Wave Systems' (WAVX) CEO William Solms on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Wave Systems (WAVX)

Wave Systems (NASDAQ:WAVX)

Q1 2014 Earnings Call

May 08, 2014 4:30 pm ET

Executives

Walter A. Shephard - Chief Financial Officer and Secretary

William M. Solms - Chief Executive Officer, President and Director

Analysts

Timothy Collins - Security Research Associates, Inc.

Kevin Gusinow

Operator

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 8, 2014. I would now like to turn the conference over to Walter Shephard, Chief Financial Officer. Please go ahead.

Walter A. Shephard

Thank you, Mike, 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, 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 actual results to differ materially from those contained in any forward-looking statements that we may make. We released our 2014 first quarter financial results this afternoon after the markets closed. Please refer to the company's press release available at wave.com for more details relating to our financial results and corporate progress.

Before I turn the call over to Bill Solms, our CEO and President, I would like to make a couple of comments regarding our financials. The company reduced its net loss from $10.2 million for the year-ago period to $3.3 million for the quarter ended March 31, 2014. Backing out onetime severance costs and noncash impairment charges that occurred in the 2 quarters, the company reduced its operating loss to $2.9 million in the just-concluded quarter from $6 million in Q1 of 2013.

As noted in the press release, revenue for licensing and maintenance increased by 7% year-over-year. Breaking this down a bit further, our OEM licensing and maintenance revenues declined by 6%, while our non-OEM licensing and maintenance grew by 19%, reflecting our increasing efforts to grow that particular customer base. We did not repeat our service revenue of $800,000 that we had in Q1 of last year. That particular contract ended in Q3 of last year, so that will be an impact when comparing year-over-year revenues over the next 2 quarters as well.

On the expense side, we continue to closely monitor our expenses. Year-over-year operating expenses declined by $7.4 million. Again, backing out the onetime severance costs and noncash impairment charges, operating expenses declined by almost $3.6 million. We have eliminated a lot of the low-hanging fruit in terms of expense reduction, so we are redoubling our efforts in looking again at our expenses and see where we can find additional savings.

I'll now turn the call over to Bill.

William M. Solms

Good afternoon, everyone. I'm happy to discuss our Q1 earnings today and also to give you an update on the company overall. As I've mentioned to you on previous earnings calls, I have a plan to turn the company around and drive the company to profitability, and we are focused on doing that from both reducing expenses and increasing our revenues. I'm here today to tell you that we continue to execute on that plan, and I'm very happy to report the first positive signs that this plan is getting traction. We continue to focus on new ways to monetize the outstanding technology that Wave already has. Some examples of that are: the Virtual Smart Card, which is based on the TPM management technology. The Virtual Smart Card is receiving significant attention from the marketplace, and we had a particularly positive debut of the demonstration of Virtual Smart Card at the RSA Convention this year.

For self-encrypting drives, our SED sales are focused especially in the health care space; and the market is driving customers in our direction every day with news of practically a new breach every week. This is only strengthening the need for our SED management capability in the marketplace. Along with that, we're also seeing accelerating sales of our DPS suite, our Data Protection Suite, which continues to be significant revenue stream for us.

We've had some great changes in key management positions in the company that occurred in Q1 to include our new CFO, Walter Shephard, who you've just heard from. I'd like to welcome him to the team, and I'm extremely pleased with the job that he's been doing so far. We've also hired several new enterprise sales representatives, which are going to help us sell these larger deals to enterprise customers and move away from the smaller -- small- and medium-business transactional-type opportunities. These new personnel that we're putting in the company are helping us create the new culture of Wave, continuing to produce outstanding technology, but focused on returning that value to the shareholder.

Our increased focus on enterprise sales, along with greater diversity in our OEM sales and partnerships, is of particular importance; and there's some pieces of our earnings that I'd really like to call out to you today. The most telling number within the results today is the fact that our revenue is up year-on-year, 19% over Q1 in 2013. It's also up quarter-over-quarter from Q4 of last year in double digits. This is particularly telling to me because it's the enterprise licensing and maintenance revenues that are most important in my plan to turn this company around, and that's what's going to make the difference for us to be able to achieve our goal of driving this company to profitability. We've put a lot of information out for you today, and so Walter and I are prepared to take any questions you might have at this time. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Michael Warenko [ph].

Unknown Analyst

This is regarding the partnership you have with Micron. When could we anticipate seeing further details?

William M. Solms

Well, the interesting thing about what we released on that is, if you noticed in the press release, it's the first part of a multipart opportunity with Micron. And because we're still negotiating that second phase, I can't really give you details on that yet. But I can tell you that the first phase of the deal with Micron was a smaller preliminary phase. I can tell you that I've met with them. I met with Micron personally last week in California, and Micron and Wave are both very pleased where the direction that, that partnership is heading.

Operator

The next question comes from the line of Raymond Stuckle [ph], a private investor.

Unknown Shareholder

I'm interested in the Wave business model. You mentioned sales and you mentioned licensing. I'm curious to know what percentage of your income you anticipate to be recurring in the sense that it's something that a client will have to re-up on, as it were, or keep paying going forward and we can build on an incurring base or whether we've got to just keep selling outright.

William M. Solms

,

Sure. Let me address that in a couple of ways, and then tell me whether or not I answered your question, okay? So one of the most important things when I took over was I realized that a significant portion, in fact, the majority of our revenue, was coming from our OEM sales and particularly, a single OEM partner. And that worried me about -- I thought that was too risky a strategy. I thought that this company has tremendous potential to increase our revenue through the enterprise sales and that those should be taking the lead over what we're receiving off our OEM partnerships. And so a lot of my energy here has been focused on improving our sales positioning, our marketing and how we're selling the same technology through a more solution sales approach, in other words, focused on meeting the customers' needs and having our technology build a solution that does that. So we are driving up the percentage of enterprise sales against that of our OEM sales. We're also mitigating the risk on the OEM sales side, as we see that one large contract with Dell declining by having more OEM partners that we're getting revenue from and so it diversifies the risk a little bit. The last thing I'll say to you is that when we talk about whether it's recurring, our standard perpetual license includes a 20% annual maintenance fee that goes with the perpetual license. So there is some recurring revenue stream on our standard licensing model. We've also begun to do subscription pricing, which does not have a maintenance component but which has to be renewed every single year. So that may be more along the lines of what you're talking about. I'm going to throw in one more fact for you, though, and it's one of the internal metrics that I was using when we brought on new leadership in North America. I was watching very closely of the new billings that we're bringing in, the percentage of how much of it was maintenance on previous sales and how much of it was new license billings. And Tom Conte, our Vice President of North American sales, was able to significantly drive up the percentage of our billings, which is based on new licenses. And what that means is that we're going to have a continuing maintenance stream on those going forward. So I was particularly pleased to see that our new license billings percentage is going up. That's a positive sign for us going forward for the revenue stream. Did that answer your question?

Unknown Shareholder

Yes.

Operator

The next question comes from the line of Robert Meier [ph] with REM Financials [ph].

Unknown Analyst

Yes. Bill, I'd like you to comment on what is your time frame, your target date, your internal goal you have set for your own management team to reach cash flow breakeven. And finally, how close is Wave to completing the CSG (sic) [CESG] evaluation and approval process?

William M. Solms

Okay. So we're not giving guidance on the call. So I can't share with you the specific internal target that we have for being cash flow positive. I'll tell you we have one, and I'll you that I hammer it into the team every time we talk. And it is achievable. And I'm looking forward to being able to announce that to you when that occurs, but I can't give you a guidance on that right now. I'll tell you that I'm optimistic and that we are executing on the plan that I've been discussing over a couple of quarters now, and that plan is working and it continues to work. And I'm only seeing accelerated traction as we go forward. On the CESG acceptance, the last word that I received on that was we're tracking on the end of June to complete that evaluation, and that's the last word I've got. And we'd be very happy to see us complete that second phase and be on the approved vendor list for the U.K. government.

Operator

The next question comes from the line of Timothy Collins with Security Research Associates.

Timothy Collins - Security Research Associates, Inc.

Bill, I was just kind of curious as to -- I guess I have 2 questions. The first one is, do you think you have the company rightsized and staffed? And are you happy with that? And then the other question is, you've refreshed the product line and I was just wondering how that refreshed product line is being received in this area of cyber-hacking awareness.

William M. Solms

Okay. Well, let me tackle the first one. In terms of the rightsizing, I really think that we're there. We've done some significant reductions in the headcounts over the last 2 years. I've continued to do some targeted pruning, as I call it, since I've been here, as opposed to a large-scale risk. Our end strength right now is somewhere just under 150. And I will tell you that based on the opportunities that we have in front of us, my questions right now are coordinating with Walter and his team on when we need to start growing the staff. We have enough traction on the opportunities. We have enough interest of companies asking us to do some work for them that now, we have an issue of how are we going to bring on more personnel behind the revenue curve so that we can justify the increase. And I'm really looking at an increase now as opposed to further decreasing on size, but always with the concept of efficiency in mind. The second question on the products is, I'm particularly pleased at the very strong reaction that we're getting from our product suite. And as I mentioned before, it's not necessarily completely new technology. It's that we're taking it and its different use cases -- we're taking the same technology, and we're applying it in a way that resonates with the need that the customer has as opposed to trying to educate them on the basic technology behind what we do. And the great news is, well, it's great for us, is that the customers out there are so aware of the continuing string of high-profile breaches that they're starting to understand that they -- not only do they need to protect themselves from a technical point of view, but now in the C-suite and even the boardroom, the customers are beginning to understand they have a responsibility to mitigate that risk. And so we're -- our products and our solutions are starting to resonate at that level and not just with the engineers. Did that answer your question?

Timothy Collins - Security Research Associates, Inc.

Great.

Operator

The next question comes from the line of Jeff Patterson [ph], a private investor.

Unknown Shareholder

Bill, I had a question on the revenue stream side. I know beyond the path, like, you're saying that one customer, Dell, has been the primary revenue source. And the old model was basically to kind of recruit a few more Dells to cover the quarter-to-quarter expenses and then the enterprise stuff, to kind of be the icing on the cake, so to speak, where we made the profit. Is that still kind of the plan to recruit other OEMs in the Dell model? Or is that something you guys are trying to kind of moving away from? And the other question I did have is, how secure are we with the Dell relationship? We've been seeing that decline for a while now. Are we going to still be on the next models? Or do you -- can you elaborate on what's going on with Dell currently, since they are our biggest customer?

William M. Solms

Yes. Well, let me tell you. So first, am I trying to recruit other OEMs on the Dell model? Partly true, okay? We're actively engaging with other OEMs, and if you've been following any of our announcements, we've been quite successful at entering into relationships with other OEMs that are tied to revenue streams. The way in which -- well, let me just tell you, when I looked at what we were doing with Dell, Dell was a great deal that this company made, but I looked at the way it was structured. And I -- based on our competitors in the space, I wasn't sure that we would ever be able to do another Dell-like deal. And in fact, the evidence was that we hadn't done another deal like Dell, and it had been a while. And so rather than continuing to try to replicate the Dell deal, which I believe was no longer pertinent in the competitive market space, we made some adjustments into how we were going to gain these new OEM partners. And the good news is we've started closing lots of agreements. You've seen that we've announced agreements with Samsung. We've announced agreements with Micron. We've announced agreements with several others. And we've basically tailored them to the individual needs of that OEM and mapped it against the capabilities that we had. So what you find is, these deals that we're announcing, and we've had some nice response, not only from our customers, but occasionally from the market, as some of those deals are getting announced and rightly so, but it's not a repeat of what we did with Dell. So I hope I answered that question for you. The second one is, the Dell deal itself. So Dell did not renew their contracts with Wave for our solution last year. Now, they still had a number of machines that were already imaged with our solution, and that's a continuing revenue stream. But we expect that, that is going to continue to decline and eventually, taper off completely. We are still getting some revenue also from SED sales that go through Dell, and I have initiated several outreaches to them to see what, if anything, we can do to help repair and strengthen that relationship. But I'm not just focused on Dell. In fact, I like the fact that we've diversified our OEM partnerships, and it's not one single large revenue stream. It's a series of smaller revenue streams that together can make up for what we used to get from Dell. Taken with that, that's sort of the -- the enterprise sales sort of used to be the icing on the cake. Maybe now, we need to go more meat-and-potatoes-type things. The enterprise sales is the core of our upside, of our growth potential, of what's going to be the biggest piece of the engine of our revenue. The OEM sales are still important, but I -- well, they already are, and I hope that the enterprise sales continue to overshadow that. They've got much bigger upside for us right now. Did that answer your question?

Unknown Shareholder

Yes, that does. And I mean, I think we've always been -- the investors have always kind of seen the government as being -- whenever the government kicks in, that's when the whole ball always starts rolling downhill fast. Can you elaborate any on what's going on, on the government side, as kind of a follow-up question? Dell, being our biggest customer, always made me somewhat nervous too. I'd rather have [ph] your revenue stream coming from several hundred customers than 1 or 2, because if 1 or 2 goes away, then you're in big trouble. So I like the idea of multiple revenue streams coming from different sources. I think that's the correct path to go down. But it seems like if the government were to engage, that's going to bring you a lot more multiple revenue streams fast. Because if the government requires vendors that are dealing with them to be secure sources, like you're talking about the supply chain channel, I think, in the last conference call, I think that's another great potential revenue stream right there.

William M. Solms

Yes, and you're absolutely right about that. And I have a bit of -- I have some good experience and some expertise in federal sales -- federal IT sales. And so I gave that particular attention, as you figure that I would, right, with that being a good part of my background. And...

Unknown Shareholder

Yes, and actually some of the hires that you've made recently seem to be pointing in that direction a lot too. So, that's something we're excited to see, as investors.

William M. Solms

Yes. You've rightly identified the potential there. And so I have replaced all of the Wave employees who were related to federal and government sales. And I had to do a quick evaluation on were we on the path of success, did we understand the process correctly, and did the people I -- were the people that I had the right ones to get us there? And so I made some changes. I went out, and with the help of the team, we recruited some very capable people who managed to pass my extremely tough scrutiny on whether they would be successful in federal sales. I hired a new sales guy named Scott Fritz [ph] working for our VP in North American Sales, Tom Conte. And I'm extremely pleased with the work he's been doing. I just got a chance to review his pipeline just 2 or 3 weeks ago, and I'm telling you Scott [ph] is right on track. I -- well, I can't say anything forward-looking -- I'm getting the wave-off there -- but I'm pleased with what he's doing. We also hired Dell's Defense CTO and Cloud Strategist, and he was really acting as their federal CTO, truth be told. And he was being pursued by other very large IT companies, whose names I won't mention. And I went -- and I flew down to talk to him. And I -- unlike you all, it's frustrating. I can't show you all the inside proprietary stuff of what's coming, and I really wish I could. But I'm able with him, under NDA, to lay all that out to him. And he got to see all the facts. He got to see the whole pipeline. He got to see where we stood with the government, as well as commercial sales, because he wasn't just federally focused. And after seeing all that, he chose to come to Wave, and I was very pleased about that. And hopefully, people understand that a really smart guy who had options looked at all the facts and chose to come with us, and I think that's a good sign for the future.

Unknown Shareholder

And actually, I want to compliment you on the job that you've done so far. I know a lot of investors are very happy with the progress we're seeing and wish it would've occurred years ago. But keep up the good work, and we're looking forward to you seeing some of the fruits of your labor.

William M. Solms

Yes, thanks. As I mentioned, we're only at the beginning of the plan and there's more to come, so I hope to deliver that return that you and the other shareholders have been waiting for.

Operator

We now have a follow-up question from the line of Raymond Stuckle [ph], a private investor.

Unknown Shareholder

Bill, it's Ray again. Early on, you identified eSign and Scrambls as non-core and potentially subject to divestment or sale. Where do you stand on that?

William M. Solms

I would tell you that I continue to be focused on divesting non-core assets. I can't speak specifically right now because negotiations are under way for some of those. I would tell you that we are -- when it comes to Scrambls, we're looking at a much greater potential to monetize that than I had thought just 2 quarters ago, and we are -- we're in the process of pursuing opportunities that have come to our attention related to that. And so there's more -- there'll be more news to come on that. But that's all I can say right now, sorry.

Unknown Shareholder

Do either of these represent an ongoing cash drain?

William M. Solms

Well, I think it's in our numbers right now. I would tell you that right now Scrambls is not a significant cash drain. eSign does represent a cash drain. That's in our published numbers, and that has something to do with -- that we'll factor into our decision whether or not to sell it.

Operator

[Operator Instructions] We now have a question from the line of Dan Gordon [ph], a private investor.

Unknown Shareholder

Bill, I'm just curious, what level of importance do you assign building a professional service business? And what would you hope that to be if one existed a couple of years from now?

William M. Solms

I will tell you that probably, and it sounds like you're putting 2 to 2 together, if we're looking at significantly increased enterprise license sales, that there has to be a professional service piece to go along with that, and the issue that I'm looking at right now, not only is our ability to address that professional services internally, but that we -- I have made arrangements to partner with an external company to be able to scale fast enough with our ability to handle the professional services requirements that would be involved in configuration and deployment services.

Unknown Shareholder

A quick follow-up, do you have an estimate of the number of options that's been forfeited over the last couple of quarters?

Walter A. Shephard

I don't have that information with me at this time. If you want, give me a day and you can give me a call at my office and I can -- I'll let you know what that is.

William M. Solms

That's Walter, the CFO. That's in his file.

Operator

The next question comes from the line of Jeff Kitchen [ph], a private investor.

Unknown Shareholder

Yes, just 2 things, and I apologize if it got covered in the beginning. It took a while to get logged into the call. But, one, can you just talk about any future financing plans? Or maybe just directionally? I know you guys made a comment in the press release that you haven't done anything with the ATM since March 31, so color there. And then, two, any way to frame the ramp at Samsung and the initial launch of products there?

William M. Solms

Well, so I really can't talk about the financing. I mean, I will tell you what we put out there that -- it is in this -- in the release that we haven't executed it since March 31. And if you've followed us since March 31, we've had some pretty big days, and the -- I think the important thing there to realize is that I mentioned on this call before that I'm not a fan of the ATM, and I -- I'm trying to show the investor that we have the discipline not to use it when that's appropriate. And that's all I'm going to say about that. If -- I -- let me -- that's all I'm going to say about that. Tell me again your second question.

Unknown Shareholder

Just any color you can give about the ramp at Samsung. I know you guys have a relationship product but may be if you can give some character to it.

William M. Solms

Well, the -- I can't talk about the specific shipments from Samsung. To be honest, I'm still waiting on a report from them on -- for some of the previous shipments. I can tell you, we're particularly pleased with how strong that relationship is turning out to be and the ongoing conversations we're having for future growth. And because it's future stuff, I -- that's really all I can say.

Operator

The next question comes from the line of Kevin Gusinow with First Place Financial.

Kevin Gusinow

Bill, my question is more directed along the Board of Directors. I saw that there is stock compensation plan comes -- expires July 1, 2014. And I was wondering with a company that's got about a $20 million revenue a year, wouldn't it be, for the shareholder, advisable to -- they're getting paid about $395,000 a year is what I see as far as their base goes for the 6 independent directors. And currently, it's 15,000 in stock options. Wouldn't it be better if they got less of a salary and more option that they're more invested with the shareholder, and this company needs to cash flow better? So that's my question. What's your opinion?

William M. Solms

So just so you know, those discussions are under way now, and we have noted that and we're moving to some industry best practices there, which align more closely with [indiscernible].

Kevin Gusinow

No, I can't -- you're breaking up.

[Technical Difficulty]

Operator

Well, Mr. Gusinow, please go ahead. Your line is open.

Kevin Gusinow

Yes. Hello?

William M. Solms

Can you hear me now?

Kevin Gusinow

Yes.

William M. Solms

Okay. So just so you know, yes, we -- we're aware of that situation, and discussions are under way right now to move to some industry best practices, which tend to line up with the observations you're making.

Operator

The next question comes from the line of Martin Robert [ph], a private investor.

Unknown Shareholder

Okay. I have 3 questions, and it basically is regarding the previous CEO. One is, I'd like to know about whether a non-compete clause was -- is with him and how Wave's technology and patents are protected, that's one. Two is, I also noticed that a relative of his has now and appears to have a very similar program as we have with Scrambls, which was spent 2 years of investors' money on, and I am concerned with that. And also, that a company that he is now running was created basically prior.. it looks like, leaving Wave, and I'm wondering how much of investors' money might have been spent with other employees and time while he created this company. So can you answer any of those questions for me?

William M. Solms

I can answer some of those questions for you. So we do have the normal legal protections with Steven that we have -- that you would expect with any former employee. I would tell you that we're in ongoing discussions with Steven about how to make sure that our activities are cooperative and not competitive. I am completely dedicated to protecting Wave's assets and will not compromise that for anyone, including former employees of the company. And in response to the question about the relative -- with the Scrambls-related product, we're in ongoing licensing discussions with Lexi Sprague and her company right now in order to properly license that and protect Wave as well but also to try to take advantage of the opportunity that might be created there.

Unknown Shareholder

Okay. And as far as the company that was created, you have no comment. Is that correct? That the previous CEO is now involved with...

William M. Solms

I'm not -- I am not aware of any company that was created prior to his departure from Wave, so it would be inappropriate for me to comment on that.

Operator

We now have a question from the line of Waltz Polson [ph], a private investor.

Unknown Shareholder

Yes. Bill, what are the challenges that remain to begin securing meaningful enterprise business and federal government business?

William M. Solms

That's a great question, and that's -- you've hit on the 2 things that are kind of the core of what I spend my time on. I'm doing a couple of things. I'm working to transform the whole company. I'm changing some of the key leadership. I'm changing the culture in the company. But when it comes down to it, what I really need to do is affect change in our enterprise sales revenues, and that includes also the government. And I take that as a really high-priority task. So one of the things that I had to do was I had to figure out what we needed to change, why weren't these large sales occurring? We haven't had any in several years. Why weren't these large sales occurring? What did we need to change? And I fell back on a lot of my personal sales experience. And I've mentioned, I think, on some of the previous calls how I socialized, what we were doing and how we were selling it within my own network and realized some dramatic change was required and went back to sort of the roots of my sales success based on something called solution selling is get to know your customers, figure out what their problems are and give them a solution for something that they know is a problem and they're willing to pay to make that pain go away and then make sure that solution is built on your products, and you can deliver a reliable solution to them. And that's -- it's really that simple. So when I looked at our TPM technology, in particular, and the reason I focus on that one is we're so highly differentiated in the marketplace. It's great cutting-edge technology, and no one else is really doing what we're doing out there. And so I'm focused on that because we have a real sense of urgency of getting the sales team, getting the right people on the sales team who understand that technology, who understands how to do a large sale to an enterprise customer, because it's a different skill set to doing small transactional sales, and to drive that up and to start seeing multi-million-dollar sales opportunities in the pipeline. And so those changes have been affected. Those opportunities are progressing. As I mentioned before, one of the interesting changes when you go from a small transactional sales to larger, more complex sales is the sales cycle grows, right? Those are 3-, 4-, 5-quarter sales cycle deals. But as you guys noticed, I've been talking about it for a while, which means some of those opportunities have been planted 1 quarter or 1.5 quarters ago. So we're starting to see progress. And as I've mentioned before, based on that timing and the sales cycle, it will be the second half of this year before we begin to see that stuff bear fruit. And that remain -- it was true when I said it on previous calls. It remains true now. The good news is we're closer to what the end of that should be. So that kind of encapsulates my picture for the enterprise sales. It was also -- what's the use case? Nobody wanted to buy TPMs, right? No one -- other than a couple of really bright engineers were really that interested in TPMs. But what they are and should be interested in is what problem does it solve for them, how does it affect their business value, okay? If I'm Target, do I want to avoid losing my CEO and taking a billion-dollar hit to my market cap, because I failed to properly protect my company from intrusion from a hacker? And our solution, our TPM-based solutions, whether it's device identity or specifically Virtual Smart Card, bounds with the user identity and passwords would have prevented that initial intrusion. So the point is, as we're marketing our solutions and we're talking to other customers, we have some very compelling reasons that they should be listening to us. And we have very little competition in this space right now. So I'm excited about it, I'm enthusiastic about it. And ask my sales guys, they'll tell you I talk to them about it and how we're doing it and what help they need to get it done all the time. The second question that you asked me was related to government sales. The thing about U.S. federal government sales is that it's a unique beast. The federal acquisition rules are very specific, and they are, in some ways, quite different than the way you do a commercial sale. And you have to know the process, and you have to know how the game is played. You can take your solution to a couple government agencies, and they can love it and they can tell you they want to buy it all day. If you haven't done the right steps to do it, such as do you hold a prime contract or a relationship with a prime contractor on the contract vehicle that, that agency must buy off of in order to buy anything? If you haven't done that, then they can't buy your stuff. Do you have a GSA Schedule 70, so you could sell it off the GSA Schedule? If you don't have that or you don't have access to that through a partner, then they can't buy your stuff. So it's -- there's specific knowledge of the federal acquisition rules that is important, along with the ability to educate the end customer on the need for it and to show you, just like a commercial customer, the value proposition and then get into their -- get into the unique federal budgetary cycle and get this in. And the other thing I will say is, it's also important to understand the importance of lobbying on the Hill as a way to help accelerate your federal efforts, and we're actively pursuing that right now.

Operator

We now have a follow-up question from the line of Ronald Lemay [ph], a private investor.

Unknown Shareholder

Listen, I have a statement to make and then I have a question to ask. And my statement is -- I'll keep it succinct, but basically, I consider myself a long, but not a long, long -- I've been involved about 7 years with the company. Some people have been involved 20. It's been a long, hard road, needless to say. It's like -- I never realized I'd go through what I went through with this company, and I'm still hanging in there. But the long and the short of it is, you've given us something that's very, very important, and that's hope. You've brought us back, and we don't feel so rejected anymore, so I appreciate that. I want you to know it.

William M. Solms

Thank you.

Unknown Shareholder

Secondly, my question is, this is something that's never been answered to us and it refers to a guy named Rich Lee. In the other regime, we gave away 3% of our shares, 370-something-thousand shares to this man. Now he's not working for us. Nothing has ever been told to us about what happened. Can you shed some light on that, please?

William M. Solms

Sure. Well, I will tell you that Rich Lee is still working for us. He's leading our Wave Cloud development project, which is actually a key piece of our sales strategy going forward. And so he is still involved with Wave, and he is adding value to Wave now.

Unknown Shareholder

Okay, good. Good. And what were those shares for?

William M. Solms

The -- I think you're probably referring to the fact that we purchased some codes from a company called EXO5 that Wave is building. It's Wave Cloud solution on. So we were able to accelerate our development of the Wave Cloud solution by purchasing some code from a company called EXO5 that he was associated with.

Unknown Shareholder

Okay, all right. Well, listen, thanks for the explanation and thanks for the hope.

William M. Solms

I hope to deliver more on that and just so you know, it's one of my driving goals within this company to get us, first, to cash flow positive and then to profitability and to return that value to the shareholder, and we're working for that every day. So I appreciate you hanging in there and for being a long-term investor.

Unknown Shareholder

Yes. And from the tone of what you tell us, it does not seem like it's that far away, thank God.

William M. Solms

I hope you guys noticed when I said year-over-year enterprise sales revenue was up 19%. That's a metric that I look at. I'm not just calling it out because it went up. That's a very important metric to me, and I'm very enthusiastic to see that increase.

Operator

There are no further questions at this time. I'll now turn the call back to you. Please continue with the presentation and/or closing remarks.

William M. Solms

Well, I'd like to thank everybody for joining the call today and for those good questions. I think you could tell by my answer there at the end of that I'm very enthusiastic about what's going on in the company. The -- we're continuing to work through some issues and some friction, as any company has. And this plant to turn the company around, as I've stated, is not something that happens in 1 or 2 quarters. And if you look at across the industry, when someone is turning the company around, it takes often a year or more. And so our plans are long term, but we have significant intermediate steps that we're hitting, and we're continuing to execute on that plan, and we're seeing traction. I mentioned the 19% increase in revenues year-over-year, so those things never go up on a straight line. It'll be a little bit jagged. It'll be up a little more, it'll be up a little less. You may have a dip or a valley, but the long-term track of that is upwards. And that's what we're going to use to be a significant factor of getting this company to profitability. So I'd like to thank all of you for the call today. I hope you're sharing my enthusiasm for the -- some of the details of the results that we reported, and I'd like to thank you all for continuing to be investors. Bye.

Walter A. Shephard

Bye.

Operator

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

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