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VASCO Data Security International (NASDAQ:VDSI)

Q3 2010 Earnings Call

October 26, 2010 10:00 am ET

Executives

T. Kendall Hunt - CEO

Jan Valcke - President & COO

Cliff Bown - EVP &CFO

Analysts

Andrew Abrams - Avian Securities

Ignatius Njoku - Jefferies

Josh Goldberg of G2 Investment Partners

Brian Freed - Morgan Keegan

Joe Maxa - Dougherty & Co

Scott Zeller - Needham & Company

David Ives - FBR

Fred Ziegel – Blue Water Capital Market

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the VASCO Data Security International Inc. Q3 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 would now like to turn the conference over to 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 and 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 are going to review the results for the third quarter of 2010. As always, we will host a question-and-answer session after the conclusion of management's prepared remarks. If possible, I would like to budget one hour total for this conference call. If you can limit your questions to one or two, it would be appreciated.

Revenues for Q3 were $26.3 million, an increase of 19% compared to the third quarter 2009. Revenues reflected strong growth in both banking and enterprise and applications security. Our revenues from our banking market increased 20% over Q3 2009. Revenues from our enterprise and application security markets increased 17% over Q3 2009. Q3 2010 was our 31st consecutive positive quarter in terms of operating income. Our gross profit for the quarter was 71% of revenue and our operating income was 10% of revenue.

Our business mix between banking which provide higher volume, lower margin and non-banking which provides lower volume, higher margin resulted in continuing healthy gross margin of 70% for the first nine months of 2010. Non-banking revenue was 24% in Q3 and 28% for the first nine months in 2010. This compares to 25% in Q3 a year ago and 27% for the first nine months of 2009. Also contributing to the healthy gross margin was the gross of our non-hardware revenue which was 26% versus 24% in Q3 and 25% versus 23% year-to-date compared to this same period a year ago.

During the quarter, we sold an additional 387 new accounts including 50 new banks and 337 new Enterprise and Application Security customers. This compares to the third quarter a year ago in which we sold 350 new accounts including 56 banks and 294 enterprise and applications security customers. We now have over 10,000 customers including more than 1,500 banks in more than 100 countries. Although management considers the number of new customers as an indicator of the momentum of our business and effectiveness of our distribution channel, the number of new customers is not indicative of future revenue.

During the third quarter 2010, our cash and our working capital increased 14% and 10% respectively compared with our balances at the end of the second quarter. At September 30, 2010, our net cash balance was approximately $86.4 million and we have approximately $92.3 million of working capital. The strong cash balance gives us the flexibility to invest in our growth now that the economy seems to be improving. In past quarters, we told you that our banking business was recovering. We also told you that the number of RFPs was growing. These RFPs are now materializing in firm orders. Our order intake from the banking business is now growing quickly.

As demonstrated by our Q3 2010, earnings report the recovery and the financial vertical is beginning to result in improved financial performance for our company. The confidence that we communicated in past quarterly earnings calls is we believe being justified today. We firmly believe that the banking market will contribute to strong growth in 2011. We also believe VASCO’s banking and enterprise and application security businesses are evolving back to normal.

Looking back, we can say that VASCO is a much stronger and robust company now than it was before the financial and economic crisis began. We have several healthy sources of revenue from different markets both vertical and geographic. We believe that there will be strong, steady growth going forward. As we stated before, our traditional banking market is in recovery. Manufacturing challenges such as scarcity of parts due to general ramp up in the recovering electronics industry still exists and may cause delays in delivery. Nevertheless, we believe that VASCO is prepared to overcome these challenges due to our know-how and experience related to large volume hardware production and assembly. We believe this situation affects all of our competitors and may even turn into competitive advantage for VASCO. We are particularly proud that we can deliver positive short term results again, while investing heavily in the longer term.

But during our Q1 earnings call on February 11 this year, we introduced our strategic plans for DIGIPASS as a service our cloud-based authentication platform. Today, I am happy to inform you that we are finalizing our DIGIPASS as a service platform and very soon we will announce that first phase of this new service offering so stay tuned.

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

Jan Valcke

Thank you, Ken. Ladies and gentlemen, we are proud to announce that the recovery of our core business is materializing. With the regards to our banking markets, there is a global improvement of the situation both in market touched and untouched by the financial crisis in 2008 and 2009. Last year, we experienced that many large deployments of strong authentication in the financial sector were frozen or delayed. From the end of 2009 onwards, we noticed a higher activity in the request for proposals all over the world. Logically, it takes a number of quarters before it shows RFP are turning into orders, deliveries and revenue. The third quarter is the first quarter of 2010 that this materially affected by this compact of the banking business.

Although this recovery is still so much slow and in countries hurt by the financial crisis, we strongly believe that VASCO has overcome the fall-out of this financial crisis. Order and take was strong for all banking market in Q3. Evidence of this increase in order and take was reflected in the Q3 revenue.

In addition we have a strong backlog for deliveries in the fourth quarter and for 2011. Our non-banking business is growing steadily. The enterprise and applications security markets are growing strong despite the traditional seasonality due to the holiday period in Q3.

With the imminent introduction of DIGIPASS as a service as described by Ken, we are well armed to tackle applications and vertical markets previously out of our reach.

During this third quarter, we kept reinforcing our product offering by adding wireless functionalities to our identity core authentication server. We also introduced multi-OTP functionality to our DIGIPASS client authentication products and last but not least, we launched the DIGIPASS 831 an EMV-connected smart card reader with replaceable batteries, a larger display and improved user interface.

We will keep investing strongly in our product portfolio in order to maintain and strengthen our market leadership position in the authentication sector. The fact that we kept investing in VASCO’s people, officers, products and markets during the pass crisis period, we will hope is to speed up our growth, know the environment looks more positive. We are convinced that our continuous investment will translate into our future results. This approach is in my opinion, the right way to create long-term shareholder value. Our investments in people are well on track. At the beginning of this year, we announced that we will hire 60 additional employees to support VASCO’s future growth. Many of those new recruits are already onboard and are getting up to speed in order to contribute to VASCO’s future success.

As a conclusion, I would like to thank VASCO’s people for their efforts to keep VASCO successful and profitable throughout this crisis. It seems like we have weathered the storm. We are convinced that we have started a new chapter in VASCO’s success story. Thank you.

Operator

Thank you, Jan. At this time, I would like to introduce Cliff Bown, VASCO’s EVP and Chief Financial Officer. Cliff?

Cliff Bown

Thanks, Jan and welcome to everyone on the call. As noted earlier by Ken, revenues for the third quarter of 2010 was $26.3 million, an increase of $4.2 million or 18% from the third quarter 2009. The first nine month’s revenues were $75 million, an increase of $5.2 million or 7% from the comparable period in 2009. The increase in revenue for the third quarter and first nine months reflected in increase in revenues from both the banking market and the enterprise and application security market. Revenues from the banking market increased 20% for the third quarter and 7% for the first nine months of 2010 when compared to the same period in 2009. Revenues from the enterprise and application security market increased 17% for the third quarter and 9% for the first nine months of 2010 when compared to the same period in 2009.

It should also be noted that the comparison of revenues was impacted by changes in the exchange rate of Euro and the Australian dollars and the U.S. dollars. We estimate that revenues in the third quarter were $1.2 million and 800,000 lower for the first nine months of 2010 respectively than they would have been as the exchange rate in 2010 and the same as in 2009.

Percentage of total revenue coming from the enterprise and application security market decreased 1% each point for the third quarter of 2010 and increased 1% each point for the first nine months of 2010 when compared to the same period in 2009. Revenues from the enterprise and applications security market were 24% of total revenue from the third quarter and 28% of total revenue for the first nine months of 2010. For the third quarter and first nine months of 2010, the percentage of revenue coming from Europe has declined when compared to the same period in 2009.

The third quarter of 2010, the geographic distribution of our revenue was approximately 69% from Europe, 9% from the United States, 11% from Asia and the remaining 11% from other countries. In the third quarter of 2009, approximately 77% of our revenue is from Europe, 9% from the United States, 6% from Asia and the remaining 8% was from other countries. For the first nine months of 2010 the geographic distribution of our revenues was approximately 58% from Europe, 9% from the U.S., 9% from Asia and the remaining 14% from other countries. For the first nine months of 2009, approximately 73% of our revenue was from Europe, 6% from the United States, 9% from Asia and the remaining 4% from other countries.

Goss profit as percentage of revenue for the third quarter in first nine months of 2010 was approximately 71% and 70% respectively. In 2009, gross profit as percentage of revenue was 70% in both of the third quarter in nine-month period ended September 30. The increasing gross profit as percentage of revenue for the third quarter of 2010 compared to the 2009 primarily reflects available change in the mix of products sold.

The mix of products sold in the third quarter in first nine months of 2010 reflected in the increase in non-hardware revenue as the percentage of total revenue and a decrease in card readers sold as a percentage of total revenue when compared to the same period in 2009. Our non-hardware revenues are 26% and 25% of revenue for the quarter and first nine months in 2010 respectively and compared to the 24% and 23% total revenue for the quarter and first nine months of 2009.

Revenues from card readers were 15% of our revenue for both the third quarter and the first nine months of 2010 and compared to 19% and 18% for the third quarter in the first nine months of 2009 respectively. As noted on previous calls, our card reader product line has lower margin due to the competitive pricing pressures.

Operating expenses for the third quarter of 2010 was $16 million, an increase of $2.6 million or 19% from the third quarter of 2009. And the operating expenses for the first nine months of 2010 were $47.9 million, an increase of $7.1 million or 17% from the same period in 2009.

Operating expenses for the third quarter in the first nine months of 2010 included $0.8 million and $1.9 million respectively, of expense related to stock-based incentive plan. Operating expenses related to stock-based incentive plans for 2010 were $0.3million and $2.74 million higher than the comparable period in 2009.

For the first nine months of 2009, operating expenses reflected a benefit of $0.8 million, including a reversal on the first quarter of 2009 of $2 million related to the reversal accruals for long- term, performance-based incentive awards, where it was determined that that targeted performance would not be achieved.

It should also be noted that the comparison of operating expenses in the third quarter of 2010 to 2009 was positively impacted by the stronger U.S. dollar in 2010. We estimate that expenses were $1.2 million and $0.7 million lower than the third quarter in the first nine months of 2010 respectively than they would have been, had the exchange rates in 2010 been the same as in 2009.

For the third quarter including the benefit of currency operating expenses increased $706,000 or 10% in sales and marketing increased $524,000 or 19% in research and development, an increase by $1.4 million or 37% in general and administrative when compared to third quarter in 2009. The increase in sales and marketing expense reflected – primarily reflected in increase in compensation expenses related to increased headcount, increased marketing expenses, and increased travel cost partially offset by the benefits of the change in exchange rate.

The increase in research and development expenses primarily reflected increased compensation expenses related to an increase in headcount partially offset by the benefit of the change in exchange rate. The increase in general administrative expense from early reflected increased compensation expenses related to increase in headcounts and higher professional fees partially offset by the benefit of change in exchange rate. For the first nine months of 2010 including the benefit of currency, operating expenses increased by $1.3 million or 6% in sales and marketing, $1.7 million or 20% in research and development and $4.2 million or 40% in general and administrative when compared to the bank arrears in 2009.

In addition to the recent notice of the change within the third quarter, the increase in expense reflected the benefit of the reduction of stock based incentive plan, compensation expense recorded in the first nine months of 2009 just previously mentioned and an increase in recruiting expenses and an increase in our provision for uncollectible cash receivable.

Operating income for the third quarter of 2010 was $2.5 million, an increase of $548,000 or 28% from the $2 million reported in the third quarter of 2009. For the first nine months, operating income was $4.8 million in 2010, an increase of $3.2 million or 40% from the $8 million reported in 2009.

Operating income as a percentage of revenue or operating margin was 10% for the third quarter and 6% for the nine months of 2009 and in 2009 our operating margins were 9% for the quarter and 12% for the first nine months.

The company reported income tax expenses $867,000 for the third quarter and $1.5 million for the first nine months of 2010. The effective tax rate was 28% for the third quarter and 27% for the first nine months of 2010. For 2009, the company reported income tax expense of $1 million from the third quarter and $2.9 million for the first nine months.

The effective tax rate reported in 2009 was 40% for both the third quarter, and 29% for the nine month period ended September 30. The effective rates for both 2009 and 2010 reflect our estimates of our full-year tax rate at the end of the third quarter in each period.

The decrease in the tax rate in the first nine months of 2010 compared to 2009 is primarily attributable to an increase in our estimates of pre-tax income at the end of the third quarter in 2010 compared to 2009. As you may recall we have reduced our full-year 2009 tax rate to 22.6% in the fourth quarter of 2009, as earnings in the fourth quarter 2009 were higher than we are projected at the end of third quarter of 2009.

In addition the rate for the first 9 months of 2010 included the benefit of $282,000 of discreet items related to adjustment of prior tax provisions. Under our current structure, our effective tax rate will be very sensitive to the level of pre-tax income. As pre-tax income increases, we expect the effective rates will decline. As pre-tax income decreases, the effective rate will increase. Earnings before interest, taxes, depreciation and amortization or operating cash flow if you will; was $3.6 million for the third quarter and $7.3 million for the first 9 months of 2010. EBITDA was $241,000 or 7% higher in the third quarter and $4.5 million or 38% lower than first 9 months of 2009.

The makeup of our workforce at September 30, 2010 was 329 people worldwide with 172 in sales, marketing, and customer support, 104 in research and development and 53 in general and administrative. The average headcount for the third quarter of 2010 was 30 persons or 10% higher than the average headcount in the third quarter of 2009. The average headcount for the first 9 months of 2010 was 11 persons or 4% higher than the average headcount in the same period in 2009.

Our balance sheet continues to show strong cash and working capital balances throughout the third quarter of 2010. As of September 30, 2010 our net cash was $86.4 million, an increase of $10.4 million or 14% from the 76 million at June 30, 2010, and an increase of $18.8 million or 28% from $67.6 million at December 31, 2009.

As of September 30, 2010, our working capital balance was $92.3 million, an increase of $8.2 million or 10% from $84 million at June 30, 2010 and an increase of $4.7 million or 5% from $87.6 million at December 31, 2009. We had no debt outstanding during the quarter.

Finally our day sales outstanding in receivables decreased to (50) days as of September 30th, 2010 from 71 days at June 30, 2010 and from 88 days at December 31, 2009.

Thank you for your attention, I would now like to turn the meeting back to Ken.

T. Kendall Hunt

We believe our business is not only improving but is returning to a strong growth pattern which will be more predictable in the future. Our decision to continue investing in our business during the tough economic times, we believe will serve us well going forward. For example we now have local VASCO staff in evolving markets which promised incremental growth opportunities.

We also introduced many new products and will soon launch the new DIGIPASS as a service platform. Because of these investments strategy during difficult times we are a stronger company and more competitive than ever.

Now guidance. We reaffirm the guidance that we announced at our last conference call. First, we expect the full year 2010 revenue will grow from 5% to 10% over full-year 2009. Second, we believe that a full-year 2010 operating income will be in a range between 5% to 10% of revenue.

This guidance reflects the company’s strategy to continue its aggressive growth by investing in its people, our newly announced DIGIPASS as a service and the infrastructure necessary for long-term profitability. It also reflects our continued evolution to a more software centric company with a focus on recurring revenues.

This concludes our presentations today, and we will now open the call for questions. As I mentioned earlier as a courtesy to others on the call, I would appreciate it if you would limit your questions to an initial question plus a follow-up. If you have additional questions please get back into the queue. Operator.

Question-and-Answer session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Andrew Abrams with Avian Securities Please proceed with your questions.

Andrew Abrams - Avian Securities

Hi guys. I just wanted to check a couple of small things. Card readers. Are you expecting card readers to stay kind of at the level they were this quarter or is this sort of a – you know just a one shot quarter that they came down. Is there some level that you can kind of predict that there is going to be – they are going to be running at or is this kind of just an up and down as we have gotten before?

T. Kendall Hunt

Jan, why don’t you address that question?

Jan Valcke

Okay, thank you. We are of course a strong authentication company and we see some facts in the market. We see that banks for instance, but also other corporations are going more and more to electronics signature and digital signature solutions. That is the first fact. The second fact is that, sometimes solutions used with card readers shortly when they are unconnected are not so secure than if for other solutions. As a conclusion we should say it should take the commodity card readers probably we will stay at the same level we are now. Probably we will see an increase in higher priced, higher margin connected readers with more capabilities; more software and more other products that can issued electronic and digital signatures.

Does that give you an answer your question?

Andrew Abrams - Avian Securities

Yes. The only clarification that I’m looking for would be – if in fact you are talking about the high end of the card reader business. The margins on that product would be higher I’m assuming than the low end that you have talked about and you have never – at least not that I remember broken out those two categories. So, would this be a positive to you margins despite the fact that they are card readers per se which tend to be lower margins?

Jan Valcke

Yeah. You see we told (inaudible) about commodity products. Commodity products are products that only do user of authentication or has less capabilities than these high end readers or these high end tokens or the software oriented. So, yeah.

Andrew Abrams - Avian Securities

Right. And as a follow-up. Just a question on OpEx. Maybe my estimates were a little more on the high side but it looks like you guy came in a little lower on the OpEx side than I would have expected. Are you getting pretty far through your spend pattern for the year or was my estimate just a little more on the high side?

Cliff Bown

I think you estimates may not have reflected fully the impact of the holiday season in Europe for Q3. So there is a seasonal effect on our OpEx as well as there is on our revenue. And what happens is a lot of our folks take vacations in Europe and we charge those expenses against the accrued vacation liabilities rather than going BNL. As you look forward I would anticipate that our OpEx in Q4 would step up substantially of what our Q3 levels were.

Andrew Abrams - Avian Securities

Got you. Okay, thank you. That is very helpful. Also just – the DIGIPASS is a service, when this comes out, and I am assuming that this is going to take a little while before it starts to build up to something appreciable. But I am assuming that all of these is going to show up as kind of long term revenue, meaning deferred revenue as it matures or you are actually selling a physical product that has a hardened value?

T. Kendall Hunt

Well, it is a service but we also have the ability to include the physical DIGIPASS token as well as the DIGIPASS for mobile which is software but you can expect that most of the revenue – most likely will be a subscription nature and will be invoiced and revenue occurring as we collect moneys.

Andrew Abrams (Avian Securities)

Got it. Thank you.

T. Kendall Hunt

Sure.

Operator

Our next question comes from line of Joe Maxa with Dougherty and Company. Please proceed with your question.

Joe Maxa –Dougherty and Company

Thank you. Kind of just want to ask a little bit more about you mentioned potential manufacturing challenges or – are you seeing any issues now that could delay some of your orders into push out just maybe Q1 from Q4. Is that what we should thinking about? Secondly, along the same lines given your increase visibility and looks like more backlog – are you expecting a little more smoothening of the seasonality from Q4 to Q1?

T. Kendall Hunt

Just one second. As far as manufacturing is concern I think we recorded before that what the recovery of the electronic industry there has been a lot more manufacturing going on in China which is the side of our three manufacturing partners and a lot of the component parts for in scarce supply and so we had to manage as well as we can. I think that some of the orders that we got in we could have delivered in Q4 if we had enough components so I think by definition that is probably going to smooth things out a bit. And what was your question about backlog?

Joe Maxa –Dougherty and Company

I was looking at the increase competence in the revenue in the backlog with these RFPs turning into long term order if that –

T. Kendall Hunt

Yes.

Joe Maxa –Dougherty and Company

Would suggest that Q1 would may be less seasonal in the past – maybe a more of the smoothening from Q4 to Q1 or would you still expect that your typical seasonality?

T. Kendall Hunt

I would expect the typical seasonality, Joe. There are anomalies. The third quarter that we just closed, was actually up about 6% over the second quarter which is a bit unusual but generally speaking the seasonality that we have talked about in the past is a way to look at it so we would expect that the first quarter would be down compared to fourth quarter.

Joe Maxa –Dougherty and Company

Great. Right. Flipped a question for you on the tax rate did you – did I get it correct that you are expecting a full year effective tax rate to be 27%?

T. Kendall Hunt

No. That is the blunted rate – at point in time Joe the full year rate we expect to be thirty two excluding the impact of the discreet items and then the discreet items are reducing the tax rate about $280,000. Full year pre-tax earnings times about 32% percent less the 282 for the discreet items should give you the right tax rate for full year.

Joe Maxa –Dougherty and Company

The 282 two that was a basic points?

T. Kendall Hunt

No. That was dollars – absolute dollars and those are resulting from filing a tax return in various jurisdictions incurring up the estimates that we recorded in those periods versus the actual tax returns file.

Joe Maxa –Dougherty and Company

So you are expecting your effective tax rate in Q4 would be ups up from Q3.

T. Kendall Hunt

Yes. In Q3 we had reduction in tax rate because we revised our full year tax rate down from 35 to 32% excluding the discreet items.

Joe Maxa –Dougherty and Company

Okay, got it.

T. Kendall Hunt

(Inaudible) affected that adjustment in Q3.

Joe Maxa –Dougherty and Company

Okay. I understand. Thank you very much.

T. Kendall Hunt

Okay.

Operator

Our next question comes from the line of David Ives with FBR. Please proceed with your question.

David Ives - FBR

Yeah. Just more of a strategic view how – when you looking at your business you seem – it is becoming more predictable and obviously if that was especially a few years ago and your prior with the most predictable business out there. What is it specifically that gives you confidence that we are not going to hit another speed bump, I mean obviously there are underlying (inaudible) that you guys are seeing. Can you talk to that from a high level as what gives you confidence going fiscal level? Is it going to be bit more predictable?

T. Kendall Hunt

The comment is based upon purchase orders that are coming in as a result of the RFPs reaching maturity and the customers deciding on the vendor and when they decide on the VASCO they typically gives us a purchase order that is good for six months to 12 months and with a schedule of deliveries so we had good visibility and as more and more of these larger RFPs reach maturity and the PO are issued the VASCO we can start looking out six to twelve months. That is the visibility and the predictability that I am talking about. If there would become another economic down turn prices in two years or three years then we have to adjust and place whatever the outcome is there but when I talked about with Jan and Clifford I talked about visibility. It has to do with backlog; it has to do with firm backlog. Orders we gotten from the customers and schedules for production or deliveries over that period of time.

David Ives - FBR

Okay guys. Thanks.

T. Kendall Hunt

You are welcome.

Operator

Our next question comes from line of Fred Ziegel with Blue Water Capital Market. Please proceed with your question.

Fred Ziegel – Blue Water Capital Market

Okay Good morning everybody.

T. Kendall Hunt

Hi Fred.

Fred Ziegel – Blue Water Capital Market

Couple of questions, I guess one you can maybe one beyond – DIGIPASS as a service. Did you mentioned this gives you the ability to reach out the markets that you are – probably not been – certainly physically located in – Can you talk at this point about the strategy specifically in the marketing front to create some noise and then the second question for Jan is what are you seeing in terms of a shift – if there is a one to mobile platforms or running on TV.

T. Kendall Hunt

Alright well back to your question about DIGIPASS as a service. This is going to be a multi-face roll out. First of all and so we are targeting certain market – the first and the most obvious that we are going after that is our focus is B2B and in that case we are talking about SAS vendors that are doing business everyday with their customers in providing some kind of a service or a product and many of these SAS vendors do not want to be in the security business. Do not want to install - anybody ups on occasion platform themselves they want to in to B2B business and so we are going to be offering some of these in the cloud businesses the opportunity to provide strong indication for their business clients – that is the next phase 1. Phase 2 would be more or B2E, business to employees and that would be for applications that the company, the enterprise has outsourced and is making their employee available for these outsourced services. And then the third phase would be through B2C and that would be again these three phases would be over period of time. The first phase will be a very targeted phase with email and promotions and white papers and WebEx and Web&R and (Inaudible) and everything you can imagine to identify good prospect and convert them to customers. Jan you want to go ahead and answer the shift to mobile – the opportunity for mobile.

Jan Valcke

Yes. Well, there is a demand for doing authentication on mobile platforms. This is not so much to shift to as more an add-on where people are using mobile platforms together with their PCs. Now there are different ways to do strong indication of I mentioned before that is more shift today from only user authentication also to have no electronic and also visual signature capabilities. And there are different ways to do that on a platform. That is of course a traditional way with traditional DIGIPASS. This is still the way that most of the banks, most of the corporations are using. There are software products that are available for software DIGIPASS that are available for those mobile platforms. We have them in all forms and all colors and on all operating systems there are available. The rest and most of regions, the SIM card the smart card that can be use where we have solutions for it. And there are other ways to doing it in the future so I believe we can say that VASCO is really ahead of it. If you look at the competition we are very strong in that field and we are ready to serve our customers on whatever way they want to use their mobile platforms.

Fred Ziegel – Blue Water Capital Market

One last question, this may be a little too early but if you seen anything coming out of the VeriSign authentication acquisition by Symantec either good, bad or indifferent.

T. Kendall Hunt

Well Fred you probably know that we were partners with VeriSign and actually provided our DIGIPASSes for their platform. We continued to be their partner even though they are now part of Symantec. Symantec and some areas of the world that we do through distribution, we package their anti-virus with our DIGIPASS pack so we reach the many opportunities to continue to work with VeriSign and many opportunities to partner with Symantec.

Fred Ziegel – Blue Water Capital Market

Thanks.

Operator

Ladies and Gentleman as a reminder to register your question please press the one follow by the four on your telephone keypad. Our next question comes in line with Scott Zeller with Needham and Company. Please proceed with your question.

Scott Zeller – Needham and Co.

Thank you. Regarding the guidance can – it sounds from your commentary that visibility is improving. We heard that the RFPs you mentioned in previous calls are now actually converting into orders. Could you tell us why the guidance was not change for the full year then despite the increase visibility?

T. Kendall Hunt

Actually Scott if I can help you a little bit with that question. Jan eluded to potential production problems, shortage of components parts earlier. We factor that into our full year estimate. Second factor we are looking at is the fourth quarter of last year was a very strong quarter when compared to fourth quarter of 2009 – our third quarter of 2009, we had a 27% sequential growth in revenue. So we got a very large number to hit in Q4 to even equal what we did last year. It is a function of timing of what is happening within the year has the response to the RFPs converted into order earlier. We have a couple of soft orders at the beginning of 2009 that would make it easier to come but the comeback or the return of the banking business happening in the fourth quarter which is a very strong quarter for us last year.

Scott Zeller

Just a follow-up on that, I think that was Cliff. The commentary around the components, it’s (inaudible) times in the Q and A and they prepared their marks now, I mean should we be bracing ourselves for a surprise in the fourth quarter regarding reported revenues that – I mean is it possible we will hear about strong demand however the reported revenues could be surprising?

T. Kendall Hunt

No, I don’t think so. We are re-affirming our guidance for the whole year. We can kind of allow the numbers.

Scott Zeller

Okay. And then regarding the new contract scan on the improved visibility your RFPs. Could you let us if the nature of the larger contract is similar to what we have heard before where customer will discuss your plan for in order with several pieces perhaps we have some visibility going forward or have the project perhaps changed to be more discrete in near term focused in single purchase?

T. Kendall Hunt

Why don’t you answer that Jan?

Jan Valcke

I would say it is the same way that they are ordering like in the past. They order for long term deliveries.

Scott Zeller

Okay, thank you very much.

Operator

Our next question comes from the line of Katherine Egbert with Jefferies. Please pursue with your question.

Ignatius Njoku - Jefferies

Hi, this is Ignatius Njoku for Katherine Egbert. Thank you for taking my question. Just want to understand how is your customer buying behavior? Are you seeing more on retail opportunity versus how you seeing your customers buying more on budgets?

T. Kendall Hunt

Well, it is really a two. I think Jan just tried to address that. In the case of new customers, they are probably looking at corporate or retail audiences for new projects and they have to rule out whatever they are – the number is a part of their strategy. Probably all the corporate clients is co-percentage of the retail clients that takes and that is going to be done over multiple periods like multiple years. We also have an upgrade opportunity with existing banks that perhaps have had our products for 3 or 4 years and now because of increase hacker activity perhaps they want to upgrade to a new product like the DIGIPASS 270 which is one time password plus signature plus multiple identities. So we have opportunity to convert the RFPs for the most part brand new customers that are rolling out to audiences for the first time. And then we also have this opportunity to go back their existing customers to allot upgrades to what they have right now. Again, both being multiple periods – one year, two years, that sort of thing. We are moving away from the just in time orders that we have been experiencing for the last couple of years to more planned and sane order in fulfillment process.

Ignatius Njoku - Jefferies

Thank you.

T. Kendall Hunt

You are welcome.

Operator

(Operator Instructions) Our next question comes from the line of Noah Steinberg of G2 Investment Partners. Please proceed.

Josh Goldberg - G2 Investment Partners

Hey, it is actually Josh Goldberg for Noah, how you doing?

T. Kendall Hunt

Hi Josh, how are you?

Josh Goldberg - G2 Investment Partners

Great. So Ken, I guess I heard you talked about strong growth more in this quarter (inaudible) than you have before and obviously the RFP activity was strong and now it is translated into orders which I think is a big change and a very positive one for the company. Could you give just some color on what strong growth means or physicality like was this your best order quarter ever? How much stronger was it in terms of orders versus a year ago? Something like that.

T. Kendall Hunt

I do not know if I can give you exact percentages or anything like that but we have been talking about the RFP activity increasing for about three quarters and we tried to describe how that works. It starts with the request for information where a target customer might send out an RFI to thirty or forty potential vendors of security. They go through that process and then decide on knowing (inaudible) three or four vendors that have solutions that they are interested in and then they have a very precise RFP that they issue to those three or four vendors and the vendors have to spend time to answer the RFP and submit their proposals. And then a decision is made on the vendor, hopefully VASCO. And if it is a larger account, larger customer then we negotiate a contract. So unfortunately these things do take time and that is why we have been talking about it for several quarters. And the second quarter, we have very good order intake which was beginning of some of the conversion of these RPFs into real orders. We had more in the third quarter and we probably expect yet again more in the fourth quarter. And so when I say that we expect strong growth, we are looking at the conversion of RPFs in the firm orders. Those firm orders being POs that have bits of dollars and manufacturing schedules that we can now see out for six months, nine months, twelve months and we have not had for a couple of years. And so that what is encouraging us is the fact that we have better and better visibility.

Josh Goldberg - G2 Investment Partners

Can the order the year received on the second and third quarter – do you feel that just those orders not even what you are going to get in the quarter gives you a lot of comfort for growth next year?

T. Kendall Hunt

Absolutely.

Josh Goldberg - G2 Investment Partners

Okay. So the orders that you received is strong enough to give you some sort of (inaudible) toward a strong growth year next year?

T. Kendall Hunt

Yes.

Josh Goldberg - G2 Investment Partners

Okay. I just let mostly on the banking in Europe without having going on in the US?

T. Kendall Hunt

I think we are seeing an improvement everywhere. Europe has been a - Jan, you can comment as well but we definitely are not seeing an improvement in (inaudible) and the banking activity there. Do you have anything else to comment about that Jan?

Jan Valcke

Yeah. We need to make a difference here between the banking and the non-banking business. The banking business in the US is still a corporate banking business so there is no real activity on the security for retail banking. And the rest of the world is using our (inaudible) for to secure corporate banking transactions, weaker banking transactions. So we see growth in this security for retail banking all over the world. RFPs are coming already from the whole world. Of course except from the US because again there is no activity there in retail banking. For the rest, we see growth everywhere in this non-banking business also in the US. US I should even say started a bit earlier this growth due to the fact that a crisis started also early in the US.

Josh Goldberg - G2 Investment Partners

Right. All right, last question for me is obviously with a nice growth here and I am sure let just throw it out there something like a 15% growth top line because you spent so much money on your expenses insurance, you been building out DIGIPASS’, service as well as some of the other activities. Is it fair to say that whatever you grow your sales you probably growing an increase in earnings even faster?

T. Kendall Hunt

I think we need to stay tuned for guidance for next year Josh on that one. In general, I agree with the permit that you are lying out. For the last couple of years if you look at it has been investment years for VASCO where we continued to either maintain investments we have put in place in 2008 throughout 2009 or actually increase our investments in infrastructures starting in Q4 2009 to date. As we do look forward, it is not unreasonable to think our revenue growth surely exceed our gross and OpEx but that will be (inaudible) in terms of our guidance which will most likely be discussed in February 2011 conference call.

Josh Goldberg - G2 Investment Partners

Right. Not a question, a minute, just I would see old timers in the stock know that when your company starts growing you are top line. I mean you gain on 20 – 25 cents a quarter pretty easily.

T. Kendall Hunt

We would hope that would be the case but have not put pencil to paper yet to lay it all out at this stage.

Josh Goldberg - G2 Investment Partners

Okay, great. Thanks again.

T. Kendall Hunt

Thank, you Josh.

Operator

And it appears there is no further question from the participants at this time.

T. Kendall Hunt

All right. Well, good. Well, thanks to everybody for joining our conference call. We always appreciate good questions. And as always, this management team wants to thank all the loyal and hard working VASCO people around the world for their contributions and everybody have a good day.

Operator

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

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