Wave Systems' (WAVX) CEO Bill Solms on Q2 2014 Results - Earnings Call Transcript

Aug.10.14 | About: Wave Systems (WAVX)

Wave Systems (NASDAQ:WAVX)

Q2 2014 Results Earnings Conference Call

August 7, 2014, 16:30 PM ET


Walter Shephard - CFO

Bill Solms - CEO and President


Howard Halpern - Taglich Brothers

Ronald Meyer - REM Financial


Ladies and gentlemen, thank you for standing by. Welcome to the Wave Systems Second Quarter Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer (Operator Instructions) As a reminder, this conference is being recorded, Thursday, August 7, 2014.

I would now like to turn the conference over to Walter Shephard, Chief Financial Officer.

Please go ahead, sir.

Walter Shephard

Thank you, Albert, 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 that 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 second quarter and year-to-date 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. Though the company reported net loss in the quarter of $3.8 million which was $300,000 more than Q2 of year ago, our 2014 year-to-date net loss of $6.6 less than it was this time from the year ago.

Over the first six months we have experienced reduced revenues from our principal OEM customer and the completion of the Department of Defense service contracts. However, year-to-date our enterprise revenues have remained constant from last year, even as we transition the company to concentrate on larger scale enterprise opportunities and transform the sales team.

We continue to monitor our operating expenses as this area has played a key role in helping us to reduce our overall net loss. We'll continue to take prudent cost cutting steps, while at the same time, invest in areas we feel critical to achieving our sales and product development goals.

Looking at the balance sheet, with the completion of the latest capital raise, our balance sheet is stronger -- in a stronger position today as our accounts payable and accrued expenses are at their lowest levels in years.

I will now turn the call over to Bill.

Bill Solms

Thanks Walter. As I stated in my comments in our press release, I'm never satisfied with reporting a loss or quarterly drop in sales. But as we transition with sales teams focused form some legacy Wave products to our newest Virtual Smart Cards, TPM and SED management solutions and as we replaced 80% of the sales force in North America, I'm not completely surprised that the friction of those transition has resulted in a temporary drop in our enterprise sales.

What I do want to call out to you though is as we addressed the issues that laid to that drop in sales to include some changes in senior personnel who were responsible for delivering those numbers, there is a lot of very good things in Wave's future and in the near term future as we look forward.

We did a public launch of our Virtual Smart Card 2.0 solution on July 22nd and it was quite a success. We did a very high profile, what I like to call, Silicon Valley version of enterprise product launch. And we had a simulcast amongst the various engineering locations and we also and we also had one of our large partners DMI host our public webcast and demonstration from their offices in Downtown, Washington D.C.

We received very favorable press release for this new product, maybe we would have seen some of them already. There is quite a few of them that are online in our website and our various social media accounts have been calling them out.

We've also -- and probably more importantly been receiving some very strong customer interest. I was speaking with a Fortune 500 customer just earlier today who expressed to me how pleased they are with this launch and in fact are moving forward with it at a fairly good pace.

A lot of the increased billings that we project to see from this new product, Virtual Smart Card 2.0, are those that we think are part of the plan that Walter and I have to improve the financial performance of the company and it will be, in fact, central to that strategy.

Some of the other things that I would like to talk about are the facts that we recently announced are an LOI with Bell ID as the card company that we are in partnership with for the EMV solution that’s the Europay, MasterCard and Visa.

You've heard me speak about this a little bit before. But the purpose of doing this is to reduce online fraud and in fact that was in the headline of our other press release for the partnership that we announced.

For those who aren’t familiar with it, it's basically the equivalent of the European credit cards that has the chip in them with the credential to reduce the ability of someone to impersonate you when they are making a transaction.

Our partnership with Bell ID extends that security to the e-commerce space, using our TPM technology as a way of tackling that market by marketing our solution to banks who issue the cards to allow them to save money both from reduced fraud and also from the lower transaction fees they pay when they can have an equivalent of what's called a card-present transaction.

I think there is tremendous upside to that market and I'm pleased and that we are basically taking our current technology with some minor adjustments to allow us to pursue an entirely new market basically e-commerce transactions and I hope you all share my excitement for them. There are two large customers that we are targeting already and as we close those deals, there will likely be some press to announce that that you can follow.

The other thing that I would like to call out and it's at the top of my mind since I've been doing a number of press interviews and that recently is, many of you may be aware of the high-profile Russian hackers group that stolen 1.2 billion user credentials.

It was above the fold on the front page of the New York Times yesterday, which I think is kind of standard of making it big news. And we already have been responding to numerous requests to provide expertise in -- to different news organizations and explain what does it mean and how do you counter that sort of thing.

The great news is, is that Wave's multi-factor authentication solutions, Virtual Smart Card 2.0 being one of them, TPM management with its strong authentication being another effectively negates your risk that your user credentials have been stolen. It’s a very positive story of the Wave.

At previous earnings calls I discussed how, I think the market is much more receptive to our solutions. You could not pick a better example of a situation where the general public as well as the business customer base is now intensely aware of the risks of not having a strong device identity base multi-factor authentication solution and we're using this in our marketing efforts as most we possibly can to get that point across to our potential customers.

There is a number of other positive things that are going on. I won't go through the details of all of them. You are certainly free to question me about those during the Q&A Session.

I just like to wrap up my comments by saying, we are not shying away from acknowledging that this was a drop in sales billings and revenue overall for the quarter. I believe that the thing that we are most focused on right now is the potential to increase that and the traction that we're already getting in the plan that we've been discussing since I took over last November.

The good news is that we had allowances within that plan for things like this and we are still on track with the same plan that we've been discussing for the last three quarters to turnaround the company and improve its financial results. I remain as confident today as I was the last two or three times that I discussed that on these calls and I think we have the evidence to back that up.

We look forward to bringing better results going forward and it will be through hard work and diligence of the employees of the company that we carry that out.

So at this time I would like to turn it over to the operator to take questions.

Question-and-Answer Session


Thank you (Operator Instructions) Our first question comes from the line of Howard Halpern with Taglich Brothers. Please go ahead.

Howard Halpern - Taglich Brothers

Good afternoon. I have a question, I guess, going back to the reorganize sales dip. How do you reorganize it to become, I guess, more focused? And at what level are the first inquiries that you were able to get, is it just -- is the IT department or is it at a higher-level, you can add some color to that.

Bill Solms

Sure. Well, the refocusing that we've done is, I retargeted our sales force both in North America and Europe to shift their targeted customer from what I -- I'll call SMB and small medium business where the typical deal size when I took over was somewhere in the 2,000; 3,000; 4000 license range in terms of what they considered one of their larger deals. This is excluding the major deals that the company made three or four years with names you are familiar with BASF, British Petroleum, et cetera.

So I wanted to shift them to large enterprise customers and what I found is, that the folks that we had were not necessarily the right ones to engage with those customers. So, we had to go out and recruit and hire people who are comfortable speaking to not just the IT staff, like you mentioned, but also to executives all the way on up to the C-level executives at Fortune-500 companies and that’s just different individuals, it’s a different background.

So recruiting those folks to a cutting-edge IT company like Wave takes a little bit of time. I am really pleased with those that we found and brought on board, and they are already starting to show their ability to do that by the opportunities that are progressing through the pipeline. Is that answered your question?

Howard Halpern - Taglich Brothers

Yeah, it does. I also -- I guess the sales process to, does it necessary if they like the product, want the product, they start out with a small pilot program or is it just that it’s starts more and then just keep ramping up as time goes by?

Bill Solms

I mean, to answer that, two different parts. One, using that starts with pilot or PLC because we are a smaller company that may not be as well adverse with our technology and we want to see it and feel that works before they commit and that's typical. You don’t have that large companies like Microsoft and Oracle they frequently would ask for the same thing. But I think it’s even more comfort (ph) by the smaller company like Wave.

And the second thing is, one of the things that when I look at our sales person, I don’t want to see any fields where we start with just a little bit and it slowly grows over time. When you are talking about a cyber security for your company, the analysis that you use is why don’t you lock the front door if you leaves the windows and the back door open? So if these companies really want to protect their environments, they need a broad deployment and through out sales force we are pushing for them to do broader deployments and not do a one little piece at that time.

Howard Halpern - Taglich Brothers

Is there -- wanted to keep your industry that's may be gaining more traction than anther that have an eye on adopting the Wave products, like may be healthcare or banking?

Bill Solms

Well, actually it fit too the big ones like there. The good news is when you are talking about securing your company's environment against hacks like this big one that was announced this week because, you know, those users credentials that were stolen user name and password, it’s not just individuals at home and doing their the things they do from their computer at home. Those are also credentials from people at work for their works computers. And so the companies out there need to recognize the risk if they don’t have sophisticated defense in place like Wave's Virtual Smart Card 2.0. So I think it’s important to realize that they need to get a defense for that sort of thing at work as well and that's what they should be concerned about.

I may have lost track on your original question, sorry. Does that answer your question?

Howard Halpern - Taglich Brothers

A little bit. But how successful I guess is the sales force in the healthcare -- for healthcare companies or insurance companies growing rapidly.

Bill Solms

Yeah, that's right. You ask about the verticals as well. So we are getting significant traction in the financial services' vertical. I think that make sense. People realized that they have reached there, probably has significant dollar impact. We are getting good success in other verticals as well. I won't name them all. But it’s not just targeted to one or two.

The healthcare industry, we are getting some very strong traction. And also not just on our TPM management solutions, but our self-encrypting drives management solutions are incredibly attractive in the healthcare industry as well as some of our strongest mid-sized customers have come from and it’s continued to generate significant interest, because our solutions based on SED management offer a specific ability to avoid heap-up based penalties and breaches that have been incurred heap of the penalties, I should say.

So the overall answer is, the good news is it’s really applies across the most every vertical that's out there and so what that means is we have a large addressable market and it gives me sense of urgency and getting out there with the right sales force pursue it and diver results in multiple markets.

But we are targeting the financials services and healthcare markets upfront. And answer to your question.

Howard Halpern - Taglich Brothers

Okay. Well, I look forward to see the progress that you have made.

Bill Solms

Excellent. Thank you.


Next question comes from the line of Robert Icelar (ph) who is a private investor. Please go ahead.

Unidentified Analyst

Yeah, hi, Bill. I appreciate all the steps you have taken undo the mess left by the former CEO. But I was hoping over a month into the second half we see some early evidence that the turn has growing preferably as contract progresses and attach. Just wanted to know, are you sticking with your statements that by the end of this year, we will clearly see the fruits of overcharges you put into play or would you now believe it should take longer.

Walter Shephard

So, I will tell you this. I am not -- I am restricted from giving guidance, specific results that are forward-looking. But I will tell you that I have not changed my plan. The plan for when we are going to see the results is still on track and I have not modified it.

Unidentified Analyst

Okay. It sounds good.


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

Ronald Meyer - REM Financial

Hi, Bill. I would like your comments on a couple of items. About two years ago, Wave entrusted Logic, former Wave partner, showed proof-of-concept of TPM mobile and android device. Would you update shareholders on when Wave will be ready to deploy our mobile TMP management device solution?

And also in regard to Wave announcement back in February of this year, outlining the shipment of our management solution with Samsung TPM security chip. Would you give shareholders some indication as to the timing when Samsung will start to contribute significantly to Wave's revenues?

Bill Solms

Okay. Well, let me answer both of those questions. So you hear a lot of my personal topics of (inaudible) which is moving into the mobile space. It’s one of my highest priorities. I would tell you that -- of course, as you know, I wasn’t at the company two years ago when we did that demo, as you mentioned. And I have look into that. And frankly, that solution never got lays and didn’t move pass that first stage.

But I will tell you that I am intensely interested and my CPO and my engineering team know that I am intensely interested in pursuing mobile TPM whether it’s a physical TMP or a firmware TMP, I am intensely interested in pursuing those solutions. We are working hard to -- in our plans to expand into the android space. And I think from anyone who understands the market, that's really an obvious call.

I think the fact that we weren’t moving in that direction before is an issue that I want to correct as quickly as possible. I can’t talk with you about any specific plans right now. I can tell you that we have spoken as recently as this week with large mobile security providers and we are actively pursuing it. But there is really nothing more I can say about that at this time.

I think the second part of your question was Samsung TMP, you probably noticed as many did that we signed an agreement with them earlier this year to ship our software and Wave will be a significant contributor and frankly I just can't say -- my answer is not seeing enough. Okay? I don’t have specific timing that I can give on that. We are actively working to increase our relationship with Samsung and seen what we can do to drive those revenues higher and be a good partner for them. And that's pretty much my answer for you.

Ronald Meyer - REM Financial

You mentioned earlier about SEDs, what percentage growth are you experiencing in the management of SEDs and SSDs in say this year's first and second quarters versus last year's third and fourth quarters? And are you expecting increasing growth for the reaming two quarters 2014?

Bill Solms

I don’t have the answer -- I don’t have that specific answer parsed out right here in front of me. I would tell you that I think I felt a little disappointed in the growth of our SED management sales. I have asked the team to reinvigorate both the marketing of our SED solutions particularly with SEDs are pretty focused on healthcare vertical, which is their specific benefits to customers regarding heap of compliance and avoiding heap of penalties as well as not losing customer data that being really most important thing.

But I would tell you that I think that there is some low-hanging fruits to be reap and increase SED sales and that we have a marketing focus to do it and I have asked our two scientists, Bob Thibadeau who is the original inventor of SED to sort of the spearhead of that reinvigorated marketing solution. And so he has a schedule or he is out speaking at the appropriate conferences where those groups are gathered and I am plan to use that where the sales team attached to pursue significant enhanced SED sales.

I can't give you guidance going forward and how I think that's going to effects Q3 and Q4. I am telling you that I am -- what I am telling to sales teams and that I am expecting and demanding increased sales of our SED solutions within the healthcare space.

Ronald Meyer - REM Financial

Okay. Thank you.


(Operator Instructions) Our next question is form the line of Dave Avege (ph) who is a private investor.

Unidentified Analyst

Yeah, hi, Bill. Could you give us an update on what's going on with the government with the fiscal year ending on September 30th? Do you see any chance of us getting any type of attraction by then with the government and also the WidePoint announcement, would we see some fruit from that announcement in the next couple of quarters?

Bill Solms

Well, I will tell you that -- and somebody may know I have a background of federal sales as well. So I am intensely focused on the government's Q4, you know, which is our Q3. I know the Wave -- I know how deals tend to go down and they often tend to go down right at the very end of the quarter. The government being the buyers, know they can squeeze the render when they hold off to the very last minute. I was involved in it extensively myself on both sides when I was in the government and also when I was out selling to the government.

So, I will say that we have a number of opportunities that I'm very actively watching. I can't give guidance, so I won't go any further than that, but I will tell you that, I replaced everyone involved with government sales because I believe we were approaching at the wrong way before and I'm very pleased with the positive changes that they are making now.

So, without giving guidance on government sales, I would tell you, as I said, I'm actively watching a number of opportunities that have a potential to close.

And on the second part of your question, I'm very, very pleased to be partnering with WidePoint. As you all know -- well, as you may know, they are -- they hold a number of government contract, primarily based upon providing a certificate authority.

We have partnership with them that would allow them to use our TPM management software to provision those certificates on the TMP chips within government computer. I think it’s a very -- it’s a win-win match for both WidePoint and for Wave and we certainly are driving very hard to increase the revenues -- increase the sales that we're winning together.

Once again, I can't give guidance, but that is a specific area that I think is a bright spot for us going forward.

Unidentified Analyst

Can you give us an update on the Micron relationship, where are we at from one of the shareholders' meeting? And what do you also expect second half from them?

Bill Solms

Well, I can tell you that technically, our solution is progressing very well. For those of you who remember the press release that we put out in Q2, is one of the things that was well-received by the investor and shareholder community.

We talked about it being a two-phase deal and things are progressing very well between Wave and Micron to move it to second phase. And I can't talk about that before it's announced, but technically, it's progressing well and I'm eager to move onto the second phase.

Unidentified Analyst

So, what exactly are we doing with Micron? What does it entail the second phase? Can you give us an idea what we're looking at? Is it -- what type of product is it? Is it involved--?

Bill Solms

I'll tell you in general, I mean I can't tell you what has been announced yet, but I can tell you in general that we're working with Micron to develop security solution that works with their flash memory that they embed in a number of product, all the way from computers that have flash memory involved, all the way down to embed compute solutions that run on very low processing power.

But the commonality between them is they all have a flash memory component which is why Wave thought it was a particular good common denominator to be involved with and providing security for these low power embedded compute solutions.

Unidentified Analyst

Bill, are we any further along with the CESG about the approval?

Bill Solms

Actually I just got on update on that today. We're further along; we're actively resolving issues in phase two with them. We have a number of active opportunities in the government sector in the U.K., both their central government and their local government services which are often local element of a central organization like their healthcare services and we have a partner that we're working with to help us progress through phase two of the solution and I'm very pleased with the progress.

And as you know, the award of some of those contracts is depending on final approval by CESG and some of them will move forward before we receive final approval. So, it's good news on the front.

Unidentified Analyst

And just one last thing Bill, I know that in the launch that you would mention about getting out to analysts and to comminuting with a private government event in September. That's not that far away and without I giving guidance, what type of things could you talk to analysts about that are stir the pot to get the company moving forward if we don't have deals by then?

Bill Solms

Well, so I guess only to the question what am I talking to the analysts about? So, it's also the same thing I've been doing a bunch of -- these press interviews about the last couple of days. So, a really interesting point to bring up is 1.2 billion hacked user credentials and who is worried about whose credentials are on there and are they able to access my systems.

So, it’s a very pertinent topic. We talked to them about that, we talked to them about the fact that Wave is the only company in the world that offers a managed Virtual Smart Card that runs on Windows 7 and that a huge number of the companies and government agencies out there that run Windows are still on Windows 7 and probably will be for a while.

Some have moved to Windows 8, that's great because our Virtual Smart Card works on Windows 8 and Windows 8.1 and we can also manage Microsoft's Virtual Smart Card. We just add a few more features to their core solution which is the way they interact basically with the vast majority of their partners.

So, when we talk about -- what am I talking about with the analysts, I'm talking about Virtual Smart Card 2.01 because it’s a great solution that answered some of them very pressing and pertinent problems, the latest example of which is this (inaudible).

But I'm also talking to them about other things that we're doing. ENV is intensely interesting to some analysts. The fact that we're combining the ENV solution with a CPM is the way to securely provision credentials on all of these laptops and desktops that people are conducting e-commerce on, is very interesting to the banks that issue cards and process billions of card-based transactions. And technically it’s a very advanced way of producing fraud in a way that banks can actually measure their ROI.

Unidentified Analyst

And just one quick question--

Bill Solms

Those are – go ahead

Unidentified Analyst

I'm sorry. Just one quick last thing. Can you give us an update on what's going on with the Wave and point (inaudible), I know that you've been doing some redeveloping of it. Can you give us an idea when we're going to hear from that?

Bill Solms

Well, you're right and that we're doing not redevelopment, but additional development. I personally believe that it needed a little more work to make it a standalone solution. It's got a sophisticate core engine that works with the TPM to measure those PTR values in the computer and check for changes.

I thought it needed a little bit more work to make it what I call a fully baked solution. There are some sophisticated customers that only needed that core engine done and we're able to integrate it into their sector solution and they are already using it.

But if we're going to approach the average enterprise customer out there, it needed a little more work and so we're still doing that. We don't have projection right now, or where that's going to be done, but it's not -- it's something that I would have done sooner rather than later. But then it's about all I can tell you right now.

Unidentified Analyst

Okay. Thank you, Bill.


Next question comes from the line of Walt Polston (ph) who is Private Investor.

Unidentified Analyst

Yes, can you give a -- you just talk about the federal government a little bit already, but can you give an idea, is there still approvals need to sell in certain agencies or branches of the government?

Can you may be give may be a percentage as to how much of these federal government in its entirety can Wave sell into now?

Bill Solms

Well, I would tell -- I can't give you a percentage, I would tell you that it’s a lot lower than I think it should be based on our capabilities. It's lower than it should be based on the response that we get when we brief to potential customers.

Part of the reason that we weren’t successful in the past is that selling to the federal government has its own unique sub-cultural. It's -- you can't sell it on the same way that you sell you the regular commercial space. The way their contracts are led, if you're not a prime on the contract vehicle with that agency is going to the market on, then you literally can't bid unless you find a prime who includes in their solution.

And if you don't understand that process then the end customer can like your products all day and you'll never sell anything. So, one of the key things we did when we replaced actually every level of the Wave employees who were involved in selling to the federal government is I made sure that they had a comprehensive knowledge of how to get that get done.

So, when you can go direct, when you can't, when you have to go through a partner of an integrator what's much more often the case? And we're actually -- we're moving that forward.

Some of those federal sales require additional certifications that we're working on. Some of them don't. So, we're pursuing the ones that don't right now as we’re simultaneously pursuing those certifications that will open up some of the other opportunities.

Unidentified Analyst

Thanks. Thank you.


There are no further questions at time. I will now turn the call back to you.

Bill Solms

Okay. Well, thanks everyone for joining for that call today. As I've stated, I won't shy away from dealing with the numbers that we're reporting. I am -- we're still on track for the plan that I've had in place for this company since I took over last October. And every plan we account for a variance of what our predictions might be. And I would tell you that as we look at the transition, as I mentioned, from some of the legacy Wave products to some of the ones we're focused on as we transition from smaller customers to larger enterprise customers and as we actually transition with physical sales force itself.

I knew there would be some friction related to the sales as we did that. But those changes were all done because of the ability to generate much stronger results going forward. And I am as confident today as I was in the previous earning calls that we're going to achieve that goal.

So, thank you very much for joining. And I look forward to delivering the results that you are all looking for. Thank you.


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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