Wave Systems' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.10.13 | About: Wave Systems (WAVX)

Wave Systems Corp. (NASDAQ:WAVX)

Q3 2013 Earnings Conference Call

November 7, 2013 16:30 ET

Executives

Gerry Feeney - Chief Financial Officer

Bill Solms - Acting Chief Executive Officer

Analysts

Kevin Gusinow - First Place Financial

Ron Meyer - REM Financial

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Wave Systems’ Third Quarter Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, November 7, 2013.

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

Gerry Feeney - Chief Financial Officer

Thank you operator, 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 the 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 after results to differ materially from those contained in any forward-looking statements that we may make.

At 4’0 clock this afternoon, we released our financial results for the third 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 third quarter ended September 30, 2013, Wave’s net revenues were $6,251,000 which was a $7,19,000 decrease compared to the third quarter of 2012 net revenues of $6,970,000 and a $491,000 decrease compared to this year’s second quarter net revenues of $6,742,000. Compared to a year ago, the third quarter of 2013 decrease in revenue was principally due to lower OEM bundling revenue resulting from a lower volume of shipped units.

Total billings for the third quarter of 2013 improved to $7,69,000 compared to $6,85,000 in the third quarter of 2012 and $5,940,000 in the second quarter of 2013. Compared to a year ago the $1 million increase in the third quarter of 2013 billings was principally due to a $500,000 increase from our Safend products and $360,000 increase from services and an $840,000 increase in license and maintenance billings. This is offset by a $700,000 decrease in OEM bundling resulting from a lower volume of shipped units.

Reflecting ongoing cost containment programs including the initiatives completed in mid May of 2013, Wave’s combined SG&A and R&D expenses declined 30% to $9.1 million in the third quarter of 2013 as compared to $13 million in the year ago third quarter. These expenses also declined 11% as compared to $10.2 million in the second quarter of 2013. The GAAP reported net loss for the third quarter was $2.9 million or $0.09 per share compared to last year’s third quarter net loss of $6.1 million or $0.05 per share and this year’s second quarter net loss of $3.5 million or $0.12 per share. The weighted average number of basic shares outstanding for the third quarters of 2013 and 2012 along with the second quarter of 2013 were approximately 31.1 million 24.5 million shares and 28.3 million shares respectively.

The Q3 non-GAAP expenses which are net of non-cash items such as impairment expense, depreciation, amortization and stock-based compensation expense decreased from a $11.2 million for last year’s third quarter to a new multi-year quarterly low of $8.4 million for this quarter. This brings these expenses within $1.4 million of this quarter’s $7.1 million in billings. Additionally, for the first nine months of 2013, these non-GAAP expenses which are net of the non-cash items decreased by over $8.2 million to $28,696,000 compared to $36,958,000 for the first nine months of 2012.

At September 30, 2013, Wave’s total current assets were $6.9 million which included $1.8 million of cash. Wave’s total current liabilities were $13.9 million including the current portion of deferred revenue which totaled $7.1 million. In the third quarter, Wave’s raised gross proceeds of approximately $2.6 million in an average price of $1.39 per share through its At-The-Market or ATM structure. Also, during the third quarter, in July 2013, Wave raised gross proceeds of $1.5 million in a registered direct placement of its Class A common stock.

That pretty much wraps up this portion of the financials. And with this I’d like to turn it over to Bill Solms, who’ll highlight some of the key developments for the third quarter of 2013.

Bill Solms - Acting Chief Executive Officer

Thank you Gerry, and thank all of you for joining the call today. I’m – just to start off, I want you know that I’m pleased and humble to be given the opportunity to lead Wave. And I’d like to thank the Board for their trust and confidence in me and given me the opportunity to do so. For those of you who don’t know me that well, a little bit about my backgrounds. I’m a West Point graduate in 1985. And have over 20 years on active duty as an officer in the United States Army. And to tell enough, I was not an IT or a signal guy but I was a paratrooper and an Apache helicopter pilot and commander. And then I finished up my active service in the Pentagon as a Strategic Planner.

I transitioned in 2005 to the commercial sector where I want to work for Microsoft for several years and then Oracle, and then after working at one or two smaller companies, I joined Wave. Over that period of time, I led ten different organizations of various sizes. And probably about half of those, I could characterize as either needing significant improvement or you could clearly call them a turn around. And it’s with that – through that lens which I’m looking at the opportunities here at Wave and things that we might need to do to improve our performance and our results.

When I was first approached to join Wave, which was not that many months ago, I took a very hard look at the company because I didn’t know it that well although I had heard of it. And I asked myself three very specific questions before I decided to join the company and that was one, we’re producing good and technologically sound products. Two, are we able to differentiate those products in the marketplace which means we should be able to sell them. And three, is the company continuing to innovate or did we have one great product and we would – I would be kind of a wonder and which takes so long-term prospects would not be as good.

And the answer I got to all three of those questions, after doing some significant due diligence was a resulting yes to all three. And that’s why I chose to join the company. But it does lead the lingering question of if we – if the company is doing those three things well, what could we do to improve the performance and the results particularly in the billings. And so my assessment was well we‘re putting a lot of good products together and our engineering side was doing a good job. We needed to substantially improve our performance and a good disciplines performance in execution of the sales and marketing of those things that we already have would be the key to turning the company around and improving our results.

So, I believe that my sales and management experience that I picked up over the years in my combined military and corporate career position me well to taking on the challenges here at Wave. And the interesting thing is as many of you may already know, I joined the company initially to lead the North American sales division. And I began what I saw was needed in terms of a transformation in North American sales. And my position as CEO now I see that is a continuation of the transformation when I started there. The fundamentals are the same, the issues are the same. My span of responsibility is much greater and my – but it also gives me a greater ability to integrate all the different elements of the company into a single per hand vision as we move forward. One of the things that I could point out to you as we look at what are we going to do different in terms of sales and marketing, is going to be – well get an analysis of who we were selling to and then who I thought we should be selling to. And the products that we have available to is particularly those that are based on enterprise management of TPM, how significantly greater potential what I think we’ve been realizing.

Now, we’ve been doing a pretty good job of selling our data protection sweet line of products. And we’ve been doing a good job in selling our self-encrypting devices. And both of those I think we can step up again a little bit more. But in particular, I think we need to pay particular attention in improving our performance when it comes to the enterprise management of TPM devices. And what use cases does that give us to sell to our targeted customer base. And the two biggest ones I like to emphasize on this call is by integrating the element of device identity management into our customers identity and access management processes. We give them the equivalent of what I like to talk ultra secure network access by layering device identity management on top of their existing user identity management.

We have the ability to harden up their network defenses and in fact we can change the whole paradigm on their defenses against external attack through their networks with a very small investment in a very simple change. The other used case that I really want to emphasize is what we call a virtual smartcard. Virtual smartcards are considered on the cutting-edge of industry best practices and the concept is being advocated by numerous large IT companies out there. And we’re seeing a significantly upward trend of interest in our virtual smartcard capability. Wave Systems Corporation is the – basically the only company worldwide that has an effective enterprise quality, virtual smartcard solution that works both on Windows 7 and Windows 8. We’re alone on a company that offers a solution on Windows 7. And I intend to exploit that capability through our marketing and sales campaigns.

We’re going to be looking at targeting larger corporations. When you think about the use cases that I just described to you, hardening up their network defenses and using a virtual smartcard to simplify their IT processes and drive down their security cost. You start to think which verticals would that not apply to and the answer is it applies to almost all of them. And it’s gratifying to se the interest that we’ve been getting from some of these larger customers. We’re going to accelerate that by targeting them through specific marketing campaigns. And in fact we’ll be out at a Identity and Access Management Conference here in the very near future.

So, as we move towards looking at those larger customers, I think it’s also gratifying to see that what I believe the market has moved in our direction. Recent public events of data breaches of insider threats of hacker intrusions. The commercial public, the governments and general public in general are much more aware of the threats of malicious attacks and are much more significant way and looking to upgrade their defenses to ensure not only attacks, not only defense against attack from malicious outsider but also the security of their own files and data against an intrusion from any sort of outsider.

So, let me just say and moving on that it’s in expressing this new Wave the way we want to rebrand Wave to our customers in that if you haven’t looked at our solutions in the past year. So, you really don’t know Wave and you should take a second look. And I’ve got an extremely positive response from those companies that I’ve gone out to and I pitched it slightly different version of what we think Wave is and what Wave can do for them. I would like to say that in terms of my current actions and objectives within the company, I’m conducting some product reviews, some strategic product reviews over the next few weeks. These are going to cover business processes, it’s going to cover products and projects and it’s also going to cover sales and marketing.

And as we go through that, I’m going to get input from all the key stakeholders on decisions on what the company needs to focus on going forward, which of these things are the core of our business and the strengths that we want to focus on. And which of those things are either outside the core or maybe very interesting but we can’t afford to do them at the present time because we want to focus on our core business. And until I receive that feedback from them, I'm not going to be commenting on specific actions that I’m going to take on specific products. But I do want to let you know that we have a plan already, we have a vision that I’m executing within the company that will cause some restructuring and some refocusing. But as we focus on executing well those products, we already have developed a monetizing that to the maximum extent possible. We’ll then look to reinvest that money into future growth.

I will just let you know that I’ve already begun to reshape the management team. As we move in a different direction with a slightly different focus, it requires sometimes a changing other personal is involved. And this will include additions as well as some departures. Some of those departures have already occurred. I’m very pleased to reporting the addition of Tom Conte as VP of Sales for North America, backfilling my old job. Tom came to us after a successful, very successful career at Dell. And I got to know him when he is in that position and I have great confidence that he will be able to step into North America and help Wave achieve the success and execution that we’re looking for.

The last thing I will say to you is that I – one of the first things I did in the company is I took the time and I found the time is often the most precious commodity for me these days. But I want a rounds to all the different Wave officers around the country and around the world and that includes our officers in Europe and Tel Aviv because I wanted a chance to speak to all of our employees and tell them about the visions that I have for the company, the fact that I chose to come here because I’m absolutely convinced our hidden value in this company and that we are – we are not that far away from being able to actualize that into some significantly increased results. I want to give them confidence in what we’re doing going forward. I wanted to give them some clarity to what each of their roles and responsibilities would be and what I need them to do for their portion of the company’s success.

And then I took a little time to listen to them as well because there is one thing that I have learned over the years is that not every good idea comes from the top and in addition to hearing how things are going, they’re quite frequently you could get some good ideas from those of all levels of the organization. So, I really enjoyed meeting them all. I receive I will tell you uniformly positive feedback and the changes that we were making. And I’d like to thank them all for their kindness in a way they receive me as I went out to each of those organizations. I’m sure you all will have some further questions on how we are doing and what we are doing. And to the extent, possible answer is many of those as I can.

So, at this point I think we’ll turn it over to the Q&A portion. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question comes from the line of (indiscernible) Private Investor. Please go ahead.

Unidentified Analyst

Hi, Bill congratulations. I’ve been a Wave investor for over about 17 years. The initial business model was that we would target on number one or number two companies within certain vertical of tears. And then after we’ve made those initial sales that the follow the subsequent sales would be the sales cycle will be much shorter. So, we got GM number of years ago, we got BASF and followed by BP. But over the last two years we’ve got nothing in regard to those independent vertical segments. So, I was very delighted to hear your comments that was about target those verticals. My questions is actually regarding our current relationships with Microsoft, Dell, Intel and HP. Could you elaborate on those please?

Bill Solms

Well, first of all thanks for being a Wave investor, I appreciate that. I would tell you that our relationship with Microsoft is good, maybe not great. I would like to see some improvement made in that. I think it’s good that we help Microsoft understand that although we are not a Microsoft only shop that we do a lot of great developments around their operating system. And some of the things that we do should help a number of their customers look to migrate towards the security enhancements that they put into Windows 8. So, as far as I’m concerned, we have a good relationship, I was a four year employee at Microsoft, so I have my own contacts there I’m looking to make those relationships even better. So, the – we have a – we’re looking to make it better and it’s up to Microsoft to get to want to join us in that proposal.

As far as Dell is concerned, Dell is going through a lot of changes right now. And so I would hesitate to tell you anything about what they’re up to because I would tell you that our sales, our OEM sales with Dell have gone down based on the fact that they acquired Credant. And but I think what we’re finding is we’re still continue to have sales with them. And with some of the contacts that we have there too includes recent addition of Mr. Conte from Dell I would say we have fairly good contacts. And so I’m looking to approve that if we can as long that’s to the benefit of Wave.

As far as HP and Intel are concerned, we have ongoing contacts with them. I don’t think we have any significant adjustments in the positive or negative sense. I will tell you overall, just in the sense of is Wave being a good partner to those large companies. I am looking to institute some standard business practices here at Wave that might make us an easier partner to deal with. And I’m also looking to see if we can do about increasing the overall quality level of our releases that will certainly make our partners happy, not that there is a problem on the quality now but anytime that we can focus more attention on raising that bar, it’s definitely a good thing for your partners.

Unidentified Analyst

Thank you.

Operator

The next question from the line of Kevin Gusinow with First Place Financial. Please go ahead.

Kevin Gusinow – First Place Financial

Hi, Bill. I had a question regarding Steven’s removal and your promotion. Will his removal have an effect on the fourth quarter numbers, I assume he has a – where you have to pay him a certain amount. And then my next question would be where is that money going to come from, I saw we had $1.8 million in cash at the end of quarter three. I also saw we sold about $1.5 million worth of stock but where do you see – what do you see that having an effect on the company?

Bill Solms

Well, I would tell you that, Steven does have a severance payment in his contract. We’re doing some ongoing negotiations with Steven because he’s still part of the committee, still a Director on the Board of Directors. So, we basically we’re in ongoing discussions with him as to what the terms of that will be and how they’ll play on the futures. I don’t want to discuss any details now because we’re still on a ongoing talks about that. We have taken into account the fact that we could charged against Q4, we do have sufficient funding to deal with it. And that’s probably all I want to say about at this point because it is the subject of ongoing talks with Steven.

Operator

The next question comes from the line of Ron Meyer with REM Financial. Please go ahead.

Ron Meyer - REM Financial

Hi, Bill. I have a couple of items, I’d like you to comment on. I think most shareholders want to give Steven full credit for taking the first critical step of positioning Wave as the technology leader of this Trusted Computing space. But now shareholders want to take that next critical step to making Wave what I’d call a financial success. And with that mind could you tell shareholders how you plan to get Wave to that next step by giving a bit more of a perspective on how you will approach the management of Wave by addressing. What will be your three main goals for the next year and what measurable performance objectives will you set to reach those goals. And finally, could you comment on the Intel announced that it could give its shareholders an assessment on the potential revenue that, that could be generated from that deal.

Bill Solms

Okay. Thanks. I’m writing all these down to make sure I don’t miss any of your questions. So I may have to tell you, you may have to tell me if I got them all.

Ron Meyer - REM Financial

Sure.

Bill Solms

So, the first – well I’d say what – tell me which one you like me to answer first?

Ron Meyer - REM Financial

Go ahead with your three main goals for next year to get us to a financial success.

Bill Solms

Well, I’ll answer that in two different ways. One, is I have three main themes that I’m using across the board that I’m emphasizing and that is clarity, efficiency and accountability, okay. Clarity of what we’re doing by making some internal organizational changes that will simplify our organization chart. When I mentioned before in my talk, I said I’ve taken over a number of organizations before, some of which needed a little bit of improvement or turnaround. And the one common theme that I’ve seen in all of them is there is often some confusion as to who is doing what to whom or exactly which things are officially sanctioned projects or not.

And typically what goes along with that is people in a certain division within the organization are worrying about different things, potentially above their level or in one of their peers divisions. And I find this in every organization I go to, that needs some improvement. And so, one of the first things I’m doing is trying to add clarity, all right. I’m going to let them know those things that are above them that either me personally or my executive team is going to handle and not to worry about those. And I’m going to clarify which things are at the core of our business and which things aren’t. And then, what their pieces in that larger picture.

And then once I clarify what their prices in that large picture, I don’t want them to focus all of their energy and all of their efforts at being excellence on what that pieces for the company. And it may sound like a bunch of clichés but what I find is over and over again that clarity is necessary and then actually helps people understand what’s going on and what their pieces and it raises the performance of all our (indiscernible) organization when we do that, okay. The second thing is efficiency. I’m putting in place series of policies that will give people a sense of targets of what they should be striving for, for instance I’m implementing some travel policies for instance and instead of just saying hey should somebody be – shall I place somebody in for meeting. The question is they’re going to ask themselves could they join virtually first, could they do it by VTC, could they do it by phone, do they need to be there in person.

That being said, we don’t want to be penny wise and pound foolish, I don’t want to not send a key guy to a sales call because I said cut down on travel cost. But because of that we miss an opportunity to make a sale. So, it’s got to be done with some common sense. But I found when there is no limits and when there is no policies that has been well communicated, those kinds of cost can occasionally be bigger than they need to be. The good news is the team here has been doing a great job over the last couple of quarters bringing our cost down and I just want to compliment them for the job they’ve been doing on there. The issue is because there are still efficiencies to be gained, and my assessment is yes. So, we’re going to continue move in that direction.

The last thing is accountability. That’s very important to me. I am not going to go into every one of our divisions and tell people how to get the job done. What I’m going to do is I’m going to clarify what their role is, I’m going to give them some metrics and what their deliverables are. And then I’m going to hold them accountable for whether they are succeeding in that or not. I’ve already made some changes on the executive team based upon my assessment of that already. Hence, I’ll continue to do so. And just see I am holding my self accountable to the board and to the shareholders for the performance of this company over the next coming quarters, hopefully years.

I am going to work hard to make sure that we properly and execute the sales and marketing so that we monetize to the maximum step possible the great products that we spent the last few years developing and investing in. If there is one difference that I would say that I’m hoping to bring to the company before we were company with a great vision but maybe with slight execution in terms of sales and marketing. Now, I have to be a company of vision and amazingly good execution and we’ll know that when the metric of the sales on the billings go up. Does that answer your questions?

Ron Meyer - REM Financial

Till announcement. And could you give us kind of an assessment of the potential revenue that could be generated from that deal?

Bill Solms

Yeah. Well I was very pleased to see that deals, like it shows the – I think it shows the strength of the company in dealing with major OEMs in the marketplace. And the fact that Wave is still a significant player there. I am not going to comment about specifics in terms of the revenue of that particular deal at this time. What it shows is that we are still on the cutting-edge of technology in that area and the major OEMs are recognize that. Does it bowed well for our future revenues, yes. But it wouldn’t be appropriate for me to try to quantify that, at this time.

Operator

(Operator Instructions) The next question comes from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hi, Bill. Over the course of 2013, Steven Sprague had made quite a few comments about government coming on board starting to turn on TPM, he had even mention I think at the shareholder’s meeting about five different proposals that were on the table to the U.S. government to start using Wave’s software. Could you comment on where we are today, is it something that going to happen in the next quarter or two and where is the focus now on getting the government contracts, knowing that we have a certificate noteworthy. I’m sorry a certificate of net worthiness with the government.

Bill Solms

Well, I'm happy to comment about that, for those things that I can, okay. And so, one thing I would tell us is the certificate in net worthiness that was received by the army. Is it good thing to have but it basically it’s what I call – to take into ride it’s not guarantying you that you’re going to get any business, okay. it means they’ve shut you out and that you were cleared to work on their network if anybody chooses to buy you and try to put you on the network.

So, I just want to put that in perspective because not every one always understand what that means and what the implication is. We do have a number of – we do have a number of proposals in the government space right now. My expectation is that we’re going to see an uptake in government sales. And I will tell you that one of the reasons that I hired Tom Conte to replace me for the North American sales team is just the federal sales team falls underneath that role. And Tom – I was certainly feel comfortable calm myself an expert in federal sales and so is Tom. And so as I have less time to devote these specific opportunities on that team Tom is jumping right in without any break to make sure we continue to push those. With that being said I don’t want to comment on any particular on an any specific deals but I will tell you that we have current opportunities in front of the Department of Defense, Department of Homeland Security, we currently have some sales and some high level governmental organizations but I'm not going to go into any detail on that.

I think your question resolves around are we going to see an uptake in government adoption. I think the answer is yes, I can’t speculate on what the timeframe is. But certainly my expectation is that it’s going to happen a lot more quickly than we have seen in the past. We did have one nice little sale in federal before the end of Q3 Sandia National Labs bought a nice sweet of our stuff and Sandia is a lab that does some pretty sensitive work so their security requirements are pretty high. And I think it’s a testament to the quality of our products that they chose to go with us. So, we’re going to look to leverage that out amongst the other federal customers and we do have some secondary larger companies that are reviewing organizations within federal that are looking at our stuff right now but I'm just not going to comment how close those are to closing. I like to be the kind of guy that where I like to be known for what I deliver is oppose to what I promise and so that is why I’m going to not say anything more about that and I hope to please you with delivery in the near future.

Operator

The next question is from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hi, Bill. What were do you proposed that Wave is going to get it financing needs met these ongoing losses. I thought I heard you say that you felt you had an up cash on hand to go but are we looking at more dilution?

Bill Solms

Well, I will tell you this. So, I am putting changes in place that for the expressed purpose of making this company profitable and being able to fund the company without further dilution of the shareholder value. What I need to say is that kind of change doesn’t happen overnight, okay. I have a plan in place to do that in a fairly reasonable amount of time. But it doesn’t mean that I can change things immediately. So, I believe that it’s a black mark on this company that we have funded operations by diluting the shareholders holdings and I think it is a personal challenge to get us to the point where we don’t have to do that any more. Once again that doesn’t happen over night. I hope to please you all with how soon we can change that process but there is going to be a transition period. And so way we change it is by finding a way to better monetize the products that we have.

And as I kind of alluded to before, the reason that I’m confident in this is that when I first started looking it coming to Wave I try to understand what it is that Wave did and what the products are and I have a fairly good network out in the street. And I have some friends that I was able to talk too. And I started with an discussion on talking about Trusted Computing Group and TPMs and what I found was they were polite but it didn’t induce any buying activity. So, I started to look at the potential of what we had and where we in fact position at the right way with our customers in our marketing and in our sales purchase. And as I started to discuss – as I start to think over what would be the right way to do this. I looked at when we talked about our involvement in Trusted Computing and I found it that wasn’t necessarily by itself well understood and therefore generating any excitement of among our potential customers. So, then I start to say okay well how well should I describe it, what does involvement in Trusted Computing give you and what it does is that gives us but it really means is we have enterprise management of the TPM. And so when I looked at that concept and bounced off sort of my network that wasn’t enough because a lot of people outside are niche in the cyber security space don’t necessarily understand or aware of the TPM chip.

So, when I start to think a step further and I said okay we have enterprise management the TPM chip that basically gives us the concept that what we call the Device Identity Management. I mean that started to get people slightly more interested. So, I took it a step further and I said okay Device Identity Management gives us a concept of only known devices are touching your network and that’s not new that’s not something that I brought to Wave, you’ve heard that before. But in stringing it together this way I'm tying to show a progression. And that got people little more interested and I – but it wasn’t quite enough. And so I said okay, only known devices touch your network and that’s when I came to this phrase that I’ve used of ultra secure network access.

So, then I went back out and talked to a couple of big customers and I said hey well I see at the way what you did and these are folks that I knew from my time at Microsoft, my time at Oracle, relationships that I had and I said well I can give you ultra secured network access and 100% of them said that sounds very interesting to me, I would like you to tell me more about that either tell me now or can you come back by the way I want to bring in this security guy. It generated interest in buying activity and that’s what got my attention, that’s when I realized the hidden value that we have here. It’s when I realize that there wasn’t into our changing the products that we have, our products already have value, it’s a matter of how do we express that to the market in a way that generates buying activity, it’s not about educating the market, it’s about meeting the customers needs and selling them our solution, that’s central that we have to do here.

And so, that was one of the use cases that I’m using to show that there is substantial untapped customer demand for what it is that we do. And in an other use case you heard me talk about this virtual smartcards and that’s just for the TPM management. That’s where I see our biggest potential upside, I also see potential for increased sales in the SED management and in the data protection sweet area. But as you can tell although I’m insisting that we continue to do all three and we continue to increase our billings in those areas. It’s the enterprise TPM management that I think is under exploited in terms of what we can do to monetize our product sweet. And because of that potential and because that applies to so many companies that needs what we have to offer.

My sense of how big our pipeline isn’t should be and my confidence in our ability to make returns on that is very high, I'm quite bullish on the prospects for Wave and that’s why I joined the company. Now I would tell you that when you’re dealing with government customers and you’re dealing with large enterprises, a complete cold start to close the deal often takes multiple quarters as many of you already know. So, our strategy is both to accelerate those discussion and those opportunities that are already in progress gets to continue to convert on those things that we’ve been doing well at a lower volume and it’s to make sure we’re selling all the seeds we possibly can now that we’re going to rate in terms of revenues.

Potentially, we’re couple of quarters down the road, but the key thing is we’re not waiting that long to increase the revenues so there is many other things we can do and have already started doing. But to the full cycle of a cold start from a customer that’s never heard of us before that’s the sort of thing it doesn’t happen in the current quarter that’s something that takes the care in feeling of our professional sales organization to move all the way through the sales process. That maybe a longer answer that you wanted but I hope that answered your question.

Operator

(Operator Instructions) We do have a follow up question from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Yeah, hi. Could you give us a little bit of follow up on what’s going on in the – with the CESG over in England and the whole European market and where is that moving which Joe Souren in, in charge.

Bill Solms

Well, as you know as you correctly stated, Joseph Souren is in charge of our EMEA sales team. We do have some ongoing meetings with that organization. In fact, I asked Steven to go over and have some meetings in London just the week before last. It’s just the nature of that organization and the fact that it’s an ongoing opportunity. I don’t want to say anything that could jeopardize the deal there. All I will tell you is we are on ongoing talks and we’re not – we’re not – we haven’t closed the deal yet. So, I don’t want to talk specifics. The good news is that based on all sorts of current events, lot of organizations in Europe are very concerned about their information assurance and their ability to safely encrypt things and to prevent intrusion from unwanted external hackers whoever that might be. And I see this as a sales opportunity in Europe and we’re working hard to exploit that with a number of customers including CESG.

Operator

The next question is from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Good afternoon. I have a question regarding, we spend a lot of money on TVTonic, we spend money on Scrabbles where we supposed to be something that should have lasted basically a year, it was funded to I remember I think it was a $100,000 a month. And I want to know if that ever brought in any revenue if TVTonic is still working or if it is liable, can you tell me if we’re going to let these things go and move ahead.

Bill Solms

So, it’s good to know that the issue of what’s going to remain core to our business and what we’re going to fund going forward and what we’re going to choose to either stop or spin off is that central theme of the products and project review that I’m having here within the next two weeks. It’s already scheduled, the agenda is already set and I’m specifically going to be addressing those questions because it’s a very valid question to say okay what are you going to choose to focus your time and efforts and resources on and what are you going to choose not to pursue. And because that conversation is ongoing I’m not going to answer questions about a specific product but I will tell you I think it’s a very pertinent question and I intend to – we are going to address it. And we’re going to have very specific results and you’re going to – we’re going to know very cleanly what the answer is going to be but I want to hear from all my key executives, I want all the stakeholders to have a chance to get me the input before I make that final decision. I’ll tell you that I don’t need consensus to make a decision but I do value the input of our executive team and actually I want to get that before I make it and it will be coming soon.

Operator

The next question comes from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hi, Bill. Congratulations.

Bill Solms

Thank you, Daniel.

Unidentified Analyst

Question on Samsung, a forecast was referred to in the SEC I know that – I'm sure you can get into any numbers and I think I’m mostly trying to tie to what products would include Wave capabilities. What would be the first quarter that Samsung royalties could be received?

Bill Solms

Well, it’s a good question and I will tell you that it’s a question that I have. We are currently in discussions with Samsung. I believe there – that’s a company that I want to increase our business with. But because I’m still working internally with the team on exactly when will I start to see the billings from Samsung, I don’t want to answer that question. And I apologize if it seems like I’m picking a number of these questions down the road but I’m not going to give you an answer on something where I don’t know the facts yet. And it’s not because I’m not asking the right questions. We’re very much going to give an answer to these questions in a very near future. And so for those things that’s appropriate for me to talk about on an earnings call. I’m going to share those with you as soon as we have the answer which is not going to be wrong. But I will tell you there is also those things that we’re not are not appropriate first discussion on earnings call and in that case I’m still going to have to hold back on those as we go forward. But I think you’re right to focus your attention on what are we doing with Samsung and just know that, that’s one of my highest priorities.

Operator

The next question comes from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hi, Bill. Nice to see some fresh air in the company, again a long term shareholder of 17 years.

Bill Solms

Thanks Larry.

Unidentified Analyst

It’s nice to hear some common sense instead of a lot of technical stuff that most of us don’t understand anyways. I do want to say I really appreciate Steven’s getting us to this point. I think if it wasn’t for him we wouldn’t be where we are now. But sales have been not what we should be and we’re hoping that you can bring us there. It sounds like you have a completely fresh breath of air. Couple of things, on the expenses we’ve been really good about bringing expenses down in the last couple of quarters. Do you see bringing him down further and by bringing him down further and anticipation of keeping sales growing, do you – when do you see the possibility of us breaking even. Is it – do you see a possibility in the first and second quarter of 2014?

Bill Solms

Well, I would tell you this. The potential of us breaking even in my mind has more to do with our ability to increase billings than it does in our ability to reduce the expenses all the way down to where our current level of billings is. I think the team has done a fantastic job in reducing our expenses over the last several quarters, it’s one of the things that I’ve analyzed. I will tell you that you can’t continue to reduce down at that rate indefinitely. We have had some reductions in force in the employees in the company. And we’re at the point now where I’m looking to have the ability to reinvest some of our revenues into actually some strategic hires in the engineering space.

You heard me talk before of where we got to have excellence in execution of what we’re doing now and we must continue to innovate moving forward. So, as I’ve been out to view all the elements of a company, my priority for reinvestment within the company is a couple of very strategic hires on our engineering side. And so I’m looking to do that. Now, what is that have to do with your question, well what it means is I’m not sure how much more we can significantly reduce those expenses. And so my focus is more on the side of effectively increasing our billings to increase the revenue numbers.

I would tell you that I am excited about the opportunities that I see and I am bullish on the company’s prospects overall. And without being too specific, this is doable in the near term. I’m absolutely convinced of it, I manage to convince Tom Conte to lead well and come to us not because he just blindly trusted me. I had to show him the vision of what we have and where we’re going and what the potential is. And he realize the value as well and chose to join us. So, without being anymore specific than that, I think that’s a very good sign that the story that we have here internally is a pretty good one and I’m quite pleased to be part of it and have my name attached to it.

Operator

The next question is a follow up from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hey, Bill. You had mentioned before that not a lot of enterprises were aware of the TPM and while that’s true we do have a standard body or as a computing group which consist which is made up of an enormous amount of very large enterprise companies.

Bill Solms

Yes.

Unidentified Analyst

But none of them seem to be adopting Trusted Computing for their own internal usage. So my general question is what do you think is going to be needed in order for that adoption to actually start taking place, are we looking at a federal mandate or what do you think is going to happen for them to start actually adopting their or what they’re suggesting other companies start to do?

Bill Solms

Well (Jess) I think that’s an excellent question and its one that ask myself when I got to the company because I think its an obvious question. So a couple of things one is you may or may not know that I’ve changed our representation on the TCG Board. I would tell you that I think we need to more effectively work with those OEMs in particular who are on the board to use our technology.

To be fair many of them are using TPM technology in form or another and in some cases it’s a proprietary form. So they’re not all great candidates for the Wave solution for TPM management. When I was talking about the large enterprises they aren’t necessarily fully aware of TPM management. I was talking about the different verticals of customers out in the commercial enterprise. The government as a whole but also I'm talking banking, non-banking financials, critical infrastructure, oil and gas, big three automotive, healthcare I mean biotech.

When you look at companies that have critical intellectual property that they need to protect that they spend billions of dollars on research on developing or they just want to harden up their fences against either data loss or external attack of their network. We’ve got a great solution for them in fact in some cases we have a highly innovative and market leading solution for them in the case of virtual smart card for corporations that are one to seven which those that are on Windows the vast majority are still on Windows 7 they can’t get a virtual smart card that works at the corporate level from anybody other than us.

So we are putting together an immediate marketing campaign to go our there and address that opportunity and take advantage of the Window opportunity that we have and the market demand that’s there. I'm not sure that I fully answered your question but we’re working to raise the awareness within the TCG Group participants of our involvement. Like I said I'm changing our representation on the Board and then our marketing efforts to the – to our customer base outside of the OEMs that are on TCG are where I probably see our biggest potential upside.

Operator

The next question comes from the line of Private Investor (indiscernible). Please go ahead.

Unidentified Analyst

Hey Bill a quick question regarding our pipeline. We’ve been hearing certainly quarter-over-quarter the pipeline is growing, we have some wonderful opportunities in the pipeline. I guess my question is we haven’t really seen any of it as far as we are into the numbers. Is your overall definition of what’s in the pipeline at least different from where we are coming from?

Bill Solms

Well its one of the first things that I changed when I took over the North American teams. I changed a couple of things one, the phrase I use is you shake it really hard and you get all the dead leaves to fall off because for me what’s really important is that you have confidence in what’s in there. So you can correctly allocate your resources and so you can competently manage these things to close. The worst thing you could ever do to me if I'm running your team as to surprise me and tell me that’s something is falling off the pipe without any warning or any knowledge of what’s going on or that it just continuously slips from quarter-to-quarter to the right. And to be honest, we had a fair amount of that going on. One of the reasons that I hired Mr. Conte to replace me is that I know he is equally as brutal on that as I am, okay and I'm pretty brutal on that. In fact without going into detail I will tell you that I changed, I'm changing the compensation mechanism for sales guys so that they don’t start fresh every quarter.

Besides their quarterly quotas there is an annual quota so if you miss your number in the quarter it carries over to the next quarter and you start off in the whole. These are just little changes that I'm making based on my own experience in managing sales teams at large IT companies okay, using the best practices that large IT companies use to succeed and drive highly successful sales forces. To get them to not be able to hide these things and to have absolute fidelity in the pipeline to where we as the executive team can competently mange our expectations on what revenues, going hear what billings are going to hit and when and I know that my CFO here would be quite pleased if I can deliver on those internal promises to increase our reliability there. And I’ll tell I’ve done it before in other organizations and I'm absolutely going to do it here.

So I'm not going to talk to about specifics what’s in the pipeline I'm telling we’re changing the pipeline procedures, folks that are going to be successful sales people at Wave will understand that its absolutely doable what I'm asking them to do. I mean of the folks at Microsoft and Oracle can do it then they can do it here and that’s going to be, I'm going to insist that they do. I believe I’ve answered your question, I'm not going to go into specifics what’s in the pipe but I'm telling you that we’re going to have a much higher level of credibility and reliability on those deals that we’re tracking no more fluffs.

Operator

The next question is from the line of Private Investor (indiscernible) is actually a follow up question.

Unidentified Analyst

Yeah hi Bill again. I had question about the self-encrypting drive market. The analysts are saying that the SSDs and the SEDs that there will be approximately 150 million of them in 2014 and with the patents that we now own that we brought from Bob Thibadeau, could you give us an idea of where we stand as far as monetizing those patents in 2014 with all the relationships we have with all these different manufacturers and OEMs?

Bill Solms

So well two parts of goodness there okay. One is you’re seeing we’re continuing to have these partnerships and relationships like you saw with the one we recently announced with Intel and if you read that you can see Lenovo also was on board with that opportunity. But I – it’s a good question and we are revealing, I will tell you that we’re revealing the potential of gaining revenue from those patents. Its under consideration. The question is I'm going to do whatever brings the greatest value to Wave, okay. And if that means we consider an option of enforcing that patent or selling it, we’re going to look at what value does it bring to the company. If it would negatively impact our ability to earn revenue with other OEMs then I might no exercise that. So its under review and we’re going to whatever brings the best value to Wave.

Operator

The next question is from the line of Private Investor (indiscernible). Your line is open.

Unidentified Analyst

Yeah earlier in the call you had indicated a simplified message for TPMs is there a simple message that has been developed to sell management software for SED drives?

Bill Solms

Well I'm not sure that, the reason I mentioned, the simplified mention for TPMs is because it was a significant change from how we had them selling it. I'm doing a review of our marketing pitch for SED drives right now. I think we have been reasonably effective at selling – of the management software for SEDs. As many of you probably know the SED market got disrupted in the recent past for reasons that were outside our control the ability of the OEMs to ship it. The manufacturer of the SEDs themselves – that was due to some external disruptive factors and that certainly impacted Wave’s ability to sell the management software.

That being said I'm not willing for us just to rest in our worlds and maintain the status score going forward. We have the father SEDs within the company. If I need to chart him out to raise awareness at various marketing venues I will. We’re going to look at how well we’re executing on that, we’re going to look at our strategies with the OEMs. And I would like to up our gain in the SED sales area.

The level of improvement is I believe we can get our of the SED management sales is just not as much as I think we can get out of the TPM management sales but there is still potential for improvement and we’re very directly looking at that question and coming up with some very specific as how we’re going to do it. The way we’re marketing all of our products right now is receiving my direct personal attention for improvement.

Operator

The final question comes from the line of (indiscernible) Private Investor. Please go ahead.

Unidentified Analyst

Hi Bill, welcome to the hot seat.

Bill Solms

Yeah, thanks.

Unidentified Analyst

You’re handling all the questions well. Bill, the one I have for you is somewhat technical and I'm wondering you suggested that you want to sell and put more emphasis on sales of TPM management etcetera. But what about, what the NSA is doing with having to tell the agencies in the governments that they can use 1.2, what’s your thought on that, is that going to be a whole back or has it in fact had been a whole back on way of success to-date?

Bill Solms

Well I think you’re asking me is the fact that NSA is saying they can use GPM over 1.2 version of the GPM is that holding back our sales, was that your question?

Unidentified Analyst

Yeah correct.

Bill Solms

I don’t think so. Frankly I’ll tickled to death if they increased their use of any version of the GPM and I’d be happy to sell them the management software to do it, okay. I think the government as a whole has been slow to adopt the use of GPM for reasons that are largely bureaucratic. We’ve had some good people doing some very good work to go through the normal steps that you have to do and governments to get approval to do it. That’s going to be certified to touch the network and the recent statement that the NSA made about mandating GPM chips for national security systems staring in 2015 is certainly going to help us because that means the procurements that they’re doing in 2014 that will take effect in 2015 will be required to use GPMs and then GPM management going forward.

So, I expect that to drive an up take in sales to government, we can’t tell how much yet or also using the public recognition of the value of GPMs to the information assurance capabilities of sensitive government networks as a fairly significant public endorsement of the technology and we intend to leverage that in broader areas within governments and within critical infrastructure out in the commercial sector.

Operator

And there are no further questions at this time. I’ll turn the call back over to you sir.

Bill Solms - Acting Chief Executive Officer

Okay. I’d like to thank everybody for joining us today. I’d like to particularly thank those investors in Waves that have been with us a long time and have been loyal and been with us through the ups and downs. I would like to reemphasize that I joined this company because I'm absolutely convinced that there is hidden value here and I'm absolutely convinced by making a few fundamental changes we can better execute the business of selling Wave’s products that will increase the billings to the company and increase the value to the shareholder. And I ask you to follow with us as we go forward over the next few quarters. I'm eager to show you that I can deliver that and not just talk about it. And I'm hoping that you all will hold me accountable on that as we move ahead. Thanks very much for your time and we’ll be speaking to you all soon.

Operator

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

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