsey & Co.

Yes, I mean you had 6% margin, right? 6.5. So with '09, I am not saying when you give it but have you kind of viewed or this is our goal?

Clifford Bown

We have... we do have an internal goal Daniel of course. What is acceptable in the past, we've had minimums that we looked at that we had a very robust economy in which the business was growing, financial was growing very fast. But we've always had an attitude of running a very tight ship, a very disciplined organization and a profitable organization. That has been our goal from the very, very beginning when we reassembled the team in that first quarter of 2003. Our goal always has been and always will be to maintain a profitable organization. And we do have a minimum operating margin that we have as our internal plan, yes we do.

Daniel Ives - Friedman, Billing, Ramsey & Co.

I mean should I view this quarter as a well water mark given that a kind of took you by surprise, I'm not trying to get into the corner and given a number, but I just want to understand I think investors to have some comfort that you're going to contain cost and cash flow to make sure that '09 was just preservation in the bottom line?

T. Kendall Hunt

Well, yes I'll say what I said a few minutes ago. Our goal has always been and will always be to run a profitable business with a positive cash flow that keeps us out of trouble that allows us to invest in opportunities as they come up, and we'll continue to do that. Then I would like to also point out that this quarter's margin is lower than it would have been had it not been for that impairment charge for the project. So if you took that $1.3 million and added it back to margin even our operating margin in this quarter is just under 11%.

Daniel Ives - Friedman, Billing, Ramsey & Co.

Okay, so I think -- and just one last one that I'll hand it off, when you -- you don't give backlog, I understand that, but have you seen a change from when we talked to you in early January, we're talking months and a half. I mean do you think seeing more stable -- do you feel it give a better grip as business improved a bit -- I'm sure I understand some what you guys are seeing is it continuing to deteriorate, is it stabilized, what you're seeing?

T. Kendall Hunt

Well...

Daniel Ives - Friedman, Billing, Ramsey & Co.

Months to months.

T. Kendall Hunt

Yeah, I think we had nothing has changed in terms of our view at the market. There are certain markets that are weak, United States is very weak. We didn't do as we had hoped in the United States for 2008. However as we pointed out in our January 6 and we've launched again today indicated, we have many markets around the world that are still strong, they're still robust. It's business as usual. I was just in our Indian operation in Mumbai for the first week of February and it was very positive there. The Indian GDP is growing at 7% and I think that was adjusted down from 7.2%. So everything I heard there is an example and that's an example of a market that continues to grow. We list the others Brazil, Russia and China the other markets and we'll focus on the markets that are still robust.

Daniel Ives - Friedman, Billing, Ramsey & Co.

Okay. Thanks.

Operator

Now, our next question comes from the line of Andrew Abrams from Avian Securities. Please proceed with your question.

Andrew Abrams - Avian Securities

Couple of questions, first maybe you could talk about the way you handle backlog, I mean I know that most of your deliveries are relatively quick. Are customers pushing out those delivery schedules past what would normally be one quarter. And how do you adjust your backlog, if they start to extend out even further than that. Do you actually pull them out of your backlog and assume they're not happening or do they kind of stay in there until the customer comes back to you and says well here is the date that we're actually looking for?

Clifford Bown

Well backlog to us are firm purchase orders with the schedule for the quarter in which we account for them, if for some reason the customer says you have my purchase order and we agreed upon a certain schedule for the next 12 months. And they ask us to delay one of those schedule shipments and also schedule manufactured runs. We'll delay it because we're at the service of the customer. But in that event it's taken out of backlog and put in the appropriate backlog quarter.

Andrew Abrams - Avian Securities

Got you. Okay. And, inventories were up a bit in this quarter, was that anything unusual other than timing or was there a build up in one side or the other?

T. Kendall Hunt

We had a buildup in raw material inventories specifically processors. We were informed by the manufacture processors that they were planning to discontinue some of the processors that are our mainline units. So we build an inventory of those processors so we could ensure production throughout 2009.

Andrew Abrams - Avian Securities

Got you. And lastly mix in 2009, and this is more kind of hardware versus software that I'm looking for. Can you give us where you guys think you'll wind up being by the end of 2009 in terms of the software content versus hardware?

T. Kendall Hunt

Well we've communicators can again (ph) -- we've communicated for a while but we consider ourselves as software company. And the physical processors, little calculators are simply carriers of that software. We also described and shared with the market that we intended to move to more and more software delivery. As an example a soft token delivered on a cell phone, on a PDA, on a Blackberry or even on a PC. And so we've been executing that strategy. I can't tell you where the mix will end up but I think you can anticipate that the share of non-hardware revenue will continue to grow.

Andrew Abrams - Avian Securities

Okay. Thank you.

T. Kendall Hunt

Sure.

Operator

And our next question comes from the line of Andrew Hall (ph) from Dougherty and Company. Please proceed.

Unidentified Analyst

Yes good morning and afternoon. This Andrew Hall on for Joe Maxa. I had a couple of quick questions. What kind of a percent are you guys seeing for headwind with foreign currencies where to stay at current levels for 2009?

Clifford Bown

Well Andrew, that's a difficult question to ask because we don't know exactly how the sales are going to be dominated. If the mix of the currencies of the new revenues is somewhere to what it has been in the past and the dollar remains weak versus the euro, we expect that it will have a negative impact on operating margins, because the decline in sales will be greater than the decline in operating expenses.

Also as the dollar strengthens against foreign currencies we have a decline in the gross margin rate, because all of our purchases of inventory or the purchases of the most significant components of our inventories are dollar denominated. So if the euro becomes weaker versus the dollar we loose the sales revenue and our cost of goods remains confident.

Unidentified Analyst

Okay. And then with some of those deals that you saw slipped from December. Have you seen any of those close here in the first couple months of this year?

T. Kendall Hunt

Yes, you can address that the deals were actual deals. I mean we had Pos, so if you're saying closing as in schedule the manufacturing and schedule the shipment of the underlying order, I don't have any specific information other than to say I don't know of any that were cancelled. We communicated that before, and I'm sure that that still is the case, it's just a matter of delivering in 2009.

Unidentified Analyst

Okay. Thank you.

T. Kendall Hunt

Sure.

Operator

And our next question comes from the line of Katherine Egbert from Jefferies. Please proceed with your question.

Katherine Egbert - Jefferies & Company

Hi, good morning, good afternoon. I want to talk about the first half of '09. It seems like you say I'm looking in the revenue growth, you put up in the first half of '08, that you may have some tough comparable. Is that true? How did your kind of orders flow through the first half of '08? Thanks.

Clifford Bown

The revenues through the first half of '08 were growing in strength. The first quarter of '08 was $28.9 million; the second quarter was $35.4 million. So there was a strong growth in Q2 over Q1. Obviously, the revenues this quarter are comparable to Q1 of 2008 but if the economies stay the same then it would be difficult to achieve the same percentage increase in the Q2.

That said, please recognize that the history of VASCO or the seasonality of VASCO has been that Q1 is usually flat to slightly down from Q4 of the previous year and Q2 by its nature seasonality is stronger than Q1. So we still are waiting to see what the real order flow and demand is but certainly we had a nice increase in 2008 and maybe difficult to achieve the same increase in 2009.

Katherine Egbert - Jefferies & Company

Okay. That's really helpful Cliff. And then also what do you think the tax rate could be for '09, and will it be around 15%?

Clifford Bown

I wouldn't expect it to be that low. If you took out the one-time benefit of us reversing the reserve for the NOL, we would be at about 19% today. Full year fourth quarter and full year 2008 would have been at 19%. I don't see any big reason that it would change appreciably from there but it will really depend upon the mix of our business, where those earnings are realized and tax rates of those jurisdictions.

Katherine Egbert - Jefferies & Company

Okay, got it. Thanks a lot, Cliff.

Operator

(Operator Instructions). And our next question comes from the line of Rob Owens from Pacific Crest. Please proceed with your question.

Rob Owens - Pacific Crest Securities

Yes, thank you very much. Question on the software, hardware mix more so around pricing, with the mix shift to software what kind of headwind does this create on either unit pricing, revenue? Is this impacting deal sizes?

T. Kendall Hunt

The software, you may recall that when that long ago that we were all hardware, we had a little software associated with our VACMAN Controllers, that's our middleware that integrates our product into our customers big applications of our partners platforms. And it was almost all hardware revenue. And so the pricing flexibility and the ability to deliver the software in different ways to some degree is incremental. So it -- I don't think it really impacted the revenue from the hardware. It was a new emphasis, a new opportunity. Does that address your question Rob?

Rob Owens - Pacific Crest Securities

Not really. So ...

T. Kendall Hunt

Okay.

Rob Owens - Pacific Crest Securities

On a per unit price, if you are delivering a software token to go on some other form factor versus a hardware token. Is that at the same price or what is the pricing difference between...

Clifford Bown

I see. I can't tell you the exact price but indeed if we're selling software, as I said it is an incremental opportunity that we didn't have before and it is a lower price per unit or per user than hardware unit.

Rob Owens - Pacific Crest Securities

And on a list basis, is that 10%, 20%, 30%?

T. Kendall Hunt

Maybe it will really vary by the size of the deal Rob. As we talked before, we're really oriented towards larger volumes. So the larger the volumes of the transaction the lower the price, and so, I can't tell you if there is any standard differential between the two. But as you focus on that and the exposure that it creates to revenue, please remember that there isn't any real cost of goods on those software based tokens. So we may end up with same or actually better gross margins.

Rob Owens - Pacific Crest Securities

Okay. And then if I look at 2008, can you help me understand maybe what's your revenue from pre-existing customers was versus what's your revenue yield is from customers acquired during the year?

T. Kendall Hunt

We don't actually look at it that way Rob because the customers once they join VASCO they are customer for several years as they go through the initial roll-out and then subsequent roll-out. So we've not try to identify when a customer stops being a new customer from that initial roll-out versus when they become an existing customer.

Rob Owens - Pacific Crest Securities

Okay, great. Helpful, thanks.

T. Kendall Hunt

Thank you Rob.

Operator

And our next question comes from the line of Brian Freed from Morgan Keegan. Please proceed with your question.

Brian Freed - Morgan, Keegan & Company, Inc.

Good morning. Thanks for taking my call. Really two quick questions; first of all, just a clarification on operating expenses. As you think where you are still a software basically at this time, you talked about maintaining versus -- maintaining operating expenses versus setting them. Do you feel like you need to continue to invest as this point in time that the gain share against the containments or you actually look to cut operating expenses on an absolute basis to drive up operating margins?

Clifford Bown

What we feel that we have addressed our expenses appropriately. We have expectations about revenue for the year. We are fully prepared if need be to cut more expenses but we don't anticipate that will be necessary. And we don't want to be too aggressive because we did invest in our infrastructure and continued to invest in our infrastructure with best in hiring people and training those people. And those are assets that we want to take advantage of.

So I'm satisfied, I think our management team, I know our management team it says like with where we are today in terms of our expense level compared to our internal plan for revenue and gross margin.

Brian Freed - Morgan, Keegan & Company, Inc.

Okay, great. And the second question, so what are your advantages historically has been your economy is still advantage given the unit volume disparity between you and your competitors. Do you see this economy still advantage or routing as the market shifts towards more of the software base solution, as you don't really have that manufacturing leverage anymore?

T. Kendall Hunt

Well we still sell a sizeable number of physical devices because that's what the customers want. As I said before I know that non-hardware revenue will continue to increase. But there always be customers that want the physical device and we maintain that manufacturing advantage. As an example the large banks love to have the physical Digipass calculators in their color and with their logo because it's a branding opportunity.

Once again with World of Warcraft and Blizzard Entertainment they choose a physical device not a software device or an SMS message, they chose a physical device, the Blizzard authenticators. So I anticipate that we'll always have physical devices and we'll maintain that advantage of economies of scale and lower cost per unit for manufacturing. Jan, do you have anything else you'd like to address?

Jan Valcke

Yes, we need to make a difference on the software side of our controller suite of products, which is basically on the infrastructure side. And while we sell over VACMAN Controller and also our identity, identifier as per user for year based range of products.

So basically the change we have made in the company as from 2005 is that we added more and more software also in the infrastructure side. We changed our business model and we're today the hardware is an idiom the hardware devices, the hardware tokens, the hardware readers, the whole Digipass range of products or an idiom to that VACMAN Controller/identity/identifier range of products. That's our first concentration.

The second thing is more and more -- not more and more but there is a demand on the market on the Digipass side also to have software form factors. For instance, on a mobile platform, secondly for online web applications and so on. So we really need to make the difference here. We're increasing our effort on the infrastructure side to be added a lot of differential formalities. The customers like that and they're buying this products, this VACMAN Controller products again on a per user per year based product size.

So basically what I'm trying to say here is we need to make the difference between the Digipass software, tokens if you wish and the infrastructure side.

Brian Freed - Morgan, Keegan & Company, Inc.

Okay.

Operator

And our next question comes from the line of Scott Zeller from Needham & Company. Please proceed.

Scott Zeller - Needham & Company

Thank you. Wanted to ask again, there have been several questions about the deals from the December quarter that we have moved out. Would you consider those deals to be booked but not yet recognized revenue? So Ken when you said you have a firm purchase order. Should we consider those actually booked?

T. Kendall Hunt

No, they're not booked. We would not account for those as revenue until we ship. And as we described before typically its FOB Honk Kong and in some in cases with the larger customers they do have a short period of acceptance once they receive them. And we always track every transaction very closely so that we have the right revenue cutoff for each deal, each transaction.

Scott Zeller - Needham & Company

Okay. And I think in the September quarter we heard there were two 10% customers. I understand you said there were no 10% customers for the full year '08, but were there 10% customers in the December quarter?

T. Kendall Hunt

There was one 10% customer in the fourth quarter but not on a full year basis.

Scott Zeller - Needham & Company

Okay. All right, thank you very much.

T. Kendall Hunt

You're welcome.

Operator

And we have a follow up question from the line of Brian Freed for Morgan Keegan. Please proceed.

Brian Freed - Morgan, Keegan & Company, Inc.

Hey, one quick follow-up on the firm commitment that you have, what would be the level of commitment in other words if someone would given you a firm commitment opted to cancel the order altogether, would you -- would they still be obligated for you some or all of that order at some point in the future?

T. Kendall Hunt

Practically speaking if a customer gave us a purchase order and they decided to cancel that purchase order we would allow it. It's not something that has occurred very often but sometimes it has occurred. Our job is to take care of our customers and if they have an issue that they need to deal with and they've issued a purchase order and we've not manufactured that order, we would allow them to cancel the order, but that is to the extreme.

Brian Freed - Morgan, Keegan & Company, Inc.

Thanks.

T. Kendall Hunt

Sure.

Operator

And we've got another follow-up question and that is from the line of Andrew Abrams from Avian Securities. Please proceed.

Andrew Abrams - Avian Securities

Just a quick question; credit issues, have you guys seen any change in the ability of any of your customers either on the enterprise side or bank side. But probably more so on the bank side or financial side, to obtain credit or use credit or any affect from the credit issues that face your customer base right now?

Clifford Bown

In terms of the quality of our receivables that general the answer is no. The specific answer is you will see a slight increase in our bad debt expense in this quarter. But that's a normal operating kind of thing. We always have distributors, or smaller resellers that have been capitalized that they may have a problem making a payment on an account.

But overall our receivable situation is very good, our loss history is also very good and it's in part due to the fact that most of our customers need to follow on orders and therefore we hold the leverage that they need to pay their prior obligations before we will ship new product to them.

Andrew Abrams - Avian Securities

Got you. Thank you.

Operator

There don't appear to be any further questions at this time.

T. Kendall Hunt

All right. Well, with that I want to thank everybody for their attention and I appreciate everybody being on the call today and your good questions, your excellent questions.

In summary, we are the same VASCO that we've always been. We're a company focused on execution. We're focused on delivering shareholder value. We're focused on being very productive at almost $500,000 in revenue per employee. I think that tells the story and the profits that we've been delivering for years now tells the story.

So this year, it's going to be one where our focus is on profitability, and looking for opportunities for investment to further our market share and to further our growth.

At this time, I'd like to say good morning, good afternoon to everybody, and for all the VASCO people from around the world, thanks once again for your hard efforts and I you know appreciate it. Bye for now.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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