Vdsi equity report

NASDAQ VDSI

Current Price $21.27

Recommendation

Key Statistics

Technology Cyber Security

Market Cap:

Target Price $37

Annual Return 19%

Cap $ 863 M

Company Overview

BUY Sector: Industry:

Fair Value $27

VASCO Data Security International Incorporated, together with its subsidiaries, designs, develops, and markets security systems to protect and manage access to digital assets worldwide. The firm is headquartered in Delaware but operates worldwide. The majority of its revenue stems from overseas with 64% from EMEA, 21% from Asia Pacific and 9% from other countries and only 6% from domestic sales. The company operates in two segments: banking and financial services market (83% of sales) and the enterprise and application security market (17% of sales).

Price Performance

$863 M

Trailing P/E: Forward P/E: P/S: P/B:

EV/EBITDA:

25 21.4 4.3 4.2 16

Beta:

1.73

ROA: ROE:

14.1% 17.3%

Margins Profit: Operating:

16.8% 19.7%

Target Price / Annual Return Bear: Base: Bull:

$30 / 9% $37 / 19% $58 / 44%

Investment Thesis

Catalysts

• Growing demand for firms to have secure networks because of the increasing number of data breaches

• Growing number of data breaches will increase cyber security demand

• Solid customer base creates reliance on Vasco solutions

• Internet of things will increase connected devices and demand for the authentication of the user

• Growing demand for cloud and mobile based security solutions will enable Vasco to earn recurring revenues

• Digipass is a market-leading authentication security solution

• Cloud solutions improve scalability and improve top and bottom line growth

• New regulations to protect consumer transactions and personal privacy will drive sales for Vasco’s products

• Increasing demand for two-step user authentication systems will drive demand for Digipass • Vasco will see increasing demand from other markets besides financial firms as it will leverage its expertise in user authentication across all industries • Increasing regulation of governments requiring corporations to increase IT security spending will drive growth Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

Risks • Ability to penetrate non-financial firm markets • Vasco systems or customers experience a hack from authentication system • Reliance on small number of customers attributing 46% of revenue • Foreign currency fluctuations

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Business Model Vasco sells and licenses its products to two main markets, the banking and financial services market and the enterprise and application security market. These authentication solutions are sold by a direct sales force or an authorized distributor. Customers choose either an on-premise model or a cloud-based service model to host Vasco’s authentication services.

On - Premise Model The on-premise model is the traditional choice for large bank and enterprise security customers to license Vasco’s software in their own applications and network. Banks can change the level of security required for corporate accounts, customer accounts, and even mobile applications. Enterprise security clients have the flexibility of remote access to the company network as well as the level of security required for different employees. Historically, most of Vasco’s business has been using the on-premise model to license its software and products.

Banking Authentication System

The Vacman Controller ensures that the user is who it claims to be through a two-step authentication system. This enables Vasco to offer its customers the ability to control critical aspects of security as in the case with a high value transaction or a high frequency user.

Enterprise VPN Access

Identikey Authentication Server is sold to enterprise firms. This service provides secure access to the firms’ file servers and emails. Prior to access, the user is screened and verified through Identikey.

2

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Business Model Cloud - Based Model Customers can choose the cloud-based model in which Vasco offers its DIGIPASS authentication on its own cloud servers. DIGIPASS allows customers to use Vasco’s secure two-factor authentication software at a cheaper cost and a shorter implementation time. It is catered towards enterprise and application providers that use third party applications on the cloud and want to confidently authenticate users. MyDigipass also allows application providers to use only one secure log-in to access multiple applications.

As the Internet-of-things concept continues to grow in popularity, companies are developing mobile applications to allow customers to have constant access to their accounts and information. Vasco’s DIGIPASS for Apps provides seamless integration of two-factor authentication into any application. This allows application developers to focus on creating their application and gives Vasco the opportunity to secure it.

All of these secure solutions are fully scalable in price and capabilities and are recurring revenue streams for Vasco.

Vasco provides security and authentication services for Salesforce.com through the cloud. This lets the company focus on its CRM products while still providing bank level security.

Other well-known companies like Google are starting to rely on Vasco’s DIGIPASS as a service to secure its customers and applications.

Takeaway We expect a shift for the cloud-based model to contribute to a higher percent of sales than it is now. Since Vasco already has a large market share in the banking industry, we see the company leveraging its cloudbased solutions to the small and medium sized businesses for growth. In the past, Vasco’s software cost too much for these businesses to use; however, the cloud-based software scales down into the range where it could be affordable. This fundamental shift will increase margins and add recurring revenues for top-line growth. It is not fully recognized by the market.

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Products Host Systems

VACMAN Controller is an API-based authentication platform that can support

multiple devices and process over 9,000 authentications a second. Working with both Digipass hardware and various software authenticators, Vacman can securely provide all of a company’s authentication needs. It can integrate into any application, only takes a few days to implement, and is versatile to let the customer choose what level of security is needed.

IDENTIKEY servers are either authentication or federation servers. The authentication server is a complete software suite used to support and monitor authentication requests for companies of all sizes. The federation servers are better suited for large corporations and governments. Identikey provides one of the most comprehensive authentication platforms that can handle multiple applications, networks, and locations.

Client Authenticators DIGIPASS is a software-or hardware-based authentication product that uses two of the three security factors, what a user has and what a user knows. The user needs either a hardware or software version of Digipass and a PIN code that only the user would know in order to access data and applications. There are over 50 models of Digipass including phone applications, single button devices, and card readers all used to make sure that the person signing on to a network is who it claims to be.

Risk IDS is a real-time analytical program that monitors and authorizes user access on

web and mobile applications based on personal data about the user. It uses data such as user location, types of financial transactions, and changes to account information to detect abnormalities and prevent money laundering. If abnormalities are detected in the authentication process, Risk IDS increases the amount of authentication needed to log into the account or completely denies access.

Cronto Visual Image Authentication uses HD Color QR codes to offer users another

way to securely sign on to services and/or digitally authorize transactions. Users scan a bank-generated QR code with their mobile device or Digipass to securely log in to their accounts.

DigiPass is a market leader in the user authentication industry. Vasco will leverage this product’s unique positioning to benefit from the growing adoption of cloud and mobile applications.

Furthermore, DigiPass as a service will improve margins and create long-lasting partnerships with top technology names such as Intel and Google.

4

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Growth Catalysts Growing Demand for Secure Networks In the past year there have been multiple cyber attacks against multinational corporations. Home Depot, Target, Sony and J.P. Morgan were all victims of this growing crime. Most companies do not have the resources and expertise to establish a secure network that can keep hackers out.

J.P. Morgan’s breach could have been prevented if it had implemented Vasco’s two-step authentication system. Vasco provides secure systems for banking companies all over the world. As the demand for cyber security grows, Vasco’s revenues will increase in both new customers and recurring revenue from products already in place.

Cloud Based Solutions The firm’s ability to offer cloud based security solutions will improve scalability and fuel top and bottom line growth. Cloud-based systems are a mega trend in the technology industry as enterprise firms are preferring cloud servers as opposed to traditional hardware. This creates a new market opportunity for Vasco. Vasco will continue to improve their solutions to allow secure cloud systems. The firm’s ability to penetrate this market will drive strong future growth and improve operating margins from the recurring revenue streams.

Mobile Application Downloads More customers are using mobile banking applications than ever before.

In 2017 over 268 billion mobile applications will be downloaded as opposed to only 64 billion in 2012. Banks and financial institutions focus on creating an app that will be easy for consumers to use. The security of the application is outsourced to Vasco. Digipass is directly implemented into the application therefore, the consumer’s willingness to use mobile banking applications will drive revenue and demand for Vasco technologies.

Innovation Operating within the technology industry, Vasco’s upper management is well aware that it must continue to improve and innovate its products to remain a key player in the cyber-security industry. The firm focuses on developing new products by employing small containing groups with an entrepreneurial mindset using internal and external sources. Top management has a keen focus on where the industry will be in 2 - 5 years rather than where it is right now. The firm has proven highly capable of developing new innovative products superior to the current market. With the integration of Cronto technology into the Digipass platform, the firm was instantly recognized by Gartner Research and corporations worldwide as a market leader and visionary in the authentication security industry.

We expect this to continue as the firm has proven its continued focus on providing secure and easy systems for its customers and customers’ clientele.

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Industry Drivers User Authentication Security Vasco operates in the user-authentication security industry, ensuring the user is actually who it claims to be identifying with on the account.

Number of data breaches have doubled since 2013

Vasco and its competition deliver on-premise software/ hardware or a cloud-based server that enables real-time authentication decisions for users who are using a nonrecognized device to access one or more applications, systems or services. Furthermore, Vasco offers client-side software or hardware that allows the end users to use the real-time authentication system.

There are approximately over 250 vendors that offer a standalone user-authentication product or service. Of those, fewer than 50 have credible authentication security solutions. One of those firms is Vasco Data Security.

7.5% CAGR in company spending on IT

User-authentication security has existed for many years.

However, the demand for cyber security has not been as great a need in the past. Now it isn’t only a focus of corporations, but also federal governments have issued reports and regulations. These regulations are forcing corporations to spend more on security solutions, benefitting Vasco and others in the industry.

The graph to the right depicts computer and software spending from corporations. The continued rise in spending will create greater need for these computers to operate in secure software systems. Vasco and other cyber security firms will see increased sales from the steady ramp up in computer and software spending.

Over 4 Connected devices per person by 2015

Another major industry driver for user authentication demand is the Internet of things. This is a mega-trend that is seeing robust growth with huge revenue potential for firms that directly benefit from the Internet connecting to everything we do. We expect by 2020 that there will be over 6 connected devices per person. This shows the tablet and mobile device growth and the growing necessity to authenticate the user before allowing him/her into the system. We expect the continued adoption of connectivity will drive demand for Vasco authentication products and spur innovation.

6

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Competitive Landscape Direct Competitors

RSA Security LLC – EMC: RSA is the cyber security division of EMC that offers authentication solutions through its platforms RSA Authentication Manager and RSA Adaptive Authentication. Its customers range from mid to large-sized enterprise corporations. Its authentication methods are available as software, hardware, and on the cloud.

Where it falls short: RSA is a subsidiary of EMC and accounts for 4% of EMC’s sales for 2014. The scalability of being a subsidiary of a large corporation is a positive, but upper management would need to make RSA an integral focus to fully capitalize on the cyber security market. Since RSA can’t dramatically increase sales and drive growth, we do not see EMC leveraging its capital to RSA. Gemalto – GTO – International: Gemalto offers three authentication platforms: Protiva, IDConfirm, and Ezio Server. It caters to business-to-employee and business-to-consumer solutions. The main focus of its business is to provide micro processors for personal devices such as smart cards, SIMs, machine identification modules, e-passports, and secure electronic documents. Only one third of their customers comes from the banking, securities, and insurance industries. Gemalto acquired SafeNet on January 9, 2015. SafeNet offers server-software products and a cloud service.

Where it falls short: Gemalto’s widespread focus on industries besides banking will enable Vasco to take market share by offering easier and more secure solutions. Gemalto’s broader product focus limit its ability to produce the most secure authentication applications going forward.

Entrust Datacard – Private Corporation: Entrust provides a wide-focus authentication platform through its software IdentityGuard and cloud-based services. The company also offers desktop embossers, desktop card printers, passport systems, and central card issuance systems. In 2013 the firm generated $120 million in revenue prior to its buyout by Datacard.

Where it falls short: Together the firm is now more focused on expanding to more than just security services. Furthermore, its authentication platform supports a smaller range of methods than Vasco.

Symantec - SYMC: Symantec delivers its authentication platform, Symantec Validation & ID Protection (VIP), as a cloud service. 31% of Symantec’s revenue came from its Security segment, which encompasses authentication and other products and services such as anti-virus and backup offerings.

Where it falls short: Symantec offers only cloud based authentication services and does not have server software or appliance offerings that Vasco offers. This limits its appeal and cloud service security offerings. The majority of the firm’s revenue comes from domestic sales and it does not have the ability to offer its cloud solutions overseas. This limits the firms’ growth potential and its ability to directly compete with Vasco.

Kobil Systems - Private Corporation: Kobil is a German-based private company that offers one authentication platform, the Smart Security Management server. It targets the financial service sector but its presence is mainly limited to Germany, Austria, Switzerland, and Turkey.

Where it falls short: Limited global visibility and limited platforms and product lines limit its threat to Vasco.

Vasco is the global leader in banking authentication security. With the entrance of mobile and cloud services, the firm has a greater earning potential from annual service fees from its existing customer base.

Market Share Banking Authentication

Enterprise Authentication

We expect Vasco to leverage its expertise in user authentication to gain a larger market share in enterprise and application security services.

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Competitive Landscape Indirect Competitors

FireEye Incorporated - FEYE: It offers security products and services to enterprises and government in the form of malware protection systems for email security, web security, and file security that evade legacy signature-based security products.

Where it falls short: It does not offer authentication solutions and have yet to report a profit since its IPO. Furthermore, 75% of its revenue comes from the U.S., limiting its global reach.

CyberArk - CYBR: It provides IT security solutions that protect organizations from cyber attacks that have made their way inside the network perimeter. Its software solutions are focused on protecting privileged accounts and accounts with administrative capabilities.

Where it falls short: The firm does not operate in the same space that Vasco does. Furthermore, the company operates at a low profit margin with relatively high multiples.

Fortinet - FTNT: The firm is a major player in the Unified Threat Management business, which is a multifunction network of security products. It offers a suite of cyber-security products and services that allow their clients to detect and eliminate threats without locking down their systems. Its products mainly focus on firewalls, spam filters, and switches. Each FortiGate consolidated security platform is able to provide an integrated authentication server.

Where it falls short: The firm specializes in firewall and malware, whereas Vasco specializes in user authentication.

CheckPoint - CHKP: The firm offers hardware and software solutions for network security to enterprises and consumers. The company has been known for its enterprise-level firewall security and Unified Threat Management. The company consolidates its product offerings into two main lines: appliances and blades. The blade system allows customers to add security options without having to buy new hardware.

Where it falls short: The firm operates in a different market from Vasco. Checkpoint’s growth initiatives will be focused on replacement firewall services. This does not pose a threat to Vasco’s current business.

Vasco VDSI Market Cap ($ in M) $ 859

Revenue ($ in M) $ 201

Trailing P/E 25.66 Forward P/E 18.17 P/S 4.5 P/B 4.4 EV / EBITDA 17.96 Beta 1.73 Profit Margin 16.61% Op Margin 18.90% ROA 10.27% ROE 17.16%

Competition Cyber Security Firms (Indirect Threats) FireEye CyberArk Check Point Fortinet FEYE CYBR CHKP FTNT $ 6,480 $ 1,620 $ 15,170

$ 5,570

$ 425 $ 103

$ 1,500 $ 770 -­‐ 163.2 23.93 219.8 -­‐ 140.9 18.52 51.58 15.8 16.6 10.18 7.39 5.29 11.3 4.19 8.31 -­‐16.65 75.05 17.14 60.75 -­‐ -­‐ 1.11 1.77 -­‐104.26% 9.66% 44.09% 3.29% -­‐111.44% 19.86% 53.55% 7.77% -­‐18.91% 8.52% 10.18% 2.89% -­‐38.61% 9.81% 18.22% 4.02%

Direct Competitors Sub of EMC Gemalto Symantec RSA GTO SYMC $ -­‐ $ -­‐ $ 16,070 $ 1,035

$ 2,442 $ 6,620 -­‐ 0 17.71 -­‐ 0 12.11 -­‐ 0 2.46 -­‐ 0 2.75 -­‐ 0 7.62 -­‐ 0 1.26 15.29% 12.80% 13.89% 23.00% 15.32% 22.55% 0.00% 0.00% 6.98% 0.00% 0.00% 15.75%

Average Sector Industry $ -­‐ $ -­‐ $ -­‐ $ -­‐ 19.66 23.11 70.33 0 7.45 4.36 2.61 6.38 50.98 0 0.94 0.45 8.57% 18.86% 10.91% 21.82% 10.47% 20.06% 13.79% 28.15%

There are many competitors to Vasco, serving as both direct and indirect threats. We believe that Vasco’s differentiated brand as a financial authentication market leader will be a major driver going forward. Furthermore, Digipass is widely known around the industry as one of the premiere authentication services. This will enable Vasco to capitalize on mobile and cloud services than many of its competitors whose products lack the market appeal that Digipass has.

8

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Customers & End Markets Vasco provides on-premise, cloud, and mobile-based solutions to over 10,000 customers, including more than 1,700 financial institutions in more than 100 countries. The firm’s top 10 customers account for 46% of revenue. The two largest customers, Rabobank and HSBC, account for 12% and 11% of sales respectively. The other major customers account for 23% of revenue, such as BNP-Paribas Fortis, Citibank, KBC and Citibank.

We expect the firms’ major customers to drive revenue growth for Vasco. With the growing demand for mobile and cloud solutions, the firm will be able to sell more products other than hardwarebased security. This will enable Vasco to collect annual service fees creating a more consistent revenue stream. The long-standing relationships with its customer establish a reliance and familiarity with Vasco systems by reaching the clients of the customers. We expect difficulties switching systems for an entire corporation to be a benefit for Vasco’s sales.

Percent of Revenue from Major Customers

Vasco operates in two segments, banking and enterprise/ application. Currently, the firm’s sales are dominated by the banking segment accounting for 83% of revenue. The enterprise/application market is a higher margin business, but Vasco’s well established niche of catering to financial firms is a positive for the firm. Vasco is able to leverage its secure systems for financial firms to offer enterprise and application security that most of its competitors cannot compete with. In addition, Vasco’s management has proven competent with over 47 quarters of reporting a profit. Other competitors such as FireEye are still not generating a net profit.

Recent increases in security breaches and financial losses for banking firms are not being matched by IT security spending, which has remained relatively flat. Companies will be forced to spend more on IT security with the increased scrutiny from federal regulators and involvement from top management. This will force financial firms to increase spending on information security, fueling growth in Vasco’s banking segment.

Revenue from End Market

Small and large size businesses have been adopting cloud-based security services at different paces. Around 55% of small businesses and 77% of large businesses use security services in the cloud.

More specifically, businesses are showing an increase in interest for solutions to identity and access management. Vasco is well positioned to take advantage of this trend as more small businesses start to employ cloud-based solutions. Vasco’s Digipass as a service and MyDigipass cloud applications are ideal solutions for the businesses’ increase in interest for identity and access management solutions.

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Risks & Mitigants Foreign Currency fluctuations could dilute earnings with over 90% of sales from Overseas.

Mitigating factor: Vasco conducts its business in Euros and U.S. Dollars to create a natural hedge. During this fiscal year 65% of sales were denominated in U.S. Dollars, 30% in Euros and 5% in other currencies. The firm also denominates 45% of operating expenses in Euros and 67% of its cost of goods sold in Euros. This minimizes the effect of currency fluctuations on bottom line earnings.

Vasco’s ability to penetrate non-banking markets.

Mitigating factor: Vasco will target small and medium enterprises where there is less competition and other markets where its products will see high demand with its increase in demand of cloud-based security services. Furthermore, there is also opportunity from e-commerce and e-government markets Substantial amount of revenue stems from a small number of customers.

Mitigating factor: The company relies on long standing partnerships and relationships along with easy to use systems for the consumers creating a reliance of the firms on Vasco products. Going forward we expect revenues from small and medium businesses to further diversify Vasco’s revenues.

Management T. Kendall Hunt Chairman and Chief Executive Officer Mr. Hunt, 70, is the founder of Vasco Corp and served as CEO and President from May 1984 to June 1999. He has been Chief Executive Officer since November 2002 and has served as Chairman of the Board since the Company’s incorporation in 1997.

Mr. Hunt has extensive experience in international business and the acquisition of multiple companies in the U.S. and Europe. He has been affiliated with several early stage tech companies and served as a member of the Board of Directors of Global Med Technologies, Inc. for four years until April 2010. Mr. Hunt is also affiliated with several organizations around the world; he’s President of the Belgian Business Club of Chicago.

He earned his MBA from the Pepperdine University, Malibu, California in 1979 and a BBA from the University of Miami, Florida in 1965.

Jan Valcke President and Chief Operating Officer Mr. Valcke, 59, has been President and Chief Operating Officer at Vasco since 2002.

He joined and has been an Officer at Vasco since 1996. He serves as an Executive Vice President of Sales and Marketing and has been managing worldwide sales, marketing, business development and product management for both Digipass and Vacman product lines since 2000. He received a degree in Science from St. Amands College in Kortrijk, Belgium.

Clifford K. Bown Executive Vice President and Chief Financial Officer Mr. Bown, 63, has held the position of Vice President and CFO of Vasco since 2002.

Mr. Bown received a BS in Accountancy from the University of Illinois and his MBA from University of Chicago. Since 1991, he has held CFO positions for companies in the insurance and healthcare industries and was CFO of publicly traded XL/DATACOMP, a midrange computer systems and support service provider in the U.S. and U.K. 10

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Valuation

EPS Deprc / Sh Cap Ex / Sh NWC / Sh FCFE PV of FCFE Intrinsic Value Current Price % to fair value

Free Cash Flows to Equity Model 2014 2015 2016 2017 2018 Term Val $0.85 $0.99 $1.19 $1.37 $1.55 $ 37.19 $0.02 $0.02 $0.02 $0.02 $0.02 ($0.04) ($0.02) ($0.04) ($0.02) ($0.04) ($0.06) ($0.01) ($0.09) ($0.13) ($0.13) $ 0.77 $ 0.98 $ 1.08 $ 1.23 $ 1.40 $ 0.77 $ 0.87 $ 0.85 $ 0.87 $ 24.19 $ 27.56 21.21 Shares Out Discount Rate 30% Beta 1.73 39360 MRP 6.0% Risk FR 2.0% CAPM 12.4%

We used a free cash flows to equity model to value what Vasco’s future prospects are worth today. The model implies the stock is 30% undervalued on our base-case scenario. This model has implied assumptions based on our expectations of the firm, its competitors, and the industry landscape: • The growing demand for authentication security will drive double digit top and bottom line growth • Capital expenditures will remain at a fairly low percentage of sales as we do not see the need for the firm to increase spending on office equipment and furniture • Vasco’s 36-month historical beta is 1.73, the beta used in our discount rate; we expect the stocks volatility to be in line with this projection

$ 32.7 $ 34.2 Terminal $ 35.7 Value $ 37.2 $ 38.7 $ 40.2 $ 41.7 % to Fair Value Bear 11% Base 30% Bull 47%

FCFE Scenario Analysis Discount Rate 14.0% 13.0% 12.4% 12.0% $ 23.5 $ 24.2 $ 24.7 $ 25.0 $ 24.4 $ 25.2 $ 25.7 $ 26.0 $ 25.2 $ 26.1 $ 26.6 $ 27.0 $ 26.1 $ 27.0 $ 27.6 $ 27.9 $ 27.0 $ 27.9 $ 28.5 $ 28.9 $ 27.9 $ 28.8 $ 29.4 $ 29.8 $ 28.8 $ 29.8 $ 30.4 $ 30.8

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

To account for the volatility of the market and the stock, 11.5% we also conducted a scenario $ 25.5 analysis by changing the $ 26.4 discount rate and terminal price. $ 27.4 $ 28.4 The bear case still implies $ 29.3 Vasco is 11% undervalued, $ 30.3 whereas in the bull case $ 31.3 the stock is over 45% undervalued.

The scenario analysis shows the high upside potential for Vasco, with little downside.

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NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Valuation

Return

P/E Constant Model 2014 2015 2016 2017 2018 $ 0.85 $ 0.99 $ 1.19 $ 1.37 $ 1.55 25.0 24.4 24.4 24.4 24.4 $ 21.21 $ 24.18 $ 29.11 $ 33.46 $ 37.86 14.0% 20.4% 14.9% 13.2%

EPS Fwd P/E Price Return

P/E Expansion Model 2014 2015 2016 2017 2018 $ 0.85 $ 0.99 $ 1.19 $ 1.37 $ 1.55 25.0 24.4 27.6 30.8 34.2 $ 21.21 $ 24.18 $ 32.85 $ 42.22 $ 52.95 14.0% 35.8% 28.5% 25.4%

EPS Fwd P/E Given the current environment of the industry, and Price Return the growing demand cyber security is starting to

P/E Contraction Model 2014 2015 2016 2017 2018 $ 0.85 $ 0.99 $ 1.19 $ 1.37 $ 1.55 25.0 23.2 22.2 21.3 20.5 $ 21.21 $ 22.91 $ 26.47 $ 29.21 $ 31.73 8.0% 15.6% 10.3% 8.6%

To establish a target price for the stock we conducted multiple models to arrive at a consensus EPS value. The first model used is a price-earnings Fwd P/E multiple model. We modeled for P/E expansion, contraction and constant.

Price

The P/E constant model was derived based on the forward multiple for next year multiplied by the revenue growth , which equals 24.4. This multiple results in a $37 price target and an annualized return of 20%. The forward P/E multiple of 24.4 is slightly higher than its 10-year historical average of 23.2 forward P/E multiple, but lower than its 10year trailing average of 27.7.

see, we believe it is possible that Vasco’s multiple will continue to expand given the rapid growth within the cyber security sector. This model yields a target price of $52, which implies a 37% annual return.

To serve as the bear case, we also conducted a P/E contraction model. We used this as the bear case since we do not expect the multiple to contract in the next four years. The multiple will contract as the firm reaches a mature life cycle. We do not see this occurring for a while because of the high demand for cyber security and speed of change within the technology sector. This model yields a target price for 2018 of $31, which implies an annual return of 12%.

Price / Earnings Sensitivity Analysis 2015 2016 2017 EPS Estimates $ 0.99

$ 1.19

$ 1.37

20.5 $ 20.27 $ 24.40 $ 28.04 21.3 $ 21.08 $ 25.38 $ 29.17 23.2 $ 22.97 $ 27.66 $ 31.79 Price / Earnings 24.4 $ 24.18 $ 29.11 $ 33.46 Multiple 26.9 $ 26.60 $ 32.02 $ 36.80 29.6 $ 29.26 $ 35.22 $ 40.48 34.2 $ 33.82 $ 40.71 $ 46.80 Bear 12% Annualized Base 20% Return Bull 37%

2018 $ 1.55

$ 31.73 $ 33.00 $ 35.97 $ 37.86 $ 41.64 $ 45.81 $ 52.95

We conducted a sensitivity analysis on the target price for each year, based on the multiples we believe Vasco could potentially trade at. In all multiples there is still a strong upside with very little downside risk at its current price. This supports our recommendation of a strong buy on this stock.

12

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Valuation 2014 Revenue Segment Banking

bear

168,112

179,879 growth 33% 7% Enterprise / App Security 33,425 35,765 growth 18% 7% VDSI Revenue 201,537 215,645 top line growth 30.0% 7.0% EBIT 38,088 40,160 margin 18.9% 19% Depreciation & Amort 6,156 5,206 EBITDA $ 44,244

$ 45,366 EV / EBITDA Multiple

EV / EBITDA Segment Analysis 2016 bear base bull

2015 base

bull

191,647 14% 38,105 14% 229,752 14.0% 46,234 20% 5,206 $ 51,440

218,545 30% 40,110 20% 258,656 28.3% 55,930 22% 5,206 $ 61,136

205,063 7.0% 40,010 5% 245,073 6.7% 48,886 20% 5,206 $ 54,092

216,561 13% 42,678 12% 259,239 12.8% 55,601 21% 5,206 $ 60,807

bear

2017 base

bull

bear

2018 base

bull

249,141 30% 45,726 20% 294,867 28.3% 67,665 23% 5,206 $ 72,871

231,721 7.0% 44,811 5% 276,532 6.7% 56,779 21% 5,206 $ 61,985

242,549 12% 47,372 11% 289,921 11.8% 63,877 22% 5,206 $ 69,083

281,530 30% 51,213 20% 332,743 28.4% 78,303 24% 5,206 $ 83,509

259,527 7.0% 49,741 5% 309,268 6.7% 64,901 21% 5,206 $ 70,107

269,229 11% 52,109 10% 321,338 10.8% 72,254 22% 5,206 $ 77,460

315,313 30% 56,846 20% 372,160 28.4% 89,264 24% 5,206 $ 94,470

17.23

14

16.0

20.0

14

16.0

20.0

14

16.0

20.0

14

16.0

20.0

Enterprise Value less: debt plus: cash Market Cap

762,385

-­‐ 72,441 $ 834,826

635,124 -­‐ 158,529 $ 793,653

823,033 -­‐ 158,529 $ 981,562

1,222,714 -­‐ 158,529 $ 1,381,243

757,290 -­‐ 178,875 $ 936,165

972,905 -­‐ 178,875 $ 1,151,780

1,457,420 -­‐ 178,875 $ 1,636,295

867,794 -­‐ 200,045 $ 1,067,839

1,105,330 -­‐ 200,045 $ 1,305,376

1,670,182 -­‐ 200,045 $ 1,870,227

981,502 -­‐ 221,723 $ 1,203,225

1,239,366 -­‐ 221,723 $ 1,461,090

1,889,404 -­‐ 221,723 $ 2,111,128

Shares Out

39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360 39,360

Equity Value / Sh Expected Return

$ 21.21 $ 20.16 $ 24.94 $ 35.09 $ 23.78 $ 29.26 $ 41.57 $ 27.13 $ 33.17 $ 47.52 $ 30.57 $ 37.12 $ 53.64 -­‐4.9% 17.6% 65.5% -­‐4.6% 17.3% 66.7% -­‐7.3% 13.3% 62.4% -­‐7.8% 11.9% 61.7%

The next model conducted to determine the target price is an EV/EBITDA multiple. Besides establishing a target price, this model also shows the premium shareholder’s would receive if the firm was bought out by another company.

To project the future equity value per share we used an EV/EBITDA multiple of 16 (10-year historical average is 15.7). We believe that Vasco should trade at a slightly higher multiple than its 10 year historical given the increasing demand and fast changing environment of the cyber security industry. Furthermore, Vasco will not reach a mature life cycle in our investment horizon as it continues to generate innovative new products that enable safe and easy authentication platforms for its customers and its customers’ clientele.

EBITDA Estimates 12.00 13.30 14.60 EV / EBITDA 16.00 Multiple 17.35 18.70 20.00 Bear Annualized Base Return Bull

EV / EBITDA Sensitivity Analysis 2015 2016 2017 $ 51,440 $ 60,807 $ 69,083 $ 19.71 $ 23.08 $ 26.14 $ 21.41 $ 25.09 $ 28.43 $ 23.11 $ 27.10 $ 30.71 $ 24.94 $ 29.26 $ 33.17 $ 26.70 $ 31.35 $ 35.53 $ 28.47 $ 33.43 $ 37.90 $ 30.17 $ 35.44 $ 40.19 9% 19% 28%

2018 $ 77,460 $ 29.25 $ 31.81 $ 34.37 $ 37.12 $ 39.78 $ 42.43 $ 44.99

We conducted a sensitivity analysis on the multiple to account for seasonality of new contracts for Vasco. Even at a multiple of 12 (bear case), well below its historical average, there is still a 9% annual return, which will likely outperform the benchmark return (estimates around 8%) this year.

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

13

NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Valuation 2014 bear

2015 base

bear

2017 base

bull

bear

2018 base

bull Revenue By Region EMEA $ 129,385 $ 138,442 $ 147,499

$ 166,055

$ 157,335

$ 166,429 $ 189,302

$ 177,531

$ 186,127 $ 213,618 $ 198,547 $ 206,296 $ 238,923 growth 35.1% 7.0% 14.0% 28.3% 6.7% 12.8% 28.3% 6.7% 11.8% 28.4% 6.7% 10.8% 28.4% Rev / Sh $ 3.28 $ 3.50 $ 3.73 $ 4.20 $ 3.98 $ 4.21

$ 4.79 $ 4.49 $ 4.71

$ 5.41

$ 5.03

$ 5.22

$ 6.05

P/S Multiple 4.5 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 Price $ 14.74

$ 11.36

$ 16.80 $ 31.11 $ 12.91 $ 18.96 $ 35.47 $ 14.56 $ 21.20 $ 40.02 $ 16.29 $ 23.50 $ 44.76

growth Rev / Sh P/S Multiple Price

bull

Geographic Revenue Analysis 2016 bear base bull

U.S. $ 12,098 $ 12,945 $ 13,792 $ 15,527 $ 14,711 $ 15,562 $ 17,700 $ 16,600 $ 17,404 $ 19,974 $ 18,565 $ 19,290 $ 22,340 2.7% 7.0% 14.0% 28.3% 6.7% 12.8% 28.3% 6.7% 11.8% 28.4% 6.7% 10.8% 28.4% $ 0.31 $ 0.33 $ 0.35 $ 0.39 $ 0.37 $ 0.39

$ 0.45 $ 0.42 $ 0.44

$ 0.51

$ 0.47

$ 0.49

$ 0.57

4.5 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 $ 1.38 $ 1.06 $ 1.57 $ 2.91 $ 1.21 $ 1.77

$ 3.32 $ 1.36 $ 1.98

$ 3.74

$ 1.52

$ 2.20

$ 4.19

Asia Pacific $ 42,365 $ 45,331 $ 48,296 $ 54,372 $ 51,517 $ 54,494 $ 61,984 $ 58,130 $ 60,944 $ 69,946 $ 65,011 $ 67,548 $ 78,232 growth 54.9% 7.0% 14.0% 28.3% 6.7% 12.8% 28.3% 6.7% 11.8% 28.4% 6.7% 10.8% 28.4% Rev / Sh $ 1.07 $ 1.15 $ 1.22 $ 1.38 $ 1.30 $ 1.38

$ 1.57 $ 1.47 $ 1.54

$ 1.77

$ 1.65

$ 1.71

$ 1.98

P/S Multiple 4.5 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 Price $ 4.83 $ 3.72 $ 5.50 $ 10.19 $ 4.23 $ 6.21

$ 11.61 $ 4.77 $ 6.94

$ 13.10 $ 5.33

$ 7.70

$ 14.66 Other Countries $ 17,689 $ 18,927 $ 20,165 $ 22,702 $ 21,510 $ 22,754 $ 25,881 $ 24,271 $ 25,446 $ 29,205 $ 27,145 $ 28,204 $ 32,665 growth -­‐12.1% 7.0% 14.0% 28.3% 6.7% 12.8% 28.3% 6.7% 11.8% 28.4% 6.7% 10.8% 28.4% Rev / Sh $ 0.45 $ 0.48 $ 0.51 $ 0.57 $ 0.54 $ 0.58

$ 0.66 $ 0.61 $ 0.64

$ 0.74

$ 0.69

$ 0.71

$ 0.83

P/S Multiple 4.5 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 3.24 4.5 7.4 Price $ 2.02 $ 1.55 $ 2.30 $ 4.25 $ 1.76 $ 2.59

$ 4.85 $ 1.99 $ 2.90

$ 5.47

$ 2.23

$ 3.21

$ 6.12

VDSI Revenue Rev / Sh Equity Value

$ 201,537 $ 215,645 $ 229,752 $ 258,656 $ 245,073 $ 259,239 $ 294,867 $ 276,532 $ 289,921 $ 332,743 $ 309,268 $ 321,338 $ 372,160 $ 5.10 $ 5.46 $ 5.82 $ 6.55 $ 6.20 $ 6.56

$ 7.47 $ 7.00 $ 7.34

$ 8.42

$ 7.83

$ 8.14

$ 9.42

$ 22.96 $ 17.69 $ 26.17 $ 48.46 $ 20.10 $ 29.53 $ 55.24 $ 22.68 $ 33.03 $ 62.34 $ 25.37 $ 36.61 $ 69.72

Vasco is a well established global authentication firm. Therefore, we conducted a price/sales multiple model to establish a value based on the regional sales for the firm.

We projected that the revenue mix stay constant during our given investment horizon. Vasco’s price/ sales multiple trades at a discount to its peer group and the broader industry. The average multiple of its peers is 7.4, which serves as our bull case. This implies an annual return of 46% and a price target of $60.

Revenue Per Share 3.24 3.56 3.88 Price / Sales 4.50 Multiple 5.55 6.60 7.40 Bear Annualized Base Return Bull

Price / Sales Sensitivity Analysis 2015 2016 2017 $ 5.82

$ 6.56

$ 7.34

$ 18.85 $ 21.26 $ 23.78 $ 20.71 $ 23.36 $ 26.13 $ 22.57 $ 25.47 $ 28.48 $ 26.17 $ 29.53 $ 33.03 $ 32.28 $ 36.43 $ 40.74 $ 38.39 $ 43.32 $ 48.44 $ 43.04 $ 48.57 $ 54.32 6% 18% 46%

2018 $ 8.14

$ 26.36 $ 28.96 $ 31.57 $ 36.61 $ 45.15 $ 53.69 $ 60.20

The bear case uses a multiple of 3.24, which is the stock’s 10 year historical average. Using this multiple implies an annual return of 6% with a price target of $26.

We do not expect its price/sales multiple to contract because its multiple already trades at a discount to the industry and its sector’s peer group.

14

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Scenario Analysis

18.4 20.4 Price / 22.4 Earnings 24.4 Multiple 26.4 28.4 30.4 Annualized Return Bear 9% Base 20% Bull 31%

12.0 13.3 14.7 EV / EBITDA 16.0 Multiple 17.3 18.7 20.0 Annualized Return Bear 15% Base 19% Bull 25%

Price / Sales Multiple

3.2 3.7 4.1 4.5 5.5 6.5 7.4

Price / Earnings Scenario Analysis 2018 EPS $ 0.80 $ 1.05 $ 1.30 $ 1.55 $ 1.80 $ 14.7 $ 19.3 $ 24.0 $ 28.6 $ 33.2 $ 16.3 $ 21.4 $ 26.6 $ 31.7 $ 36.8 $ 17.9 $ 23.5 $ 29.1 $ 34.8 $ 40.4 $ 19.5 $ 25.6 $ 31.7 $ 37.9 $ 44.0 $ 21.1 $ 27.7 $ 34.3 $ 41.0 $ 47.6 $ 22.7 $ 29.8 $ 36.9 $ 44.1 $ 51.2 $ 24.3 $ 31.9 $ 39.5 $ 47.2 $ 54.8

EV / EBITDA Scenario Analysis 2018 EBITDA $ 70,107 $ 72,558 $ 75,009 $ 77,460 $ 83,130 $ 27.0 $ 27.8 $ 28.5 $ 29.2 $ 31.0 $ 29.4 $ 30.2 $ 31.0 $ 31.9 $ 33.8 $ 31.8 $ 32.7 $ 33.6 $ 34.5 $ 36.6 $ 34.1 $ 35.1 $ 36.1 $ 37.1 $ 39.4 $ 36.5 $ 37.6 $ 38.7 $ 39.7 $ 42.2 $ 38.9 $ 40.0 $ 41.2 $ 42.4 $ 45.1 $ 41.3 $ 42.5 $ 43.7 $ 45.0 $ 47.9

Price / Sales Scenario Analysis 2018 Revenue $ 291,338

$ 301,338

$ 311,338

$ 321,338

$ 331,338

$ 24.0 $ 24.8 $ 25.6 $ 26.5 $ 27.3 $ 27.4 $ 28.3 $ 29.3 $ 30.2 $ 31.1 $ 30.3 $ 31.4 $ 32.4 $ 33.5 $ 34.5 $ 33.3 $ 34.5 $ 35.6 $ 36.7 $ 37.9 $ 40.7 $ 42.1 $ 43.5 $ 44.9 $ 46.3 $ 48.1 $ 49.8 $ 51.4 $ 53.1 $ 54.7 $ 54.8 $ 56.7 $ 58.5 $ 60.4 $ 62.3

Annualized Return Bear 13% Base 18% Bull 30%

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

$ 2.05 $ 37.8 $ 41.9 $ 46.0 $ 50.1 $ 54.2 $ 58.3 $ 62.4

$ 88,800 $ 32.7 $ 35.7 $ 38.7 $ 41.7 $ 44.7 $ 47.7 $ 50.8

$ 341,338

$ 28.1 $ 32.1 $ 35.6 $ 39.0 $ 47.7 $ 56.4 $ 64.2

$ 2.30 $ 42.4 $ 47.0 $ 51.6 $ 56.2 $ 60.8 $ 65.4 $ 70.0

$ 94,470 $ 34.4 $ 37.6 $ 40.8 $ 44.0 $ 47.2 $ 50.4 $ 53.6

$ 351,338

$ 28.9 $ 33.0 $ 36.6 $ 40.2 $ 49.1 $ 58.0 $ 66.1

A scenario analysis was also conducted on each model to establish a range for the price target in 2018. Even if Vasco earns $.20 less than we estimate and trades at a lower multiple than its 10 year average the stock will have an annual return of 9% at its current price in the bear case.

In the EV / EBITDA scenario analysis the firm has an annual return of 15% at a 14.7 multiple to its $75 million EBITDA. This model shows the upside for Vasco and the premium the fund would receive if the firm was bought out.

The price / sales model accounts for alterations in revenue and the P/S multiple. Even with Vasco earning $10 million less than estimated with a multiple of 4.1 the stock will generate an annual return of 13% over the fund’s investment horizon in the bear case.

15

NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Appendix Income Statement ($ in thousands) Revenue Cost of goods sold Gross profit Operating costs: Sales and marketing Research and development General & administrative Amortization of Intangible Assets Total operating costs EBIT Interest income, net Foreign Currency Adjustment Other income, net EBT Provision for income taxes Net income from continuing operations Net (loss) from discontinued operations Net income Diluted EPS Diluted Shares Out

2011

2013

VASCO Data Security Intl 2014 2015

2016

2017

2018

$ 168,082 $ 154,029 $ 155,047 $ 201,537 $ 229,752 $ 259,239 $ 289,921 $ 321,338 $ 59,970 $ 54,464 $ 55,176 $ 73,771 $ 83,180 $ 92,300 $ 102,934 $ 113,767 $ 108,112 $ 99,565 $ 99,871 $ 127,766 $ 146,572 $ 166,939 $ 186,987 $ 207,571 $ 40,294 $ 37,768 $ 40,323 $ 43,362 $ 48,248 $ 54,440 $ 60,883 $ 67,481 $ 18,636 $ 18,794 $ 21,315 $ 19,497 $ 22,286 $ 25,146 $ 28,122 $ 31,170 $ 22,450 $ 20,071 $ 21,196 $ 22,287 $ 25,273 $ 27,220 $ 29,572 $ 32,134 $ 1,967 $ 1,905 $ 3,325 $ 4,532 $ 4,532 $ 4,532 $ 4,532 $ 4,532 $ 83,347 $ 78,538 $ 86,159 $ 89,678 $ 100,339 $ 111,338 $ 123,110 $ 135,317 $ 24,765 $ 21,027 $ 13,712 $ 38,088 $ 46,234 $ 55,601 $ 63,877 $ 72,254 543 261 162 118 345 389 435 482 (760) (410) (624) -­‐ (919) (1,037) (1,160) (1,285) 1,260 819 864 (286) (230) (259) (290) (321) $ 25,808 $ 21,697 $ 14,114 $ 37,920 $ 45,429 $ 54,693 $ 62,862 $ 71,130 $ 1,557 $ 5,468 $ 3,147 $ 5,309 $ 6,360 $ 7,657 $ 8,801 $ 9,959 $ 24,251 $ 16,229 $ 10,967 $ 32,611 $ 39,069 $ 47,036 $ 54,061 $ 61,171 -­‐$ 6,118 -­‐$ 630 $ 180 $ 873 $ -­‐ $ -­‐ $ -­‐ $ -­‐ $ 18,133 $ 15,599 $ 11,147 $ 33,484 $ 39,069 $ 47,036 $ 54,061 $ 61,171 $ 0.47 $ 0.40 $ 0.28 $ 0.85 $ 0.99 $ 1.19 $ 1.37 $ 1.55 38,568 38,677 39,158 39,499 39,499 39,499 39,499 39,499

Revenue Growth Cost of goods sold Gross profit Operating costs: Sales and marketing Research and development General & administrative Amortization of Intangible Assets Total operating costs EBIT Interest income, net Foreign Currency Adjustment Other income, net EBT Provision for income taxes Net income from continuing operations Net (loss) from discontinued operations Net income EPS Growth

16

2012

Common Size Income Statement 2011 2012 2013 2014 2015 -­‐8.4% 0.7% 30.0% 14% 35.7% 35.4% 35.6% 36.6% 36.2% 64.3% 64.6% 64.4% 63.4% 63.8% 24.0% 11.1% 13.4% 1.2% 49.6% 14.7% 0.3% -­‐0.5% 0.7% 15.4% 6.0% 14.4% -­‐3.6% 10.8%

24.5% 12.2% 13.0% 1.2% 51.0% 13.7% 0.2% -­‐0.3% 0.5% 14.1% 25.2% 10.5% -­‐0.4% 10.1% -­‐14.9%

26.0% 21.5% 13.7% 9.7% 13.7% 11.1% 2.1% 2.2% 55.6% 44.5% 8.8% 18.9% 0.1% 0.1% -­‐0.4% 0.0% 0.6% -­‐0.1% 9.1% 18.8% 22.3% 14.0% 7.1% 16.2% 0.1% 0.4% 7.2% 16.6% -­‐30.0% 202.8%

21.0% 9.7% 11.0% 2.0% 43.7% 20.1% 0.2% -­‐0.4% -­‐0.1% 19.8% 14.0% 17.0% 0.0% 17.0% 16.7%

2016 13% 35.6% 64.4%

2017 12% 35.5% 64.5%

2018 11% 35.4% 64.6%

21.0% 9.7% 10.5% 1.7% 42.9% 21.4% 0.2% -­‐0.4% -­‐0.1% 21.1% 14.0% 18.1% 0.0% 18.1% 20.4%

21.0% 9.7% 10.2% 1.6% 42.5% 22.0% 0.2% -­‐0.4% -­‐0.1% 21.7% 14.0% 18.6% 0.0% 18.6% 14.9%

21.0% 9.7% 10.0% 1.4% 42.1% 22.5% 0.2% -­‐0.4% -­‐0.1% 22.1% 14.0% 19.0% 0.0% 19.0% 13.2%

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Appendix Balance Sheet ($ in thousands) Current assets Cash and equivalents Excess Cash Accounts receivable Inventories Prepaid expenses Foreign sales tax receivable Deferred income taxes Other current assets Assets of discontinued operations Total Current Assets Property and equipment, net Goodwill, net of acc. amortization Intangible assets, net of acc. amortization Other assets, net of acc. amortization Total Assets Current Liabilities Accounts payable Deferred revenue Accrued wages and payroll taxes Income taxes payable Other accrued expenses Deferred compensation Liabilities of discontinued operations Total Current Liabilities Deferred compensation External Funds Needed Other long-­‐term liabilities Deferred income taxes Total Liabilities Stockholders' Equity Common Stock Preferred Stock Additional paid-­‐in capital Accumulated income Accumulated other comprehensive income Total Stockholders' Equity Total Liabilities & Stockholders' Equity

2012

2013

2014

2015

2016

2017

2018

$ 106,469 $ -­‐ $ 27,574 $ 18,675 $ 1,896 $ 415 $ 1,714 $ 41 $ 2,651 $ 159,435 $ 4,052 $ 13,176 $ 6,507 $ 3,336 $ 186,506

$ 98,607 $ -­‐ $ 28,528 $ 25,653 $ 2,719 $ 543 $ 1,634 $ 2,051 $ 1,910 $ 161,645 $ 3,145 $ 23,532 $ 16,733 $ 6,822 $ 211,877

$ 72,441

$ 64,940

$ 29,994

$ 33,875

$ 2,312

$ 598 $ 906 $ 1,160

$ -­‐ $ 206,226 $ 2,825

$ 22,208

$ 12,819

$ 7,260

$ 251,338

$ 158,529 $ 18,272 $ 36,760 $ 38,263 $ 2,636 $ 682

$ 906

$ 1,322 $ -­‐ $ 257,369 $ 2,888 $ 22,208 $ 12,819 $ 7,260 $ 302,544

$ 178,875 $ 42,136 $ 41,478 $ 41,535 $ 2,974 $ 769

$ 906

$ 1,492 $ -­‐ $ 310,165 $ 3,688 $ 22,208 $ 12,819 $ 7,260 $ 356,140

$ 200,045 $ 71,430 $ 46,387 $ 46,320 $ 3,326 $ 860

$ 906

$ 1,669 $ -­‐ $ 370,944 $ 3,968 $ 22,208 $ 12,819 $ 7,260 $ 417,199

$ 221,723 $ 106,710 $ 51,414 $ 51,195 $ 3,686 $ 953

$ 906

$ 1,850 $ -­‐ $ 438,438 $ 4,802 $ 22,208 $ 12,819 $ 7,260 $ 485,528

$ 7,765 $ 8,146 $ 6,212 $ 378 $ 3,688 $ 2,424 $ 1,335 $ 29,948 $ -­‐ $ -­‐ $ 97 $ 141 $ 30,186

$ 6,378 $ 15,703 $ 7,067 $ 4,087 $ 3,841 $ -­‐ $ 30 $ 37,106 $ 115 $ -­‐ $ 57 $ 321 $ 37,599

$ 10,680

$ 17,830

$ 8,458

$ 1,899

$ 5,413

$ 806 $ 111 $ 45,197

$ -­‐ $ -­‐ $ 55 $ 213 $ 45,465

$ 12,477 $ 20,333 $ 11,488 $ 1,899 $ 11,488 $ -­‐ $ -­‐ $ 57,684 $ -­‐ $ -­‐ $ 55 $ 213

$ 57,952

$ 13,845 $ 22,943 $ 12,962 $ 1,899 $ 12,962 $ -­‐ $ -­‐ $ 64,611 $ -­‐ $ -­‐ $ 55 $ 213

$ 64,879

$ 15,440 $ 25,658 $ 14,496 $ 1,899 $ 14,496 $ -­‐ $ -­‐ $ 71,989 $ -­‐ $ -­‐ $ 55 $ 213

$ 72,257

$ 17,065 $ 28,438 $ 16,067 $ 1,899 $ 16,067 $ -­‐ $ -­‐ $ 79,536 $ -­‐ $ -­‐ $ 55 $ 213

$ 79,804

$ 39 $ -­‐ $ 74,965 $ 81,256 $ 60 $ 156,320 $ 186,506

$ 40 $ -­‐ $ 79,871 $ 92,401 $ 1,966 $ 174,278 $ 211,877

$ 40 $ -­‐ $ 82,450

$ 125,885 -­‐$ 2,502

$ 205,873 $ 251,338

$ 40 $ -­‐ $ 82,450 $ 164,954 -­‐$ 2,852 $ 244,592 $ 302,544

$ 40 $ -­‐ $ 82,450 $ 211,990 -­‐$ 3,218 $ 291,262 $ 356,140

$ 40 $ -­‐ $ 82,450 $ 266,051 -­‐$ 3,599 $ 344,942 $ 417,199

$ 40 $ -­‐ $ 82,450 $ 327,222 -­‐$ 3,989 $ 405,723 $ 485,528

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

17

NASDAQ: VDSI | March, 17 2015 | Price: $21.27 | Fair Value: $27

Appendix Cash Flows ($ in thousands) Cash flows from operating activities: Net income from continuing operations Cash Flows from Operating Activities Depreciation and amortization Loss on disposal of assets Deferred tax expense (benefit) Stock-­‐based compensation Changes in assets and liabilities: Accounts receivable, net Inventories Foreign sales tax receivable Other current assets Accounts payable Income taxes payable Accrued expenses Current deferred compensation Deferred revenue Net cash provided by operating activities of continuing operations Cash flows from investing activities of continuing operations: Purchase of Short Term Investments Maturities of Short Term Investments Additions to property and equipment Additions to intangible assets Other assets Net cash used in investing activities of continuing operations Cash flows from financing activities of continuing operations: Proceeds from exercise of stock options, net Tax payments for stock issuances Stock option tax benefits Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash Cash and equivalents, beginning of year Cash and equivalents, end of year

bear P/E Model $ 31.73 Geo P/S $ 25.37 Prod Model $ 30.57 GeoMean / Sum $ 29.09 Total Retun 37% Annualized Return 9% 18

2012

2013

2014

2015

2016

2017

2018

$ 16,229 $ 10,967 $ 32,611 $ 39,069 $ 47,036 $ 54,061 $ 61,171 3,644 0 1,065 3,726

5,042 275 (-­‐6,118) 2,587

6,156 0 492 2,399

5,206 0 0 0

5,206 0 0 0

5,206 0 0 0

5,206 0 0 0

4,530 (-­‐2,641) 264 77 407 (-­‐1,589) (-­‐207) (-­‐1,933) (-­‐537)

(-­‐39) (-­‐4,660) (-­‐6,766) (-­‐4,718) (-­‐4,909) (-­‐5,027) (-­‐6,492) (-­‐8,222) (-­‐4,388) (-­‐3,272) (-­‐4,785) (-­‐4,875) (-­‐135) (-­‐112) (-­‐84) (-­‐87) (-­‐91) (-­‐93) (-­‐2,865) 1,150 (-­‐162) (-­‐170) (-­‐177) (-­‐181) (-­‐1,460) 4,531 1,797 1,368 1,595 1,625 3,641 (-­‐2,063) 0 0 0 0 565 3,344 3,030 1,474 1,534 1,571 (-­‐2,424) 691.00 -­‐ -­‐ -­‐ -­‐ 6,787 2,437 -­‐ -­‐ -­‐ -­‐

23,035

10,331 $ 38,754 $ 37,701 $ 46,837 $ 52,434 $ 59,397

(-­‐94,856) 29,916 64940 -­‐1,453 -­‐737 -­‐1,474 -­‐954 -­‐1,508 (-­‐112) -­‐ -­‐ -­‐ -­‐ (-­‐1,295) 0 0 0 0

-­‐1,337 -­‐326 117

-­‐944 -­‐294 267

-­‐1,546

-­‐20,466

(-­‐67,800)

64,203

(-­‐1,474)

(-­‐954)

(-­‐1,508)

441 0 0

114 -­‐998 3,318

51 -­‐123 253

114 -­‐123 253

114 -­‐123 253

114 -­‐123 253

114 -­‐123 253

441 1,015 21,972 84,497 106,469

2,434 181 244 244 244 244 145 -­‐165 -­‐368 -­‐415 -­‐464 -­‐514 -­‐7,862 -­‐ 26,001 85,923 20,346 21,171 21,678 106,469 98,607 72,606 158,529 178,875 200,045 98,607 72,606 158,529 178,875 200,045 221,723

Price Target Probability Matrix base bull prob bear $ 37.86 $ 52.95 33% $ 10.57 $ 36.61 $ 69.72 33% $ 8.45 $ 37.12 $ 53.64 33% $ 10.18 $ 37.19 $ 58.29 100% $ 29.19 75% 175% 38% 19% 44% 9%

base $ 12.61 $ 12.19 $ 12.36 $ 37.16 75% 19%

bull $ 17.63 $ 23.22 $ 17.86 $ 58.71 177% 44%

Muma College of Business | Student Managed Investment Fund

Recommendation: BUY | Target Price: $37 | Expected Return: 19%

Analyst Biographies Giovanni Burbano is a senior majoring in finance with a minor in economics. Burbano is a member of the Student Finance Association and is working on a leadership certification through the Certified Student Leadership program.

Burbano is a first-generation college student with a passion for security analysis who is pursuing the CFA designation.

Burbano grew up in Cali, Colombia, and speaks both English and Spanish.

Contact Info: gburbano@mail.usf.edu | LinkedIn: www.linkedin.com/pub/giovanni-burbano/49/266/b14/en

Matt Errico moved to Tampa from New Jersey to pursue a finance degree at USF because he wanted to study at a large metropolitan university. He earned an associate degree in business administration from Raritan Valley Community College in Branchburg, N.J., before transferring to USF. While pursuing that degree, Errico worked full-time as a construction supervisor at Hilpert Construction, a family-owned firm specializing in luxury remodels. He helped rebuild homes destroyed by Hurricane Sandy.

Contact Info: merrico@mail.usf.edu | LinkedIn: www.linkedin.com/in/matthewerrico/en

Originally from Jacksonville, Fla., Jason Reyes is a senior at USF. He is pursuing a bachelor’s degree in finance. Reyes served as an intern for two years at Scottrade. He is the president of Pi Delta Psi Fraternity and aspires to work as an equity research analyst after graduation in May 2015.

Contact Info: jasonreyes@mail.usf.edu | LinkedIn: www.linkedin.com/pub/jason-reyes/94/177/55b/en

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes

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