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

Q3 2012 Earnings Call

October 25, 2012 10:00 AM ET

Executives

Kendall Hunt – Founder, Chairman, and CEO

Jochem Binst – Director, Corporate Communications

Jan Valcke – President and COO

Cliff Bown – EVP and CFO

Analysts

Joe Maxa – Dougherty & Company

Fred Ziegel – Topeka Capital

Jeff Andry – Wunderlich Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the VASCO Data Security International, Inc. Q3 2012 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) As a reminder this conference is being recorded Thursday October 25, 2012.

I would now like to turn the conference over to T Kendall Hunt, Founder, Chairman and CEO. Please go ahead, sir.

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 am the Chairman, Founder and CEO of VASCO Data Security International, Inc. On the call with me today are Jan Valcke, our President and Chief Operating Officer; and Cliff Bown, our EVP and Chief Financial Officer.

Before we begin the conference call, I would like Jochem Binst, VASCO’s Director of Corporate Communications, to brief all of you on forward-looking statements.

Jochem Binst

Thank you, Ken. Ladies and gentlemen, 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.

At this time, I will turn the call back over to Ken.

Kendall Hunt

Thank you, Jochem. Today, we are going to review the results for third quarter 2012. 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.

Revenues for the third quarter 2012 were in line with the numbers discussed in our pre announced release of October 9. As we noted at that time, revenues from both the banking and enterprise and application security markets were lower than revenues in the comparable periods in 2011. Revenue from continuing operations for the third quarter of 2012 decreased 12% to $36.3 million from $41.4 million in the third quarter of 2011 and for the first nine months of 2012 decreased 4% to a $115.2 million from $119.6 million for the first nine months of 2011.

Our gross profit for the quarter was approximately 66% of revenue compared to 67% for the third quarter of 2011. Our operating income from continuing operations was approximately 17% of revenue for the quarter compared to 18% for the third quarter of 2011. At September 30, 2012 our net cash balance was $96.1 million, an increase of $11.6 million over our balance of December 31, 2011 and we had approximately $123.8 million in working capital. This strong cash position and strong balance sheet continues to be an important benefit to VASCO’s future growth.

While we were disappointed with the results for the quarter, we believe that our traditional business remains strong and that our business is sound. We are also continuing to invest in our services platform and expect it will allow us to expand our target market to consumers and other applications beyond the reach of our traditional products. We are optimistic about our business prospects in both our traditional and services business models for 2013.

I promised during last earnings call to give you additional metrics regarding the ramp up of our services business. First, we are currently targeting application service providers, ASPs, of all types and their users. These users might be customers, partners, employees and others that utilize applications offered by the ASPs. For now the users that we are targeting for MYDIGIPASS.COM are those that consider Internet security a priority. Initially, we believe they represent a small percentage most likely less than 5% of the total users. Going forward, we expect this percentage to increase.

The ASPs go through several stages before going live on our services platform. The first stage is the signup stage. In this stage, we are inviting the ASPs to go to our developer website and sign up. Sign up means that the ASP creates an account on VASCO’s developer website. After registration, the ASP can download the tools and read the information on how to integrate the MYDIGIPASS.COM connect button into its website.

The next stage is the testing stage. Testing means that the ASP can simulate using MYDIGIPASS.COM and VASCO’s sandbox environment. The ASP can have multiple website test environments. The third and final stage is applied for live key. This means the ASP has completed a form to receive the real MYDIGIPASS.COM connect button for their website. When the ASP wishes to go live, they need to place an order with VASCO for user licenses and clicks which are authentication events. Once the order is approved, the ASP receives a live key. This key is used by the ASP to implement the MYDIGIPASS.COM button on their live website.

Currently, we have over 200 ASPs in one of these three stages. Once the ASP has integrated the MYDIGIPASS.COM button on their website, the ASP supported by VASCO marketing urges their users to click the button on their website to establish a personal account on MYDIGIPASS.COM. As their users sign up and establish their accounts on MYDIGIPASS.COM, they can then access the ASP’s website quickly and securely consuming the authentication clicks purchased by the ASP. Once the ASP’s allotment of licenses and clicks are consumed, we expect them to order additional licenses and clicks, a recurring revenue model.

In the third quarter, we announced that MYDIGIPASS.COM is now integrated with WordPress, the largest self-hosting blogging tool worldwide and Drupal which has added MYDIGIPASS.COM to its contributed modules, enabling web developers to embed secure login access for the websites they build through the Drupal community.

During the remainder of 2012 and beyond, we will concentrate on building a critical mass for MYDIGIPASS.COM enabled websites and activating end users. We believe that we will generate meaningful revenue for our services offering in 2012.

I’d like to repeat what I said before. We believe VASCO’s overall business is sound. Including Q3 2012, we have delivered 39 consecutive quarters of positive results. Our cash balance has also grown substantially over that same period. However, the performance of our traditional business and the banking business in particular has been irregular due to the transactional nature of our business.

We believe that our banking business is very sound. However, the timing of when a deal materializes within a quarter or a year can have a significant impact on our quarterly financial results. In the short term, I do not expect this to change. Our banking business will stay transaction driven but we can and must improve the predictability and visibility of our quarterly and annual results in that market.

Executive management has decided that our current approach to forecasting and account management is not working as well as we would like. Accordingly, we have decided to reallocate our sales resources to better manage our key account banking opportunities. Effective immediately, our Vice President of Sales has been asked to take the lead of a dedicated key account team focusing on VASCO’s largest banking customers. At the same time, Jan Valcke will temporarily assume direction of the sales organization in combination with his responsibilities as President and Chief Operating Officer.

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, revenue from our traditional business can differ quarter-over-quarter because of timing and size of one order can have a huge impact on short-term results. It is a challenge to forecast not only when an order will be placed but also when specific shipments will be delivered. Our traditional business provide us with the necessary sources of revenue, invest in our future growth both in the traditional business and in services.

Our banking market give us large volumes with lower margins. Banking is important for VASCO because it bring us the critical mass we need in production and it is our entry point in the geographic market. Banking is still the largest part of our business. It is exactly the banking business that we will take extra measures to fine tune our forecasting system.

The action that we will take are twofold. One, we will reinforce the system of linking and mirroring local business plans and sales forecast. The business plan gives us the potential of a market while the forecast tell us how the sales pipeline looks like. By linking both, we know which actions to take to tackle the market be it via regeneration or sales activity. I will personally oversee and monitor the implementation of the system.

Two, key account management for VASCO’s top banking customers. As with many businesses, a relatively large proportion of our revenue comes from relatively short list of top banking customers. As a consequence, we must focus on and give the highest priority to strategic key accounts. Therefore, we have asked VASCO’s Global VP of Sales to take the lead of the dedicated key accounting focusing on VASCO’s large banking customers. That way, we expect to improve our visibility regarding our banking revenue.

We expect the relationship between our traditional business and our service business has to be complementary. Banking alone with enterprise and application security generate the funds necessary to build a strong services offering while staying profitable. With our new measures, we believe to be able to enhance the predictability of our banking business. However, we will not be able to completely neutralize the transaction driven character of our business.

We expect that our service business will bring a stead growing and a recurring source of revenue starting from 2013. We tackle discrete new service business opportunity from four different perspectives. First, our application securities sales staff aims at recruiting ASPs in order to secure B2B occupations with DPS. Secondly, our business development organization focuses on large ASPs in the B2C field. A number of business development people are already on board and we expect to strengthen their ranks in short term.

Thirdly, our marketing will support the ASP with many actions designed to help them sign up their users on the MYDIGIPASS.COM platform. And finally, our banking application security sales organizations will go back to companies that have been brought about in step one to sell extra services, packages, activation fees and more.

It is our firm belief that combination of our strong traditional business and our service business will lead to a new period of strong growth for VASCO. Thank you for your attention and I would like now to turn the meeting back to Ken.

Kendall Hunt

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

Cliff Bown

Thanks, Ken, and welcome to everyone on the call. As noted earlier by Ken, revenues for the third quarter of 2012 were $36.3 million, a decrease of $5.1 million or 12% from the third quarter of 2011. For the first nine months, revenues were $115.2 million, a decrease of $4.4 million or 4% from the comparable period in 2011. The decrease in revenue in the third quarter reflected an 11% decrease in revenues from the banking market and a 16% decrease in revenues from the enterprise and application security market.

For the nine months ended September 30, 2012, the decrease reflected a 6% decrease in revenues from the banking market, partially offset by an 8% increase in revenues from the enterprise and application security market. It should also be noted that the comparison of revenues was impacted by changes in the exchange rates, primarily changes between the euro and Australian dollar to the U. S. dollar. We estimate that revenues were $1.5 million lower for the third quarter and $3.4 million lower for the first nine months of 2012 than they would have been had the exchange rates in 2012 been the same as in 2011.

The mix of revenues for the third quarter of 2012 was 82% from the banking market and 18% from the enterprise and application security market. The mix of revenues for the nine months ended September 30, 2012 was 81% from banking market and 19% from the enterprise and application security market. For the third quarter and first nine months of 2011, 81% and 83% respectively of our revenue came from the banking market and 19% and 17% respectively of the revenue came from our enterprise and application security market.

The geographic distribution of our revenue for the first nine months 2012 was approximately 61% from Europe, 7% from the United States, 22% from Asia, and the remaining 10% from other countries. To the first nine months of 2011, approximately 72% of our revenue was from Europe, 9% from the U.S., 7% from Asia and the remaining 12% was from other countries.

We believe that the change in mix of revenues by region does not reflect any significant change in the economic environment of any given market but rather reflects that our business is based on specific projects undertaken by our customers in specific time periods. As discussed previously, the majority of our revenues are sustainable and repeatable by nature rather recurring.

Our gross profit margins were approximately 1.3 percentage points lower in the third quarter of 2012 than in the third quarter of 2011, but were 1.6 percentage points higher for the nine-month period ended September 30, 2012 as compared to the same period in 2011. Our gross profit margins were 65.8% and 65.2% of revenue for the third quarter and first nine months of 2012 respectively, compared to 67.1% and 63.6% of revenue for the comparable periods in 2011.

The decrease in gross profit as a percentage of revenue for the third quarter of 2012 compared to 2011 primarily reflects the impact of the strengthening of the U.S. dollar versus the euro and other currencies of countries where we operate. The increase in gross profit margin for the first nine months 2012 compared to 2011 primarily reflects a reduction in transport costs and other non-product costs, an increase in revenue from the enterprise and application security market as a percentage of total revenue, a reduction in card readers as a percentage of total revenue and an increase in non-hardware revenue as a percentage of total revenues, partially offset by the negative impact on revenue and gross profit and changes in foreign currency rates.

As noted on previous conference calls the majority of our inventory purchases are denominated in U.S. dollars. Also as previously noted our sales are denominated in various currencies including but not limited to the euro and Australian dollar. As the U.S. dollar has strengthened when compared to the same periods in the prior year, revenue from sales made in euros and Australian dollars decreased as measured in U.S. dollars without a corresponding change in cost of goods sold.

As noted earlier, the impact from changes in currency rates are estimated to have decreased revenue by $1.5 million and $3.4 million for the third quarter and the first nine months of 2012 respectively. Had the currency rates in 2012 been equal to the rates in 2011, the gross profit margin would have been approximately 1.3 percentage points higher for the quarter and one percentage point higher for the nine months ended September 31, 2012.

As noted earlier, revenue from our enterprise and application security business, which generally has margins that are 20 to 30 percentage points higher than the banking market, was 18% and 19% of our total revenue for the third quarter and first nine months of 2012 respectively compared to 19% and 17% for the third quarter and first nine months of 2011 respectively.

Card readers which can have a lower gross profit margin that is approximately 10 to 20 percentage points lower than other hardware related margins due to competitive pricing pressures were 13% of our revenue for both the third quarter and first nine months of 2012 respectively, compared to 21% and 22% for the third quarter and first nine months of 2011 respectively.

Non-hardware revenue which can have a gross profit margin that is approximately 20 to 30 percentage points higher than hardware related revenue, depending on the model and quantity of the hardware unit sold, was 23% of our revenue for both the quarter and first nine months of 2012 respectively, compared to approximately 25% and 22% of total revenue for the third quarter and first nine months of 2011 respectively.

On a consolidated basis, our operating expenses for the quarter in nine months ended September 30, 2012 were $17.6 million and $57.7 million respectively, a decrease of $2.7 million or 13% from the third quarter of 2011 and a decrease of $2.7 million or 4% for the nine months ended September 30, 2012.

The decrease in consolidated operating expenses for the third quarter of 2012 compared to the third quarter of 2011 was primarily related to a benefit from the change in currency rates of approximately $2 million, a reduction in accruals for annual incentive compensation liabilities of $0.6 million where management believed that was no longer probable that the performance objectives will be met and a reduction in accruals for stock-based incentive plan liabilities of $0.4 million also where management believed that it was no longer probable that the performance objectives would be met, partially offset by a 2% increase in average head count.

The decrease in consolidated operating expenses for the first nine months of 2012 compared to the same period in 2011 was primarily related to the benefit of the change in currency exchange rates of approximately $3.7 million and the reductions in accruals for incentive compensation liabilities during the third quarter as previously noted, partially offset by a 3% increase in average head count.

Operating expense for the third quarter in first nine months of 2012 includes $0.5 million and $2.7 million of expenses related to stock-based incentive plan cost respectively compared to $0.9 million and $2.2 million of stock-based incentive plan cost for the third quarter and first nine months of 2011 respectively. Operating expenses also included $0.5 million of amortization related to purchased intangible assets for both the third quarter of 2012 and 2011. Amortization of purchased intangible assets was $1.4 million and $1.5 million for the nine months ended September 30, 2012 and 2011 respectively.

Operating income for the third quarter of 2012 were $6.3 million, a decrease of $1.2 million or 16% from the $7.4 million reported for the third quarter of 2011. For the first nine months operating income was $17.5 million in 2012, an increase of $1.8 million or 12% from the $15.7 million reported in 2011. Operating income as a percentage of revenue or operating margin was 17% for the third quarter and 15% for the nine months of 2012. In 2011, our operating margins were 18% for the quarter and 13% for the first nine months.

We reported income tax expense of $1.5 million for the third quarter and $4 million for the first nine months of 2012. The effective tax rate was 24% for the third quarter and 22% for the first nine months of 2012. For 2011, the company reported income tax expense of $1.3 million for the third quarter and $3.4 million for the first nine months. The effective tax rate reported in 2011 was 18% for the third quarter and 21% for the nine months.

The tax rate in the third quarter of 2012 was negatively impacted by an adjustment to increase our estimated full year tax rate from 21% to 22%. The tax rate in the third quarter of 2011 benefited from a decrease in our estimate of our full year tax rate from 30% to 21%. The effective tax rates for both 2012 and 2011 reflect our estimate of our full year tax rate at the end of the third quarter in each period.

The change in our tax rates reflects a number of differences including, but not limited to, our estimates of full year pre-tax income at the end of the third quarter of each year as well as the geographic distribution of where the income will be earned. 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 tax rate to decline. As pre-tax income decreases, the effective tax rate will increase.

The makeup of our workforce as of September 30, 2012 was 372 people worldwide with 174 in sales, marketing and customer support, 144 in research and development and 54 in general administrative. The average head count for the third quarter of 2012 was 7% or 2% higher than the average head count in the third quarter of 2011. The average head count for the first nine months of 2012 was 11% or 3% higher than the average head count in the same period of 2011.

Our balance sheet continued to show strong cash and working capital balances throughout the third quarter of 2012. Our net cash balance was $96.1 million at September 30, 2012, an increase of $11 million or 13% from $85.1 million at June 30, 2012 and an increase of $11.6 million or 14% from $84.5 million at December 31, 2011.

The increase in cash from June 30, 2012 was attributable to positive cash flow from operations, the weakening of the U.S. dollar to the euro and most all other currencies, other countries in which we operate and favorable changes in key elements of working capital. The increase in cash from December 31, 2011 was primarily attributable to positive cash both from operations partially offset by a negative impact on cash of the strengthening of the U.S. dollar to the euro.

At September 30, 2012 we had working capital of $123.8 million, an increase of $5.7 million or 5% from $118 million at June 30, 2012, and an increase of $15.2 million or 14% from $108.6 million reported at December 31 of 2011. The increase in working capital for the quarter and nine months ended September 30, 2012 was primarily related to cash flows related to our operations.

Thank you for your attention. I’d like to now turn the meeting back to Ken.

Kendall Hunt

Thank you, Cliff. In closing, I’d like to comment on our updated guidance. We are reaffirming the guidance that we gave during the October 9 conference call. We believe that our revenue for full year 2012 will be in a range of $150 million to $157 million down from the guidance given on our second quarter earnings conference call of $175 million or more. We also believe that our operating income excluding amortization of acquisition related and tangible assets will be in the range of 11% to 13% of revenue down from the guidance given on our second quarter earnings conference call of 13% to 16% of revenue.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Joe Maxa. Please proceed with your question.

Joe Maxa – Dougherty & Company

Thank you. Ken and Cliff, I wanted to address or talk more about the guidance and where your op margins are expected to be. You’re much higher than at 11% to 13% now I believe and looking at your guidance, that would suggest Q4 could be an operating margin quarter, much less than the 11% to 13% if you’re to get into that range. Is that how we should be thinking about it?

Kendall Hunt

The answer is yes, Joe. As we’ve tried to forecast Q4 and look at the mix of the business and where the business is coming from and the currencies in which some of the transactions might be denominated, we do estimate that we’ve got some risk on gross margin on the operating expense line given that we had the one-time adjustment, so to speak, of incentive compensation both for bonus as well as long-term incentives. Those won’t be continuing or won’t reoccur in Q4, so the OpEx is planned to increase for that.

We also see the exchange rates in the current environment for the euro to the dollar being higher than they were in Q3 and previous quarters. Right now, it’s about $1.3 per euro. So when we put all of those factors together, we anticipate that our operating margins in Q4 would be lower than both Q3 and year-to-date Q3.

Joe Maxa – Dougherty & Company

And Cliff, help me out with the operating expense line. I think you had said $2 million were due to foreign exchange. Was that some type of accrual? And now the pretty big number that could impact your OpEx line.

Cliff Bown

No, that was just the change in the average rate. For Q3 of 2011, it took $1.44 to buy a euro. The average for Q3 of this year was $1.25 to buy a euro.

Joe Maxa – Dougherty & Company

Okay.

Cliff Bown

So that change of 14% had a significant impact on OpEx.

Joe Maxa – Dougherty & Company

Well, let me ask you this way. The G&A line sequentially was down pretty dramatically. Can you explain kind of what the difference was?

Cliff Bown

The G&A line was down for basically a couple of key reasons. One was currency exchange. The second was the majority of those adjustments to compensation went into the G&A line. And third would be related to professional fees. As you may recall in the third quarter of last year, we were working on the DigiNotar situation. Those fees would largely be down and just go up at this time. But there are other general activities where professional fees were higher last year than this year. Those issues were really not that significant recurring so we really didn’t comment on them in our script.

Joe Maxa – Dougherty & Company

Okay. So on Q4 OpEx, we should be looking at more of the Q2 as a base than Q3 is, the ballpark.

Cliff Bown

Yes, I would suggest that’s reasonable.

Joe Maxa – Dougherty & Company

Right. Okay, thank you.

Operator

Our next question comes from the line of Fred Ziegel. Please proceed with your question.

Fred Ziegel – Topeka Capital

Hi, guys. Ken, could you shed some light on the pricing both for licenses and clicks on the new service? Let me see you said something.

Kendall Hunt

Let me see. We have a pricing scheme that is kind of similar to SMS text messages. The telcos sell them in bundles to their corporate clients and so we’ll have two different types of pricing schemes. One will be for more of a commercial use and in that case the users can buy a certain number of licenses and that would be for their users to sign on and become members of the MYDIGIPASS.COM platform and then they would buy a group of clicks that would be registered every time the user has an authentication event.

There is a different type of pricing that is more for governmental or non-commercial applications and, in that case, there is a an annual fee, set annual fee that is recurring every year and then there is a price per user, it’s a fixed price per user that recurs every year. Jan, do you have any other color? I would prefer not to give exact numbers at this time but that’s basically how the pricing works.

Fred Ziegel – Topeka Capital

On the commercial side, is the license perpetual or is it annual?

Kendall Hunt

Jan, would you address that please?

Jan Valcke

Yes, may be a short step back, Fred, is the principle again of the MYDIGIPASS.COM community is that a user is getting a free DIGIPASS. Most of them are DIGIPASS for mobile, a DIGIPASS that is downloaded on their iPhone, iPad, whatever and that we believe that that user will use that DIGIPASS for multiple applications, not only for only one application. The ASPs can basically buy this community, by what Ken already mentioned, activation fee, authentication, we have then some other different ways of selling packages. Most of them are annual. That means perpetual and annual means if you’re buying 100,000 clicks and you don’t have consumed it after a year, then they will be lost for the ASP.

Fred Ziegel – Topeka Capital

Okay thanks.

Operator

Our next question comes from the line of Jeff Andry. Please proceed with your question.

Jeff Andry – Wunderlich Securities

Hey, guys. This is Jeff Andry in for Bryan.

Kendall Hunt

Hi, Jeff.

Jeff Andry – Wunderlich Securities

Regarding your – hey, how you doing? Regarding your WordPress win, that’s the first major brand name win we’ve seen here particularly in the States. Should we view that as representing an increased acceptance of that product in the U.S.?

Kendall Hunt

Jan, please address that.

Jan Valcke

Yes, it is certainly an increase of the compatibility of all those websites using those protocols. So this is not only U.S. It’s a protocol that is used by Drupal worldwide for different websites. So the compatibility makes us that there is no technical reason anymore why a website should not be connected to MYDIGIPASS.COM

Jeff Andry – Wunderlich Securities

Okay great, thank you.

Operator

(Operator Instructions) We do have a follow-up question from the line of Joe Maxa. Please proceed.

Joe Maxa – Dougherty & Company

Yes, hi. Just one more question. Ken, where do you see the most growth opportunity in your core business? Are you seeing more growth coming out of Europe now? I mean it may be not just today, given the macro but where do you see it in the next in the coming year or two?

Kendall Hunt

Jan, would you address that too, please?

Jan Valcke

Yes, sure. The question, Joe, about our traditional business banking or enterprise?

Joe Maxa – Dougherty & Company

No, really kind of like really across all your business units.

Jan Valcke

All right. So basically what we are doing is making business plans. In these business plans, we are measuring the maturity of, one, a country and, B, a market. That means that I think we have a much fair idea where we can grow faster than the average or the VASCO average in some countries. I believe or we believe that even if there will be a growth coming also from Europe, we believe that there will be substantial growth coming from Latin America and from Asia in the banking business.

The U.S. is a bit more difficult when it comes to banks. We all know the U.S. banks really go for applications and retail banking where two-factor authentication is needed. What will be the effect of mobile authentication, that we will see quite soon in the U.S. But due to the fact that it’s a very difficult market to forecast, I cannot give predictions there.

If it comes to the enterprise security, I believe we’re going to have a stable growth worldwide of single digit and maybe double digits but then a little bit above 10%. But the real growth needs to (inaudible) on the stability and our growth really need to come from MYDIGIPASS.COM. I think that with all the customers we have, with the demand of the market to pay security as on-demand clicks that we will see a growth there, a more substantial growth in U.S. because ASP is really a North America business or more a North American business than in Europe. But I expect there that the U.S. market will grow substantially in that field.

Joe Maxa – Dougherty & Company

And as a follow-up on that, I think there’s indications maybe on last quarterly call suggesting you thought 2013 bookings from your DIGIPASS service could be 10% of your total. Is that still a number you’re comfortable with?

Kendall Hunt

Well, I remember saying that, Joe, and what I said was I would be disappointed if we couldn’t have order intake or percentage of the business to be at least 10%. I guess I stand by that. If we can’t do that well, I will be disappointed. And we’re driving towards that, but that is not a prediction. That’s not guidance.

Joe Maxa – Dougherty & Company

Understood. Thank you.

Operator

And we do have a follow-up question from the line of Fred Ziegel. Please proceed.

Fred Ziegel – Topeka Capital

Couple of things, I know you generally don’t have a 10% customer in a quarter or year for that matter, but my question is what’s the concentration of, say, the top 10 or 15 or how are you guys thinking about them? I’m really thinking about this relative to kind of the key account organization you’re setting up.

Kendall Hunt

Yeah, Fred, we actually generally do have a 10% customer in each of the periods. It’s just a different customer given the transaction and nature of the business. A customer that’s 10% in one quarter may not be in another quarter. You may also recall that last year HSBC for the full year was about 17% of our revenue and it was largely due to a significant transaction that was in the – getting backlog going into 2011 and shipped in the first half of 2012.

So for this quarter, we have one customer that’s just slightly over 10% of our revenue in the quarter, year-to-date we only have one customer, different than the one and in the third quarter that year-to-date is just slightly over 10% of our revenue whereas last year year-to-date we had one customer that was 20% of our year-to-date revenue. So the concentration is less this year than it was a year ago.

But specifically to your question, if I took the top 10 customers for 2012, they would account for 40% of our revenue this year. If I took the top 10 customers for 2011, they represented 59% year-to-date last year.

Fred Ziegel – Topeka Capital

Okay. And within those – I know, Ken, you’ve said in the past that you thought that within your current customers, you were only 10% or 20% penetrated. What’s that percentage roughly of that in the top 10 banks? How penetrated are you within them?

Kendall Hunt

Jan, can you address that question?

Jan Valcke

So, firstly I don’t understand really the question.

Kendall Hunt

Jan, Fred is asking if you took the top 10 customers that is accounting for 44% of our business and you looked at all their customers total....

Jan Valcke

Okay.

Kendall Hunt

...and you looked at the number of units we’ve shipped to those banks, what percentage penetration would we have? And just an estimate.

Jan Valcke

Okay. Again, it’s really depending on the customer and the region. In mature countries, we believe that we have a penetration of 62% to 70%. In non-mature countries or less mature countries, that can be as less as 30%. So as an average, I would say, 50% would be a good estimation.

Having said that, the growth is or the growth in a existing customer can be as follows. The first one is a replacement where the projects general goes for – stands for four years. After that, the customer will replace it either by new products with, A, all the products with the new technology; B, there is always a default order replacement of products not working anymore, not so much from the technical point of view but rather from the misuse of the products.

And thirdly, is we may not forget that and certainly in non-mature countries there is a service increase in account holders that becomes e-banking account holders. So besides that the whole market is not penetrated, there’s also those three ways of increasing our market in the existing customer base.

Fred Ziegel – Topeka Capital

Okay, one final question, is there 2013 EMV opportunity in the U.S. or is it beyond 2013?

Kendall Hunt

I’ll address it then Jan can follow up. If history repeats itself, looking back at the way that was rolled out in Europe, I think they made the announcement their intent to roll out the EMV card and that’s the EuroPay, MasterCard, Visa that’s what that stands for. And the whole idea was they wanted to find a way to reduce credit card fraud and so that required that all of the shops and restaurants and retail stores had to update their point-of-sale equipment to be able to receive a smart card to plug it in and to have the buyer enter their four-digit PIN much like an ATM.

And so that takes a long time to get industries or shops et cetera to upgrade their hardware to be compatible with the EMV card. So my personal opinion is we’re still several years away. There may be specific applications where the EMV card is used but not in a wholesale way. Jan, do you have any different thoughts on that?

Jan Valcke

A little bit I think. You need to see EMV as a protocol and that protocol can be used on a chip card where the protocol is put on the chip or it can be used online. I believe for the moment, U.S. is rather going online EMV. That means that they are not going to use smart card technology for the credit card companies. Having said that, Canada is totally different than the United States of America. Canada is really going for EMV or I should say the European way where EMV is put on the chip card.

Fred Ziegel – Topeka Capital

Okay, thanks.

Kendall Hunt

Welcome.

Operator

There are no further questions at this time.

Kendall Hunt

All right. Thank you, operator, and thanks to everybody for joining the call. We look forward to our next call in February. Have a good day.

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 line.

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