A strong finish to a volatile year
After a turbulent year, VASCO Data Security International, (VDSI) reported revenues and operating profits at the top end of guidance in Q4, with growth coming from both the banking (+8%) and the enterprise application (+26%) verticals. It has boosted its sales presence, ‘rightsized’ its cost base and is cautiously optimistic going in to FY14. On FY14 consensus P/Es, it trades in line with peers – its ability to deliver on its enterprise application strategy is key to driving rating expansion from here.
Q4 results show improving momentum
Q4 revenues increased 11% y-o-y to $43.3m, an improvement on Q3’s 8% y-o-y growth due to a return to double-digit growth in the Enterprise and Application division (+26%) and ongoing steady growth in the banking vertical (+8%). This strong performance enabled VASCO to compensate for the weak Q2 (-20%) and report full-year revenues of $155m, +1% y-o-y. Full year operating margins of 11% (adjusted for amortisation) were down on FY12’s 14.9%, reflecting the impact of the Cronto acquisition and ongoing investment in the cloud services platform and sales and marketing.
Cautiously optimistic for FY14
Although the enterprise application market had a strong Q4, growth has been inconsistent over the last few years. With an expanded sales force in place and a re-worked sales strategy, management hopes to deliver a more steady performance from this division going forward. Banking revenues, although lumpy, continue to show a solid upward trend and an announcement from a large customer regarding its intention to roll out DIGIPASSes to its US retail customers should support growth prospects in FY14. Management is guiding to FY14 revenues of $160-165m (excluding the new services), which suggests growth of 3-6% on an adjusted operating margin of 11% to 13%. Revenues from nontraditional services that are starting to trickle in could supplement growth.
Valuation: Does not capture margin potential
VASCO trades on a FY14 P/E of c 21x, broadly in line with peers. If management can deliver on its enterprise application growth strategy, there is significant scope to expand the top line and improve margins, which remain significantly below historic levels and peers. Evidence of success here is key to driving the rating. Cloud solutions, while still at an early stage of commercialisation, are starting to be deployed and offer a degree of option value to the share in the longer term.
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