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
Wave Systems (WAVX) Q1 2013 Earnings Call May 9, 2013 4:30 PM ET
Ladies and gentlemen, thank you for standing by. Welcome to the Wave Systems First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, May 9, 2013. I would now like to turn the conference over to Mr. Gerry Feeney, CFO. 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 could 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 first quarter of 2013. 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 first quarter ended March 31, 2013, Wave's net revenues were $5,794,000 compared to the first quarter of 2012 net revenues of $6,982,000 and fourth quarter of 2012 net revenues of $7,131,000. The first quarter of 2013 results reflected approximately $1.4 million less in OEM bundling revenue due to a lower volume of shipped units compared to the year-ago first quarter. Total billings for the first quarter of 2013 were $5.9 million compared to $6.7 million in the first quarter of 2012, and $9.3 million in the fourth quarter of 2012 billings, which included a $1.7 million 3-year maintenance contract. Primarily attributable to continued cost reduction initiatives, Wave's combined SG&A and R&D expenses declined to $11.2 million in the first quarter of 2013 from $14.6 million in the first quarter of 2012 and $11.7 million in the fourth quarter of 2012. During the first quarter of 2013, Wave recorded noncash impairment charges totaling $4.2 million to write down the value of goodwill and intangible assets attributed to Safend, of which $1.6 million is included in the licensing and maintenance cost of net revenues, and $2.6 million is reflected in impairment of goodwill and intangible assets. Including in the $4.2 million of Safend impairment charges, the net loss for the first quarter was $10.2 million or $0.10 per share compared to last year's first quarter net loss of $8.3 million or $0.09 per share, and last year's fourth quarter net loss of $13 million or $0.13 per share, which also included $7.5 million in Safend impairment charges. The weighted average number of basic shares outstanding for the first quarters of 2013 and 2012 along with the fourth quarter of 2012 were approximately 105.4 million shares, 90.2 million shares and 104 million 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 noncash compensation expense. In the first quarter of 2013, Wave had negative EBITDAS of $5.2 million compared with negative EBITDAS of $6.4 million for the first quarter of 2012 and negative EBITDAS of $4.1 million for the fourth quarter of 2012. At March 31, 2013, Wave's total current assets were $5.9 million, which included $1.8 million of cash. Wave's total current liabilities were $15.7 million, which included $6.5 million of short-term deferred revenue.
In the first quarter of this year, Wave raised approximately $263,000 and an average price of $0.715 per share through its At-The-Market or ATM structure. Also, during the first quarter, in March 2013, Wave raised gross proceeds of $1 million in a private placement. And subsequent to the end of the first quarter, in April of 2013, Wave raised additional gross proceeds of approximately $3.2 million with the sale of Class A common stock. And now, with that, Steven will highlight some of the key developments for the first quarter of 2013.
Steven K. Sprague
Thank you, Gerry, and thank you, everybody, for joining the call today. We appreciate your support. So let me just start with some just general notes on operations. First, I'd like to say that the company is very focused on its enterprise sales efforts and really, the conversion of our enterprise accounts. And I'll come back to that some more in a couple of minutes. Let me start with a few sort of non-sales-based comments. So after the last 18 months or so of very strong investments in our efforts in mobility and our efforts to launch in the Windows 8 platform space, we've completed the vast majority of that work, and it's allowed us to target a fairly substantial reduction in our annual expenses. And so we have work in process, and have mostly completed the necessary steps to reduce our annual operation -- operational cost by over $10 million per year. And you'll see that reflected -- you'll see some of it reflected already in the first quarter, and you'll see additional reduction in expenses over the course of this year. And the company is really in a very strong position to execute in the sales aspects of the market.
But the second thing I'd like to mention is that as was reflected in our proxy, Jack McConnaughy, one of our board members, has decided to retire, which will be effective as of the Annual Shareholder Meeting on June 20, and the board's began a process to replace him. And I would just like to thank Jack for his years of service. He's been a very strong board member with great small company experience, and has been very instrumental on helping guide the company through both our ups and downs over the course of the last 14, 15 years. So again, I'd like to thank Jack for his service. We also see really some interesting developments that are expanding in the worldwide distribution of both Windows 8 mobility and self-encrypting drives on everything, and I'll come to talk about that in a minute. The marketplace for Trusted Computing has really had a very positive boost with Microsoft's Windows 8 launch. While I know the global press around Windows 8, it's certainly not brilliant for Microsoft. The Trusted Computing aspects have been very instrumental in helping the marketplace that's here, and we're really starting to see the effect of that.
I'll also make the comment, just because I'm sure everybody will ask the question, from an expense reduction side, yes, management has taken a pay cut pretty much across-the-board. And management's also deferred a number of payments to help us on a cash flow basis. I know that's always a question that people ask. So I'll start with it right out front. So let me talk a little bit about the direction and the strategy of the company. There are really 4 core areas that we are focused on, and I'm going to use terms that are non-technology-based because I think that this stuff gets lost a little bit within the terms of authentication and access control in BIOS integrity and things like that, that confuse many people about what really the goal is. So there are 4 things that we're trying to do. One is Wave is very focused on providing the tools and technology to eliminate the use of passwords. This is probably not going to eliminate them in their entirety, but it's about making every single password go away one at a time, and I think it's a really great way to think about it. So the other day, my systems got enabled, so I no longer have Wi-Fi passwords in the office. And I will never need them again. So I have made the Wi-Fi access passwords in my office go away. Wave employees don't need them. Our infrastructure doesn't need them. Our computers automatically manage them. They're centrally configured. We've effectively eliminated a password. And I think that's not the only way we can approach this problem. There is no silver bullet that will magically one day wake up and you will no longer need passwords in your head, but we can all work together as a community to, one-by-one, reduce our reliance on passwords going forward. And I just think that that's one of our very important missions at Wave. It's something that every investor will benefit from and everyone of our customers benefits from.
The second thing we do is we're making it possible to have devices that are safe to lose. No matter how hard we try, we will forget stuff on airplanes, leave it in back of taxi cabs, have things that are stolen out of our bags or take a lesson, don't put your bag behind you on the ground. Everybody knows not to do this, but we still have things that are picked up and carried away. And the reality is, our devices need to be safe to lose, and Wave invests and builds supplies and offers the technology that makes it possible to make quite a range of devices safe to lose. It's not universal. It's not something we're trying to support on your iPhone, that's a responsibility for Apple, but it absolutely can make your PC infrastructure safe to lose. And Wave's providing really fantastic technology to help achieve that. And there's a huge market for it.
The third arena is how we do we support private communications on public cloud services? So Wave built a number of products that are helping us to make it more secure to leverage these public services in very much the same way that for years, companies have used AT&T wires for private communications by using a little bit of security and encryption to make that possible, so they don't have to bury their own wire from the, I don't know, the GM facility on this side of the town to the GM facility on that side of town. But now, it's no longer just about the wire. It's about our data that's in the cloud, our data that's at Facebook, our data that's in a variety of different places. And Wave builds a collection of tools and utilities, both for the enterprise and now for the consumer market that make it possible to have private communications over public cloud services. We think this is a very large and growing marketplace in front of us. And we have a unique solution and offer in the market.
And finally, and probably the most important one, is that we can have only known devices with known capabilities on the network. I think one of the most important things that we see in the marketplace today is that there will be a myriad of devices. You will have a smartphone and a tablet and a PC and a corporate PC and a bring your own PC and computer in your car that gets the e-mail. And not all the devices are created equal. And that in reality, if we try and up-level all the devices to the same capabilities, by default, we end up with the lowest common denominator. And that the real value in the marketplace that will drive innovation, enable a whole new model of thinking about how computing works is to have a device with its identity and its capabilities, so that when I go to a site, for example, and have a PC with a self-encrypting drive, the download button lights up because my PC is safe to keep that file. Where, perhaps, if I'm on just a browser at the hotel or I'm on someone's iPad, I can't download the file, I can only view the file online. And so if you want to work while you're sitting on the airplane, having a file in your machine is a good thing, but you should have a machine that is safe to lose, that is capable of securing those files and information, et cetera. And so we think we provide some of the key infrastructure that allows this market model where we will all have lots of different devices, as opposed to trying to get every device to work exactly the same. I think it's a great way to kind of understand the 4 core areas of technology that we're pursuing in the marketplace.
So to help reflect, I think some of the interest that's in this, we announced today a relationship with Fujitsu America, that is offering our products on a global basis in support of their Trusted Computing capabilities, both on tablets and PCs, to support really a new model of computing, a device that's safe to lose, that has hardware-based encryption in the box. I think there's a really great support for this from Micron, who builds solid-state drives that are leveraged in these machines, and who are now building this capability across their whole product line. And that's a very important consideration as we see the volume in the self-encrypting drive business expanding, and the investment by the drive manufacturers, including Opal capability across their product lines, and in the OEMs willing to carry this capability to market through their distribution channels and help promote and support it into the market. Fujitsu is a great global brand, and we're very pleased to work with them and supply the infrastructure that supports their Trusted Computing capabilities and their self-encrypting drive capabilities in the platform. And we really look forward to significant opportunities and volume coming out of this business. Products are available now. And so this is an agreement we expect that will actually generate revenue for both companies starting in this quarter, although really I think the real growth in revenue will happen in Q3. So we're very pleased to add them as a partner of Wave's.
Overall, the OEM business has been very good. There's , like I said, very strong interest around what we're doing in mobility. The interest in understanding the implications of Windows Microsoft -- Windows 8 in the ecosystem is very important. And that is coupled with, however, the fact that their very well publicized set of numbers that there was significant softness in overall global PC volume in first quarter. So there is a little bit of a battle that has to be fought here. I think that there is incredible value in the enterprise space with the PC platform. There's no question that the consumer market is very interested right now in non-Windows-based products. Having said that, I think there is tremendous value in the PC platform, in the Windows-based platform. And if you haven't gone out and bought a Windows 8 mobile device, it's really an interesting device to play with and use. It has a lot of value to offer. We've just delivered our updated software to the OEM channel. We just shipped our new version to Dell, and we're supporting the current Windows 8 platforms. We're supporting the new drive platforms. So we really have a very cutting edge solution in the marketplace. It's part of what's been driving our investment in technology, and it -- I think we really provide the market-leading solution at this point in time in the marketplace. Certainly, on a feature basis and certainly in supporting the standards that are in the market, we probably have the strongest solution that's available.
With that, we've actually been making really good progress in the enterprise accounts across-the-board. We've had very good development work that's gone on in Europe. We have executed relationships with a number of customers. We're actually seeing volumes start to appear in a few of them. We have others that we're delivering solutions today, where they've selected us as the solution provider. We're still waiting for the sort of volume dollar orders to happen, but we're very pleased with how the development is taking place in Europe and beyond Europe. And we also have really good traction on the ground in the United States. I think a good way to understand today the enterprise market is probably 2 ends of the spectrum. Over the course of the last few weeks, we briefed the Fortune 50 company, where we had really their global IT and security folks in the room, and provided them with the complete presentation on Trusted Computing. And there was really strong interest, and there's been really excellent follow-up since that meeting and a brand-new introduction to the capability and interesting commentary on why haven't they heard as much about this as they, perhaps, should have. So I think it'll be interesting to see how they engage the product line and capabilities into their organization. And on the other end of the spectrum where we had a company call us up and say, we're really interested in device identity, can you come show us a proof of concept? We've delivered the proof of concepts there in the early stages of the business conversation. And it looks like the whole process, beginning to end, to get to an order could be in under 6 weeks' period of time, and this is a multiple thousands of unit customer in the marketplace. And they really are interested, primarily in device identity. And that's such a great indicator for us that the message is finally getting through, that device identity is one of the most valuable things we could do for any IT department anywhere in the world. It's what reduces their complexity and improves their security and assures that only their devices are attaching to their networks.
Our Windows 8 strategy, which we launched and we talked about at the end of last year and in the first quarter, on the annual conference call, has been received very positively. The -- we offer an augmentation to the Microsoft infrastructure to manage Windows 8 mobile devices. I carry around a tablet that has no domain password, no Wi-Fi password, no VPN password. I have a PIN number that unlocks my tablet, and it's completely connected to my enterprise. It's essentially managed by my enterprise. There is no third-party controlling the system, and it was easy to implement. And that story has played really well. We have a number of pilots that are underway. And as I've said in the past, one of the key aspects of what we're doing with our Windows 8 mobility offer is we're offering a solution that gives you a vastly better solution than an iPad or an Android tablet with the leading mobile device management software. It works with your Windows infrastructure. It's familiar. It runs all your office applications. It has a vastly better operational experience for the user, and it's available from a variety of different providers. It is the capability that we're now offering with Fujitsu. And so we expect to continue to expand the number of customers who are looking at that. And while Windows 7 is still the meat and potatoes of the industry, it's still where you make the bulk of your revenue, every single customer you call wants to take a meeting and talk about what you're doing with mobility and what you're doing with the tablet infrastructure. Everybody has a question, and we have already stopped a number of non-PC-based deployments. We have people evaluating the Windows platforms. In most cases, they've only really had the machines for under 30 days. So we're right at the front edge of this. I think the strategy we executed is working really well. It's been a very broad change to how we're marketing our solutions into the market. It's not about selling just commodity data protection for around encryption or data protection, it's about offering a complete suite of Trusted Computing in the market. We have a unique offer, and we really have a very differentiated offer in the marketplace.
And all of it centers around a core concept, which is the identity of the device is really critical. Government's been an important sector for us, and let me just make a comment on government. Momentum is good right now. We are certainly seeing lots of moving pieces that are well-educated in this process that are moving, hopefully, towards some form of a decision. And it's very, very hard to gauge, as it's always been very hard to gauge with the government, how that actually consummates. But I would say we were watching right now the crescendo towards a potential decision. Hopefully, we have enough moving pieces and enough momentum to get it there. We'll see. Certainly, all the other bits and things, they're going along around government. Some help, some don't, ranging from major breaches that certainly helped and push things along to sequestration, which results in nobody knows who has any budget. All of those things are really interesting calculus into this. But I would say, right now, the best way to describe it is there is truly solid momentum within the U.S. government to drive towards some greater guidance decisions and potentially acquisition in scale around the Trusted Computing side. It is the #1 thing they could do in cyber security. There's nothing else that would provide the same level of benefit on a cost-to-benefit basis that Trusted Computing could provide. There's certainly plenty of budget to accomplish this, and only known devices connected to the network is what solve the cyber theft problems in cable, solved the cyber theft problems in mobility around phones. And both of those, 20 years ago, and I think it's about time that the government accomplish the same purpose. So we continue to work on it everyday. We're -- we try and be very steadfast, not get frustrated, and really push where it's appropriate. And I think we're making progress. We'll see. And it's all about pushing a standard forward, and if the standard is adopted. Wave has a strong enough presence in how we've executed it so far that we'll get a significant portion of whatever business becomes available.
That's mostly within the Defense Department arena. We also see interest now within the federal space. Those are typically smaller projects, but there are a number of them that are coming to ground. We just closed a small one the other day. And we think we can continue to mature those into others. We offer a great solution within the federal space that can help. And certainly, there are opportunities in state and local, but federal and DoD tend to get pressed by the same requirements in the marketplace.
So in wrapping up a little bit, let me talk a little bit about scrambls. We're very pleased to have won a couple of awards recently, Smart Card Magazine's Best Content Protection in Europe. We beat out a number of very significant players. We really have a fantastic solution in the marketplace with scrambls. Same with, we won Computer Weekly's Cloud Innovation Category Award, also in Europe, and I think provide, again, a very innovative solution to the marketplace. We have a number of pilots that are underway. And I thought it would be worthwhile just to remind everybody how we make money in this. We have a very strong subscription-based business model, so the normal scrambls infrastructure is free. Any user can go sign up to it tomorrow, and if you're going to send a PowerPoint to a friend on Dropbox, you should use it. It's easy to use, it's easy to manage and it really makes sure that the information you're putting on the cloud is information you continue to control. Where we see the prime opportunities, healthcare is a great example, where your doctor might want to send you your blood results. And now, they can take that PDF or word file or Excel spreadsheet, encrypt it and send it to you. And the hospital would pay us for the purposes of managing and auditing that transaction. The consumer's use of that application is free. And so it's a very effective model. We have a number of pilots that are underway, and it really is the technology that can stand by itself. But I think it's greatest value is when it's built into other people's services, and we have a number of companies that are either already building it in or exploring building scrambls into their product to assure that the content that people put into their cloud service can be made private. And so the person running the cloud service can't read everything. And so scrambls provides an independent, auditable key server that assures that the content that's put somewhere else, is properly protected and can't easily be opened by any one player. It requires cooperation of more than one company to open it.
We also just launched this morning a preview of a new service called Knowd. Anyone with a PC can go play with it. There's also beginnings of support for Android, but it's primarily designed right now for the PC platform. And what this does is it automatically will provision the Trusted Platform Module if it's in your machine. What that makes possible is that we combined a machine's identity or a device ID to any cloud service. We support a number of the open cloud protocols. And so our hope is that your service providers, your bank, your e-commerce provider, your shopping site, et cetera, will offer you the opportunity to register your device. And so in the future, perhaps, you can only move money out of your account if it's from one of your devices. You might be able to check your balance anywhere in the world, but if you want to move all the money out of your bank account, you can't just steal the person's password, you've got to steal their PC. And I think the beauty of this is that finally, your schnauzer at home, your alarm system, the doorman, the guy who sits in the little box at the end of the driveway, the fact that you live in North Dakota or wherever, all comes in and contributes to your complete cyber security investment because someone's going to have to come to your house and steal your PC to gain access to your account. And I think this really can substantially change the quality of the cyber connection in the marketplace. We developed a service to sit on top of and be compatible with the existing approximately 1 billion PCs with TPMs that are out there. So there's certainly a large enough installed base for a pilot, that's meant to be a little bit funny, and we support your Windows 8 tablet. And the technology is designed to support your mobile phone and its secure elements, really, any device and the secure elements that are available. So Trusted Computing is certainly the center of gravity for it, but we intend to support whatever security device is in the box. This service will also articulate the capabilities of your device to the cloud service as well. And so it becomes a very important piece of the puzzle as to how do we move towards a cloud-based model of computing, so only the corporate machines gain access to your salesforce.com. You're going to have to steal a corporate device in order to gain access. And it puts a new control layer of managing the device and managing the user's relationship with managing the service. So we'll see how it goes. We have an existing customer which is Criterion. They are using the Knowd service as part of their NSTIC project, which is targeted at the major financial services providers. And so our hope that this is a service that will be then offered and leveraged by companies that have today, tens of million of existing users. So we expect the installed base of users using Knowd to grow pretty rapidly as the service actually gets launched in the market. We launched the service today. They're out at the NSTIC conference today, supporting it. And I think that this is another capability. Anyone who's interested can go to id.wave.com, and you can go see where your trust score is in your computer. And there are some simple actions you can do to improve it. And we'll continue to make suggestions on things you can do to improve your trust score over time. The purpose of its launch today is to help us offer this to partners who would integrate it into their services. At the end, a trust score has no value unless you can use it as a specific service. It is already integrated into our scrambls service. So anybody with a scrambls account does have the potential to bind their machine ID to their scrambls account. So there are some very interesting ways you can use those technologies in combination.
And let me just wrap up by saying that Wave is also actively working on a number of strategic relationships in the marketplace around technology and partnerships. We continue to work to advance our technical leadership and our unique market offerings in the space. We have a number of very interesting partners. We have sufficient experience and capability in the market that we're able to ask people to help support those projects. And so we continue to work on both the innovation side and the advancement of the marketplace and provide the industry leadership that's necessary to get Trusted Computing launched. We have certainly done a tremendous amount over time to get Trusted Computing to where it is today. And while the revenue still has some work to come up to really drive this business forward, we are in a position where Microsoft and Intel and HP and Dell and Lenovo and Fujitsu and Acer and Asus and many others are -- and Samsung, are supporting a common industry infrastructure to enable a more secure computing model going forward. We have the leading market installations in both size and scale. We have the leading technical solution in the marketplace, and we're at the forefront of a really tremendous emerging market. We have the tools, the talent, the people to get there. I won't say it's been easy. I know people are frustrated with the pace that the results have been. And I would just say that we have taken very substantial steps, both in managing our expenses, keeping our heads down and focused on the goal, trying to execute the right things. The mission of this company is to increase our shareholder value, and deliver a company that really can be at the forefront of what we believe to be one of the largest emerging markets in computing around the hardware security and capabilities that are built into the device. At the end of the day, we're moving to a network that is a network of devices. And it will be interesting to watch it develop, and Wave is very much at the forefront of making that happen. So with that, I'll stop with my prepared comments. I'm sure there are quite a few questions. I'll work to answer as many of them as we can. And thank you, again, for your time.
[Operator Instructions] And the first question comes from the line of private investor, John Cangolosi[ph].
I just wanted to ask you this here, seeing that we have a lagging stock price, are the Wave shareholders -- investments, are they -- are the investments in jeopardy?
Steven K. Sprague
Are the investments in jeopardy? I would say no. But I don't -- the question is, how you define the word jeopardy. But Wave, today, has been in a very capable position in the marketplace to execute. We -- I just talked about a number of things, but you have an incredible list of customers that you're actively pursuing and actively working on that could easily drive the company to cash flow positive on a quarter by quarter basis. We're not without interest in our products. We're not suffering from having to change a product line. We've completed our major investments in technology transformation, driven by the new operating system launch, which is really an augmentation of what we did before, although, we've rebuilt many new pieces to support things like UEFI BIOS, which probably isn't important to most people except that's how all your new computers are going to boot. And we did full proper native support, so when you get a tablet, you can type into the keyboard on the tablet and move your finger around as a mouse because you don't have a regular mouse anymore. Things like that, that are very important technical components to bring to the party. If you want to play in this market, you have to make those investments. So -- certainly, there's no question, momentum has not been strongly in our favor over the course of the last, really, year or so. And I would say that there's a really interesting situation that's setting up around the whole Microsoft versus everybody else. And I'm -- I like to look at it this way. On one side, everybody goes, "Oh my God, PC shipments are down to only 87 million new devices in Q1." I build technology that could touch every single one of those. By the way, I'm one of the only companies that's building technology in the Trusted Computing space that can touch every one of those. And the question is, whether or not you're really comfortable with passwords going forward, or you'd like them to go away because 87 million units, if you'll look at only -- so then the other day, what did somebody say, "Oh, T-Mobile shipped 0.5 million iPhones." I'll take the 87 million versus the 0.5 million iPhones. Now clearly, iPhone sales are more than that, but it's just interesting that T-Mobile's total numbers were 0.5 million. So there's a huge volume market, and perhaps, the concept that we're all going to only use tablets and nobody's having keyboards anymore, I would challenge you to look at your everyday use of computing. And so, I think we're in an interesting position. I think we're in a market that's underserved. I think we build an elegant solution. We are adding customers. And I would say the one thing that I've changed recently is we're really 100% focused on the major players in the market. It's quite clear that we need a few more substantial lead cows to demonstrate to the market the role that Trusted Computing can offer. Every one of the customers who's deployed Wave solutions has lower operational costs, has happier end users, has a more secure infrastructure, but we need to them to talk about it more. We need them to advocate more for the benefit of those solutions in the market place. And that's still been a challenge because, whether we like it or not, this is security related.
Right. Well, the $3.2 million replacement that was done in April, last month, was that really necessary for you to do that?
Steven K. Sprague
Yes. There's no question. We run without a lot of cash reserves, so the company, operationally, we have access to capital, and we are giving every opportunity for the shares to benefit from the news we put into the marketplace and for the time for that news to develop in the marketplace. And we'll see how the world reacts to it. I think that -- there is no question in my mind that we sit in one of the strongest positions the company has ever been in from a product and capabilities and customer demand perspective in the history of the company. The launch in November of Windows 8, which is educating the customer base on the needs and requirements of Trusted Computing, has been incredible for us. We see it every single day. I no longer run into customers who go, "So what's a TPM? How does it work? Why do I need one?" The best way to think about this is, if you're a company that is going to go deploy Windows 8 in 2 years, then you've already decided to buy into Trusted Computing because your Windows 8 security model leverages off of the Trusted Platform Module. And so, you should have your full infrastructure for Trusted Platform Module management in place, up and running and operational before you buy your bulk of Windows 8 machines. And so today, that means you should have gotten started now because it will take you a couple of years to get it fully deployed on everything, fully operational in part of your internal policies and procedures. And so, that's beginning to wake up the marketplace. That means there are 500 million endpoints that need to upgrade in the next 3 to 5 years, and we average, what, $40 to $50 per seat. So that's an okay total available market to be pursuing.
The next question comes from the line of private investor, Jason Miller[ph].
My question to you is, we talked about bringing down expenses in marketing and getting the word out there. With everything going on, with what we hear about China and the hacking and this and that, just listening to CNBC alone, 4 or 5 times a day, they're interviewing people about this how to protect your data and your systems. How come we never see or hear you, Brian or someone on the team being questioned? Why is it always guys from other companies?
Steven K. Sprague
So we reach out -- we certainly reach out. We are a smaller voice in this space. I think that the reality at the end of the day is, and I don't think this should surprise anybody, that companies like McAfee and Symantec and others or pick some of the other really big brands that are out there are certainly perceived to be the major leaders in the computing marketplace. They just don't have a Trusted Computing offering. Part of their problem is that Trusted Computing, as a standard, doesn't have as strong of an advocacy group as sort of individual corporations do by themselves. On the other hand, we have something that's much more powerful, which is, it ships in every box. And so, it's the evolution of the story. I would argue that this falls into the category of where if every shareholder wanted to help, let's make this the conversation around how these technologies provide the solution and communicate that over the existing social media channels in -- to CNBC and others, and it will have a huge effect. This is a game of everybody in the boat rowing in the same direction. I know this has been hard and challenging. I do this every single day of my life. And I appreciate the frustration that is out there. We have a hold of one of the greatest opportunities, truly, one of the greatest opportunities in the market. Yes, revenues have not exceeded our expectations yet. That's an understatement. On the other hand, we have demonstrated our capacity to close large transactions, to deliver the major players in the industry, to deliver the right innovation and technology, and we're not missing out on the transactions. I would love to be able to say that we are massively incompetent and that 95% of the market share is being taken by XYZ Corporation on Trusted Computing and we're only getting 5% even though were supposed to have this great innovative technology. It's the other way around. We have all the leading deployments of any scale of Trusted Computing. You could argue we have probably more than 50% market share, excellent. So it's the market that's not yet picked up the picture in enough scale. The vast majority of what we do is education. It's just that it's taking too long. If we were brand-new and telling the story for the first time, we'd have a very different picture, and I appreciate that. But at the end of the day, the question is, what should we execute from a different perspective in the marketplace? And that's what drives me every day. We've changed things. We've changed to a mobility picture, we've changed in other places. But yes, this should be a conversation on CNBC. There are industry standards in the U.S. government. We would not embarrass ourselves on CNBC at all. And you've seen me on video a couple of times before. We're perfectly capable of holding our own. We're perfectly capable of resisting, being thrown under the bus. Help push it. I don't have $1 million PR budget to get myself on CNBC. We should use the tools and talent that we have. And while you're watching CNBC, send them a tweet saying, "This guy is an idiot. We should have the guys from Wave on." Whatever. It's -- there's a tremendous opportunity to leverage the channels of communication that are out there, and maybe what we should do is have the conversation about our dissatisfaction of what we're doing and scramble that so that only the people that are really interested will be able to read it. We need to promote the context of what we do every day, and it takes every hand and feet. I do it to the extent that I have time. I know others in Wave do it as well. And all of us can support it in the same manner.
The next question comes from the line of Ronald Meier with REM Financial.
I read with interest the February 12 darkreading.com article on Wave regarding our security solutions for Windows 8 tablets, and it dovetails with a lot what you've been saying today. And the tagline in that article was Wave Systems Corporation, the Trusted Computing company, and there's a quote from Richard Stiennon in that article that "Wave has introduced the killer app for these devices, like Windows 8. One that eliminates the need for passwords, features, encryption and delivers the assurance that only authorized tablets are granted access to corporate resource no matter where they connect." And it appears that Wave is going towards features of Wave's software rather than the old emphasizing of the technology, as evidenced by the no more passwords and data is always secure and audited like you've stated today. My question is, will this marketing strategy be the primary message that Wave will promote in the coming months? And how effective is it in regard to increasing referrals from Microsoft or Windows 7 and 8 products? And finally, how much percentage-wise is second quarter revenue ahead of first quarter revenue?
Steven K. Sprague
Okay. So let me answer the 2 questions. So on a marketing basis, I think that our view of this right now is, we've got to get ourselves out of what I would consider the techno-mumbo-jumbo of the industry because it confuses people. There are 400 companies that offer authentication solutions for Windows 8. However, they're almost all proprietary, they lock you into a specific technology, they're not interoperable across platforms. There's a whole bunch of things that are negative, and by the way, they sell way more stuff than we do. So they've been highly effective and they've been in the market for a long time. The interesting aspect is, if you walk into a company and you go, "We would like to upgrade your VPN security," they go, "Oh my God, I'm not even interested in talking to you because my top 5 priorities are mobile, mobile, mobile, mobile and mobile. And do you guys have anything that works in the mobile space?" And so our conversation today is around, how do I bring you a consumer experience platform with the efficiency and security of true enterprise grade capabilities? And I think the reference model in this market space should be Blackberry security. Fantastic. You got a device that has a PIN number, and it gets your stupid e-mail in your pocket. Yet, remember back to the days, when you didn't get your e-mail in your pocket. And that device was truly transformational of the industry. And they've certainly had their issues up and down over the years; I'm not talking about them today. We're talking about the introduction of it years ago. And the cool thing about was that the user didn't know the credentials to the e-mail. And so we're duplicating that model now in the PC. iPhone, you know the credentials to your e-mail for your corporate mail and therefore, you can type them into your iPhone, your BMW, the kid's TV set, whatever, and propagate access to your e-mail all over the place. What we're providing is something where we replace the concept of a password in the user's head with the registration of a device. By the way, you're all familiar with this. You go to Best Buy, you buy a phone and they have to register it with the AT&T network before your phone number works. Registration is the thing that is what makes a mobile device a mobile device. And I think one of the key stories that we're telling today is that you can think of the TPM enabling the billion PC devices to join the mobile network as 3-pound smartphones, that it's a device identity-based network, and it's not dependent on which wire you plugged into. And you know this experience to all of us. You have phones that work on Wi-Fi and then you walk outside and the same phone still working on 4G. It switched on networks, and it didn't give up your session. Where -- with the PC today, you can unplug the cord in the back of the cable and go from plugged into Wi-Fi and it will hang you up. So an identity-based network based on the device's identity is really what mobile is. And so, we provide a tremendous experience to transition that, and I think we're trying to change the language of that to the extent that we can because it's not about being on a Gartner quadrant in this corner on authentication. Authentication is only a very small piece of the puzzle. Yes, I need good device authentication, but I also need to know what capabilities the device has. Is this a device that has a self-encrypting drive? In which case, let me send them your health care data. If you're connected with your device without a self-encrypting drive, then please don't send me the file with everybody's personal identifiable information on it. So there are some core capabilities that I think the market needs, and I think these are very synergistic with Microsoft's messaging, with the PC OEMs' messaging. And I can make an argument that -- let me say it this way, if I go over to your house, and you're the first person who bought a DIRECTV box that gets HD, what do I want when I get home when I get to my house and turn on the TV set in old standard definition watching a football game? Dude, I want a HD box, and so I've enrolled the user in replacing all the boxes because, hey, if you've got an HD box, I need an HD box, and then they come to my house and then I got HD and you don't have HD and pretty soon, the whole world's got HD. And they're busily now trying to sell us 3D television instead, right? So the question is, how do we offer a capability in the platform that can be easily articulated to a service to say, this is a box that has a special capability in the platform, and therefore, I get a better quality of service. I believe that will actually help the consumerization of IT to push us in a direction where I say, "No, no, no. I want the box that will allow me to work at home, not the box where I can only work at work." And so, I think this helps the whole ecosystem. It helps innovation. It helps a whole range of different capabilities in the marketplace. So we play an important role in that, and I think that we're very synergistic with not only the OEMs' message, but Microsoft's message, and we work to align ourselves to the best of our capabilities in that market. The second half of your question was, where are we in first quarter versus second quarter? It's always a little hard to tell -- on this specific data, I'd have to go look exactly. I would tell you that I think we're in a much stronger situation in second quarter than we were in first in the number of deals that are actively in line to close that are significant dollar value. We had a couple in first quarter. We have a half a dozen in second quarter. So they still have to come to ground. I would say in actual booked revenue, we're probably not massively different. Things tend to close towards the middle to the end of the quarter, and we're in the midst of that. I would say we're having a stronger quarter. We have a dramatically stronger pipeline than we've had before. No question about it. Part of it is also that I have some newer accounts that have just shown up on the radar screen, but they're very actively moving towards close, and so, those are very beneficial as well. There is enough business that could drive us all the way to a breakeven quarter. Will we get there in its entirety? I don't know. We need a little bit of luck to close these deals. I would say, we also need a little bit of momentum on our side. There certainly are transactions we're working on that exceed the total expenses of the quarter. They're hard to predict that they're probably going to be in before the 30th. So but overall, the pipeline is really good. We've probably added somewhere in the $20 million of annual pipeline in the course of just the last couple of months -- since the last call, probably in that scale. And I don't think that, that's an unrealistic estimate. The market is getting easier. There's no question that budgets are feeling a little bit more robust in the market, that people are willing to spend the money. People are telling us, they have money to spend and they're buying things. So it's -- let's say, the overall economy condition is getting better as well. One of these times, I'm going to surprise you to the upside.
[Operator Instructions] And the next question comes from the line of private investor, Dave Davish[ph].
Steven, I have a question about the -- there's been a lot of news lately about Intel and ARM and how ARM has been basically eating Intel's lunch with this new mobile product with TrustZone, and we've already had a relationship with ARM and TrustZone. So my question is really a 2 part question. Is our IP a part of the TrustZone? And the second part of the question is, where do you see Intel falling into the market in this marketplace, say, over the next 12 months?
Steven K. Sprague
Sure. So no, our IP is not part of TrustZone. It's their own intellectual property. Wave's had interesting capabilities in programmable security in the past, and we have intellectual property in that space, but that's not really specifically the game we're trying to play here. It's -- this is a marketplace that I think is in its development stages. So here is the picture that's important to understand. So inside an ARM -- a modern ARM design because they're a licensing company that then licenses designs to companies like Qualcomm and Samsung and others, is the TrustZone capability. And it offers what's called a Trusted Execution Environment. What that means is, is that somehow in the silicon, it becomes possible to run a program where a debugger or another program can't watch the operation, and therefore, can't change the operations. So you have a much higher assurance of execution of the code that's in that little execution environment, and so they called it Trusted Execution Environment because it's executing code in a more trustworthy manner. The way ARM TrustZone works is incredibly similar to the way Intel TXT works. Intel Trusted Execution Technology shipped on the last, I don't know, 400 million, 500 million Intel platforms. It's probably in every one of your PC boxes. And Intel TXT is part of the work that was done to Intel processor architecture back as far as the earliest formations of the Trusted Computing Group. The purpose of TPM is to assure that code loaded into a TXT environment is actually what you expect it to be. And so, you can have duplicate functionality on a Intel TXT platform leveraging Trusted Platform Modules as you could have on an ARM TrustZone platform. So interesting debate as to who's shipping more volume today. I would actually argue that the Intel guys crushing it compared to ARM on actual shipments and volume of TrustZone in smartphones. So be a little careful when you think of ARM processor architecture as it relates to programmable controllers and feature phones and all that kind of stuff in volume. The actual smartphone volume is not yet exceeding the PC volume. And let's just take tablets for a second and put them in their own category. So Intel would tell you that they have equivalent functionality and capability and et cetera. I think it will be interesting to see how it goes forward. It really then all becomes who writes applications for and who leverages it. We've done some work in Intel TXT. We've done some work in ARM TrustZone. I would tell you that our objective is to treat them both as a trusted execution capability. I think there's some really fantastic companies out there that are leveraging the Bolt technologies, and our job is attestation services. So now it's connected back to a product that Wave sells. So Wave's BIOS integrity is how we start from the very lowest levels of the device all the way up into the operating system stack or the trusted execution environment and assure that the code running in the trusted execution environment is what you expect. Our job is to report to the services that this is a known device that has that known capability. Right now, we're one of the only companies in the world that supports the attestation services on Windows 7 and Windows 8. And what we're trying to do is extend that to the entire smartphone ecosystem. I will tell you I'm a little constrained on resources today to be able to do as much as I would like in that because we clearly need to show more revenue before we're allowed to invest more. It's a market for the taking. It is -- we have a leading solution in the marketplace. We have the leading pilots that are deployed. We have the leading market implementations that are deployed, and I use it as part of all my services, including nodes. So nodes, at launch, already does platform integrity validation on the machine that connects. So if you actually had a trust execution environment, nodes could tell you that it was there. And so, that becomes an incredible capability in the marketplace. Look, other than Wave shareholders and a few people who work for us and a few of our customers out there, this is a really early-on space. However, this is core to how this becomes one of the largest segments ever in computing because this is how I turn every endpoint device into a set-top box, and so this is how you do subscriber management to all cloud computing for everything from content control to information distribution, to information assurance, to integrity, to how do I know that the video camera in the corner actually produces the video that we thought it was. This is the Internet of everything. So it's interesting. It's really cool. We make a little bit of money on it. We try not to spend too much money on it. And it provides us with a -- I think a tremendous forward view capability in the marketplace. And from our perspective, Intel or ARM, they can fight it out. We'll support whoever's left standing in the marketplace. And I think that it's not a question of who's standing; I think it's just really fun battle to watch.
And the next question comes from the line of private investor, Bill McChristian[ph].
I've been a shareholder with you for a little over a dozen years, and I'm very happy with all I hear about the technology and its potential and its capabilities. I am patient, but I'm sure many of us would like to see the day come when the stock surpasses its previous peak back in the late '90s, if not beyond.
Steven K. Sprague
But 2 questions, if I may. The first, are you able to provide any financial guidance full year for this year or even on a quarterly basis that we might get a number's feel for? And what would be the -- as you know it in the pipeline, what might be possible and what would you consider probable? And the other question I had is really more a business development or marketing question. What is the critical task that you see that needs to be accomplished in order to achieve a breakthrough in business development on the upside?
Steven K. Sprague
Excellent questions. So I would just -- I'll maybe start with one comment. I actually think the really interesting thing about Wave as it sits today is the business plan supports exceeding its previous high. And I think that's an important aspect. Sitting here today with all the challenges that we have, there's absolutely the potential for that within this organization, with the business model and products that the company carries today. And you can build the spread sheet that shows it. Now the question is, can you deliver that spreadsheet that shows it, but the market's there and the scale is there. So on an operational basis for this year, we are running the company to achieve cash flow breakeven during the course of this year, and that's the operating plan we function with every single day. And so, if you were sitting in my board meeting, looking at numbers and forecast for this year in the numbers we've put together, the pipeline, our assumptions against that pipeline and taking a very conservative approach from a revenue perspective, we believe we can get to a cash flow neutral year. And so, that's what we work towards every day. Obviously, that's not the goal. The goal is to exceed that substantially, and I think that we sit today with -- what's the potential upside? The potential upside is very significant. I think that it's -- we're working somewhere in the range of $50 million worth of enterprise, not including government, and there's probably another $25 million worth of government business that is possible in the next 12 months. And we keep adding to that pipeline. And we're not losing transactions off. They're not going somewhere else. They're getting educated in us. So clearly, those kind of numbers would help propel the stock and the company and the idea solidly in the marketplace. The interesting question is, what is the business development task that would actually cause this to break out in the marketplace from a Trusted Computing perspective and education perspective? We're -- I would say, there's not any one, and I don't think the company should ever only invest in one, it would be too much if all of your eggs are in one basket. There is certainly a lot of energy that's put into the government-led path, and we've seen progress there; we just haven't seen a breakout there yet. And where the government leads well is that they can't actually make their mind up about anything. They have to write guidance and regulations and support and advice and advisories and technical authorities and all sorts of things that help them have the whole ecosystem making a decision to adopt. The beauty is that those special publications like this state 147 and this state 155 are not only just for the federal government, but they get rapidly adopted by the largest enterprise customers worldwide. And so, I think there is a definitely worthwhile energy investing in continuing to press the sort of guidance, best practices, regulatory requirement, et cetera, model that's led by government, both in the U.S. and in Europe. And in Europe, we've done a tremendous amount of work with the U.K. Government. I actually have some interesting deployments there that are underway. I think the second one is what I would consider the consumer breakout. And there, we have not played very much in the past because typically, Trusted Platform Modules have only been on business class systems. With the shipping of 50 million computers in Q1 in consumer market that have Windows 8 with TPMs in them, we think there's the beginnings of a space to support a consumer effort in reducing our reliance on passwords. And so, therefore, the efforts, like we launched today with node as a model of the marketplace, clearly, if all of a sudden -- pick one of the players, it could be somebody like PayPal or Amazon or others, decided to make it possible -- or you could even pick gaming would be a fantastic arena as well, decided to supplement their passwords so that like the breach we had in the last few months with LivingSocial, where they lost 50 million people's accounts, you also have to steal their PCs. That would be a really valuable service we could provide, and I think that getting consumer adoption in scale would obviously wake people up. And I think the final one, and I don't think that any of these is weighted more than the other is, can we have a parade of large accounts that actually are willing to talk about their deployment of Trusted Computing and the efficiencies that its brought to their enterprise? Because there's nothing that gets another enterprise more excited about deploying something than seeing the guy next door do it already. It is a huge herd mentality industry, and Trusted Computing could very easily become the new sexy thing. I think that -- I think there's a -- the current challenge with things like Apple and the tarnish that's a little bit on that story right now and the concern that I need new innovation in iPad and the launch of Windows mobile and things like that, all of that comes together to say, "That could actually have a breakout event." I mean, they're only at, what, 2% market share of Windows tablets. It will become 50%. The entire enterprise is going to deploy Windows tablets. It's just a better plan. Even if you're a complete Apple advocate, it's still just a better plan. It's better technology, it's better integration. It's faster, it's easier to use, it supports all your legacy applications, et cetera, et cetera, et cetera. There are a hundred reasons why it's a better plan. And I think it will become -- the products they're building are pretty sexy and cool, too. So as my daughter likes to say, "You cannot take math homework notes without a stylus." And I think it's a really good point. And you cannot do math homework notes on your iPad. But you can do them on your Dell Latitude 10. And you can do them on your Fujitsu. So I think we have to continue to seek out that breakout event that launches the market. When the market launches, then I think the thing that every investor should continue to look for is, so who's the #2 provider? Because that's really the question. That's the place I keep looking for. So who takes this market from us? And right now, we're pretty strongly out in front. Certainly, there's some competitors in self-encrypting drives and whatever to the legacy data encryption stuff, but not in the Trusted Computing space at all. It's kind of Microsoft's implementation, which by the way, only runs on Windows 8, with little pieces that run on Windows 7. And then Wave builds a complete solution for both Windows 8 and Windows 7, and we augment the existing infrastructure on Microsoft. And so we're doing the same thing everybody in the planet has been doing on top of Microsoft operating systems for years. It's why you have a Cisco VPN or a Juniper VPN or why you buy Adobe to show files. All these are systems where they've offered value above and beyond and augmenting the existing Windows ecosystem, and people have been willing to pay for it. So we think there's-- that's actually a really -- being a Microsoft supporting partner has been a good business for a long time, and we think it still is. So we're prepared for that. We have a worldwide presence. We have footprint on the ground. We have the right OEM and distribution partners. We continue to augment our distribution partners. The deal we did today makes it possible for somebody who wakes up tomorrow and everybody wants a self-encrypting drive. I can supply all Fujitsu machines that are being shipped. They have the capacity to sell. They have the capacity to support it. I have the software that's in the box. We can actually both together really build real revenue off of that in scale. And we have the same thing at Dell, we have the same thing at HP, we have the same thing in a variety of other providers. So we have a very strong distribution channel in the marketplace today to support that growth. It's creating that breakout, it is what we focus on every day.
Our next question comes from the line of private investor, Kevin Schneider[ph].
I have a question that I'm hearing a lot from shareholders. Do you think we will be able to avoid a reverse split?
Steven K. Sprague
I don't know. It's coming from the share price, right? We have to achieve minimum bid compliance of $1 for 10 consecutive trading days, and we have to do that prior to -- I think, technically, it's -- Gerry told me the exact day, but it's...
Gerard T. Feeney
Steven K. Sprague
July 8. So work off backwards from that day. What you want the company to do is make sure that if you're unable to maintain that -- so we've got to do what we can do. We can do it from news flow. We can do from revenue projections. We can do it from clearly articulating what our goals and missions are, but at the end of the day, it entirely depends on if there are more people who want to buy stock than sell stock, the stock will go up. And what you want the company to do is to make sure that if in a case, you can't make -- maintain compliance by minimum bid, that you are properly in shape to accomplish maintenance of your NASDAQ listing requirements. And so, we have certainly done that with our proxy statement, with our work towards the Annual Shareholder Meeting, the timing of that. We have all the needs and requirements, in order do that. It is in our interest to maintain the stock above $1. It's entirely dependent on whether or not we're able to create enough demand and excitement about what we're doing that there are people who want to buy versus sell.
Sir, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation and closing remarks.
Steven K. Sprague
Well, I'd just like to thank everybody for their interest and their patience. I know this has been a hard time. The message has clearly been delivered to me. We are very focused on what we're doing. I'd say, the team is well-motivated. You have a great group of people that are working for you, and we're working, I think, quite well together, and we're trying to be smart in how we're executing in the marketplace.
Certainly, things happen, we can and can't predict. But I would say that actually, Wave is in a very interesting and very strong position today. We certainly have some challenges that we have yet to overcome, but now is the time where the company has tremendous opportunity in front of us.
So it's not a time to rebuild. We've actually done that, and we're really benefiting from our change in marketing direction, our change in focus. Most of that work started now almost a year ago, and I think we're seeing the results of it. I think we predicted the entrance with Microsoft into the marketplace correctly, and we have a more than adequate and capable solution to support what the customer is asking for in the marketplace.
And so we look to continue to expand our distribution partnerships, focus on our major enterprise accounts and bring them to ground and clearly, just demonstrate that Wave is a great partner to work with, whether you're an enterprise customer or you're a technology partner in the marketplace. We look forward to continue leading and providing strong technical innovation in this marketplace.
Thanks for your time. Thanks for your energy. And I hope everybody has a great day. And I look forward to talking to you in August.
Actually, anybody, I look forward talking to you in June 20 at the Shareholder Meeting, if you're there. We look forward to seeing everybody there. Thank you.
Ladies and gentlemen, That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.