OneSpan Inc

:VDSI   3:59:04 PM EDT
25.28
+0.80 (+3.27%)
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Why Vasco Could Be The Best Cyber Security Stock





Fundamentals


##Symbol##VDSI

There's a remarkable tug-of-war happening right now with Vasco Data Security International (VDSI). The company lives in the enterprise security products, software and services realm of technology, a booming segment in general. The company offers authentication and e-signature solutions, amongst other things. The company has immensely strong fundamentals. In fact, if we lok at all technology firms between $1 billion and $3 billion in market cap, it has the second strongest core fundamentals. Here's a snippet from the star scanner.



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The stock is up more than 150% in the last year because of exceptional execution and remarkable growth. The demand for cyber security is overwhelming, as "hack-a-headlines" spin around social media instantly as various companies and agencies face high profile cyber attacks (see Sony, Target, JP Morgan, NYSE, etc.). VDSI has delivered strong products which deliver on innovation that keeps the company ahead of its peers.

But there are some big (BIG) doubters on this company. Incredibly, the company shows over 45% short interest as of June 15, 2015. And, just to make it more confusing, 48% of stock is owned by institutions. It's a fascinating tug-of-war, with the bulls beating the bears right now. The bearish thesis surrounds the fact that over 80% of revenue comes from banks; companies which move from large product to large product and essentially destroy their partners with one fell swoop. VDSI management knows full well this risk and is moving quickly (and successfully) into non-hardware (aka recurring license revenue) business areas.

VDSI's revenue (TTM) has risen for more than five consecutive quarters, which triggers a "trend." Year-over-year growth in revenue (TTM) is nearly 44%. Further, operating margins, net income (earnings) and free cash flow are all rising. I note that while competitors like FireEye (FEYE) are growing quickly as well, those competitors are losing money to earn that growth, while VDSI is hitting all-time highs in earnings even as it grows.

Technicals   |   Support: 26.8   |   Resistance: 33.64   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
VDSI's 3.13% rise today is critical to its technical outlook.

Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

VDSI has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-28 $0.26 $56.0 M $56.0 M $65.1 M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 228 159 157

Operating Margin (QTR) 1.328 1.11 1.08 RISING

Net Income (TTM US$ Millions) 44 12 16

Levered Free Cash Flow (TTM US$ Millions) 31 24 12 RISING

Research and Development (US$ Millions) 5 5 5 FALLING

Research and Development Expense/Revenue 0.070 0.132 0.137 FALLING





Stock Returns and Chart

VDSI is up +22.8% over the last three months and up +4.7% over the last six months. The stock price is up +153.3% over the last year.We must note the recent collapse off of the highs and the weak technical rating.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 228159157


Revenue (TTM) has increased for at least five consecutive quarters which triggers a "trend" (in this case it's eight consecutive quarters). In the time series chart below, we can see the consecutive quarter growth.

Note that VDSI is growing revenue by 43.75% year-over-year. Any number over 20% has an added impact on the fundamental (star) rating. in fact, when we look at the chart (below) we can see that revenue (ttm) has smashed all-time highs and now stands at nearly $230 million, up from $159 million a year ago.

What do all these numbers mean?
VDSI's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.3281.111.08RISING


This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. For the latest quarter VDSI showed a ratio of 1.33. But it's the trend, combined with the growth in assets that is so compelling. It's quite often the case that as revenue grows rapidly in a smaller growth firm, margins (and earnings) tend to fall. It's a sort of trade-off between growth in revenue now which kills margins, for earnings in the future. That is simply not the case for VDSI. Operating margins are above 1.0 (the critical level) and are growing as assets hit all-time highs.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.11. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

VDSI's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 441216


With revenues hitting all-time highs and operating margins growing, you better believe we're going to see earnings growth. Net Income (after tax profit) over the trailing twelve months (TTM) for VDSI is up 267% year-over-year to $44 million. Now granted, a little bit of that huge percentage growth is simply small number math (neither $44 million nor $12 million are large numbers), but VDSi has seen net income (TTM) rise for six consecutive quarters (five quarters triggers a "trend") and both the annual earnings number and the quarterly earnings numbers are at all-time highs.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 555FALLING


We'll skip an analysis of free cash flow other than to note it too is rising (26% year-over-year) and move onto one interesting and potentially bearish trend. Research and Development (US$ Millions) in the most recent quarter for VDSI was $5 million which is down 12% year-over-year. In reality, the numbers are so small, that basically R&D isn't changing at all, which means R&D spent per dollar of revenue is collapsing (from $0.13 to $0.07). It's a little distressing to see R&D stay stagnant as revenue explodes simply because it could be a sign that the company doesn't really have a place to spend the money for innovation. That's a bearish view of it. A more bullish view would be that the firm is controlling costs well and on an absolute level still spends about the same on R&D. It's this two-sided argument that is reflected in the massive stock short interest versus a massive institutional long holding.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per revenue in the gold line.


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Summary
From a fundamental perspective, VDSI looks just about as good as possible. Revenue, operating margins, net income and free cash flow are growing. The stock is up 150%, caused by the fundamental strength. The bullish thesis is pretty simple: This stock is killing it on all fronts and is turning a profit as it grows, while its various competitors are so far negative in terms of losses it's almost a joke.

But there is a bearish thesis that surrounds a dependency on fickle customers (banks) and a competitive landscape. For right now, the bearish thesis is losing, though the bets on it are growing incredibly large.