A provider of open standards-based hardware and software security systems, Chicago-based security company Vasco Data Services (VDSI) offers a pure play on increased corporate spending on institutional data security.

VDSI, RSA (now part of EMC) and Aladdin Knowledge Systems (ALDN) operate in the hot field of user identification and access authorization through, among other things, special "keys" used on VPNs (virtual private networks).

The online verification industry is consolidating and recent deals suggest that corporate adoption of such systems is well underway and will be integrated into enterprise storage and processing systems.

In acquiring RSA last summer for $2.1 billion, EMC made a strategic entry into a complimentary field to its core storage business, which it anticipates producing annual potential sales of $1 billion within a few years.

IBM (IBM) responded last August by buying RSA competitor Internet Security Systems, raising the stakes for other enterprise systems operators.

Microsoft (MSFT), Symantec (SYMC), Hewlett-Packard Co. (HPQ), Oracle (ORCL) and SAP (SAP) could all be looking to acquire a mid-sized pure play security company. EMC's security division just reported a 26% revenue gain to a $500 million annual revenue run rate, incorporating the RSA acquisition, noting that the "strong performance reflected continued traction for RSA's consumer identity protection solutions as a result of federal guidelines for stronger authentication practices in online banking and concerns over credit card fraud and identity theft".

As Microsoft prepares to release its new Vista operating system, many technology analysts are concerned about the security and privacy shortcomings in the new release. So many corporations have already become more aggressive about security of their data, especially since Symantec and other consumer security providers have been unable to prevent security breaches.

With a $400 million market cap, VDSI is hardly an institutional name. Yet it's emerging as a world-leader for strong user authentication, with in excess of 550 international financial institution clients and approximately 3,300 blue-chip corporations and governments located in more than 100 countries on its roster as well.

VDSI's European business has been booming, with online user identification broadly accepted and with recent VDSI contracts with leading Belgian bank KBC and Allied Irish Banks announced in January 2007. A VDSI smart card addition last year improved its competitive standing. In May 2006, VDSI announced its acquisition of Logico Smart Card Solutions of Vienna, Austria, an authentication storage specialist with extensive experience in smart card based authentication.

U.S. financial institutions dragged their feet on online authentication, but a tightening of rules by regulators in late 2005 is compelling them to increase client protection. VDSI is the leading provider to the more than 100 U.S. financial institutions that have integrated VASCO solutions into their Internet banking offerings. VASCO's alliance with Fiserv, Inc. (FISV), a U.S. Fortune 500 company that provides information management systems and services to 17,000 clients in the financial industry, has been a catalyst for the growth. VDSI added 29 banking customers in Q3 2006 and is planning to double its domestic sales force in 2007. Banks currently represent 86% of sales, but a variety of businesses, governments and others use their products worldwide.

Online authentication service and software providers are the fastest growing segment of the security business. VDSI and a few other "industrial strength" security providers deliver user authentication software and hardware for the financial world, remote access, e-business and e-commerce via its Digipass hardware and software security products.

On January 24, eBay plans to offer PayPal users security tokens in a bid to strengthen the security of its payment service, and VASCO's authentication-token product is likely to be introduced as part of that service. And since the company has beaten analyst expectations by a third in the last two quarters and is poised to conduct a major analyst meeting on January 31, larger institutions are likely to take notice of the firm.

VDSI will report Q4 2006 earnings then and expectations are for revenue of $25.72 million and earnings of 11 cents a share, according to a consensus of First Call analysts. With full year 2007 sales slated to reach $107 million and per share earnings expected come in at $0.43, VDSI could turn out to be a good bargain at current prices.

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