Shares of VASCO Data Security International (Nasdaq: 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 (Nasdaq: SYMC), EMC's (NYSE: EMC) RSA Security, or Fortinet (Nasdaq: 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 (Nasdaq: 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 (Nasdaq: 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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