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Wave Systems (NASDAQ:WAVX)

Q4 2013 Earnings Call

March 13, 2014 4:30 pm ET

Executives

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

William M. Solms - Chief Executive Officer and Director

Analysts

Ronald Meier

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Wave Systems' Fourth Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, March 13, 2014.

I would now like to turn the conference over to Mr. Gerry Feeney, Chief Financial Officer, Wave Systems Corp. 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 document 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 4:00 this afternoon, we released our financial results for the fourth quarter and full year 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.

Before handing the call over to Bill Solms, Wave's CEO, for his comments before we proceed on to our question-and-answer session, I wanted to touch upon a few of the Q4 and 2013 highlights. And what we've done to reduce our operating losses and to further position the company's focus on growth and billings, as well as continued expense and cash management initiatives, as we push forward toward improved bottom line results and shareholder value.

In today's press release, as you review the reported GAAP results posted on Wave's consolidated statement of operations, you'll see that Q4 revenues declined by $1.5 million from 1 year ago to $5.6 million. The Q4 operating expenses decreased by $10.8 million from 1 year ago to $9.2 million.

In Q4, net loss improved by $9.3 million from 1 year ago to a loss of $3.7 million. Loss per share in Q4 was $0.11 per share versus a $0.50 per share loss in Q4 of last year. And please be reminded that all reported losses per share and share count info has been adjusted for a 1-for-4 reverse stock split, which occurred in July of 2013.

The 2013 full year reported GAAP results. The 2013 revenues declined by $4.4 million from 1 year ago to $24.4 million, mostly due to a $3.3 million decrease in OEM software bundling fees.

The 2013 operating expenses decreased by $18.1 million from 1 year ago to $44.5 million. In the 2013, net loss was improved by $13.6 million from 1 year ago to a loss of $20.3 million. Loss per share in 2013 was $0.68 per share versus a $1.41 loss per share in 2012.

As I've reported in the past, I also like to highlight non-GAAP results, including both billings and net expenses for the periods. In Q4, billings declined by $3.8 million from 1 year ago to $5.4 million. Last year's Q4 billings included a $1.7 million 3-year maintenance renewal, a total of $600,000 from a government contract, and almost $276,000 more in OEM billings.

The full year 2013 total billings declined by $4.6 million from the 2012 billings to $24.3 million. And in Q4, non-GAAP net expenses, which are expenses net of noncash items, such as impairment expense, depreciation, amortization [ph] and stock-based compensation expense, decreased by $2.3 million to $8.9 million for the fourth quarter, which included $1 million in accrued severance fees. This $8.9 million was down from $11.2 million for last year's fourth quarter. And for the full year of 2013, non-GAAP net expenses decreased by $10.6 million to $37.6 million, down from $48.2 million in 2013.

Due to continued expense management initiatives since early 2012, we've now saved a combined total of approximately $21.4 million in net expenses over the past 2 years. In the first quarter of 2014, we expect a further net reduction in reported expenses, as compared to the fourth quarter of 2013.

Wave's anticipated Q1 increased marketing and travel expenses relating to the RSA Trade Show, as well as increased audit and legal fees relating to our year-end audit work should be more than offset by the non-recurrence of Wave's Q4 '13 severance fee.

At December 31, 2013, Wave's total current assets are worth $7 million, which included $2.1 million of cash. Wave's total current liabilities were $15.2 million, including the current portion of deferred revenue, which totaled $7 million.

During the fourth quarter, Wave raised approximately $1.2 million at an average price of $1.22 per share through its At-The-Market, or ATM facility. And raised an additional $1.1 million from the sale of 1.3 million shares at $97.25 per share in a registered direct offering. And to date in 2014, Wave has raised an additional $5.4 million at an average price of $1.02 per share through its At-The-Market or ATM facility.

And with that, Bill Solms will highlight some of the recent key developments.

William M. Solms

Thanks, Gerry. Hello, everyone. Bill Solms here, Chief Executive Officer. And after Gerry's reporting to you of some of the pertinent statistics, I thought it would be a good chance to report to you, after being on board for almost 2 full quarters. Just to give you a report on what I've found and where I think we're headed as a company.

As you may remember, I joined Wave because I believed that it had some really unique innovative technology. And more importantly, as a small company, some highly differentiated technology. Some things that maybe we alone offer in the marketplace that really increases our relevance. And I would tell you that as we look at the press every day, our relevance is becoming more and more apparent as we look at major breaches like the Target breach and others that emphasize the need for greater endpoint security and stronger authentication to protect business and government assets.

So as I joined the company in Q4 and the things that we've done to date in 2014, I would have to tell you that I have run a number of organizations before, and each time, when I come in and take them over, I do a few things first. And that's what I've been doing here. I do an assessment of where we are, what our capabilities are. I look at a prioritization of what our mission is, of what our goals are. And what resources we have available. And then we have to conduct a realignment, which sometimes can be a little bit painful, that could mean reorganization of elements within the company or it might mean headcount changes. When I say changes I don't just mean reductions, although that will certainly be part of it. But it also can mean increases in other key areas as we realign our resources.

So a few of the things that we have been focused on are some -- providing some clarity, some efficiency and some accountability across the organization. That included areas such as overall operations, where we look at imposing some controls within the organization on how things were done. We also decided to implement with the input of the senior executives, some structure in how we do things. For instance, how a concept becomes a project, and how a project becomes a product and how we develop the market research around that, and assign a budget to it and a time line, and do it in a bit more structured way, so that we're sure that not only will something be technically feasible, but that it'll also be profitable to the company financially.

We have a much more targeted focus on sales and marketing. We've made probably some of our most dramatic shifts there. And the reason that's relevant is that, as I mentioned before, our core technology products are really quite good. And I'm proud to say that and I'm proud of the team at Wave that has developed those. And we have, particularly in areas of our TPM management and technology, a highly differentiated position in the market, where we're offering things that no one else really can do. Some examples of that are, for instance, Wave Virtual Smart Card solution. It's built on the same TPM management technology that we've had for a while.

But one of the things I noticed when I went out and spoke to our customers and our potential customers about what their needs were and what it was that Wave could do to help them is that there was a real emphasis in the area of this use case of a virtual smartcard. Wave's had a basic commercial smartcard capability for a while. And that has been of interest to a few customers. But I asked our engineering team to develop basically the next version of that with some enhanced features. And we highlighted this both at our Gartner Identity & Access Management Conference in Los Angeles, a few months ago. But we really were able to highlight it, for the first time significantly, this new version, at the RSA Show in San Francisco just a few weeks ago.

And we had a demo of it at our booth. It got great traction and great interest from customers, and in fact, led to a couple of very significant follow-ups with some large customers that would be very significant business for us, if we're able to pull it off and land those deals.

But the concept of using our current technology and looking for different use cases that our customers are looking for, is a driving force behind what we're doing in our sales and marketing right now. I'll give you one more example of that. We're moving into an exciting new market. And have -- in talks right now with a key partner for something called EMV, which stands for Europay/MasterCard/Visa. And if you've ever traveled in Europe, recently I should say, you notice there, they have chips in their credit cards over there. There is a process where companies can take that EMV process and assign value to be stored securely for online transaction. And the TPM chip is actually a great fit for that. And without going into too much detail there, because the talks are, although they're fast-moving, they're still in the early stages. This is a whole new exciting market for us to use the current TPM technology that we have, maybe with minor tweaks, to look at some significant sales. I would tell you that in addition to the focused approach on sales and marketing, the last thing I currently am doing, is we've talked about realignment and/or restructuring the organization. We've had some very targeted headcount changes. As we look at the things that we are focusing on in the company, that also means there are some things that we are no longer focusing on, at least internally. And in those cases, we have let some people go in order to reduce our expenses around things that aren't our priorities. And in some of those cases, we have taken people that were working on lower priority things and shifted them to fill requirements in higher priority projects or products within the company.

We have also done some changes in our sales force. And I'm very proud to say that we've hired 3 new salespeople quite recently. They come with extensive and highly respected backgrounds in the enterprise software solution market. Folks who can walk into the C suite level of large customers and present our solutions in a way that resonates with those customers. So I'm very excited to -- I'm very excited to welcome them on board and to be able to report to you that our plans of how we are changing things, are proceeding. We're not just firing people, we're hiring more qualified people to fill the roles and how that fits into our overall plan of targeting different customers and being able to sell to them effectively.

I would tell you that we've had some good success with some partners that we've been able to announce recently. We've been doing a number of things with Samsung. We're able to announce that we're supporting their EVO solid state self-encrypting drives and we're very excited to be able to do that with them and to help them meet the Opal standard. We were also able to announce that Samsung has selected Wave to -- Wave's client software for TPM management to ship with the Samsung-produced TPM chips, and we were very pleased to be selected by Samsung to do that, and look forward to working with them even more extensively as we go forward. That doesn't mean we -- that doesn't mean we're ignoring our other partners. We were able to announce Kingston earlier this week. And we have a number of other -- a number of other initiatives that we're working with the other major OEM partners out there. And we'll continue to work with them.

We have -- I won't go into too much detail, but we're seeing progress on the government side, both in the U.S. and the U.K. And we believe we will start to see some credible sales from both those governments before this year is over. And we also are looking to expand our markets, not only from the North American and EMEA base, but we're starting to see some uptick in the APAC.

I would just tell you that overall, I see enough evidence that our plan is working, that it's resonating with our customers, that opportunities that are in our pipeline are progressing at the pace that I'd like to see them to. That gives me confidence that we're going to meet our goals both in this year and get us to sustained growth and profitability going forward. I remain confident that the changes we've initiated already and continue to implement have us on the path to that sustained growth and profitability.

As I like to tell the employees in Wave, it doesn't happen overnight. You can be sitting at the helm of a supertanker and throw the wheel hard over, it doesn't mean it turns on a dime. It means that we have initiated the changes. We're starting to see the signs that we needed to see, in the metrics that we're looking for, that the change is occurring. That gives me the confidence to able to make this report to you all.

With that said, I'd like to turn it over to questions at this time. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Jeff Kitchen [ph] with -- a private investor.

Unknown Shareholder

I guess my biggest question is there was no commentary about the finance side of the equation. Other than that we continue to cap share prices at the At-The-Market. So I'm curious if there are any plans to try and monetize assets or alternative methods of financing?

William M. Solms

Gerry, would you like to lead off on that one?

Gerard T. Feeney

Yes. So the comment on monetizing on assets. As you know, over the years, we have done direct placements with groups and we have used the ATM facility. At the moment, in the case of the ATM facility, we do utilize that from time-to-time. I think quarter-to-date, this year, we're selling shares when we have been in the market at an average price 3.5% higher than the volume weighted-average price of Wave shares in the market. It is an efficient way to raise capital. Believe me, I prefer never to have to raise capital again in the market and to get to our cash flow needs through billings. But in the meantime, through reducing expenses and minimizing our cash raises, this is an efficient way because it cuts down on your cost of capital, as you know, it's at market, not discounted and there are no warrants involved. And effectively, we're selling shares of WAVX to the people in the open market who want to buy shares of WAVX. There are other methods that's used for vehicles where you could do convertible debt structures or other debt structures. Wave today has still and has maintained a debt-free structure, giving us flexibility moving forward. But...

Unknown Shareholder

So are there any thoughts or plans about either trying to monetize scrambls or eSign, because even though the illusion is that the At-The-Market is a cheap enough a financing, it destroys the share price. So the extent to which you avoid commissions or below-market pricing is way more than offset by the capping of the share price to begin with.

William M. Solms

Gerry, let me answer about the assets. I will tell you that I am looking at all the assets in the company, to see what we might monetize if they're no longer core to our business. I would tell you that we've been given very close look at scrambls and node [ph] as to what is the best way to monetize that. And we've looked at another of options. I will tell you that I think there's tremendous potential still in scrambls, and we're looking at both licensing out that technology and other options as well. eSign, we're also reviewing to see what the potential is and whether or not it's core to our business. And the last thing I would tell you is we're also examining our patent portfolio, to see if there's potential to monetize some of the patents there. So our review of the business as to what's core, what's not core, and then of course, for those things that are determined not to be core, whether or not we can monetize them by divesting them or by getting outside investment for further development. Those are all options that we're examining.

Operator

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

Ronald Meier

Yes. Bill, just a couple of items. First, could you give shareholders a little bit of guidance? I mean, I don't expect you to give specific numbers on quarter 1. But are new billings running ahead of quarter 4, showing some real progress? And secondly, I was intrigued by your comment on the recent radio interview about Wave Endpoint Monitor's functionality regarding its ability to protect the supply chain. And the recent article by Mark Rockwell stating, and I quote, "Researchers are looking to stem the tide of counterfeit electronic parts invading the military supply chain." DARPA, under its shield program, is looking for proposals and in fact they'll be holding a workshop tomorrow on Friday the 14th. Will Wave attend that workshop and will Wave participate in preparing a proposal to DARPA?

William M. Solms

Well, there's a couple of questions in there, so let me try to take those one at a time. I'm not going to give any guidance on Q1 or how it's looking. I really can't address that on this call. I would tell you that the plans that we have to increase the sales billings are because we're moving to larger customers with longer sales cycles. We are acknowledging upfront that it's going to take a couple of quarters to see the sustained growth from that. That being said, there's a couple of interim things that can close faster than that. And even some of the larger customers are interested in moving faster. But I can't give you any guidance on that right now, particularly since Q1 isn't even closed out yet. So I'm going to stay away from that question -- from specifically answering that right now. But you asked a very good question about the Wave Endpoint Monitor, and thanks for listening to the radio call. It's -- Wave produced that specifically for a particularly security-conscious customer. It was a fairly crude initial capability that we are now further developing into a more enhanced version, 2.0, if you will. And it does give the ability to attest to the supply chain, to attest to the integrity of the device as it moves through the supply chain. And that's something of significant interest to the government, as you pointed out, but also to some large corporate customers as well. I'm not personally aware of the DARPA Conference that you mentioned. And I honestly did not get a chance to talk to my U.S. federal team about that. But I assure you I'll follow-up with it -- with them and ask them what's going on. We are looking at any opportunity to monetize this, whether it be government or nongovernment. And if they're not aware of it, I'll pass it on to them. But I just didn't get a chance to talk to them about that. Sorry.

Operator

[Operator Instructions] Our next question comes from the line of Dave Abbesh [ph], private investor.

Unknown Shareholder

Bill, the recent Samsung announcement, where Wave said that they are now shipping product with Samsung Trusted Platform Modules, can you give us an idea on what the chip royalty is on each module that we ship with our software, and what the volume would look like, say, for the rest of 2014?

William M. Solms

Well, I can't tell you specifically, because that's not public information. Gerry, you can correct me, anytime if I'm wrong on this. I would tell you that it's in the same ballpark as we are receiving for our client in other similar cases. Of limited use cases like with the Samsung where it gives them local management of the TPM, and basically, that's it. It's a -- we have just started shipping with them. So our -- the volume of the shipments is going to ramp up over time. And based on that, it's a little hard to predict exactly where the volume will be by the end of the year, because we're looking at a ramp-up period. It's entirely tied to how the Samsung TPM chips ship to their customers, which are both internal to other elements within Samsung and externally. So the Samsung announcement is more of a -- it's a very good sign that we're diversifying our reliance on our OEM partners, in other words, there's not just one main channel of OEM royalties anymore. And that it is growing. But it's hard to give you specifics at this point.

Unknown Shareholder

Bill, could you tell me if there's any other OEMs interested in the same deal that you have with Samsung?

William M. Solms

Well, we're talking to quite a few of them. It would be inappropriate -- I apologize for not being able to answer your question directly, but it would just be inappropriate for me to talk about deals that are underway right now. But I would tell you that we're certainly looking to leverage the same situation with other TPM chip manufacturers. And also, we have a chance to sell our client with a TPM chip manufacturer, and we have another chance to sell it at the OEM. And we have a whole team that does nothing but focus on our OEM relationships. And we've been giving the Asian OEMs a lot more attention in the last couple of months, in an attempt to get some of the deals that have been languishing to move along. And I'm cautiously optimistic at where those are headed. And I think this Samsung announcement was kind of the first sign of the results of that.

Operator

And gentlemen, there appear to be no further questions at this time. I'll now turn the call back to you. Please continue with your presentation or closing remarks.

William M. Solms

Well, I'd like to thank everyone for joining the call today. It was a good chance both to cover the specifics of what happened in 2013 and Q4 in more detail. I would tell you that I'm really much more excited to talk to you about where we're going in 2014. And the evidence that we see that the plan that we have to bring the company to sustained growth and profitability is working and is moving in the right direction.

I caution everybody, again, that this doesn't happen in a single quarter or even 2 single quarters. It takes time. But I'm very pleased to be a part of this company and to attach my name and reputation to what we're doing here at Wave.

So thank you very much.

Operator

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

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