Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Wave Systems (NASDAQ:WAVX)

Q4 2012 Earnings Call

March 18, 2013 4:30 pm ET

Executives

Gerard T. Feeney - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance & Administration, Secretary and Duly Authorized Officer

Steven K. Sprague - Chief Executive Officer, President, Director and Director of WaveXpress

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Wave Systems Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, March 18, 2013.

I would now like to turn the conference over to Mr. Gerry Feeney, Chief Financial Officer. Please go ahead, sir.

Gerard T. Feeney

Thank you, and good afternoon, everyone. During the course of this conference call, we may make forward-looking statements regarding future events or the future financial performance of the company. We caution you that these statements are only predictions and that actual events or results may differ materially.

Additionally, we refer you to the documents the company files from time to time with the Securities and Exchange Commission. These documents identify and describe important factors that can cause the actual results to differ materially from those contained in any forward-looking statements that we may make.

At 4:00 this afternoon, we released our financial results for the fourth quarter and full year of 2012. These can be found on our website at wave.com. Please refer to the company's press release for more details relating to the financial results.

For the fourth quarter ended December 31, 2012, Wave's net revenues were $7,131,000 compared to the fourth quarter of 2011 net revenues of $11,035,000 and the third quarter of 2012 net revenues of $6,970,000. The year ago fourth quarter of 2011 included an additional $2.4 million of recognized revenue from 3 large enterprise customer licenses that were recorded rapidly during 2011 and were fully recognized by the end of 2011. Additionally, the fourth quarter of 2012 reflected approximately $1.7 million less in OEM bundling revenue due to a lower volume of shipped units during the quarter coupled with lower average royalty rates per unit, which started back in November of 2011.

Total billings for the fourth quarter of 2012 rose to $9.3 million, an increase of 52% from the $6.1 million in the third quarter of 2012, but a decline of 20% from $11.5 million in the fourth quarter of 2011 billings, which included $1.7 million related to a single large customer contract.

Primarily attributable to cost reduction initiatives, Wave's combined SG&A and R&D expenses declined to $11.7 million in the fourth quarter of 2012 from $12.4 million in the third quarter of 2012 and $14 million from the fourth quarter of 2011.

During the fourth quarter of 2012, Wave recorded non-cash impairment charges totaling $7.5 million to write down the value of goodwill and intangible assets attributed to Safend, of which $3.4 million is included in the licensing and maintenance cost of net revenues and $4.1 million is reflected in impairment of goodwill and intangible assets.

Including the $7.5 million of impairment charges, the net loss for the fourth quarter was $13,020,000 or $0.13 per share compared to last year's fourth quarter net loss of $4,863,000 or $0.05 per share and this year's fourth -- or third quarter net loss of $6,108,000 or $0.06 per share.

The weighted average number of basic shares outstanding for the fourth quarters of 2012 and 2011 were approximately 104,004,000 shares and 88,545,000 shares, respectively.

To highlight the company's operational performance on a cash flow basis, Wave reports EBITDAS, which is a non-GAAP measure defined as earnings before impairment charges, interest, taxes, depreciation, amortization and stock-based non-cash compensation expense.

In the fourth quarter of 2012, Wave had negative EBITDAS of $4,063,000 compared with negative EBITDAS of $4,189,000 for the third quarter of 2012 and negative EBITDAS of $2,779,000 for the fourth quarter of 2011.

At December 31, 2012, Wave's total current assets were $9.4 million, which included $2.1 million of cash. Wave's total current liabilities were $15.1 million, which included $5.9 million of short-term deferred revenue.

Early in the fourth quarter, Wave had issued approximately 326,000 shares of its common stock through its At The Market or ATM structure at a weighted average price of $0.99 per share, raising net proceeds of approximately $314,000 after deducting 3% offering cost. Also during the fourth quarter, in October 2012, Wave raised approximately $3.1 million in net proceeds through the sale of 3.3 million shares of Class A common stock at $1.25 per share.

And subsequent to the end of the fourth quarter, in March 2013, Wave raised gross proceeds of $1 million to the sale of Class A common stock and warrants, which were priced at the March 11 closing price of $0.83 per share.

And with that, Steven will now highlight some of the key developments for the fourth quarter of 2012.

Steven K. Sprague

Thank you, Gerry, and thank you, everybody for joining our call today. I'd like to start a little bit by touching on the outline of what I'm going to cover today. First, we're going to talk a little bit about the enterprise sales, what's currently happening, what's been taking place over the course of the last few months. And then I will talk some about the technology and our current positioning of the technology and where we think the current marketplace on a technology basis is.

So let me start with the sales side of the conversation. Clearly, this is what ultimately drives the business and we've done a lot to invest in the expansion of our sales organization on a worldwide basis. And today, we have significant contribution to our sales organization from our European organization. We're starting to see the beginning of efforts into both Asia and into the Middle East and continued growth in North America. So from a sales perspective, we find a huge transformation that's taking place in the course of the last, really, 6 months. The customer is now really starting to ask about Trusted Computing in a much more educated way and a much more understanding way than they ever have in the past. And I think a lot of that is contributed to the launch of the Windows 8 operating system, the fact that Trusted Platform Modules are very front and center to the security story, that Microsoft is telling in the marketplace and I think that's really helping with the education of the market that this is a core technology that really kind of address some of the fundamental cybersecurity needs in the marketplace.

And as part of that, we're seeing action on the ground. And I would say that our overall marketplace today, just from a sales perspective, the sales folks, et cetera, are having a much better time with a large customer base than they've had any time in the last couple of years.

In fourth quarter, we had a number of significant events. We had an additional $1.7 million payment that came out of BASF. We were very pleased to see that, and that certainly helped us with the cash flow basis in Q4. And as Gerry mentioned, that will be recognized over the next few years.

And we've also had very significant professional services revenue out of our other European accounts as well. They've been paying us to help them in their actual deployments. We've had some of the fastest deployments that have ever taken place for self-encrypting drives to the tunes of tens of thousands of devices over a very short period of time. And so, we've been quite pleased. It's been an interesting challenge, supporting worldwide deployment in scale. And I think the customers at this point are very pleased with how the product is working and how the deployments have gone, and their payments are a reflection of that.

We also recently secured a north of $0.5 million project with the U.K. government in the sale of our software for managing Trusted Computing components. And we actually think this will be a beginning of a significant opportunity within the U.K. government, both within the group that's procured and with other groups that are watching to see how that progress is actually is proceeding, both with the deployment of the technology, as well as with the use of it within the government circles. And this is a direct government account. And so we're very pleased to see that. It was part of a very significant effort to put it together, and we're working with one of our OEM partners to assemble it. And we actually expect beginnings of deployment of technology, so the products have been ordered in the beginning of deployment of technology will take place in the second quarter.

We also have a very significant win, that's actually a European bank but it's into the Singapore market, where it's using Trusted Platform Modules to replace the use of tokens. Because of the failure of some of the tokens in the past, they're looking and have been looking for alternate mechanisms. And so again, this is a first design win into the Asian banking system. And we actually expect that order to close in the second quarter and should be a significant event as well, it's a multi-hundred thousand dollar project.

So we are continuing to make significant progress across a number of large accounts. And there's a large U.S. accounting firm that's deploying the technology on a worldwide basis. They're more of a component or a country-by-country deployment as opposed to one single buy for the organization, so it tends to show up as smaller actual transactions, although some of the larger account -- larger countries will be more significant amounts. But we're very pleased to see that as well. And I would also say that the other piece that's been very interesting has been really the emergence of the banking sector around the core roles of Trusted Platform Modules, both in the protection of keys and the device identity capabilities that TPMs bring. And we have now 3 large bank projects that are in various stages. But this is really a change from where we've been in the past. These are engaged organizations, they are actively pursuing the deployment of the technology.

In some cases, we've already put bids out to them or have proof of concepts that are operational within their facilities already today. And so it really is a very significant sea change in the enterprise accounts from where we've been very much evangelizing the use of Trusted Computing to a point today where we see definitely a softening of the marketplace as far as the acceptance of the technology and really the demand for the technology.

As part of that, there are a number of very large projects that are out there where we're being told either Wave is being designed in or Trusted Computing is being designed in and they're in scale. We have one in a major European bank that's a couple hundred thousand feet opportunity, where we're specifically written into the request for proposals that went out to everybody. And so it's great to have waste technology, specifically called out in those projects and they're still in the final phases of bid projects. But I would say technologically, we've been successful in building our technology into the account. Now the next step is actually the procurement and deployment of that within those accounts.

We also have done some beginning work in emergence into the Middle East. With the cybersecurity hacks that took place last fall, there has become a very significant renewed focus on -- or new focus, renewed is probably not the right word, but new focus on cybersecurity in the region. And Wave brings a very interesting set of capabilities around the Trusted Computing side, around industry standards, around really a modern implementation of cybersecurity in the marketplace. We've found a very receptive audience. We have successfully signed up a distribution partner so far, we have a couple of others that are in the works. We have our existing relationships with our worldwide distribution partners. And we actually have a couple of very large active projects. And we'll see how they move forward. I think it's too early to have enough experience in that region to make a prediction on it. But so far, the action on the ground has been very positive for us. And we've, I think, entered the market pretty well, and we have really great partners who are helping us there. It's important to have good reputational experience in that region.

We -- and finally on the sales side. I will say that we have introduced a number of new projects or products in the course of both third and fourth quarter in our Cloud services, both with Scrambls, and at the RSA trade show, we showed for the first time our service nodes, which is all about device identity into the Cloud. And I'll talk about the technology of that a little bit later on. But both Scrambls and nodes have active pilot projects that are underway. We've found a very strong level of interest within the corporate market to have control of information that is posted into the social media context, both files that are uploaded into the Cloud, as well as social media posts that are done through the different social media sites to enable secure communications in the Cloud, really private communications in the public cloud infrastructure.

And we've seen strong enthusiasm, I think the business model is right there. That's an ongoing subscription-based business model for us. And I think that that's an area that we'll continue to see very interesting and active growth in.

Finally, let me talk a little bit about the U.S. government side. U.S. government has, let's say, been interesting for the last 4 or 5 months. And the sequester aside, which has certainly complicated things from a budgetary perspective, we have had very active pursuit of really broad-based adoption of the technology by the U.S. government. They're beginning to be pieces that those who are paying attention, our public that are out there. DISA just produced an RFI on end-user computing, that's really all around the Trusted Computing components. And we were very pleased to see that and responded to it. And we have very strong action around U.S. Army, where their commodity hardware and enterprise software program has now requiring self-encrypting drives on all mobile devices. And we've been very pleased to see the action that's taking place around the actual procurements on that account. We won't really have good volumes, I think, until we see the March numbers out of the OEMs. But we've definitely seen an uptake in the business, and we've had a lot of conversation with different groups within Army and it appears as though we'll see similar process within U.S. Air Force. I think time is still to be determined on how fast that gets done.

But overall, they're creating an environment where self-encrypting drives, Trusted Platform Modules and BIOS integrity or what some people know as NIST 800-155, which is a National Institute of Standards and Technology guidance document, those pieces really are at the heart of modernizing the network access control and security and I think will play a very important role going forward. So Wave is very well-positioned in that space. We have the right relationships on the ground. We are working that forward every day. And it is an area where we ultimately believe that there should be an end-user -- really an enterprise license agreement for our technology across the services, and that's ultimately the goal. How fast we get there, it's very hard to know, although we have been requested for scale of pricing and opportunity and things like that. So it's early on in the process, but it's a very active dialogue that's ongoing today. And it'll be interesting to see how quickly it could happen. I think it could be very short term and it could take -- obviously, it's the government so it could take forever, too. But both are possible.

Wave is also -- has one of the leading solutions around self-encrypting drive management and Microsoft BitLocker management. And we've done the work to support the high-security capabilities of Microsoft BitLocker. We're one of the unique solutions in the market that has it, both in the U.K. environment and the U.S. environment. We support the higher assurance modes of BitLocker from a central management capability, and I think that will turn out to be a very important capability for us, as these customers look at meeting their minimum obligations in securing data at rest, both with self-encrypting drives and with Microsoft's BitLocker technology. We have a number of projects that are underway on both fronts, and we continue to lead the market in the capability that we're showing.

Finally, on the sales side, Wave continues to work with a number of channel partners. And we've actually had very good progress in Europe with our channel partners, especially with the sales of our data loss prevention capabilities in the Safend product. We've actually seen growth in the channel over the last 6 months that's been pretty substantial. And we'd like to continue to duplicate that over broader regions within the European market. I think that as we've packaged the technology in a more current mechanism, really providing something that's not just about locking ports but also about understanding where the information is, it really provides a much better picture of how those technologies can be used going forward. And we look to continue to enhance that, the integration of our data loss prevention capabilities with an e-mail proxy, and let me just use it as an example. We now have the ability to look at an e-mail that's coming out of your own corporate e-mail server, regardless of who it was sent by. And, for example, if it had a sensitive healthcare attachment, only send it to your PC that has a proper encryption solution. And on your phone, you'll get a note saying that the file that was attached was redacted because your phone doesn't have an adequate data resolution. So you don't have the risk of the wrong people receiving the wrong e-mail and then losing something, and then you end up on the front page of the New York Times.

And so the channel is really helping us into telling these stories within the marketplace, and I think it's starting to make a difference. We will see continued growth in the sales operation. Cash generation in Q4 was dramatically better than it was in Q3. Q1 is typically our light quarter, although it's been pretty good so far. We still have to finish out the rest of the quarter in the next couple of weeks. And there are always interesting accounts that are at the end of the week. And the -- sorry, I lost my train of thought. And the growth in Q1 into Q2, I think, will be quite substantial.

The second quarter, we have quite a few substantial accounts that are lined up that should help. Obviously, history shows we have to bring those accounts to ground. The organization is very focused on that. We're very focused on driving this to the point where it's cash creating and ultimately doing that through the course of the year. We have the pipeline to achieve that. We have the accounts in place to achieve it. We have to bring those accounts to ground. I think we are in an environment where the corporations we're dealing with are actually bringing these projects to fruition and ordering the products and putting them into work. And I think that that's one of the key differences this year versus last. There's no question that the marketplace is moving forward, much more strongly in the acquisition of technologies around Trusted Computing.

So let me stop talking about sales for a second and talk a little bit about the technology. Wave has made a very, very significant pivot in our marketing. And I want to be really clear on the marketing side that -- I'm sorry, there's a device here that I can't turn off. I want to be very clear in the technology pivot, what is actually taking place so that nobody misunderstands what we're doing.

We are taking the existing technologies that Wave has produced in Trusted Computing, and we are rolling them into a mobile offering in the PC space, very specifically designed around Windows 8 tablets and Windows 8 touch systems. We demonstrated this at RSA a couple of weeks ago. We also put up press in the February time frame around this, but we are able today to produce a tablet where you have just a PIN number to log in to the device. And the reason I call it as a PIN is because that password is only between you, the human, and your device. And after that point, the device handles all the authentication to all the services that you belong to. So you no longer have a Windows domain password, you no longer have a VPN password, you no longer have a wireless password. The machine is safe to lose. You're able to log onto your Cloud services without having specific authentication credentials for each Cloud service. And so what you end up with is a tablet where I supply one password or one PIN number to unlock my machine, and then my machine logs me in to all the services to which I belong. I think this is going to be one of the most powerful capabilities to demonstrate for the corporate user to have a Windows-based device that runs all your legacy Windows applications in the form factor that we all think is cool and sexy now in either a very thin Ultrabook or in a tablet form factor, and yet doesn't have all this layering of security stuff on top of it that gets in your way and slows your device down.

Finally, you have a consumer experience with true enterprise class security, with all the credentials held in hardware. And so it's made up of a series of technologies that Wave has shipped for a number of years. We've integrated those technologies into a single solution under Windows 7 and Windows 8 and they combined the self-encrypting drive with BIOS integrity and the machine, so that you know it's a good machine and has a solid machine ID; with Trusted Platform Modules or virtual smart card that logs you into Windows; with Trusted Platform Module as the token for your VPN, so it logs you in to your corporate network all the time; with TPM holding the credentials for your wireless connection, so you don't need to know a wireless password to get logged on; that it includes the data loss prevention capabilities to assure that information doesn't leak out of the tablet, and it supports both our Scrambls service for cloud encryption and our new nodes service, which really helps to use the TPM as a token to log you in to any third-party cloud service that will support that capability. It's part of a technology we developed for the NSTIC program, National Strategy for Trusted Identities in Cyberspace, where we are part of the winning Criterion team. And this is technology that will be deployed into the Criterion project as well. We demonstrated it at NSA, it's operational today. And what it basically means is that you have the ability to bind your device to your service. So let's pick a bank account as an example. Instead of just having user ID and password to log in to your bank account, you can now bind your personal machine to that account and therefore, either get differentiated access or only have access from your personal machine as opposed to from any computer that somebody walks up to who happens to have stolen your username and password. So really, it's a very powerful capability and one that we think will be broadly adopted within the marketplace to leverage the hardware security of your device.

We are supporting with nodes not only TPM but also soft cert credentials, and we know that we've done that so we know that it's not a secure component. And we have also support today for leveraging the SIM module in a -- right now, in a T-Mobile cellphone. We'll expand it to other devices as well.

From a technology perspective, the beauty of the tablet and touch offering is it is right at the point of the spear for what everyone is looking for in the marketplace, which is "How do I provide enterprise-class manageability with a consumer experience on top of this new Windows mobile platform?" Because the existing mobile device management players don't manage laptops. They manage cell phones. And this is really providing the management and support that looks like mobile management and support but leveraging the existing infrastructure the corporation already owns. And so in many cases, this really feels like an infrastructure where you have the hardware, whether purchased by the user or purchased by the corporation, that has the equivalent of what looks like a SIM module in it, like the little subscriber chip that's in your phone but bound to the infrastructure the enterprise already owns and they act as the carrier. And so you're actually able to provision services to these devices as though the corporation was iTunes or was T-Mobile or Verizon. They become the carrier, they're the ones in control, which is really what the corporation is looking for. And so it provides a very elegant solution built on top of the Windows ecosystem. And so clearly, Microsoft is in a catch-up position in tablets in the marketplace today.

We, today, are able to generate revenue off each one of these transactions, the technologies in pilot today. It will ship in production in April time frame. We have first customers already lined up for it, and we hope to have a significant percentage of managing Windows mobile devices and helping that mobile play.

In addition, any organization we walk into, the same technologies play backwards against their existing Windows 7 installed base, which will be there for some time, and forwards into their Windows 8 environment, where in 12 or 18 months if they decide to transition to Windows 8, then copying the security that they tried on their tablets and their touch devices, we think is a very logical plan. And so if we can insert the technology now today into their mobile ecosystem, then we have a pretty good chance of being built into their sort of mental plan for their end-user devices going forward and obviously provide the same capabilities we have in the market today against Windows 7. We've been actively on this plan since, really, the second week of January, and it's been a tremendous entry point into the corporation. Every corporation is looking for how they're going to manage Windows mobile devices. They understand they have to treat them differently than they have in the past. And it really is doing a great job of opening doors for us and providing a common and simple message for the whole Wave sales team to carry to market, yet with a very broad and complex collection of technologies to implement it. So we really are bringing the same capabilities, the same software and infrastructure that Wave has had in the past, that we've spent tens of millions of dollars investing in, and I think, really, the investment that we made last year, which was very expensive and, in some cases, much more painful than we were anticipating because the sales growth wasn't what it needed to be in 2012. And I know that's an understatement. But it really -- it shouldn't have been as hard as it was in 2012.

And -- however, the investments that we made in building out the Windows 8 infrastructure and building out our mobility play has put us into a very strong position at the beginning of this year.

We have taken steps to reduce our expenses, both on the technology side and the marketing and sales side as we try and get the company properly sized against the revenue. And it's a little bit of a bipolar experience some days because we are both addressing these huge scale opportunities for the adoption of Trusted Computing while wrestling with the fact that we actually have to produce the sales in the marketplace to pay the rent every day.

On a final point of technology, let me just say that we continue to make progress on the mobile phone strategy. In fourth quarter, we were part of the Trust-on-IC or Trustonic, you can pronounce it either way, which is the joint venture between Gemalto, ARM and G&D. We were part of supporting that press release into the market. We're very pleased to see the concept of programmable TrustZone come to market, and we look forward to being a leading software vendor in support of Trust-on-IC and TrustZone architecture and ARM.

I think that, that has the potential to very substantially change the marketplace and both the market's understanding what's possible on a smartphone going forward and a device going forward to assure the integrity of processing of information. And I think that we have made some of the right investments in building the infrastructure in the Cloud to support both encrypted message traffic over social media and the binding of the device as a token into any account that which -- to which you belong.

I think and it's -- I think a very important piece of the puzzle here, that the future of mobile devices is really about the transformation of the network to a device identity model. And it's what's going on around us everywhere. We log in to our device, our device logs in to the cell tower, or cable box logs in to the cable company, et cetera. We don't know those credentials. And we have the ability to bring that model to the PC. In essence, taking the billion TPM-enabled PCs that are out there and converting them all into mobile architecture devices. And that's really the transformation that's underway. Wave has the right tools for it. We have the right team to execute on it. We have the right time and place to do it. We have to convert the sales number, so we can show the market that this is a growing revenue component of it. But we sit in the front of a very large transformational curve. And we have, I think, really good leadership in the space as to both the technology, the marketing side and the brand awareness side.

Folks who know about Trusted Computing, most of them know who Wave is and that we're one of the key players that they need to talk to.

So with that, I'm going to wrap up my general comments. We'll open it for question and answers. And we will spend as much time as people would like to spend. And I look forward to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ronald Meier [ph] from REM Financial.

Unknown Analyst

I have one question that centers around giving shareholders updates on the progress being made on several opportunities mentioned on past conference calls and one future opportunity I'd like you to comment on. What progress is being made on the CB-16 CHESS purchasing agreement, the FD CB2 [ph] engineering project? What number of management software referrals regarding Win 7 and 8 are coming from Microsoft to Wave products? And finally, concerning the future regarding the Win 8 tablet that you've mentioned, what kind of specific marketing sales campaign is Wave implementing to take advantage of Wave's, what I would call a potential killer app [ph], the no-password plus encryption solution for mobile devices?

Steven K. Sprague

Sure. So let me address them in order. So on the U.S. Army CHESS program, that is a program where basically what happens is technology is written in to the specification for a new computer buy. That new computer buy went live in late December, early January. Any machines purchased within U.S. Army are supposed to be purchased off of the consolidated buy. That's their own internal policy. Self-encrypting drives are now a written in requirement on -- and it says more than that. It's self-encrypting drives plus management software plus the tools and capabilities to support Trusted Platform Module and Version 1.2, as well as BIOS integrity capabilities and it talks about the emerging technologies of NIST 800-155. So there -- it's a pretty broad set of requirements around the Trusted Computing technologies. Today, we offer packages through our OEM partners to provide the management infrastructure for that. Some of it is just client side only, some is client side and server. And what this is creating is a demand within the ecosystem to acquire a single license to cover the whole space. And so, I would say, for our purposes, it's having the general desired effect, which is the use and need to deploy Trusted Computing as clearly articulated, the technologies being acquired and in order really put it into effective use, U.S. government's going to have to ultimately do some type of enterprise license agreement around these capabilities. Today, I think Wave is both uniquely positioned with technology, intellectual property, software, et cetera, in the space. I think we've done a lot of the work necessary to get the technology approved for purchase and deployment. And it's now part of a broader procurement conversation, which is very hard to guess the timing scale of. Have we submitted pricing? Yes, we have, and a couple of different ways. And these things range in scale from a few million dollars to north of $50 million.

Obviously, the latter would be much more entertaining for us, and we'd love to have it happen tomorrow. So we're prepared to take that order whenever they're actually ready to submit it. It's a little interesting right now, budgetary-wise, on the other hand, cybersecurity is a very important sector that's being funded within U.S. government and this is one of the key technologies to start the train. You cannot do a lot of the things they want to do if you don't have solid device identity underpinning the technology. So the stuff that we've done in the FCB 2 -- sorry, the acronym escapes me exactly. We provided engineering support for them. We have helped them to articulate and architect the system and they're waiting for budgetary approval to take it to the next step, so that sits somewhat in stasis until they receive budgetary approval to move forward. And I think I'll leave it at that. That's -- we've done what we can do. At this point, they need to drive it internally. And the final piece is, from a marketing perspective around the tablet and touch infrastructure, we're doing, I would say, really 3 things. The first is a direct outreach to our OEM partners. They ultimately have the benefit of knowing who's going to buy a tablet tomorrow and how do we offer an uplift to their solutions. Really, to provide a very strong competitor to the existing incumbents in the market which are clearly Apple, number one, and Android infrastructure, number two. And so, in many cases, we're trying to help the entire PC OEM space with a solution, built off of Trusted Computing that offers a substantially better model for an enterprise device. I am not trying to project, at this point in time, that this is a better consumer solution. And partially, it's because the corporation controls so many of the services that a corporate device would have access to. Where in the consumer market, you'd have to actually convert all of the consumer entertainment and consumer sites. That may happen in time. I think Trusted Computing will belong in all of these devices long-term. But today, it's really a corporate environment play for us. And so, we are working with our existing OEM partners. We have relationships with quite a few new partners as well, especially in Asia. I would expect to see additional OEMs come on board in the course of the next couple of quarters. They are very interested in this capability. They don't have the story around a tablet, just as a tablet. Here's a very nice piece of well-engineered kit with a screen. It doesn't look that different. So how is the experience different? Because it's all about the experience. And unfortunately, the enterprise experience has been very classically encumbered by the fact that the first thing that happens is you get this really nice, sexy device and then somebody layers all this cybersecurity garbage on top of it and your device runs slower and you have to answer 27 questions every time you turn the thing on, and we've all had this experience, and it's not brilliant. And what we want are things like bring-your-own-device isolation. So it's important that the user can't propagate, for example, corporate keys to another device. In the same way that the corporation can't steal your banking keys if they happen to take the device out of your hands. And so, really proper isolation of credentials that protects them for the actual user of the credential is very important and TPM does that today. And self-encrypting drives play a very important role. It's almost impossible to prove on a bring-your-own-device that there's a data resolution in place. And clearly, with Wave's cloud service and a self-encrypting drive, even if you're the user who set the whole thing up, you can provide a proof certificate to your corporation that the machine was encrypted when lost. And that's really critical going forward when you realize the European Union just passed laws that said the fines are potentially going to be 2% of annual turnover of a corporation. So they're getting serious about it. So those are the -- the second 2 pieces of how we go to market are: we've engaged with our channel partners and really, they are the larger systems integrator-type partners and I would say, we're seeing a very positive reception there; and the final one is our own direct marketing efforts. And Wave's a small company on that front, and so there's only so much that we can do to get that message out there. But we are active within the social media space, within our PR and infrastructure, at trade shows, et cetera. And we've had really positive response so far around these technologies. So I think as a technical way to introduce Trusted Computing to the world and as the point of the spear for Wave's marketing, again, bringing the complete set of technologies that we offer, this is not a technical change. This is an integration of those technologies working together as a single solution.

Unknown Analyst

And what number -- another question was what number of referrals regarding Win 7 and 8 are coming from Microsoft for Wave products? Last quarter, you mentioned you had a couple because it was pretty early in the cycle for Windows 8, but what are you seeing now...

Steven K. Sprague

I would say it's still -- I would see it still -- still falls into a few. We don't have a formal marketing relationship with Microsoft. It's something we're looking to remedy. We are in conversation with them. And we'll see where that ultimately goes. What I would say is that we have a very positive relationship with the folks within Microsoft that we're working with. I'm -- Wave is not trying to take a single nickel out of Microsoft's product. We are augmenting their capability and if anything, we're asking the customer to buy the more enhanced version of Microsoft's product versus the less. So we tend to joke each other that what we should be doing is getting a commission check from them.

Operator

Our next question comes from the line of Harvey Stern [ph], a private investor.

Unknown Attendee

Steven, I just have a question as to within the organization, who is responsible for sales in the corporate environment? Is it -- if it's Brian Berger, then he's splitting time with...

Steven K. Sprague

Let me answer it for you. So today, there are 2 of us. So Joseph Souren runs our European and Middle East and Africa sales organization. And he is based out of Holland, spends about half of his time in U.K. And right now, which is only a temporary occurrence, the North American sales team is reporting to me. And we're in the process of engaging a new EVP of sales within the North American operation. We've changed how the sales organization reported. We did that at the end of the year. And we thought we had somebody identified who is going to run North American sales and that transaction fell apart. So right now, they report to me. And they won't be for very long.

Unknown Attendee

And my comment was going to be that, you're obviously the visionary and you've kept us in the right path but it's very hard for one person to do everything. And you need help so...

Steven K. Sprague

And let me be very clear. We have a great team, right? So Len Veil is Wave's CTO and is doing an excellent job of keeping us in front of a number of the technology curves. Brian Berger has moved to being our Chief Marketing Officer, but he also is our representative into the entire Trusted Computing standards space and sits on the Board of the Trusted Computing Group and really has a very strong understanding of how the Trusted Computing capabilities need to be pressed into market. And I think we are -- we have actually a very strong then engineering team. George Kastrinakis heads up our product organization and all the various product groups report up into him. So I won't minimize Mr. Feeney's role as CFO as well. But we have a very good executive team at Wave, who are helping push the ball forward. You know there are always entertaining challenges in any organization. But I would say that this is a team that's working pretty solidly together and pulling in the right direction. And we're trying to do something that, unfortunately, has been much harder than was expected to be. And I think actually, the last 90 days has been an excellent period of time to recognize the team that is on the ground at Wave and our ability to really change the focus, both from a marketing and sales and product perspective, around the mobility story. And really, this concept that I think will turn out to be something that's very important is that one of the key messages that Wave is delivering today is that mobile is really a transformation from a network based on connections to a network based on the identity of the device and has nothing to do with the size of the device. And that is probably one of the most important statements is that we can build a network of devices. And that's, of course, what a cable industry is or what a cell phone industry is, et cetera. And that enables us to take the entire enterprise market and transform it into a mobile space, which has really interesting implications. And that's what's -- that's the science, we believe, that's underpinning, that's driving all this in the right direction. So we do have a pretty good team in place but it's been an interesting and challenging time.

Unknown Attendee

Okay, quick follow-up. I know a couple of quarters ago, you mentioned that $8 million to $10 million opportunity. It was close to closing, it doesn't seem that it's ever come to pass. We haven't closed it yet, is it still alive? Is it -- because...

Steven K. Sprague

Yes, they haven't fallen off the table. They've all taken longer than we expected. We have a couple of million dollars of additional business that should have closed in Q4 that's gotten pushed. It looks like some of it will close in Q2. It's been difficult to predict the timing of some of these. It's -- none of this is any different than anybody who's ever been in sales where somebody tells you that the budget's improved and this is approved and that's approved. And they're not looking at any other technology but they didn't send you the purchase order, right? And those are always difficult. We just -- unfortunately, there's not enough of diversity of pipeline that we're still really counting each quarter on new sales, from new accounts, they're not just selling additional stuff to people we already know.

Unknown Attendee

Steve, that's an interesting comment because from what I understand, we keep talking about a very huge pipeline, an increasing pipeline that we're getting. So I guess my next question would be, what percentage of those pipeline sales are still in the queue? And how many are falling out or going with another solution? Because each conference call, we have the same information that our pipeline is growing. And now you're saying that the pipeline is not that diverse yet, where are all the pipeline sales going?

Steven K. Sprague

Yes. So in 2012, the challenge was that the pipeline for self-encrypting drives converted into doing the same thing they were doing before because the drives were not available. And that had a very significant effect on a number of large and significant sales. That problem is no longer out there. Today, we are seeing diversity in the customer needs from both self-encrypting drives and now, Trusted Platform Modules for machine identity and Trusted Platform Modules for securing a wireless and VPN access. And the beginning of tablets. Tablets is not going to be a huge revenue contributor immediately. But if it catches on solidly, we only need to make 4% or 5% market share in the Microsoft tablet business to double last year's revenue for us. So right now, we're competing with them putting all the old crap that used to have for security on your Windows 7 PC and your Windows 8 tablet, and it's just not a very pretty experience. And so part of that is education and messaging and getting them to have approved budget. The -- where we are today is that, the major accounts that are out there are not going somewhere else. They haven't yet moved to turn on their Trusted Computing infrastructure in their platform. So this very seldom are we in a head-to-head competition with somebody where we lose the account. Does it happen? Certainly. It usually happens in relationship to some customer who's only interested in encryption. Certainly, where we see competition on a regular everyday basis is with the Safend product line, because it's much more of a commodity product. They're a classic product in the marketplace. And that's a somewhat different conversation. The classic commodity product of Safend is interesting, probably still only does $8 million, $10 million a year going forward as a classic product line. What's interesting to us are the ongoing protection of content as it integrated with what we're doing in cloud encryption and other pieces in the marketplace going forward. I think it has an incredible role to play in the mobile side, but it's not locking down the one USB port that's in your tablet. It's obviously it's a piece of it, but that's not where we see the center of gravity.

Unknown Attendee

Are we still looking for Department of Defense...

Steven K. Sprague

And it's part of the justification for the write-off because the write-off is built against their classic revenue stream and you can talk all you want about our future revenue stream for the product, but that doesn't come into the valuation consideration.

Unknown Attendee

All right. So Samsung and Department of Defense, are we still looking at them making a big splash for us?

Steven K. Sprague

Yes, we will see Samsung products ship in, we believe, second quarter. And we've delivered that capability. We continue to move forward with it. They continue to have new things they'd like to see us do, so we're very focused on that relationship. We're actually expanding into a number of other OEMs in the Asian market. We should see that progress over the course of the next couple of quarters. Some of those are fairly far down the path already. Wave has a very unique product set today in the Trusted Computing space, especially backwards-compatible into Windows 7 that just doesn't exist in any other player in the marketplace today. And so, to the extent that you believe that a company is going to adopt the Windows 8 security, leveraging the Trusted Computing parts. The way I like to say it is -- here's a good example of it. What's the U.S. government budget for Trusted Computing in the next 6 years? It's $10 billion. Well, how do you get there? It's 10 million machines, times $1,000 a machine, because they're going to buy Windows 8. And they're going to turn on the security that's part of Windows 8. Because the other choice is, they switch everything and go to Android, probably not going to happen, right? So just the fact that they're going to buy Microsoft with that kind of a budget behind it, but now the center of gravity of that security model is turning on the hardware security components that are there. You don't want to turn them on after you buy the device. You want to turn them on before you buy the device, because it's way, way, way more expensive to turn it on after you buy the device.

Unknown Attendee

Steve, I promise you, my last comment is that there's a lot of speculation on whether the Samsung NOX, a programmer initiative that they announced, there were some other companies mentioned. Does that affect us one way or the other? Are we a part of this?

Steven K. Sprague

So we just view ourselves as a second play in that. So the Trusted Computing phase -- place came into those discussions way later in the process. They started that a couple of years ago and we're pleased to see that they're investing in security as part of the device and we think Trusted Computing will play an extremely important role as -- it's a technology that should eventually become part of those kind of concepts and programs going forward. So clearly, you can't go out and buy the devices yet, handheld devices with TPMs in them. There are a few from Microsoft, there will be a lot more. I think the marketplace will be a little bit surprised by just how broadly that becomes available. If we believe what we're being told by the supply chain and the infrastructure and the players that are out there, I'm a little jaded. They all think it's going to be second quarter sometime. It's not, it's going to take them this whole year. But it will begin to show up in scale. And I think that it's a -- we've seen this process, it's takes a while for everybody to pay attention. But you're going to have a generic capability to put keys in a mobile device. And that will put competition on the existing carriers and infrastructure that controls exclusively that domain today. And it will change the world as we know it. And Wave will have some participation in that puzzle. I think we're doing a lot of the right things to play there but that's a very, very large change that's on its way coming down the pipeline. The technical pieces are in place already.

Unknown Attendee

Hopefully, we are not too much diluted by then. Keep heading class, Steven. Take care of our shareholders, all right?

Steven K. Sprague

And we're doing that but it's also very, very critical to us. And I'll just say this because I get this question all the time. One of the biggest risks for Wave is that we don't have an adequate rope tied to the back of a jet fuel dragster. So that when somebody dumps the clutch, the rope breaks. And what you don't want to do is get left behind because you won't be able to catch up. And so the only -- the play way we have is the legacy play of we've been here and we have the right tools and technology. We have to be there as the market launches. And I think today, we had a very painful year in 2012, making sure that we have the pieces on the ground to be there as the market launches. And I agree with you. We need the market to launch now and we are doing what we can to make sure that we are properly rightsized to get there. But we had to make some of the right investments or we just wouldn't be a player in the mobile handset space and Trusted Computing.

Operator

Our next question comes from the line of David Avish [ph], another private investor.

Unknown Attendee

Steven, Just getting back to Samsung again. It's been almost a year that Wave signed a 15-year agreement with Samsung and in the agreement, it was mentioned about a royalty-based program where we're going to get paid on a per chip basis, could you give us an idea, exactly what this product is? How does Wave fit in as far as the role going forward? Is it just in PCs, is it just in the phones? What is the royalty, if you could tell us, so we can -- is it a discrete TPM? So we're just a little confused on exactly where we are set right now with Samsung.

Steven K. Sprague

Yes. So what I can say, and I need to be cautious around this because this is proprietary information to Samsung. What was in the press release is we've signed a relationship with Samsung Semiconductor Group and they provide Trusted Computing-enabled products, whether it's a discreet TPM or it's a TPM as part of another device, et cetera, I'll let them announce those products as they announce them into the marketplace. We provide design information and software that is part of that solution. That infrastructure, as has been very classic in our business model over the last number of years is provided to a platform manufacturer, for example, Samsung's PC group. At which point, we provide additional software into those platforms to enable the Trusted Computing device. And those typically are under $1 price point deals. They vary on specific units, depending on what the customer is trying to achieve. And we have customers that range from $0.25 to over $1 per device. Really, depending on what level of customization and what capability is put into the device. And then those devices go to market. Again, I will let them determine whether it's going in 1 or 2 things or lots of different things. I mean, as they put those products in the marketplace, they'll show them to you. And the final piece of the puzzle or not final piece of the puzzle is obviously, Samsung is a very large manufacturer. There are lots of other places that could end up with Trusted Platform Modules and certainly, Samsung Semiconductor is a company that supplies chips and devices to other companies in the marketplace. And so we work hand-in-hand with them as a good partner would, to help offer solutions both to their customers internally and externally. And certainly, they have the capacity and capability to be one of the leading manufacturers in the world. They are today, of silicon. And there's no reason why they shouldn't be a significant provider of Trusted Computing infrastructure into the market as well. So it's a long-term relationship. We make money at the silicon level, we make money at the platform level. And then ultimately, we try and provide services in the aftermarket support them.

Unknown Attendee

Yes also, Steven, with the recent closure of the $1 million placement that just happened last week, and the fact that you don't sound overly optimistic that we're going to be cash flow breakeven in the first quarter, how do you plan on financing the company going forward, knowing that only $1 million is really only one week's burn rate at -- of what you're burning right now?

Steven K. Sprague

Yes, but we do have a little revenue that comes in. So it depends on -- it's we're not without revenue coming into the organization. So you're correct, it's about one week's burn rate. But there are other revenues that come in to help offset that. So I just want to make sure everybody's clear on that. The reality is we are trying to pay attention to the shareholder dilution and shareholder value, and we have a number of very significant projects that are sitting in front of us that put us into a cash -- a much stronger cash position. And so the question is, how broadly the balancing act between how broadly we do that? My general sense is that the next quarter will be a quarter that we see some of these larger contracts come into play and will make for a clearer picture going forward for people, as to the cash position for the company. But we maintain access to capital. We have a shelf registration that's out there. The last deal was done on a nonregistered basis. We were very close to a 10-K being filed, we had an investor who was interested in purchasing shares in an unregistered deal. And we felt that, that was an adequate transaction to do. So that's -- there's never an easy answer. I think we're opportunistic at this point in the marketplace. Having said that, we have a number of interesting accounts that sit in front of us that, in the blink of an eye, could eliminate the cash challenges on a short-term basis, I think really solve for the medium-term. The challenge here is the transition from an emerging market play to really a growth business. And I think we're seeing that happen on the ground. I will tell you that from a senior executive position in Wave, it's a little bit bipolar. You are spending your days worrying about how you're spending your nickels and dimes and then, you're putting out proposals that are tens of millions of dollars proposals. It's like, okay, I just need one of these to convert, and it'll be brilliant, right? And so you have to maintain your sanity, shall we say?

Unknown Attendee

One other question, Steven. Are we any closer to getting certification for the CESG over in the U.K.?

Steven K. Sprague

Yes, we are making process -- progress on that. We've had very good conversations with CESG. It's a 2-step process both of certifying our software and certifying drives. The process is actively underway. And we should have published [indiscernible] on that. We had one challenge in that we were working with a lab that went out of business, fortunately, before we actually wrote them a contract. But we were just about to and they had external stuff that interrupted their business line, which put a little damper in the production line of the process, but I would say we're solidly back on track at this point.

Operator

And our final question comes from the line of Bill Anill [ph], a private investor.

Unknown Attendee

Steven, hopefully I didn't miss too much on the first 0.5 hour because the Internet was kind of screwed up. But anyways, I'm through. Can you explain, do you have any inside into whether ARM will build a TPM into hardware? Or is it always going to be a firmware-based format?

Steven K. Sprague

So I think the firmware hardware TPM conversation, obviously, there are firmware TPM showing up on Intel chipsets, and there certainly are firmware TPMs. My Surface, for example, has an ARM processor and a TPM running in ARM TrustZone on that platform today, and I use it. I even use the TPM in it. And the reality is, I think there's going to be a need in the market for both. And the reason is going to be certification of the device. As Trusted Computing gets turned on for broader-based government purpose, for financial services, for healthcare, et cetera, we are already seeing a huge shift in the last few months in the concept of a certified TPM. Actually, we've had some interesting environments where TCG has had, Trusted Computing Group standards, had its own certifications and some of the chips are certified and some of them aren't certified. And we have a situation right now where there's a U.S. government account that will only buy certified machines and therefore, they can't buy a Dell machine because it doesn't have a current certified TPM in it. And actually while those are little entertaining hiccups in the market, they're really healthy because what they're doing is pressuring the supply chain to actually pay attention to the level of certification of the products in the box. As long as government is going to require certification, then it's really important that the people who build the products, certify them correctly and get the right little stamps and the right little squares on the box. And so that effort is underway. I think that there's no reason why a firmware TPM can't get certified to the same level that a hardware can because in essence, inside ARM TrustZone, you're running a TPM in hardware. The question is, what hardware, what are the other complexities, what are the risks, et cetera, and are they understood? It will always be easier to create a higher level of certification on a discrete TPM. However, there's a tremendous flexibility that's gained by having a firmware TPM. So both have their pluses and minuses in the marketplace. I think that at least on the medium-term basis, we will see both probably get certified to a relatively equivalent level and that realistically the market won't care. I think on a longer-term basis, let's call it 3 or 4 years out, I think you will see a strong market for a discrete component TPM continue to exist, as there are definitely devices in the marketplace that will require it. And the level of certification comes along with it. So we'll see ultimately where the market ends up. There is also, I think, a performance question. And that one's completely different than certification. And I think once you start using the TPM for lots of different things, the 1.5 seconds it takes my machine to log itself in will become an issue. And you, as a consumer, would happily spend an extra $0.25 in a box, to have a machine log you in, I don't know, 1/10 of a second instead of 1.5 seconds, especially if it's got to do 4 or 5 of these 1.5-second transactions. Because sitting around and twiddling your thumbs for 7 or 8 seconds, like if I just stopped and counted to 7. That's a really long time. And there's really no need to waste your time just because performance in silicon wasn't a consideration of a PC manufacturer or a handheld device manufacturer. And so I think in the world of 1 billion TPMs where everybody bought one and didn't know why, to a world where there's 1 billion TPMs turned on and we're using them every single day, you're going to discover performance. Speeds and feeds have driven the PC industry and device industry for years and I don't think it's gone away. And so, there's an aspect of that, that I think is highly entertaining. I think it's completely unexpected in the marketplace and give them another 24 months and they'll be telling you why their TPM is faster than the other guy's TPM, and I think that's all great.

Unknown Attendee

Actually, Steven, one final one. Can I just ask you what Wave brings to the Trustonic relationship? What's that whole relationship about as far as Wave is concerned?

Steven K. Sprague

So very simply. We're a software vendor that support the space. I would say there are 2 things that we're interested in bringing. One of them is very easy for us and we will definitely do which is, we will build software that is supported on the Trustonic platform and runs in their platform and we will be one of the early adopting software vendors. And we look forward to supporting them really directly in the market so that when they show the capability, we have an app that will run on it. And that's all about them sharing enough information with us and us having an engineer or 2 assigned to the project to actually deliver it. And we're in the midst of that today and I think all of that is good. Then there's the second piece of the puzzle, which is that there is a broader need for centralized management of how do us -- how does an enterprise control what Trust-on-IC Apps are distributed to which devices. And we think that's also a very interesting play. That's an area, which only people who have been hanging around Wave for a really long time would remember our trust assurance network and our embassy silicon. And it looks almost identical to what we did 15 years ago. So it's an area we have a lot of comprehension of. There's no technology today in that. But the focus on how you would do distribution of Trustlets [ph] to devices is something that we're very interested in, interested in participating in, whether at a broader level or just within the enterprise infrastructure. What does it mean for an enterprise to manage the application store for -- there are 10,000 mobile devices that are controlled by them? And so, that will form over time. It's, I think, a really interesting aspect of the environment and these are the places where if my enterprise sales were stronger, we'd be right smack out in front of it because we really know what to do there. It's where -- we're resourced-constrained on that front.

So with that, I think we're at the end of the questions. I'm sure there are people who have questions that were left held -- holding on the line. For that I apologize. We spent an hour with my long-winded answers to questions. If you have a question you'd like to send it to me on email, feel free. My email is ssprague@wave.com. And I will do my best to answer them. This is -- note, I will be traveling in a couple of days, so if you don't get something back from me relatively quickly, it's most likely because I'm on an airplane. And again, I thank everybody for their attention on the call and their support. And I would say we are definitely getting closer to the goal here. We're seeing, I think, really good progress in the marketplace. We need to show that through numbers. But the numbers always lag the actual progress on the ground. And I can't say today the progress on the ground is quite significant and really moving forward in a very positive way. I think we have the right marketing message, we've a good team on the ground, we are making progress and I think we have very strong support from our partners in the marketplace as well. With that, thank you very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and please ask that you disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Wave Systems Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts