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Wave Systems Corp. (NASDAQ:WAVX)

Q1 2007 Earnings Call

May 10, 2007 4:30 pm ET

Executives

Steven Sprague - President and CEO

Gerry Feeney - CFO

Analysts

Ronald Meyer - REM Financial

Calvin Hori - Hori Capital

Timothy Collins - Security Research Associates

John Cangelosi - Private Investor

Barry Clairmonte - Private Investor

David Archibald - Dutton Associates

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the Wave Systems First Quarter 2007 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded Thursday, May 10, 2007. It is now my pleasure to turn the conference over to Mr. Gerry Feeney, CFO. Please go ahead, sir.

Gerry Feeney

Thank you. Good afternoon, everyone. During the course of this conference call we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you that these statements are only predictions, and that actual events or results may differ materially. Additionally, we refer you to the documents the company files from time to time with the Securities and Exchange Commission. These documents identify and describe important factors that can cause the actual results to differ materially from those contained in any forward-looking statements that we may make.

At 4 o'clock this afternoon we released our financial results for the first quarter, which can be found on our website at wave.com. Please refer to the company's press release for more details relating to the financial results.

For the quarter ended March 31 2007, Wave's net revenue rose over 160% to $1,287,000 compared to the first quarter of 2006 net revenues of $493,000 and fourth quarter of 2006 net revenues of $866,000.

During the quarter licensing revenue grew primarily due to increased shipments of Wave software by our leading OEM partner.

Services revenues were lower in comparison to last year's recognition and by large one-time $300,000 government service contract which was recognized over the first and second quarters of 2006.

Gross profit rose to $1,100,000 or 85% of net revenues in the current quarter versus gross profit of $278,000 or 56% of net revenues in the first quarter of 2006. The increase in gross profit is the function of the increase in higher margin licensing revenues.

The net loss for the quarter was $5,046,000 or $0.12 per share, compared to a net loss of $4,992,000 or $0.15 per share for the first quarter of 2006.

Weighted average number of basic shares outstanding in the first quarters of 2007 and 2006 were 42,243,000 shares and 32,564,000 shares respectively.

As of March 31 2007, deferred revenue increased by $186,000 to a total of $590,000 as compared to the December 31, 2006 deferred revenue balance of $404,000.

At the end of first quarter of 2007, Wave had total current assets of $4.1 million and no long-term debt.

At this time, Steven will highlight some of the key developments for the period.

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Steven Sprague

Thank you, Gerry. And thank you, everybody for joining the call. I would like to start by talking about strength in our OEM distribution. We were pleased to ship over a 1 million copies of Wave software in all three months of this current quarter.

We were also pleased to see the beginning of the new platforms that are being shipped by Dell that are out in the marketplace today, and available on their websites. Those products are also include our EMBASSY Trust Suite, as part of the both the existing product line, as well as, the new product lines.

And we continue to see, I think, very nice adoption of Trusted Platform Modules really by the OEM’s across the board. So, this is a technology that if we look back a year from now, where we were just shipping our first units with Dell really has grabbed hold, as we expected in the market, and is driving as a standard across the different OEM platforms.

We've also continued to see very nice strength from Gateway, and increased volume from Intel in the market of the software, that’s bundled with their systems, that comes from Wave. So that's helped us to achieve our first over a million quarter, that's driven by our licensing business. And we are very pleased to see that.

Now, the next step is to see broader engagement of our enterprise business that will drive the company into profitability. When we serve by talking a little bit on the OEM side about, I think, another very interesting development, which is that Intel and their recent announcements over the course of last couple days has begun to show their additional technologies that leveraged the Trusted Platform Module.

The trusted execution technology their Star T technologies leveraged the Trusted Platform Module as part of their overall solution, and provides yet another very large player in the marketplace articulating to the customer that a TPM is an important component, that it’s something to be leveraged and turned on in their platform, and that really sets the stage for Wave's market. So, this brings the third major participant, really in the course of the last few months. And so, the first would have been Microsoft with Vista shipping in the February timeframe, where Vista's Bitlocker technology leverages the Trust Suite platform module. And anyone turning on Bitlocker would benefit from the use of Wave's tools as part of the overall management and administration of the Trust Suite platform module.

The second is with Seagate in the launch of their new trusted hard drives that provide very strong protection of data, and are also part of the Trusted Computing Group standards. And now seeing from Intel the technology and suite of technologies that come around Trusted Platform Modules as well.

So we think that we have really positioned Wave very well in the market with our OEM partners to be one of the leading suppliers of software in this space, and we continue to both work closely with them, and I think made great progress in the deployment of our software in front of the end enterprise customer as these are primarily business systems.

It’s also, I think, very useful to understand that if we look a year ago at the launch of Dell's platform, we really have followed volume curve that we expected, and we are now seeing, I think, much better positioning of the security technology across their products in the market. We are actually actively participating right now in a European tour with Dell. And I think that Wave is very well positioned within the context of the overall security solution and providing the support to our partner for their security solutions in the platform. We are an active participant on that tour and we are a significant part of their presentation and so we are very pleased to do that and be part of that.

We have continuing expectations to add another OEM, in the not too distant future and continue to grow the presence we have in the chip providers and the OEM channels for Trusted Platform Modules. The market is still very early on in its complete adoption of Trusted Platform Modules. We have seen the major players adopt across all of their enterprise lines.

The second tier OEMs are getting more serious about adoption across all of their lines. And I think we are still on track to see the beginnings of some consumer adoption of Trusted Platform Modules, a year from today. We will see that as those platforms ultimately come to market, but I think that most of the indications we see in the marketplace today are quite solid for consumer launch next year.

So, let me move from the OEM channel and talk some more about Seagate. It's been though really one of the major developments for us over the course last quarter. We have spent the last couple of years working with Seagate, both in demonstrating different solutions and platforms and helping them and ourselves to understand how trusted drives could be positioned in the market, what are the key components that need to be in place in order to have a very strong hardware-based full disk encryption solution.

This is a very exciting sector of business. There are a lot of IT dollars available right now to go solve this problem of, "I lost my laptop". I think that the solution that Seagate provides is one of the best in the market and I think we provide excellent tools to expose the full functionality of the Seagate drive.

Let me start by talking a little bit so that everybody understands how these drives work. This is a modification to the actual hardware of the drive, to include both encryption and access control as part of the drive.

So what happens is you have a drive in your machine. I actually have been traveling around for last three weeks now with a drive in my Dell Latitude and it works fantastically.

When you turn on your machine it asks you for a password. You are logging actually into the hard disk on your computer. If your hard disk doesn't receive the correct password, then it never makes a C drive available to your computer until all of the data, all of your operating system, all of your files, anything that's been held in temporary files or stored in archives is protected, because the entire C drive is protected.

There are number of other interesting capabilities that come along including that it's now possible to remotely erase that drive or even locally erase that drive or I can delete the keys that are in the drive and as a result the drive really can only be reformatted. And so if you wanted to at the end of your computer's life donate it to a school system or discard it. You don't have to worry about the drive being inadvertently discovered somewhere and having data on it, because the drive was encrypted and you've deleted those keys, so the data has gone away.

I think we have been a little bit surprised to see just how strong a feature that is. The bigger the corporation, the more interested they are in the ability to repurpose the machines, not only internally but also externally from the organization.

We provide client software to help manage the Seagate drive, and we provide server software that provides centralized administration of those drives. This centralized administration software we call EMBASSY Remote Administration Server, and that's where we expect to make the majority of our sales with Seagate in that the enterprise server is much more of a $50 or $75 seat model as opposed to there is software that we bundled with Seagate drives in a number of cases, which is typically about a $1 a transaction.

The enterprise server really accomplishes two things, one is management, but the second is auditing and compliance. And we've spent a lot of effort to make sure that we could meet the legal requirements necessary to say, that if you lost a Seagate drive in California that you could claim that the drive is encrypted and than back that claim up with adequate proof that, we believe, would ultimately stand up.

I think that's going to be one of the interesting challenges when you listen to companies talk about compliance today. They are all talking about compliance with reporting the theft of the information, not compliance with how do I prove I didn't lose the information. And we actually think the latter is going to be ultimately much more important.

And the combination of both hardware Trusted Platform Modules, the server products, really will provide a full suite solution on how do you assure that when a laptop was lost, do you know which laptop it was , which data it had on it, and whether or not that data was adequately protected.

We are beginning to see the first evolution of the OEM’s, including encrypting drives and their products. I will start because I am sure there will be a number of questions around this. We are saying that until the specific OEM’s announce what software they're using to support their drives. I don’t think I can say much more. Let me say, however, that we really see three different models in the marketplace.

One is, where an OEM selects the specific software package, bundles it with their drive and their machine and ships it to market. We see a model where the OEM will jointly market and promote the software solution for the drives, but leave it up to the enterprise to purchase the software and ship no software in the box. And ultimately, OEM’s who will ship just drives with no software at all.

And so, some may ask, well what can I do with the Seagate drive if there is no software included with it? And there are the abilities to use just BIOS commands or what are also the interface commands to drive or ATA commands, to provide a password to the drive. But, then I have one password, I have no backup and recovery methodology, I have no ability to audit that the drive was actually turned on or turned off. So it may provide a sufficient single-user solution, but it ideally doesn’t provide a solution that gets you -- the “Get Out of Jail Free card” that say that the laptop I had had sensitive information on it, and that information was encrypted. So, you don’t have to print my name in the front page of the New York Times. And we think that really is the reason why most enterprises would invest in this type of technology.

We have actually been shipping software now with Seagate for a little while. We shipped software bundled with Seagate drives to their channel partners. Those programs are just, just beginning. We've supplied evaluation copies with Seagate to many of the OEMs, if not all of the OEMs point, and that’ were we are actually with the Seagate driver for evaluation drives that are supplied. And we have been delivering a number of pilot systems, we've delivered, I think, its just under a dozen now to a number of targeted enterprises. That are a combination of both our server product and client product with an appropriate platform with the drive installed for them to evaluate this solution, as a solution for data protection for their platforms.

We've gotten very positive feedback, I think people like this solution, they like the simplicity of it, they like the ease of management. Now the next step is for them to see the availability of the drives from their specific OEM partners. A number of these customers, we've actually help deliver to the OEMs to express their interest and desire in having drives as part of all the new platforms they buy.

So, we're very much right at the leading curve of the entry of this into the market. I think the course of this quarter will be very interesting to see how all the parts are merged and how the first customers get drives. I think we'll see the beginning of any volume that comes from this market in Q3 and Q4.

But so far I would say the reaction has been very positive, as we've been at different trade events as we have gone to see specific customers, they understand the solution, they understand the simplicity of the solution, they know that it meets their security needs, they have budget for buying data at [res] technologies, and we are helping them to understand that this is a great first step in participating in the trust encrypt computing group standards. The same server that we sell to manage a drive is the same technology that used to manage your TPM.

So you get a product from Wave that's an integrated solution for both drive and TPM management these are solutions that touch very closely together and we think we offer real value to the customer in getting them on a path towards, how do I manage my drive, how do I manage my TPM. Ultimately how do I manage different aspects of the security of my platform, strong machine authentication, things like strong integrity, moving ultimately towards I think where Intel is ultimately going in aspects of trusted execution in virtualization and measuring the BIOS and all those things that come along with the technologies actually that Intel is now talking about more broadly. That helped to secure the platform.

So, we are really seeing the evolution and emergence of the trusted platform, as a solution in the marketplace, there are lots of big vendors that are pressing the technology. We are the company that is in a position to provide the management and administration tools for these platforms. I think we've gotten ourselves great strength in our partnerships with the OEM's and in a position to supply the enterprise.

Let me talk a little bit more about the enterprise software sale. This has been the one area that has taken much longer to develop than we expected, it certainly is not tracked as we expected in the marketplace. I think there are variety of reasons for that, it continues to be a healthy education process to educate customers on what TPM's are and how they can use them and what are the benefits and the fact that most organizations today could leverage the Trusted Platform Module to have only their machines on their networks, which would dramatically reduce the external attacks. It's something everyone can deploy today although very few are.

We continue to invest in education of them and pilot systems that we’re working with a number of customers. We have new customers that are continuously showing approval or expressed interest. We've actually had a number of events that I think are very encouraging over the course of the last, even just couple of months. One is we've had two very large accounts who've shown up and asked for trusted computing infrastructure. Not, that they are trying to solve a specific security problem, but they recognize that this is a platform they need to turn on, and they are ready to begin to invest in building out the infrastructure turn on their TPMs. That's fantastic, because that's a solution that ultimately we can provide better than anyone else in the marketplace today.

And then the second is we had our first sort of unsolicited request for quotation that's delivered through the channel. It's of some substance, not an order for two or three units but an order for a few thousand seats. So we are certainly quoting that. It would be great when I can say we've had our first order where we didn't have to actually interact directly with the customer from a sales perspective all the way through the process.

Today, most of our, really all of our efforts are directed at hand carrying our customers through to their first solutions, and ultimately that experience will provide the foundation to build the broader enterprise business on.

We have a very strong pipeline. It sits in front for us. It continues to move to the right. And we continue to add customers to it. People aren't telling us this is a bad idea or that they don't want to do this. They are deciding how they want to do it. They are deciding if they have budget to do it. They are making decisions on who is going to manage it and how they are going to handle it.

It has been a long and frustrating exercise, but I think we are making solid progress on that front. We continue to evaluate, is it just market conditions, or are we doing something that we should do differently? We certainly tried a variety of different things and I think we've seen some huge changes in how the approach is. So I think, primarily this is a market education challenge. I think the real, as we look back in time, the real advantage we will have over the last period of time is the advent of Microsoft and Seagate and now Intel beginning to show how customers can leverage Trusted Platform Modules, and that this is the technology they need to consider and turn on. Then hopefully they turned away first as the company they can help them to implement.

Let me also talk a little bit about the government side of our business. We continue to work with our Federal government in a variety of different areas. We have the US Army and Air Force now standardized Trusted Platform Modules on all of their new buys. We saw over the course of the last few months that the Air Force standard secure PC image is intended to be the reference design for other federal agencies. So that will help to push TPMs across all other federal agencies; we are very excited about that as well.

We have seen the completion of the first phase, of really the architecture of how they would do centralized management from a US Army perspective. Now the next step within the army is for them to make decisions around, is this something they want to go implement and how they are going to budget for it?

I will say that the government sector right now, especially in the defense department areas, clearly a very big question mark that's established by the war funding bills that are out there as to how that's going to impact their general operations.

We went through a little bit of that last summer, so I think we know what that feels like, and that certainly creates more challenges in getting projects accomplished inside the government.

Having said that, there are number of projects that we have been asked to quote on. We probably have it around a $1 million worth of business that’s out on quotes at this point in time in the Federal government.

We will see whether any of those projects or things that people can actually bring to ground. Some of them are more funded than others. But these are cases where people who are in-charge responsible for spending the money have asked us to bid the business. And so, we'll see how they execute.

I would say most of those will probably naturally mature towards the third quarter which is when the governments sort of end their fiscal year cycle and they squeeze whatever new projects they have into that timeframe. So, that's what going on the government side. We see very strong interest in the trusted drive space. We've supplied a number of demonstrations and we are actually shipping now a number of pilot units to the government, so we'll see how that path ultimately gets covered.

I think there are some challenges in government with trusted drives, because of aspects of compliance with government regulations for cryptography. And ultimately the government is going to have decide how important those regulations are versus how much they would like hardware based full disk encryption, which is clearly more secure solution, may be they want to wait a year for people to take a look at how certification gets done et cetera.

Our general sense is that they will take machines with drives and use them. This is what they have done with Trusted Platform Modules and we see no reason why they won't follow the same path with commercial off-the-shelf drives as well.

So, finally let me just finish with a note on our Electronic Signature Group. We had some very nice transactions that were done through first quarter. They are contributing revenue to Wave. We have some nice transactional revenue combined with some one-time non-recurring engineering contracts and licensing contracts, and that we have a very small team, but we are making really good progress in demonstrating a transactional model for Wave against the public key infrastructure and the strong signature capabilities that are out there.

So, again as trusted computing begins to develop, having that type of a transactional business to grow as well, I think will be very beneficial to the organization. And we have also seen very good subscriber growth across Wave Express as Vista's Media Center infrastructure shipped. I think the next couple of quarters will be quite interesting to see how the video business continues to mature.

We are in a nice position with distribution with Microsoft. We are seeing others who are paving the way towards simpler arrangements with the major content providers and we hope it to ride behind them as opposed to investing and creating that market to have the same kinds of relationships ultimately on content basis.

So, I think we are making very solid progress. We continue to have the challenges in the enterprise business that ultimately drive our revenue. We would like to see that with stronger engagement today. I think we've demonstrated our capability to bring a whole second product line in our relationships with Seagate through our existing distribution channels, and improve our probabilities if not only the enterprise sales, but also our ability to expand our relationships with OEM partners out in the market. And we are making healthy progress.

So, with that I will stop here and open it up to questions. And we'll answer questions for a while and we will go from there. Thank you very much. Thanks for your attention.

Question-and-Answer Session

Operator

(Operator Instruction). One moment gentlemen for the first question. Our first question comes from the line of Ronald Meyer with REM Financial. Please go ahead.

Ronald Meyer - REM Financial

Hi, Steven. First congrats to the staff for the nice progress in this first quarter.

Steven Sprague

Thank you.

Ronald Meyer - REM Financial

In regard to enterprise traction, you stated on the last CC that we had over 400,000 seats in our pipeline. Would you update the number of seats in the pipeline about now?

Steven Sprague

I would say it's probably relatively consistent. I think, trying to expand it from beyond there, without showing execution in the baseline number, I am not so sure I want to expand that number. There are more customers today, who are aware of what we do, who are interested in it, who are running pilots. It continues to grow, but I am not so sure it's a meaningful number until I can prove that some percentage of it begins to execute as an underpinning.

Ronald Meyer - REM Financial

Okay. On the last CC, you said a good question and I quote, would be to ask what the level of Seagate units shipped for Wave, for the year 2007 might be? So, with some additional time and data under your belt, what's your estimate now versus Seagate?

Steven Sprague

So, I think we are pretty enthusiastic. What's been fun for us over the course of the last quarter is we've been able to deliver a number of big customers, to a number of OEM’s. Not so much in specific dollar orders, but people who said, we think this is really cool technology and we would like to buy all our PCs this way.

It's easy for people to say that. I would like to actually see them now follow through and do that. But it's been very helpful, I think, in creating the level of motivation across the PC platforms.

In general, I would say that this is a market that will most likely surprise everyone to the upside in the level of interest that there is in this technology. I think we clearly feel that, and having said that, we are just at first commercial shipment. So, there is a lot of stuff we don't know.

Right, so it's very sexy, it feels really strong, but we need to make sure that when you put it out there and its running on 5000 desktops, that it works solidly, and people don't have problems and until you run something that has some scale to that I think there is a lot of stuff you don't know yet.

I would say, in general, a good way to think of this in our enterprise business is on the TPM side it's probably a much harder sale, but we know a lot more. On the Seagate side, it will most likely be a much easier sale, but I don't know enough yet. So, I think we are very optimistic but we are cautious at the same time knowing what we know around security, other parts of this that are little harder than people expect.

And it's been fantastic to deliver, so, today if you are a medium size to large size enterprise, I will supply you with two pieces of equipment; a client side machine with a drive installed and a server, and let you completely evaluate the full capabilities of the solution. And I think that that has been a very helpful program for both us and for Seagate to understand what's the customer looking for, what do they like, what they don't like. And we've got in great feedback. So, we know lot more today. I think, I want to be a little bit cautious on speculating on this side of it, but I think this could be a pretty substantive piece of business.

Let me also say that I think we are going to see a lot more competition in this business because it's a much more substantive business. In the short term, I think TPM’s are harder to engage. We probably have a much bigger lead than anybody else there. I am catching up to the functionality that we've built for Seagate, isn't a huge challenge for others. However, when you integrate Seagate with a Trusted Platform Module, let me give an example. And I think it's very important to understand, because it will help people to understand the competitive nature of this business. If you really want to protect data, you need to know at least three or four things. One is, which machine connected to the server that has the sensitive data on it, what sensitive data was put on what laptop and did that laptop have an adequate security solution installed on it to protect that data going forward.

Gerry Feeney

So automation becomes important there.

Steven Sprague

And when you lose the laptop, calling Fred up and saying hey Fred was it encrypted, is an insufficient request for the legal and accounting world. You need some level of assertion that others couldn't have screwed it up in the field. So taking all those pieces together, you have strong machine authentication using a TPM to get to the server. You have the server doing something like trusted network connect or EEE product to verify that the client machine has got the right integrity to have any data. You need a transactional record of what data was delivered and then you need an adequate data protection solution of the client, which would be Seagate, and then you need a record on ERAS server that says that Seagate drive was put out there and the user has no ability to mess it up. And when we may know, no ability to mess it up you can take my laptop with a Seagate drive and completely muck up the operating system, install Linux, if you want. And when you close the lid and open it, the first question it asks you for is what your password for your Seagate drive is?

The hardware is completely independent of the software. So, that collection of pieces on an industry standard basis, we are the only company in the world to have that capability. There are certainly are those who provide software for disk encryption today. Some of them have announced support for Seagate's drives and they will go after the market sayings encrypt your previous installed base and use us on Seagate. And we would just argue that, if you are going to spend the money to manage a new machine, why not take advantage of that same set of dollars and use it to manage your TPM, manage your drive, manage your trust infrastructure going forward, not just solving data protection.

Ronald Meyer - REM Financial

Let's hope your argument wins. A last question, could you elaborate a little bit more regarding what impact on Wave that you see from the recent Intel announcement of the grand technology available on their Santa Rosa platform or their business notebooks and particularly maybe someone like Sony or someone like that?

Steven Sprague

I think we've been waiting for our review long time. The reality as you are seeing the rest of the pieces, which originally was why Trusted Platform Modules showed up. And I think if you go back to our 2003 Annual Meeting when Palladium, was launched the first time, I think we clearly articulated that there are three pieces, a modification to the operating system, a modification to the main processor and hardware, and the Trusted Platform Module. And now you are seeing, what's been shipping in many machines as far as that's the main processor, you are now seeing chipsets that can take advantage of many of those features. And so I think we're going to see complete blossoming of use of these new trust capabilities in the platform so that we can extend the trust boundary from the centre of the network to reach out to the edge point of network. In some aspects Wave has been saying this for such a long time that, I have to go dig up slides from three years ago and replay them, because finally the market is delivering the infrastructure that we've been building for.

And you can't ship this stuff forever and have the enterprise not become aware that the core best practices tools are available in their machines, in many cases, for free; they just have to go and turn them on.

So, we'd like to believe that the 50 million TPMs that are shipped to date are out there in a position where as people discover this, all of them are going need to get software, all of them are going to need to get under management and Wave is in the strongest position to do that.

And we love the fact that when you look inside an HP platform, some other platforms don't have the Infineon software and they recommend if you want to use it to go look at Wave. That's great.

Ronald Meyer - REM Financial

Yeah. Okay, thanks Steven.

Operator

Thank you. Our next question comes from the line of Calvin Hori with Hori Capital. Please go ahead sir. Mr. Hori your line is open?

Calvin Hori - Hori Capital

Yes, can you hear me?

Operator

Yes, please go ahead sir.

Calvin Hori - Hori Capital

Yeah, Steve.

Steven Sprague

Yes, I can hear you.

Calvin Hori - Hori Capital

Hi. I was going through your recently issued proxy and frankly I am quite [appalled] that on the salary you and Mr. Feeney are pulling down given the performance of your company over the past few years?

Steven Sprague

So, I can comment on that in saying that we've actually done a number of…

Calvin Hori - Hori Capital

Let me give you some numbers. I actually went through that in 2003, from 2003 through '06 you have had net losses totaling $73 million. Your stock price has gone from 373 to 253, a drop of 32% over four years, and yet you paid yourself over those four years $1.8 million salary and bonuses. Mr. Feeney paid himself $1.396 million. A total of $3.25 million over four years were $73 million in losses and the 32% drop in stock price. Now, I get paid on performance as well, especially at this kind of performance I won't be getting any salary, and won't have any clients. I mean, do you think this is fair?

Steven Sprague

No, I think we've tried to be very clear over the development of the company as to what the primary mission of the organization has been, and I think there have been a number of places where we've been very successful. We don't ship a million copies of software last month by not doing anything.

Calvin Hori - Hori Capital

Yes, but I get (inaudible) the stock performance.

Steven Sprague

You asked your question, and let me respond to it. At the end of the day, the stock price will take care of itself if the company is successful in executing the underlying business.

Calvin Hori - Hori Capital

Right.

Steven Sprague

We are focused on being the leader in an emerging market sector. The nature of an emerging market sector, in this case, there aren't many of them that come along and this is a new PC industry standard that's being driven across the board, and Wave is clearly in a position of leadership, and the software to support that new emerging standard.

Our goal has been to put the company in a position to be in that leadership position. The challenge we have, and I won't understate the challenge, the challenge we have is that to date the enterprise, which ultimately funds a software business like Wave, has not yet engaged on using this new emerging standard as part of their security solution. It's not that money has been collected by others and that somebody else is being wildly successful in selling enterprise software in the TPM space.

We prior collected, if not the majority a very significant portion of all dollars spent on enterprise, software for Trusted Platform Modules to date. So, in a startup environment and whether this is 14 years old or 3 years old, it's still a startup environment. You are in a brand new emerging market; there is no established metric for the execution in the TPM space. And what we are trying to do is be in a leadership position to accomplish that, and I think we've made very significant strides in that.

So when, if I look at just in the last quarter’s performance, the thing that's most important to me is that when Seagate launched their platform, we were there with their solution. We participated with them in the launch of that platform. Our brand was broadly articulated with Seagate's brand and the launch of new trusted drives. As OEMs are looking at that new hardware as part of the trusted computing solutions, they are seeing our software in the box. So, we are at maximum level of presence that you could achieve for a small company with a large partner like Seagate. And we are very pleased to support them in that aspect.

Calvin Hori - Hori Capital

So, you believe your salaries are justified?

Steven Sprague

I think if you look at us in the concept across a publicly traded company, we are below the medium in compensation. Should we be the least paid executives, I don't think so. Should we be the most paid executives in this space, I also don't think so. We are below the medium point and I think that's an appropriate place for us to exist at this point in time.

Calvin Hori - Hori Capital

Let me put it this--

Steven Sprague

We structured the compensation, so there is a portion that's fixed and there is a proportion that is a [sudo] guaranteed bonus. A portion of the bonus is guaranteed a portion is not. And that's given us flexibility in how cash flow and payroll has been done. And it has varied across the years and certainly across quarters. But at the end of the day, yes I think we are fairly compensated for where we are in the business that we are today. And for the level of risk that we are pursing in this business and I think if you had to find somebody to replace our positions today, I think you have some interesting challenge to try here.

Calvin Hori - Hori Capital

I understand what you are saying, but you've already given coming back to the market frequently doing shelf registration spot. And if you and Mr. Feeney cut your salary in half to say $400,000 a year right there. So, don't you agree, I mean, this is a…

Steven Sprague

I didn't make that argument for across my entire organization…

Calvin Hori - Hori Capital

This is cash need business, I mean--

Steven Sprague

The only cash expense you are having with, I mean the fundamental cash expense is employees.

Calvin Hori - Hori Capital

Okay. Can't we have a formula based on your profitability or revenues or something, $5 million loss a quarter is just doesn't cut it?

Gerry Feeney

I think that from a execution perspective, if you want to attract a team of people, who are going to execute in this business, to put a company in a position we are, we've tried to be very clear with people that our goals is to be the leading provider of software in this emerging space. And to benefit from the emergence of that market, we are seeing the emergence of that market. We are seeing the growth of it. It is not as fast as we would have liked or nor as we have expected. But at the end of the day, you have to pick your specific business or not, we are not in quarry mining, I could argue for the amount of money you've invested we could go own a quarry somewhere in Michigan and make even more money than we have. But we wouldn't have the potential sitting in front of us that this organization has.

Calvin Hori - Hori Capital

Still 14 years. I mean, it's not like two years it's been 14 years.

Gerry Feeney

I can look back at the history and I can, and one can look at it and close your eyes and the other way to look at it is from an experience perspective. Those experienced have put us in a position where we are, where we are today. There are lots of people that are out there. They have gone through companies that were or were not successful. That may have failed those businesses that they just don't have the legacy of that business attached to them in real life numbers.

But you go on to find and develop the right market, and I think that, this is really of course what we do. I think that this is a very important question to ask. And at the end of the day, I would hope that the majority of people who invest in Wave, invest because we have clearly articulated what our objective in the market is, what our goals are. And that you can see us executing against those goals.

Calvin Hori - Hori Capital

The bottom lines are the numbers and that's what I want to see, I want to feed numbers.

Steven Sprague

Trust me; I would love to see the number as well. But in lieu of the numbers, one has to also look at how have we positioned ourselves in an emerging market against the potential of that emerging market? And if you look back in history in the PC industry, there is a tremendous sort of examples of how, when Microsoft and Intel pick a new standard technology whether it's USB or Ethernet or others, in essence, Cisco rose out of the fact that Microsoft and Intel picked Ethernet, because they built the switches that connect to the other end of the line. They weren't the token ring company. They weren't the LANtastic Company. They were the guys who built RJ-45 Ethernet. So those standards will drive adoption. There is no question in my mind that as we move forward over the course of the next five, six, seven years, that all of the Internet transactions that we do will leverage Trusted Platform Modules as part of their security.

So, where do you want to be against that future potential, where we sit today? And I think putting your brand as broadly as possible into platforms, providing the solutions in our infrastructure to manage and deploy the technology, being in a position where when somebody decides hey, this is trusted computing stuff, might help me solve my problems. The first person they call is Wave. That's where we are today. And I think that we, using Seagate as an example of something that we've done over the last two or three years, yes, we invested a ton of money in supporting Seagate's development of this product and our solution against it. And the education of the market to be in a position where we have the opportunity to be one of their leading software partners today. Now we have to execute. If we can't sell anything against it, then they will all be a waste.

Calvin Hori - Hori Capital

If I am on this call a year from now and I still see another $5 million quarterly loss, are you still going to tell me you've been progressing well?

Steven Sprague

I think I would certainly hope that that's not the case.

Calvin Hori - Hori Capital

You got to look at those things clearly.

Steven Sprague

But I think there are other things. So, I mean at this time I really don't want to speculate on the numbers.

Calvin Hori - Hori Capital

I don't want--

Steven Sprague

I think there are lots of ways that a company can be very successful in the market. So, if you saw huge growth in the revenues, and you saw growth in the expenses, and say, you saw a $5 million quarterly loss, but you were the dominant player in the field, and it was growing substantially every quarter and every quarter, and you were investing in building that sales, would you agree that that was a good thing or bad thing?

That I think comes to the question. And I don't think we should speculate today on whether that's the case not first objective for me, trust me is to get to the point where we are cash flow breakeven. So, we are not going to the market to raise the capital to fund the business.

Calvin Hori - Hori Capital

Do you need more capital soon?

Steven Sprague

Yes, we do, absolutely. You can see that from our balance sheet.

Calvin Hori - Hori Capital

Yeah, okay. I just want to say one more thing and I am going to get off.

Steven Sprague

Okay.

Calvin Hori - Hori Capital

I am just equally apologetic with the compensation committee for approving this package. That's what I am going to say and I will let somebody else get on with questions. Thank you.

Steven Sprague

Thank you.

Operator

Thank you. Our next question comes from the line Timothy Collins with Security Research Associates. Please go ahead.

Timothy Collins - Security Research Associates

Steven, I think you certainly earned your salary and bonus today. And I want to congratulate you for bringing Seagate to the front. I think it's an incredible achievement, even though company just of your Seagate relationship. So in my mind adding the Seagate relationship to your other OEM relationships certainly should give your potential enterprise upgrades from us, to give you some mindshare, some of their mindshare and help you to bring a class to some of these upgrades. And that's probably something you probably, you could spend enough time talking about, although it's very difficult to project.

As a direct question, I thought it would be appropriate to ask, since Hori has brought up compensation, that I know that you streamlined your option programs. So it might be appropriate just to mention your option program. I think it's important also to mention that you don't have two employees you have 100 employees. And that it's the direction of those 100 employees that are getting the job done, and I think they all deserve a lot of credit.

And I guess, finally I would say that you are marching towards cash flow equilibrium, I think the hardest thing for the company was to get any revenue at all. And now it's just a question of how fast will more revenue come. And I think, that's a marvelous question and I know it's hard for you to speculate on that. But, probably the whole enterprise pipeline and now that Seagate is there it probably could deserve a little more comment from you.

Steven Sprague

Yeah.

Timothy Collins - Security Research Associates

And that's it.

Steven Sprague

So, I will try and address the two or three questions. So one is, yes, we have out there a modification to our previous proxy. We've reduced the number of options we were asking for. Our original intention was kind of put the company in position where we had all the parts in place for long-term growth.

I think, clearly, we got some feedback that we would like to be in a position to have smaller option pool as a ceiling and if that's consumed then let the company come back and ask the shareholders for additional options at that point in time. And I think we agree with that and we certainly changed the proxy as a result.

The second is, in the enterprise side of the business, as I said in the sort of body of my comments. I think we are very warmed by the level of interest from people in Seagate drive solutions. I will give you an example. We have a customer out there who has fairly broad number of TPM’s in their network and we've sent them a Seagate solution and they are evaluating it and they've been quite pleased with the progress on it.

And they wanted to understand what the pricing was for a few hundred seats of Seagate, but then they said well and what will it take me to also manage my few thousand seats of Trusted Platform Modules. And therefore we get two bites of the apple in those conversations. And whether they choose to extend their server pricing to cover all the Trusted Platform Modules today or tomorrow, I don't think I really care, obviously, I would love it to be sooner than later, from revenue perspective, but ultimately if Seagate helped me to drive my administrative solution into their network, then it's there for them to manage their Trusted Platform Modules as well. When they make the decision to turn them on because they are going to be useful for them.

And ultimately, that's the thing that's so powerful in this so tomorrow we are out in Kansas with ASI talking to all of their re-sellers, of ASI Platforms, ASI selling laptops that have Seagate drives in them and our Wave software installed in them. And these are ultimately the folks, who put these platforms in front of real end customers. And now I think offering them a clear understanding of what the servers are and how the solutions are managed and how they work is very useful. But I am sure that they also need a full education on what a trusted platform module is and how it could benefit them as well.

And all the ASI platforms have TPM’s on them and many of them have our full TPM management software in the box because they came through other pipelines of supply of either chips or motherboards on to ASI. So, it's a great position to be in where you can talk to somebody, who is a megaphone to the customer about what our solutions are, not only the Trusted Platform module solution, but also the Seagate solution. And ultimately whether the customer buys Seagate first and then upgrade their TPMs or vice versa, it really doesn't matter to us, we can provide a consistent product for both pieces.

And I think over the coming, both weeks and months, it will be very clear to people how their other solutions for how we do machine identity, how we do machine integrity and how we add real strength to the business on having other organizations articulate that you want to turn your TPM on, and here is why, here's why it's a good thing and that Wave is an interesting company to work with it to help you solve these problems.

I think the more large organizations we can get pointing to us driving these solutions forward in the market, the better off it is for us. And so that's why we are very focused on today is in an emerging market, I want to make a comment on a previous question, in an emerging market what you don't want me to do, and I really truly believe this is be the perfect TPM solutions in the medical sector with a $200 million total available market sitting in front of me and be making $1 cash flow positive. And someone else is supplying the horizontal market at a loss.

Because the horizontal market player will always win and while you might have a short-term win in supplying just a narrow solution he missed the whole market. And that's why it make sense in these industry standard solutions to partner with companies who put our products in Russia, in Poland, in Japan, in Singapore, in India, in Australia, in South America because that's what company like Dell does. And so, we support our product in 14 different languages and our product is being distributed in those countries today. And it is an effort for us to build the organization necessary to support that. And to your point, those people don't come for free. And we have over 100 employees that are driving the support of Dell in the market and our other OEM partners, as well as, there to help teach and educate the customer and how to leverage this technology. So, hopefully I answered all your questions, Tim, I think you did.

Steven Sprague

Except the one, which is, how much money do I make in third quarter?

Timothy Collins - Security Research Associates

Carry on Steven.

Steven Sprague

Thank you.

Operator

Thank you. Our next question comes from line of [John Cangelosi]. He is a Private Investor. Please go ahead.

John Cangelosi - Private Investor

Hi, Steven, this is [John Cangelosi]. Can you elaborate on the progress of Wavexpress?

Steven Sprague

Sure. So Wavexpress is shipping in every copy of Vista, Consumer Vista that has Media Center as an online spotlight partner. We are one of about I would say it's less than 20 online spotlight partners. It's about a dozen. Some of the people have more than one icon. We bring all of the rest of the consumer video contents, all of the various video blogs. We have a number of great content partners, AP is one of them. Some of the brands that are out there that are more niche brands. And we have been adding in the neighborhood of a few hundred subscribers every couple of days since the launch of Vista. And so it's been growing quite nicely.

What's interesting to us as we see that there are companies that are getting a lot of publicity out there, companies like [DUSE] would be perfect example. Great marketing machine, signing up great content, but what they are really doing is helping to pave the way that makes it easy for other real players in the market to sign the same content. And with the relationship that we have with Media Center, we see tremendous opportunity to bring those same type of content experiences into the Media Center interface.

So, it's an interesting market. We have a very small team. Why do we invest in the Media Space? Because clearly we see consumer Trusted Platform Modules coming. And I don't know about you, but I am really annoyed with logging in to everything on my PC. And we certainly see that, if we could eliminate that kind of experience in media and yet bring security that would be a very beneficial capability. And it also brings us the broader relationship with Microsoft on their consumer side.

So, we are making progress. We are reaching finally an installed base of subscribers, where you can get more serious about bringing advertising revenue. Those advertising revenue models are pretty well established. So in another few months of growth, it probably gets to a more cash neutral operation within the company if the advertising dollars that are expected out there are materialized. You just need enough subscribers to maintain the attraction of the larger advertisers. If you go and download the service, it works great today. It gives you the highest quality video experience that there is on the internet. We serve everything from regular definition to high definition. And if you have an Xbox, that will actually play all the way from your PC through to your Xbox as well.

John Cangelosi - Private Investor

Right, one more question, how much is the Wave's business like percentage wise towards the government side?

Steven Sprague

It's not a huge amount. I have--

John Cangelosi - Private Investor

Could you give approximately like 10%, 15% or--

Steven Sprague

On a percentage basis, I don't know it of the top of my head. We have a three person team. Who are pretty much a 100% focused on government and then the rest of us all pitch in as required when the opportunities present itself. So, this would be true of any account right. If you need engineering support, the team can get way bigger, very quickly. We have focused predominantly on the defense department, because we see them as providing the leadership in government for how strong identity and machine identity is going to be deployed. That's what helps us get the commodity purchasing sign.

The thing that government has to do, there is just no question about it, they have to turn on the back office infrastructure to manage these trusted platforms. The longer they wait in doing that, the more expensive it becomes for them and the bigger a challenge it is to turn it on for everything. So, that's the next big step. And when we achieve that step it generates revenue for us, that’s very significant. It still takes a little bit time. Engineering has been going on to design it. But it does not have -- so, we've been trying to be very clear where it is in this process.

The architectural picture is done, but nobody has approved the building of the project yet, and that's the next step. And once they approve the concept then they will have to go figure out how they are going to buy it. So, there are still really two big steps to go that drive them ultimately to purchase. And the path we're headed down is a path that's very similar to other enterprise solutions in the government for an enterprise wide license to this kind of software. And that will ultimately be go out as a bid and we'll be one of the people who can bid on it.

So, this will be something that hopefully is very specific to what we do, which is how do we manage all the Trust Platform modules. So, we are enthusiastic about it, but it is the government. It's a 500,000 seat opportunity, that's been the scale.

John Cangelosi - Private Investor

Right. I just have one more question and then I have to go. The workforce, have you seen there is a 100 employees? Do you see yourself increasing the workforce any time soon in the near future?

Steven Sprague

No increases as the sales justifies it. I think we have an adequate level of staff to do the business that we are doing. But, I think we also have to pay very close attention to not being afraid to add resources in those places that we see substantive growth. So, I mean I think Seagate is a good example. I think we could very soon support broader channel support as more people have this technology in their hands.

You are seeing just, just, just the front edge of the Wave arriving. Okay, there are few drives that are listed here and there and everywhere, but it's sort of unclear what am I buying, how do I buy, where do I buy it, and how much does it cost. The details I think will emerge over the course of even just the next month or so, and it will become much clear as to how does an enterprise begin to acquire this and what does it do.

John Cangelosi - Private Investor

Right.

Steven Sprague

I certainly expect the most enterprises here will order a few 10s or a few 100 machines and try it, to see how it works. I also don't think that we will see a huge market for people who go back and retrofit their drives. That's asking too much in my opinion of the average end user. Take your old drive out and throw it away. Put a new drive in so you can have a trusted drive. It's quite easier to buy software to do that and wait till you get your next machine and then buy a machine with a hardware drive. I want to say it won't happen, but it won't happen a lot.

John Cangelosi - Private Investor

Okay. Steven, thank you very much.

Steven Sprague

Thank you.

Operator

(Operator Instructions) And our next question comes from line of [Barry Clairmonte] and he is the Private Investor. Please go ahead sir.

Barry Clairmonte - Private Investor

Hi Steven, how are you today.

Steven Sprague

I am doing very well. Thanks.

Barry Clairmonte - Private Investor

Good. I have a couple of quick questions for you. You mentioned that you had a couple of large companies that are using the TPM service now, and there haven't been any announcements like there was with Papageno's when they came online. So, can you just tell us approximately how large those companies are in comparison to a Papageno's?

Steven Sprague

So, let me answer in a couple ways; one is, I mentioned before there are a couple of large companies that have contacted us who want to go deploy their trusted computing infrastructure. One of those is over 50,000 sits and one of them is over a 100,000 seats. So, they are organizations of some significant substance, the result is also although if I take a little bit longer to close to business. But they have been provided with demonstrations of our software systems to run internally and ultimately the goal is getting them to make a commitment to this across their enterprises.

We have deployed solutions today in organizations that have a few thousand seats, not necessarily on every one of their computers, but starting to role into their organizations. So, the level of dialog, the level of interest has gone up dramatically over the course of last few months. But we are not at a point yet where I would say some of these large enterprises are in a position to become a reference and case study they are still in, I wouldn't say they are completely committed yet. Right, they are still in the evaluation stage they have identified us as a leading vendor, they are testing our solutions, they are trying to understand how we can help them.

And then, they learn a lot in that process and then, they have to go back and say okay. Now how really do I want to architect the deployment of this infrastructure now that I know more than I did when I called them on the first day of the process. I think that initial phase of the sale is what's taking way longer than we expected. They don't understand how this can help them. Once they've learned how it can help them then it goes takes them back a little bit to the drawing board to say okay. Now how do I architect this into my network what other things, is this going to impact? When do I start, how do I start? What other parts do I have to stand up, et cetera?

Barry Clairmonte - Private Investor

Okay, that kind of leads into my second question. You made a statement earlier about being surprised at how slow the adoption rate has been going on and that the revenues are lower than what you had anticipated, matter of fact last quarter you actually threw the sales team under the bus. But you've made another statement in today's call talking about people being, are going to be surprised at the upside of this industry. Can you reconcile those two statements for me and why should we take what you are saying at face value given some of your past predictions about when and how this technology was going to be adopted?

Steven Sprague

So, I don't think my prediction on the adoption of the industry is what you should rely on. I think you should just go to a tiny bit of research, and the tiny bit of research is how long did it take for Ethernet to become the dominant technology in the market. How long did it take for CD-ROMs, for USB etcetera? And what you'll find, if you go look at those businesses is that they tended to have very small adoption traces for a little while, CD-ROMs existed for five or six years before Microsoft said lets put them in every box. The lets put them in every box decision to adoption on every machine shipped we're right on that curve.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

So, I've looked at those curves before, they are great presentations from Intel, you can get that show going back as far as the adoption of mass coprocessors. And they are all S-curves and they trail along and then they go absolutely vertically North and then they trail off when you reach a 100% of all machines have the technology. And you just have to pick up a laptop and look around until you get multimedia, you get color, you get USB, you get Ethernet, you get some standards that have come and gone already, like parallel ports, all right. Floppy disks are another good example, where it just became a predominant standard in the box and shipped until it was replaced by a new standard in the box. I believe that Trusted computing is an absolutely solid adopted standard. Don't believe me? Go look.

Is there anybody else out there who is adopting? So I am trying to give you a roadmap for where I am looking and I see Microsoft saying, hey, we are the biggest application users. Good starting application, Microsoft's operating system. Next one will be Seagate, somebody with 50% market share saying "Cool, we think trusted computing is excellent. Let's add it to our product, build products that support these industry standards and improve the trust in the client machine, because the security of the PC sucks"

I mean fundamentally, this is the most broken thing we use everyday. Compared to our cell phones and our set top boxes, the PC platform is the least managed platform we have. And we you know carry that forward. In the last two days, you are seeing Intel starts to talk about their usage of trusted computing in the marketplace and I think you are just seeing the forefront of that curve and a discussion of that.

So, how big is it going to be? If every single organization turns it on and uses it, because every single person has it, I think it's a really, really big market. You know, what's the total revenue per year times a billion; it doesn't have to be a very big dollar per year, per customer times a billion to get to be a very, very big total available market. It's not to say a 100% percent of that market comes to Wave. By no means, will it. But we are at the forefront of being a leading participant in a market where our market share can do nothing but go down. Because if it goes up and we own predominant share in this market, if a billion people use it and we have 50% market share, you can't imagine that number.

So I look at it and say, well how do we go out there and have a significant presence in millions and millions of dollars in revenue that results from being the leading provider of solutions to this market as it emerged. That's what we are trying to do.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

And I think we've been very clear, and I would like to believe we've been clear that that's our objective.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

Problem, of course, is as you look at the (MENUSHA) data, if you get down into how’s the sale executing. Yeah, I am completely surprised. I cannot believe that the average enterprise is out there. So we could have completely stopped the TJ Maxx hack. So how?, How, because if their admin machines that have been logging on to TJ Maxx had been doing TPM authentication to their switch invisibly to their admins, then you would have had to steal an admin's machine to get on their network. That's a totally different level of attack to some guy stealing the user ID and password.

Barry Clairmonte - Private Investor

Right.

Steven Sprague

That they could have done, they've had two years with the platform shipments, one year without software and one year with software from Dell that would enable that. There is no excuse for any enterprise not turning that on. At some point, we are going to end up with somebody turns it on a little bit, and then you are going to see their freight train arrive because KPMG and Ernst & Young and those guys are going to get wind of the fact that we all have much more security in our enterprise than we thought. We just haven't turned it on. And it will become a breach of the fiduciary responsibility of the IT department to have not enabled the strongest security that they already own. If you had keys and nobody used them, you never locked your car, don't be surprised if your car is stolen. Right?

Barry Clairmonte - Private Investor

I agree.

Steven Sprague

It's a bad excuse. So they have got keys in all their cars at this point and they are not locking the car doors.

Barry Clairmonte - Private Investor

I think its largely because a lot of them don’t know that they have the keys.

Steven Sprague

I met with a top 5 bank and they were shocked to discover that this market was where it was.

Barry Clairmonte - Private Investor

Right, and I think--

Steven Sprague

And the guys at CSO and a large bank, and they are like "You are kidding me". They are on the platforms. It's like looking at his own platform, he's got one in his machine, he doesn't even know it. So, I think that's where he challenges to educate the market that they have got them. So the best thing that's happened to us is Microsoft, Seagate, and now Intel. Because I can't create a billion dollars with a marketing noise, we can't. There is no way to do that.

Barry Clairmonte - Private Investor

No, I understand.

Steven Sprague

I can just be there as the others launch the market. And so, some days we are out knowing the gold rush is going to happen. TPMs will get used. I don't think there is any doubt about that. Maybe I am wrong. If I am wrong, than this is not going to end well, right?

Barry Clairmonte - Private Investor

Right.

Steven Sprague

That's the fundamental premise we're all here. If anybody has invested in Wave stock and does not believe that TPMs will get used, that's a mistake. That's our fundamental premise. And so we are here making the assumption TPMs will be used, it's quite clear they will be on every machine built. And the reason why they will get used is very simple. There is no other technology in the world that will make the following possible.

Lets just take healthcare as an example. Every hospital, every doctor's office, every first responder, every EMT, every patient, and every insurance company in this country and all other countries in the world will have a PC with a TPM. Therefore, I know how you are going to authenticate to your electronic medical records five or ten years from today.

So, what you do, where do you build, where do you want your brand to be. You don't go build the medical record solution, because you could be the perfect provider there and you get killed by the guys doing media, or you get killed by the guys doing something else. What you want to do is provide the baseline infrastructure and some nice vertical examples. And that's what we're trying to do. So that when the medical industry just wakes up in the morning, discovers that every hospital that has a network of local practicing doctors in town that have strong authentication to the doctor's office without user ID and password, the machine is locked in the office. Cool. We want them to call west.

Barry Clairmonte - Private Investor

Okay, that's fair. Two more really quick questions, this next one should be very quick. Did you guys have the ability to monitor how the proxy's vote was going on the option plan before you changed it?

Steven Sprague

No. I have no idea if any vote were cast or whether they were voted yes or no.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

At least, I am sure that people had mailed things, and I am sure there is somebody who has collected something. But, I have not seen any data on that at all.

Barry Clairmonte - Private Investor

Do those go to the company or they go to an independent house to count them?

Steven Sprague

No, they go to some external, I forget who counts them, specifically for us. But, anyway they go to somebody who counts them, who is part of the whole mailing of the proxy and whatever.

Barry Clairmonte - Private Investor

And the company didn’t know what those results were when they made the decision to change the proxy?

Steven Sprague

No, it was very clear from our shareholders, they weren't too happy with the way it was the first, and I think hopefully we've put out a proposal that addresses those concerns and that people are comfortable with.

Barry Clairmonte - Private Investor

Okay. My last question to you Steve and this relates back to the earlier caller who was talking about compensation and I am sorry to bring this issue back up. But, over the years, I am sure you know I've been a frequent caller on your conference calls and the answer that you gave that gentlemen is almost verbatim to answers that you have given me starting back in the year 2000-2001. At what point in the future if the company continues along the revenues path that it is now, or let's say losses that continue in the $5 million, $6 million a quarter range. Would you say to yourself that I have not been successful in leading this company to where it needs to go, its time for me to step down and give the reins to someone else.

Steven Sprague

No, I think at the end of day the Board is going to have to make that decision. I serve with pleasure to Board; I am not a founder of this company, I am an employee, certainly my father was involved at beginning of this, but we have an independent board of directors and certainly a majority of them are independent.

Barry Clairmonte - Private Investor

Right. But I am not asking about the Board’s opinion.

Steven Sprague

They can make this decision. I guess the question at the end of the day is, are we in the right position? And has the market begun?

Barry Clairmonte - Private Investor

Well, Steven let me back track--

Steven Sprague

No. Let me answer your question specifically --

Barry Clairmonte - Private Investor

Alright. I have to make long win then.

Steven Sprague

That's fine. I think the challenge with this is what dictates that the company has not been successful in this context. And I guess, I would like to focus right now and what the specific successes are. If at the end of day somebody else emerged, doing the similar business to us, and they were asked briefly making $20 million a quarter in their enterprise sales business, and we still haven't sold an enterprise copy then I think you have to shoot the whole lot of us.

Barry Clairmonte - Private Investor

Okay. I guess where my issue comes in Steven is, I have been asking this question as you know for a number of years, and in that timeframe the company has changed directions multiple times, as to what its goals are, what it is trying to achieve. And I understand what you are saying about the board of directors needing to make a decision is to whether or not they want to continue your employment. But what I am getting at is, I know on my job everyday, I sit down and say, have I done a good job? Am I doing what I am supposed to be doing? As I think most employees and most businesses do in the world. You self evaluate yourself.

So, what I am asking is, would you come to the conclusion in the future if this company is still not generating significant revenues whether it would be one quarter or thirty quarters from now? Would you say, no, I haven't been able to do the job that this company needs a CEO to do, to get it to profitability. I mean you needed two or three quarters ago said, you will be profitable, but in the next quarter…

Steven Sprague

Let me the turn the question and ask, the question is very simple, on the context to the last year, okay; we've been in a position where clearly enterprise is not yet engaged in trusted computing. Right? So its hard to, I wrestled with this problem actually very significantly within the context of my sales team on a regular basis. But from an overall organizational perspective, we have, in the course in last year, in my opinion executed very well in the context of the market that we are in. And so we have doubled the product lines that our customers can buy.

We've signed a second very major sort of channel of distribution in our relationship with Seagate. We have delivered on the volume of units that we expected to ship at Delaware across a 100% of their commercial business lines. We'd have like to have closed the other OEM in the course of last year. I think a lot of that was delayed through the complexity of distance launch and nobody wanted to touch anything because it was so delicate. So, we have not executed on the enterprise side, I am not trying to hide from that fact.

Barry Clairmonte - Private Investor

And I know you are not.

Steven Sprague

I think in the context of things that we have control over, we've made a lot other right steps, I won't say every step has been prefect, it hasn't, but I think we've made very solid progress in the marketplace. And so, could we do things differently, yes. But I think we've been on a very consistent mission, since in or around the 2000 timeframe as TPM has emerged as a standard. And so if you look at our stated goals in '02, '03 timeframe as we stated them to the public, we've been following that path very strongly and there is no question that we keep looking for the softer spot to get the market to engage from a revenue perspective more solidly and more quickly, but that’s been the challenge in the market, so we do get up. Trust me, I get up every morning and ask exactly that question. What are the things that we could do to perform better in the organization? I don't think we are satisfied with where we are and I don't think you want us as shareholders to be satisfied with where we are. You want us really working towards how do we make this thing successful? We have a whole lot of tremendous opportunity and we have to continue to execute in this space if we are going to succeed.

Barry Clairmonte - Private Investor

I guess that's the thing that concerns me, because you made a statement earlier that, there is only so much we can do, we can't do a billion dollar marketing. We are just kind of here waiting for people to come knocking and that's sort of contradicts to the statement that you are talking about going out and executing you. In one breath you say, you are doing everything you can and in the next breath you say, well it's not my fault and I am kind of here waiting for the markets to come to me?

Gerry Feeney

So, which is the things we do is a question of --

Steven Sprague

But we do the things that we can afford to do. There is no question and we don't have the resources to go run double track ads everyday in the USA today. That doesn't mean that we can't go talk to the US army into standardizing TPMs in every machine they built. Okay.

Barry Clairmonte - Private Investor

Yeah.

Steven Sprague

So, those aren't contradictory statements. It's just one you can exercise with large organizations launch markets by writing checks. We have to do it by convincing others to either write big checks or by convincing others to make clear and positive statements of the global adoption of this technology. That's a little bit more subtle exercise. We don't have the resources to write a billion dollars worth of marketing. That doesn't mean that we don't get up every morning and push.

Barry Clairmonte - Private Investor

Okay. Do you have specific goals? I mean are there goals to say, we need to reach this level of sales by a certain point in time, I mean so you can measure yourself against those goals?

Steven Sprague

Yes, it's just that my primary goals are about market share and making sure that I don't let someone else in the box. And that we are the first one to go get the revenue.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

It's very hard to predict the revenue right now.

Barry Clairmonte - Private Investor

So someone else would come and take a large part of the market share?

Steven Sprague

If you came in and looked at the goals and look at execution against the goals, we've made very stock solid progress. What we've been working to do is to make sure that we don't have somebody else who shows up in this market, takes a huge chunk of market share and tomorrow was producing revenues.

Barry Clairmonte - Private Investor

You know some of the revenues that you will …

Steven Sprague

If my revenues matched their revenues, then we could both declare the market started, okay.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

And maybe you need competition to accomplish that.

Barry Clairmonte - Private Investor

But if someone does come in and take a large chunk of the market, larger than Waves, would you say that you failed in what your goals were?

Steven Sprague

Yeah, let's compare that against where we are at the time. All of these are relevant pictures, right.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

I don't think there are simple absolutes here. This isn't a case where we are in the commodity business and we are selling gold and you either sell it for $0.02 more or $0.02 less. This is not that simple. This is about launching in emerging market and where do you end up in the play.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

And that's the challenge, we are a small company. There are things we can do and there are things we can't do. And I think we try and function as strongly as we can within the boundaries. We have in many aspects way more presence in this market then as appropriate for the company of the size that we are. And you can see that across the presence that we have in lots of different places.

Barry Clairmonte - Private Investor

Okay.

Steven Sprague

[Would you] invest in energy in driving that and see how it matures and to be fair, I'll be trying to share in these conference calls, some clear articulation of what those goals are. While it's not so easy to just measure us on did your revenues go up or down last quarter.

Barry Clairmonte - Private Investor

Yeah, but from a shareholder and a stock price perspective that you got admit that's prior to number of things going to drive that the stock at this point, what the shareholders really care about?

Steven Sprague

Of course, but while the market develops, doing a little thing like Seagate is probably not a bad plan.

Barry Clairmonte - Private Investor

And I think Seagate is wonderful. I think what you guys have done there is fantastic. But, if the market does take a long time to develop, if it goes another two to three years, you guys are looking at probably in [Multiple Speakers] you would have been happy right in the million dollars Seagate investment check. And then when it took 18, 24 months longer than you thought it was going to take, you are happy to continue funding along the away. That's the challenge with this, right?

Steven Sprague

It's something you got to jump in the pool, you look at them and say should we stop swimming. And I will tell you that our internal guys working on Seagate got grief for while saying what are we doing over there? Why, does this make sense? And then as it emerged and it became clear, I think everyone had gotten very enthusiastic about it over the course of the last 12 months. But it wasn't all of that way.

Barry Clairmonte - Private Investor

Okay. Alright. Thank you, Steve. And I appreciate your time as always.

Steven Sprague

Thank you. And I think, I will ask answer one more question if there is another question and than we will wrap it up.

Operator

Thank you. Our final question comes from the line of David Archibald with Dutton Associates. Please go ahead.

David Archibald - Dutton Associates

Thank you. Yeah it appears, you are making real progress, so I would just like to know of what you specifically think are the primary internal factors that would be most likely to delay your progress over the next 6 to 12 months?

Steven Sprague

Primary internal factors?

David Archibald - Dutton Associates

Yeah, primary internal factors that takes away your progress.

Steven Sprague

I think that we are very optimistic today about the rollout of the trusted drive infrastructure and all the parts that go along with that. And I think there is a lot of pieces there where it's not necessarily completely understood all of the parts. It's a brand new business. It appears that everything you need is already in place, and you don't know what you don't know.

David Archibald - Dutton Associates

Okay.

Steven Sprague

I would say that has the opportunity to open the door and say, Oh! You have to go build this, or you have to, you are not going to get the level of adoption until you have this part or whatever. And I think we have pretty good experience in this phase. I think we are as tuned up not pieces that we know we are missing today that their gaps, but I think that's one of label and internal challenge, I think that's the one.

I think the other one is really around the enterprise business, is what else do we need to do to get some of these first enterprises to -- the enterprise will move as I heard. When we close the first two or three larger ones that are public, so that the analyst will look at it and say ah it's starting. People are beginning to buy this stuff and everybody else piles in. They tend to like follow instead of lead. And then, the other side of that is are you prepared for that growth cycle, and that that also has its own independent question challenges, and it is something that I think Wave has to worry about on a day-by-day basis. But again our things you don't know until you get there.

David Archibald - Dutton Associates

So, the last comment really was your ability to ramp, is that right?

Steven Sprague

Yeah.

David Archibald - Dutton Associates

Okay.

Steven Sprague

Okay. I mean let's just speculate for a second, so everybody thinks drives you fantastic, and you can buy a laptop next year with that one.

David Archibald - Dutton Associates

Right.

Steven Sprague

Okay, so other than you are moving millions of copies of software, well that's a pretty short ramp from here to there. And realistically the PC industry mix these decisions on an annualized basis. This year drives will be an option. If they get picked up well, next year they won't be. And there are hundreds of examples where this has been truly in biometrics, from last year to this year is a good example. Most biometrics last year were on an option. There are a lot of machines where biometrics are just built in this year, and you can choose it without it. So, that gets some more entertaining and investing in that ramp against the picture today, wherever it goes, so show me the revenue before you hire that body. Is it constrained? If you were a brand new startup company without any legacy in this space, you might approach it differently.

David Archibald - Dutton Associates

All right. Okay.

Steven Sprague

I have to balance that against the previous context in conversation.

David Archibald - Dutton Associates

Okay, good. Thank you.

Steven Sprague

Thank you. So, thank you everybody. If you have other questions, please feel free to send me an email. I'll do my best to respond. And I thank you for joining the call and thank you for your support.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and we ask that you please disconnect your lines. Have a great afternoon everyone.

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Source: Wave Systems Q1 2007 Earnings Call Transcript
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