Vdsi equity report

Analysts: Giovanni Burbano, Matt Errico & Jason Reyes 1

NASDAQ Fair ValueCurrent Price Target PriceVDSI $27$21.27 $37 Annual Return 19% Cap $ 863 M

Company OverviewRecommendation

BUYKey Statistics

Sector: TechnologyIndustry: Cyber Security

Market Cap: $863 M

Trailing P/E: 25Forward P/E: 21.4P/S: 4.3P/B: 4.2EV/EBITDA: 16

Beta: 1.73

ROA: 14.1%ROE: 17.3%

MarginsProfit: 16.8%Operating: 19.7%

Target Price / Annual Return

Bear: $30 / 9%Base: $37 / 19%Bull: $58 / 44%

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).

Investment Thesis

Price Performance

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

• Solid customer base creates reliance on Vasco solutions

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

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

• 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

Catalysts• Growing number of data breaches will increase cyber

security demand

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

• Digipass is a market-leading authentication security solution

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

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

Muma College of Business | Student Managed Investment Fund2

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

On - Premise Model

Business ModelVasco 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.

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.

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.

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.

Enterprise VPN Access

Banking Authentication System


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

Cloud - Based Model

Takeaway

Business 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.

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 cloud-based 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.

Vasco provides security and authentication ser-vices 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 cus-tomers and applications.



Products

Host Systems

Client Authenticators

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.

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.



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.

Growth Catalysts

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.

Growing Demand for Secure NetworksIn the past year there have been multiple cyber attacks against multi-national 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

InnovationOperating 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.



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.

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 non-recognized 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 stand-alone user-authentication product or service. Of those, fewer than 50 have credible authentication security solutions. One of those firms is Vasco Data Security.

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.

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.

Number of data breaches have doubled since 2013

7.5% CAGR in company spending on IT

Over 4 Connected devices per person by 2015



Competitive Landscape

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.

Banking Authentication

Market ShareEnterprise Authentication

Direct Competitors

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.

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



Competitive Landscape

Vasco FireEye CyberArk Check Point Fortinet Sub of EMC Gemalto SymantecVDSI FEYE CYBR CHKP FTNT RSA GTO SYMC Sector Industry

Market Cap ($ in M) 859$ 6,480$ 1,620$ 15,170$ 5,570$ -‐$ -‐$ 16,070$ -‐$ -‐$ Revenue ($ in M) 201$ 425$ 103$ 1,500$ 770$ 1,035$ 2,442$ 6,620$ -‐$ -‐$ Trailing P/E 25.66 -‐ 163.2 23.93 219.8 -‐ 0 17.71 19.66 23.11Forward P/E 18.17 -‐ 140.9 18.52 51.58 -‐ 0 12.11 70.33 0P/S 4.5 15.8 16.6 10.18 7.39 -‐ 0 2.46 7.45 4.36P/B 4.4 5.29 11.3 4.19 8.31 -‐ 0 2.75 2.61 6.38EV / EBITDA 17.96 -‐16.65 75.05 17.14 60.75 -‐ 0 7.62 50.98 0Beta 1.73 -‐ -‐ 1.11 1.77 -‐ 0 1.26 0.94 0.45Profit Margin 16.61% -‐104.26% 9.66% 44.09% 3.29% 15.29% 12.80% 13.89% 8.57% 18.86%Op Margin 18.90% -‐111.44% 19.86% 53.55% 7.77% 23.00% 15.32% 22.55% 10.91% 21.82%ROA 10.27% -‐18.91% 8.52% 10.18% 2.89% 0.00% 0.00% 6.98% 10.47% 20.06%ROE 17.16% -‐38.61% 9.81% 18.22% 4.02% 0.00% 0.00% 15.75% 13.79% 28.15%

Competition

AverageDirect CompetitorsCyber Security Firms (Indirect Threats)

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.

Indirect Competitors

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 mo-bile and cloud services than many of its competitors whose products lack the market appeal that Digipass has.



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 hardware-based 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.

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.

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.

Percent of Revenue from Major Customers

Revenue from End Market



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.

ManagementT. Kendall HuntChairman 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 ValckePresident and Chief Operating OfficerMr. 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. BownExecutive Vice President and Chief Financial OfficerMr. 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.



Valuation

2014 2015 2016 2017 2018 Term ValEPS $0.85 $0.99 $1.19 $1.37 $1.55 37.19$ Deprc / Sh $0.02 $0.02 $0.02 $0.02 $0.02Cap Ex / Sh ($0.04) ($0.02) ($0.04) ($0.02) ($0.04)NWC / Sh ($0.06) ($0.01) ($0.09) ($0.13) ($0.13)FCFE 0.77$ 0.98$ 1.08$ 1.23$ 1.40$ PV of FCFE 0.77$ 0.87$ 0.85$ 0.87$ 24.19$ Intrinsic Value 27.56$ Current Price 21.21 Shares Out% to fair value 30% 39360 Beta 1.73

MRP 6.0%Risk FR 2.0%CAPM 12.4%

Free Cash Flows to Equity Model

Discount Rate

14.0% 13.0% 12.4% 12.0% 11.5%32.7$ 23.5$ 24.2$ 24.7$ 25.0$ 25.5$ 34.2$ 24.4$ 25.2$ 25.7$ 26.0$ 26.4$ 35.7$ 25.2$ 26.1$ 26.6$ 27.0$ 27.4$ 37.2$ 26.1$ 27.0$ 27.6$ 27.9$ 28.4$ 38.7$ 27.0$ 27.9$ 28.5$ 28.9$ 29.3$ 40.2$ 27.9$ 28.8$ 29.4$ 29.8$ 30.3$ 41.7$ 28.8$ 29.8$ 30.4$ 30.8$ 31.3$

Bear 11%Base 30%Bull 47%

% to Fair Value

Discount Rate

Terminal Value

FCFE Scenario Analysis

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

To account for the volatility of the market and the stock, we also conducted a scenario analysis by changing the discount rate and terminal price.

The bear case still implies Vasco is 11% undervalued, whereas in the bull case the stock is over 45% undervalued.

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



Valuation

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

P/E Constant Model


P/E Expansion Model


P/E Contraction Model

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

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 10-year trailing average of 27.7.

Given the current environment of the industry, and the growing demand cyber security is starting to 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%.

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.

2015 2016 2017 20180.99$ 1.19$ 1.37$ 1.55$

20.5 20.27$ 24.40$ 28.04$ 31.73$ 21.3 21.08$ 25.38$ 29.17$ 33.00$ 23.2 22.97$ 27.66$ 31.79$ 35.97$ 24.4 24.18$ 29.11$ 33.46$ 37.86$ 26.9 26.60$ 32.02$ 36.80$ 41.64$ 29.6 29.26$ 35.22$ 40.48$ 45.81$ 34.2 33.82$ 40.71$ 46.80$ 52.95$


Price / Earnings Sensitivity Analysis

EPS Estimates

Price / Earnings Multiple

Annualized Return



Valuation

2014bear base bull bear base bull bear base bull bear base bull

Revenue SegmentBanking 168,112 179,879 191,647 218,545 205,063 216,561 249,141 231,721 242,549 281,530 259,527 269,229 315,313

growth 33% 7% 14% 30% 7.0% 13% 30% 7.0% 12% 30% 7.0% 11% 30%Enterprise / App Security 33,425 35,765 38,105 40,110 40,010 42,678 45,726 44,811 47,372 51,213 49,741 52,109 56,846

growth 18% 7% 14% 20% 5% 12% 20% 5% 11% 20% 5% 10% 20%VDSI Revenue 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

top line growth 30.0% 7.0% 14.0% 28.3% 6.7% 12.8% 28.3% 6.7% 11.8% 28.4% 6.7% 10.8% 28.4%EBIT 38,088 40,160 46,234 55,930 48,886 55,601 67,665 56,779 63,877 78,303 64,901 72,254 89,264

margin 18.9% 19% 20% 22% 20% 21% 23% 21% 22% 24% 21% 22% 24%Depreciation & Amort 6,156 5,206 5,206 5,206 5,206 5,206 5,206 5,206 5,206 5,206 5,206 5,206 5,206EBITDA 44,244$ 45,366$ 51,440$ 61,136$ 54,092$ 60,807$ 72,871$ 61,985$ 69,083$ 83,509$ 70,107$ 77,460$ 94,470$

EV / EBITDA Multiple 17.23 14 16.0 20.0 14 16.0 20.0 14 16.0 20.0 14 16.0 20.0

Enterprise Value 762,385 635,124 823,033 1,222,714 757,290 972,905 1,457,420 867,794 1,105,330 1,670,182 981,502 1,239,366 1,889,404 less: debt -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ plus: cash 72,441 158,529 158,529 158,529 178,875 178,875 178,875 200,045 200,045 200,045 221,723 221,723 221,723

Market Cap 834,826$ 793,653$ 981,562$ 1,381,243$ 936,165$ 1,151,780$ 1,636,295$ 1,067,839$ 1,305,376$ 1,870,227$ 1,203,225$ 1,461,090$ 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 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$ Expected Return -‐4.9% 17.6% 65.5% -‐4.6% 17.3% 66.7% -‐7.3% 13.3% 62.4% -‐7.8% 11.9% 61.7%

EV / EBITDA Segment Analysis2015 2016 2017 2018

2015 2016 2017 201851,440$ 60,807$ 69,083$ 77,460$

12.00 19.71$ 23.08$ 26.14$ 29.25$ 13.30 21.41$ 25.09$ 28.43$ 31.81$ 14.60 23.11$ 27.10$ 30.71$ 34.37$ 16.00 24.94$ 29.26$ 33.17$ 37.12$ 17.35 26.70$ 31.35$ 35.53$ 39.78$ 18.70 28.47$ 33.43$ 37.90$ 42.43$ 20.00 30.17$ 35.44$ 40.19$ 44.99$


EV / EBITDA Multiple

Annualized Return

EV / EBITDA Sensitivity Analysis

EBITDA Estimates

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.

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.



Valuation

2014bear base bull bear base bull bear base bull bear base bull

Revenue By RegionEMEA 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 7.4Price 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$

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$ growth 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%Rev / Sh 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$ 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 7.4Price 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 7.4Price 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 7.4Price 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 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 Rev / Sh 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$ Equity Value $ 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

2015 2016 2017 2018Geographic Revenue Analysis

2015 2016 2017 20185.82$ 6.56$ 7.34$ 8.14$

3.24 18.85$ 21.26$ 23.78$ 26.36$ 3.56 20.71$ 23.36$ 26.13$ 28.96$ 3.88 22.57$ 25.47$ 28.48$ 31.57$ 4.50 26.17$ 29.53$ 33.03$ 36.61$ 5.55 32.28$ 36.43$ 40.74$ 45.15$ 6.60 38.39$ 43.32$ 48.44$ 53.69$ 7.40 43.04$ 48.57$ 54.32$ 60.20$


Revenue Per Share

Price / Sales

Multiple

Price / Sales Sensitivity Analysis

Annualized Return

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.

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.



Scenario Analysis

70,107$ 72,558$ 75,009$ 77,460$ 83,130$ 88,800$ 94,470$ 12.0 27.0$ 27.8$ 28.5$ 29.2$ 31.0$ 32.7$ 34.4$ 13.3 29.4$ 30.2$ 31.0$ 31.9$ 33.8$ 35.7$ 37.6$ 14.7 31.8$ 32.7$ 33.6$ 34.5$ 36.6$ 38.7$ 40.8$ 16.0 34.1$ 35.1$ 36.1$ 37.1$ 39.4$ 41.7$ 44.0$ 17.3 36.5$ 37.6$ 38.7$ 39.7$ 42.2$ 44.7$ 47.2$ 18.7 38.9$ 40.0$ 41.2$ 42.4$ 45.1$ 47.7$ 50.4$ 20.0 41.3$ 42.5$ 43.7$ 45.0$ 47.9$ 50.8$ 53.6$


EV / EBITDA Multiple

EBITDAEV / EBITDA Scenario Analysis 2018

Annualized Return

0.80$ 1.05$ 1.30$ 1.55$ 1.80$ 2.05$ 2.30$ 18.4 14.7$ 19.3$ 24.0$ 28.6$ 33.2$ 37.8$ 42.4$ 20.4 16.3$ 21.4$ 26.6$ 31.7$ 36.8$ 41.9$ 47.0$ 22.4 17.9$ 23.5$ 29.1$ 34.8$ 40.4$ 46.0$ 51.6$ 24.4 19.5$ 25.6$ 31.7$ 37.9$ 44.0$ 50.1$ 56.2$ 26.4 21.1$ 27.7$ 34.3$ 41.0$ 47.6$ 54.2$ 60.8$ 28.4 22.7$ 29.8$ 36.9$ 44.1$ 51.2$ 58.3$ 65.4$ 30.4 24.3$ 31.9$ 39.5$ 47.2$ 54.8$ 62.4$ 70.0$


Price / Earnings Scenario Analysis 2018EPS

Price / Earnings Multiple

Annualized Return

291,338$ 301,338$ 311,338$ 321,338$ 331,338$ 341,338$ 351,338$ 3.2 24.0$ 24.8$ 25.6$ 26.5$ 27.3$ 28.1$ 28.9$ 3.7 27.4$ 28.3$ 29.3$ 30.2$ 31.1$ 32.1$ 33.0$ 4.1 30.3$ 31.4$ 32.4$ 33.5$ 34.5$ 35.6$ 36.6$ 4.5 33.3$ 34.5$ 35.6$ 36.7$ 37.9$ 39.0$ 40.2$ 5.5 40.7$ 42.1$ 43.5$ 44.9$ 46.3$ 47.7$ 49.1$ 6.5 48.1$ 49.8$ 51.4$ 53.1$ 54.7$ 56.4$ 58.0$ 7.4 54.8$ 56.7$ 58.5$ 60.4$ 62.3$ 64.2$ 66.1$


Annualized Return

Price / Sales Scenario Analysis 2018Revenue

Price / Sales Multiple

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.



Appendix

2011 2012 2013 2014 2015 2016 2017 2018

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

VASCO Data Security IntlIncome Statement ($ in thousands)

2011 2012 2013 2014 2015 2016 2017 2018Revenue Growth -‐8.4% 0.7% 30.0% 14% 13% 12% 11%Cost of goods sold 35.7% 35.4% 35.6% 36.6% 36.2% 35.6% 35.5% 35.4%Gross profit 64.3% 64.6% 64.4% 63.4% 63.8% 64.4% 64.5% 64.6%Operating costs:Sales and marketing 24.0% 24.5% 26.0% 21.5% 21.0% 21.0% 21.0% 21.0%Research and development 11.1% 12.2% 13.7% 9.7% 9.7% 9.7% 9.7% 9.7%General & administrative 13.4% 13.0% 13.7% 11.1% 11.0% 10.5% 10.2% 10.0%Amortization of Intangible Assets 1.2% 1.2% 2.1% 2.2% 2.0% 1.7% 1.6% 1.4%Total operating costs 49.6% 51.0% 55.6% 44.5% 43.7% 42.9% 42.5% 42.1%EBIT 14.7% 13.7% 8.8% 18.9% 20.1% 21.4% 22.0% 22.5%Interest income, net 0.3% 0.2% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2%Foreign Currency Adjustment -‐0.5% -‐0.3% -‐0.4% 0.0% -‐0.4% -‐0.4% -‐0.4% -‐0.4%Other income, net 0.7% 0.5% 0.6% -‐0.1% -‐0.1% -‐0.1% -‐0.1% -‐0.1%EBT 15.4% 14.1% 9.1% 18.8% 19.8% 21.1% 21.7% 22.1%Provision for income taxes 6.0% 25.2% 22.3% 14.0% 14.0% 14.0% 14.0% 14.0%Net income from continuing operations 14.4% 10.5% 7.1% 16.2% 17.0% 18.1% 18.6% 19.0%Net (loss) from discontinued operations -‐3.6% -‐0.4% 0.1% 0.4% 0.0% 0.0% 0.0% 0.0%Net income 10.8% 10.1% 7.2% 16.6% 17.0% 18.1% 18.6% 19.0%EPS Growth -‐14.9% -‐30.0% 202.8% 16.7% 20.4% 14.9% 13.2%

Common Size Income Statement



Appendix

2012 2013 2014 2015 2016 2017 2018Current assetsCash and equivalents $ 106,469 $ 98,607 72,441$ 158,529$ 178,875$ 200,045$ 221,723$ Excess Cash $ -‐ $ -‐ 64,940$ 18,272$ 42,136$ 71,430$ 106,710$ Accounts receivable $ 27,574 $ 28,528 29,994$ 36,760$ 41,478$ 46,387$ 51,414$ Inventories $ 18,675 $ 25,653 33,875$ 38,263$ 41,535$ 46,320$ 51,195$ Prepaid expenses $ 1,896 $ 2,719 2,312$ 2,636$ 2,974$ 3,326$ 3,686$ Foreign sales tax receivable $ 415 $ 543 598$ 682$ 769$ 860$ 953$ Deferred income taxes $ 1,714 $ 1,634 906$ 906$ 906$ 906$ 906$ Other current assets $ 41 $ 2,051 1,160$ 1,322$ 1,492$ 1,669$ 1,850$ Assets of discontinued operations $ 2,651 $ 1,910 -‐$ -‐$ -‐$ -‐$ -‐$ Total Current Assets $ 159,435 $ 161,645 206,226$ 257,369$ 310,165$ 370,944$ 438,438$ Property and equipment, net $ 4,052 $ 3,145 2,825$ 2,888$ 3,688$ 3,968$ 4,802$ Goodwill, net of acc. amortization $ 13,176 $ 23,532 22,208$ 22,208$ 22,208$ 22,208$ 22,208$ Intangible assets, net of acc. amortization $ 6,507 $ 16,733 12,819$ 12,819$ 12,819$ 12,819$ 12,819$ Other assets, net of acc. amortization $ 3,336 $ 6,822 7,260$ 7,260$ 7,260$ 7,260$ 7,260$ Total Assets $ 186,506 $ 211,877 251,338$ 302,544$ 356,140$ 417,199$ 485,528$ Current LiabilitiesAccounts payable $ 7,765 $ 6,378 10,680$ 12,477$ 13,845$ 15,440$ 17,065$ Deferred revenue $ 8,146 $ 15,703 17,830$ 20,333$ 22,943$ 25,658$ 28,438$ Accrued wages and payroll taxes $ 6,212 $ 7,067 8,458$ 11,488$ 12,962$ 14,496$ 16,067$ Income taxes payable $ 378 $ 4,087 1,899$ 1,899$ 1,899$ 1,899$ 1,899$ Other accrued expenses $ 3,688 $ 3,841 5,413$ 11,488$ 12,962$ 14,496$ 16,067$ Deferred compensation $ 2,424 $ -‐ 806$ -‐$ -‐$ -‐$ -‐$ Liabilities of discontinued operations $ 1,335 $ 30 111$ -‐$ -‐$ -‐$ -‐$ Total Current Liabilities $ 29,948 $ 37,106 45,197$ 57,684$ 64,611$ 71,989$ 79,536$ Deferred compensation $ -‐ $ 115 -‐$ -‐$ -‐$ -‐$ -‐$ External Funds Needed $ -‐ $ -‐ -‐$ -‐$ -‐$ -‐$ -‐$ Other long-‐term liabilities $ 97 $ 57 55$ 55$ 55$ 55$ 55$ Deferred income taxes $ 141 $ 321 213$ 213$ 213$ 213$ 213$ Total Liabilities $ 30,186 $ 37,599 45,465$ 57,952$ 64,879$ 72,257$ 79,804$ Stockholders' EquityCommon Stock $ 39 $ 40 40$ 40$ 40$ 40$ 40$ Preferred Stock $ -‐ $ -‐ $ -‐ $ -‐ $ -‐ $ -‐ $ -‐ Additional paid-‐in capital $ 74,965 $ 79,871 82,450$ 82,450$ 82,450$ 82,450$ 82,450$ Accumulated income $ 81,256 $ 92,401 125,885$ 164,954$ 211,990$ 266,051$ 327,222$ Accumulated other comprehensive income $ 60 $ 1,966 2,502-‐$ 2,852-‐$ 3,218-‐$ 3,599-‐$ 3,989-‐$ Total Stockholders' Equity $ 156,320 $ 174,278 205,873$ 244,592$ 291,262$ 344,942$ 405,723$ Total Liabilities & Stockholders' Equity $ 186,506 $ 211,877 251,338$ 302,544$ 356,140$ 417,199$ 485,528$

Balance Sheet ($ in thousands)



Appendix

2012 2013 2014 2015 2016 2017 2018Cash flows from operating activities:Net income from continuing operations $ 16,229 $ 10,967 32,611$ 39,069$ 47,036$ 54,061$ 61,171$ Cash Flows from Operating ActivitiesDepreciation and amortization 3,644 5,042 6,156 5,206 5,206 5,206 5,206Loss on disposal of assets 0 275 0 0 0 0 0Deferred tax expense (benefit) 1,065 (-‐6,118) 492 0 0 0 0Stock-‐based compensation 3,726 2,587 2,399 0 0 0 0Changes in assets and liabilities:Accounts receivable, net 4,530 (-‐39) (-‐4,660) (-‐6,766) (-‐4,718) (-‐4,909) (-‐5,027)Inventories (-‐2,641) (-‐6,492) (-‐8,222) (-‐4,388) (-‐3,272) (-‐4,785) (-‐4,875)Foreign sales tax receivable 264 (-‐135) (-‐112) (-‐84) (-‐87) (-‐91) (-‐93)Other current assets 77 (-‐2,865) 1,150 (-‐162) (-‐170) (-‐177) (-‐181)Accounts payable 407 (-‐1,460) 4,531 1,797 1,368 1,595 1,625Income taxes payable (-‐1,589) 3,641 (-‐2,063) 0 0 0 0Accrued expenses (-‐207) 565 3,344 3,030 1,474 1,534 1,571Current deferred compensation (-‐1,933) (-‐2,424) 691.00 -‐ -‐ -‐ -‐ Deferred revenue (-‐537) 6,787 2,437 -‐ -‐ -‐ -‐ Net cash provided by operating activities of continuing operations 23,035 10,331 38,754$ 37,701$ 46,837$ 52,434$ 59,397$ Cash flows from investing activities of continuing operations:Purchase of Short Term Investments (-‐94,856)Maturities of Short Term Investments 29,916 64940Additions to property and equipment -‐1,337 -‐944 -‐1,453 -‐737 -‐1,474 -‐954 -‐1,508Additions to intangible assets -‐326 -‐294 (-‐112) -‐ -‐ -‐ -‐ Other assets 117 267 (-‐1,295) 0 0 0 0Net cash used in investing activities of continuing operations -‐1,546 -‐20,466 (-‐67,800) 64,203 (-‐1,474) (-‐954) (-‐1,508)Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options, net 441 114 51 114 114 114 114Tax payments for stock issuances 0 -‐998 -‐123 -‐123 -‐123 -‐123 -‐123Stock option tax benefits 0 3,318 253 253 253 253 253Net cash provided by (used in) financing activities 441 2,434 181 244 244 244 244Effect of exchange rate changes on cash 1,015 145 -‐165 -‐368 -‐415 -‐464 -‐514Net increase (decrease) in cash 21,972 -‐7,862 26,001-‐ 85,923 20,346 21,171 21,678 Cash and equivalents, beginning of year 84,497 106,469 98,607 72,606 158,529 178,875 200,045Cash and equivalents, end of year 106,469 98,607 72,606 158,529 178,875 200,045 221,723

Cash Flows ($ in thousands)

bear base bull prob bear base bullP/E Model 31.73$ 37.86$ 52.95$ 33% 10.57$ 12.61$ 17.63$ Geo P/S 25.37$ 36.61$ 69.72$ 33% 8.45$ 12.19$ 23.22$ Prod Model 30.57$ 37.12$ 53.64$ 33% 10.18$ 12.36$ 17.86$ GeoMean / Sum 29.09$ 37.19$ 58.29$ 100% 29.19$ 37.16$ 58.71$ Total Retun 37% 75% 175% 38% 75% 177%Annualized Return 9% 19% 44% 9% 19% 44%

Price Target Probability Matrix



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: [email protected] | 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: [email protected] | 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: [email protected] | LinkedIn: www.linkedin.com/pub/jason-reyes/94/177/55b/en

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