Interview with VASCO Data Security CEO Ken Hunt

| About: VASCO Data (VDSI)

The Wall Street Transcript recently interviewed T. Kendall "Ken" Hunt, Founder, Chairman of the Board and Chief Executive Officer of VASCO Data Security International, Inc. (NASDAQ:VDSI). Key excerpts follow:

TWST: We would like to begin with a brief historical sketch of the company and a picture of the things you are doing now.

Mr. Hunt: I am the founder of the company and it is a business that I started initially in 1991 by purchasing a company from a local Chicago-based investment company and the origins of the business were really offshore. The very first customer was ABN Amro Bank and they were using the product to strongly authenticate their corporate customers back in the late 1980s, early 1990s. That is one of the reasons why I developed such a large business offshore. In fact, as of the first quarter of 2009, only about 5% of my business was in the United States, with the majority outside. Our business is all about strong authentication. We have software that we deliver embedded in a calculator device called DIGIPASS. We can also deliver that same software on a Java phone or on a BlackBerry or on your PC. The whole concept is that passwords are not safe and can be easily hacked. There is so much commerce being done over the Internet, Internet-based transactions, that our business is growing — because cyber crooks are being so successful.

TWST: What is the competitive situation like and what differentiates your technology from competitors?

Mr. Hunt: We describe our business as the high-volume, high-quality, low-cost producer. Our strategy is a commercial strategy where we want to make our products available at a reasonable price, number one. And we have one of the lowest costs for unit prices. But because we have been very diligent in managing our manufacturing costs, we have one of the highest gross margin results in the industry as well. The other thing is that we have this platform called VACMAN Controller; it's basically the player. And our other strategy is to give our customers a wide choice of products. We have over 50 different hardware and software models to choose from.

TWST: What's next? The opportunities seem enormous because of the way the world is going.

Mr. Hunt: Yes, I think they are. In fact, we have in a way redefined ourselves. At one time, we said we're mainly focused on Internet banking and that is true. 75% to 80% of our business is Internet banking, but there are so many different types of transactions being done over the Internet, and there is really no limit. In fact, we were able to talk about in July of last year our first Internet gaming company called Blizzard Entertainment. They have a very well-known game, the World of Warcraft game. They were having problems because hackers were hacking into the gamers' accounts and stealing their avatars and either ransoming them back to the owner or selling them over the Internet. So Blizzard now has the "Blizzard Authenticator," manufactured by VASCO. VASCO manufactures the authenticator in their corporate color, with their logo, and they sell them to their gamers through their Internet Web store.

We just also recently announced our agreement with Square Enix, a Japanese company, to help protect their Internet game, Final Fantasy XI. They were also having the same kind of problem with hackers breaking into their gamers' accounts. Square Enix is doing the same thing as World of Warcraft, selling their own authenticator to their gamers to protect their accounts. Now two or three years ago, if you had asked me — Mr. Hunt, what do you think of gaming as an opportunity? — I would have said, "Oh, sure, gambling, all that money is at risk." No, actually I think the worth or the value of the avatars is probably more than money to those gamers.

So we just keep finding new applications. I think the simple definition of VASCO's opportunities in the future is anything that's an Internet-based transaction with any type of value needs to have strong authentication.

TWST: What proportion of your total revenue do you devote to R&D?

Mr. Hunt: VASCO's R&D is a fairly low number; historically, it has been running between 8% and 10% of our top line. And, again, I think that's an example of where we're pretty clear, we're pretty smart. Instead of having a big think tank, where we're building new products and hoping that we can sell it in the market, we take a different course of action. I have a couple of business development people, one in the United States, one in Brussels, Belgium. And all they do for the most part is look for new technologies and look for strategic partnerships. So when we hear from our customers, primarily our banking customers, what they would like us to provide to them in terms of a new product, a new technology, the first thing we do is take a look at some of the small companies that we have been tracking around the world.

These are small companies that conceptualize a new product, then secure financing for that product. They assemble their own R&D team, produce the product, then sell the product in their territory or country. That is the time we enter. They are at a point where they need to expand, they've probably run out of money, so they are kind of bound into the country in which they are domiciled. We perform what is called a make versus buy analysis. We approach the company, we talk to them about acquisition, and if we can strike a reasonable deal, we buy the company for cash. I call that a technology "tuck-in." We integrate their employees into the VASCO organization, then we get great leverage from putting those products into our channel.

We have 1,250 banks around the world as our clients. We have 8,500 total customers, so we put those products into our banking channel, we put those products into our reseller channel and we get great leverage from that. That is another example of how I think we manage our business very smartly.

TWST: What would be the two or three best reasons for the long-term investor to look closely at VASCO?

Mr. Hunt: As I said before, I think that it is pretty clear that VASCO management is a no-nonsense management team that really executes well. We spend money wisely, we're not extravagant; I and all my people travel around the world, stay at moderate hotels, we watch our budgets and you can see that from our financial results over the last 25 quarters. So I think that probably the best reason is that we are a good management team, we're a good company, we make money and that benefits the investor.

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