VASCO Deserves a Second Look
Shares of VASCO Data Security International (NAS: VDSI) dropped by a precipitous 16% yesterday. The e-signatures specialist met Street expectations with earnings of $0.07 per share and beat them with $43 million in revenue -- a 74% year-over-year gain.
Um, that wasn't bad at all. So there must be a guidance problem then: Management increased its full-year sales guidance from 20% to at least 40% year-over-year growth and pointed operating margins to the lower end of the former 8% to 12% range.
OK, let's do some math.
In 2010, VASCO collected $108 million of sales. So, 40% growth would mean a minimum of $151 million. Assuming the worst, operating income would then come out to at least $12 million. VASCO's highest 12-month tax rate in the last couple of years was 22.6%, so let's go with that figure again. So we'd get net income of about $9.3 million at worst, or $0.24 per diluted share (barring massive dilution of course, which isn't a habit of VASCO's).
That does look ugly next to the Street's forecast of $0.32 per share, despite the higher sales. Then again, this was a worst-case scenario. At the midpoint of VASCO's guidance, and assuming a more typical 21% tax rate, you'd get $0.31 per share. That'd be very close to current estimates.
So why the gloomy margin outlook, then? CEO Ken Hunt points to strong sales of lower-margin products to the banking sector as both the driver of plus-sized revenue and thinner margins. "We definitely think that the current gross margins are temporary," he said, hoping to rebalance sales toward smaller but higher-margin deals in the enterprise end-market. That said, it'll take a while because VASCO has more banking orders on tap than it can fill.
Given all this information, I'd say the earnings-related drop was way overdone. VASCO has plenty of Greenfield opportunity up ahead, as long as the company can increase its production of security-key hardware to keep pace with demand. It'd be a shame to have customers clamoring for your product only to have them turn to rivals Symantec (NAS: SYMC) , EMC's (NYS: EMC) RSA Security, or Fortinet (NAS: FTNT) as their patience runs out.
The opportunity is made even larger by VASCO's commitment to security for various cloud-computing platforms. The Digipass authentication product is supported by recent Intel (NAS: INTC) processors, helping IT directors manage digital identities from a central cloud without buying additional hardware or software for each user. Digipass also works with the Google (NAS: GOOG) Apps platform, so you can sign in to your corporate suite of Google tools like Gmail and Google Docs with the same centrally managed credentials.
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At the time this article was published Fool contributor Anders Bylund owns shares of Google and has sold puts on Intel, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google and EMC. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of VASCO Data Security, Google, and Intel, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.
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