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Only 2 reasons for no PIPE yet?
The PIPE filing said they were good through May. Then from the last CC:
SKS: For that calculation the only revenue we assume is revenue we have in hand. So don't assume that... if tomorrow somebody bought a million dollars worth of enterprise software from you, it's not included in that calculation.
Claremont: Okay. When you say ...
SKS: In other words you can count on... you can count on our OEM licensing business. The probability that we get either thrown out of the box tomorrow, or that Dell stops shipping machines tomorrow is pretty low. So high probability that you'll do the couple million dollars worth of licensing business that's been the OEM licensing. That's independent of whether or not you close additional enterprise sales.
Claremont: Okay. When you say...
SKS: If you were to ... so in essence if you were in April to close $2 million worth of enterprise business, then you could lengthen the runway by that $2 million of enterprise business.,.
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N.B. In this case “revenue we have in hand” means known OEM business.
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Here it is May 9 and they still have not raised money. Aside from them simply having made a mistake, I can think of only two likely reasons.
1. They’re waiting because they want Q1 results / Q2 guidance out so they can get a better price.
2. They’re waiting because they have more money than they expected.
Either way it points to a good Q1 and/or a good April.
Mike,
Thanks for the response.
I’ll look in past 10K’s for more information. If I find anything that sheds more light on this, I will post it here.
I have started my DD on REPR.
Thanks to Mike for his work.
I have never yet found a board where people who want to discuss both the positives and the negatives are welcome, but hopefully this board will be different, as I am looking for some clarity on the “stock based compensation to obtain loan financing” issue.
The increasing Freedom 60 sales, the Medicaid-Medicare reimbursement news, the hiring, are all very positive, and make this look very attractive. But for the short-term, for the decision whether to buy now or wait, I’ve been trying to get a handle on this financing issue. (It’s not easy, as it moves around a bit in the quarterly financials. Let’s hope one of their new hires is a new bookkeeper or CFO.)
The main reason I bring it up is that I have some concern that it will knock them out of profitability for the February quarter. I know this is a non-cash charge, and so of less concern from that point of view, but if it does move them into a GAAP loss, I can’t believe that will be good for the investment short-term.
I believe the charge was $88,550 in fiscal 2006. In fiscal 2007 the charge was $174,710. So far in fiscal 2008, they have allocated $75,840 (Q1: $68,840, Q2: $2,250, Q3: $4,750). I don’t know yet how the allocatiion is calculated, but based on these figures, it seems possible that it could be in the neighborhood of $100,000 for the fourth quarter.
So I am wondering, Mike or Rawnoc, if you have an estimate for the Q4 charge on this, as I know that both of you are well aware of this issue.
I am not a basher or a short. I think shorting should be illegal, and most bashers must be lunatics. I’m just trying to get a full picture of the company at this point in time.
Thanks for any clarity you can provide.
Was The Fat Man Wrong?
Ramsey wrote in #164148: “I am not in favor of Wave stating out and out non-truths, but I am tolerant within reasonable limits because I respect that Wave has always been in the difficult position of staying sufficiently positive in order to keep investor interest high.”
I, too, was taken aback by Ramsey’s (who I respect) statement, and unfortunately I didn’t get a chance to read Alea’s (who I respect) response.
I would add, though, that if a person is going to massage the truth, then he needs to be much more skillful than Steven seems to be. A CEO cannot afford to be so distrusted, as that certainly does not help investor interest.
I’ve wondered if part of the problem is simply that Steven likes to talk. Could The Fat Man have been wrong?
Kasper Gutman: You're a close-mouthed man?
Sam Spade: Nah, I like to talk.
Kasper Gutman: Better and better. I distrust a close-mouthed man. He generally picks the wrong time to talk and says the wrong things. Talking's something you can't do judiciously, unless you keep in practice.
http://www.imdb.com/character/ch0008847/quotes
Trusted Computing vs. Wave as an Investment
Blue Fin,
Gilder is distinguishing between trusted computing on the one hand and Wave as an investment on the other.
He is not being negative on TPM’s or trusted computing, he is being negative on (“not touting”) Wave stock. He refers to the company as “Wave” or “Wave Systems” throughout the article; when he says WAVX he is referring to the stock:
"As a member of the board of Wave Systems, I obviously have an interest in this process. But I am not touting WAVX here. The process will go forward regardless of who writes the critical enabling software.”
http://www.wavxdd.com/reports/GTR_February_2007_web.pdf
Gilder Buying + TV Tonic Cable Discussion
http://www.wavxdd.com/reports/GTR_February_2007_web.pdf
GILDER BUYING
I thought that Gilder’s report from February 2007 (LAN’s End) made it pretty clear that he wasn’t recommending (or buying) Wave stock because of the likelihood of the technology being subsumed. Being subsumed is not the problem at this point, but it seemed clear he did not believe Wave was a good investment at that time.
Page 8: “As a member of the board of Wave Systems, I obviously have an interest in this process. But I am not touting WAVX here. The process will go forward regardless of who writes the critical enabling software.”
He then goes on to talk more about being subsumed, while expressing hope that other things will distract potential competitors.
(At least that’s how I read it.)
FOR THE ONGOING TVTONIC/CABLE DISCUSSION
Also on page 8. (I don’t know if this is relevant as I haven’t been able to follow the current discussion, but FWIW.)
“Next in the line of fire are the suppliers of customized applications such as digital rights management, customer authentication, and subscription control for the cable industry, telcos, and wireless service providers. These functions will succumb to the far cheaper universal industry standard of TPMs. Wave Systems will have to remain vigilant indeed to offer needed middleware and software implementations as the industry giants increasingly integrate all the TPM functionality.”
NAC and Trusted NAC
Ramsey, thanks very much for the report.
http://www.wave.com/products/eee.asp
From Wave’s website re EEE: “Machine Authentication + Protected Integrity Metrics = Trusted NAC”
So there can be NAC and also Trusted NAC?
So the TCG put out Trusted Network Connect specifications that are not necessarily “trusted"?
Good grief.
More on IR Conversation
I also talked with Yvonne Zappulla about the functionality of the cards, in the sense of, “Do end users really enjoy playing these things?”
I had played a couple of the games on the website. First the Lucky 8’s, and boy, was that tedious. (But of course there are millions of people that sit in front of slot machines for hours, so who knows?) I found the Treasure Hunt more enjoyable because you have to choose which window to use. Even knowing that it doesn’t actually affect the outcome, it was more fun.
Anyway, Yvonne said that playing the card itself is a better experience than playing on-line. Also, there are other cards - I think she mentioned the soccer game - where you feel like you are doing something pro-active, but it really has no effect. And overall the games are getting more exciting and interactive.
Also they can make cards where the player can affect the outcome. That presumably just depends on the type of customer situation.
She also talked with enthusiasm about the educational cards and mentioned math, spelling, and foreign languages. She mentioned that there is a popular series of paper educational cards out there called “Brain Quest,” but nothing like EGMI at any kind of comparable price. She was giving Brain Quest as an example of popularity and price point. I didn't ask if the educational cards will have a replaceable battery.
I went to the Brain Quest web site. They have an on-line question and answer game, which may give an idea of what EGMI could do - but in the real world. Also - and no mention of this from Yvonne, of course - I could see EGMI in some kind of licensing deal with this type of already-popular product.
http://www.brainquest.com/kids.php
Anyway, it looks like there is lots of stuff that can be done with EGMI’s cards. They must be having some fun developing these things.
Not sure if I’m misunderstanding your post, but I had thought that the software encryption companies were going to try to support all kinds of encryption by developing their own software support for FDE from Seagate, Intel, etc.
The link to this was posted by Weby in post #156839.
http://searchsecurity.techtarget.com/news/article/0,289142,sid14_gci1288486,00.html
Where does this leave software encryption companies like Credant, Utimaco, PGP, and Safeboot (recently acquired by McAfee) and Check Point (which acquired Pointsec)? Recognizing that their boom will last only as long as it takes hardware-based encryption to take hold, they are partnering with Seagate and Intel to offer integrated solutions. While the hardware companies handle the encryption processing, software vendors will focus on what they day do best--policy creation and implementation, key management, etc.
"In five years, we probably won't sell encryption software," said Malte Pollman, Utimaco vice president of products, but key and other management services for Intel, Seagate and any other hardware encryption companies.
Notes from IR Conversation
I had a long conversation with Yvonne Zappulla. I will go over my notes later in the week to see what else would be interesting, but mainly, first, I wanted to post info about the Indian gaming conversation.
I know that many of you probably already know most of this, but it is new to me.
INDIAN GAMING
The main point of the Shinnecock PR is that this is a foot in the door for EGMI in Indian gaming. Apparently the Native American communities are very insular (not surprising considering the history) and it is very difficult for outsiders to be accepted as business partners. EGMI has been trying very hard to get accepted. Apparently getting EUMBC (the distributor mentioned in the PR) was the necessary final step. It has people on its payroll that are well-regarded by the tribes and was able to get this first order very quickly after EGMI hired them. So this sounds like a very good relationship for EGMI. This foot in the door is particularly important because “Indian gaming dwarfs Las Vegas and Macao combined” and, as we know, none of this potential revenue is included in the 2008 guidance.
As for this specific order, the owner of Electronic Gaming Zone supplies goods to stores in the Shinnecock territory and this first order for 25,000 cards will be sold in those stores.
Regarding this change from the first PR to the second:
First PR: “Jonathan Smith, Head of Economic Development of the Shinnecock Indian Nation”
Second PR: “Jonathan Smith, President of Electronic Gaming Zone”
This was not a misrepresentation in the first PR. It is just an example of the fact that tribes prefer to keep their internal affairs internal.
MANUFACTURER
The manufacturer is excellent. Makes the calculators for Wal-Mart, which is (one of?) the biggest seller of calculators in the world. They are very efficient and the fact that EGMI has them as their manufacturer is a big plus and part of the reason that margins are so good.
SGMS CONTRACT
I asked about this because I felt that 5% of gross was not such a great contract when EGMI’s gross margins are 70%. She said that state and local government lotteries are low margin business and are not a prime market for EGMI. That that would be the lowest margin business that EGMI would participate in. Also the $500,000 was important to EGMI at the time the contract was signed. In addition, having SGMS as a reference initially validated the product and was very useful as EGMI tried to establish itself and as it continues to try to establish itself with overseas lotteries.
There were a couple of posts on Yahoo by platinumtrader5000, a poster who has nothing good to say about EGMI. But he pointed out that the Shinnecock tribe doesn’t have a casino and said something about the owner of Electronic Gaming Zone being at the police station (meaning he’s a cop?) One message is in the “Lee Cole’s past ventures” thread and the other under “the shinnecock press release was a joke.”
Anyway, so I went looking for information on Electronic Gaming Zone.
http://www.egamingzone.com/
It appears that maybe this is a small venture by an enterprising member of the tribe trying to get started in the gambling business? That’s OK, of course, but I just assumed the contract was with a casino.
It’s probably worth a call to IR to get more information.
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And for reference, below is the corrected version of the press release:
/C O R R E C T I O N -- Electronic Game Card Inc./
Thursday April 17, 6:40 pm ET
In the news release, Electronic Game Card Inc. Announces Initial Order with Shinnecock Tribe, issued earlier today by Electronic Game Card, Inc. over PR Newswire, we are advised by the company that the headline should read "Electronic Game Card Inc. Announces Initial Order with Shinnecock Tribal Member" rather than "Electronic Game Card Inc. Announces Initial Order with Shinnecock Tribe" as originally issued inadvertently. Accordingly, there are also several related changes throughout the release. The complete, corrected release follows:
Electronic Game Card Inc. Announces Initial Order with Shinnecock Tribal Member
NEW YORK and LONDON, April 17 /PRNewswire-FirstCall/ --
Electronic Game Card, Inc. (OTC Bulletin Board: EGMI - News; "EGC"), today announced that it has received an initial order for 25,000 Electronic GameCards(TM) from Electronic Gaming Zone, based in Shinnecock Indian Territory in New York.
The order has been arranged and placed by EUMBC Ltd, Electronic Game Card, Inc.'s distributor to the US Indian Gaming market. The order is part of ongoing activities in the gaming market in Indian Country showcasing the Electronic GameCard(TM) as several new activities will be launched this summer. The early use of the Electronic GameCard(TM), set to retail at $20 per card, is to generate consumer recruitment and brand development throughout 2008.
The Shinnecock Indian Nation is one of the longest, continuously self-governing tribes in the country. There are more than 1,300-members of the Tribe. Jonathan Smith, President of Electronic Gaming Zone, based in Shinnecock Indian Territory and a member of the Shinnecock Indian Nation, commented, "I am delighted to have placed an order with EUMBC Ltd for the use of the Electronic GameCard(TM). The Electronic GameCard(TM) makes branding and economic sense, and fits well with our growth plans as we introduce exciting new games this summer. It is our hope that our customers, once they have started playing the Electronic GameCard (TM), will not be able to put them down!"
"For a number of years we have been looking forward to the day that our Electronic GameCard is sold on Native American Territory. This is a tremendous opportunity for our company and we intend to do all that is in our power to turn this initial period into a long term relationship," said Roger Holdom, Senior Vice President of Electronic Game Card, Inc.
Electronic Game Card, Inc. and EUMBC Ltd will be presenting the Electronic GameCard (TM) and Tribal Numbers (www.tribalnumbers.com <http://www.tribalnumbers.com> ) on Electronic Gaming Zone's booth (booth number 2444) at the "Indian Gaming 2008 meeting and trade show of the National Indian Gaming Association (NIGA) in San Diego, California on April 20-23. The NIGA trade show is one of the largest annual gatherings of American Indian tribal and industry leaders, typically drawing several thousand delegates.
Re SafeNet
I don’t know details of SafeNet’s business, but it is interesting that they chose to partner with Wave rather than develop their own hardware encryption capability. Other software FDE vendors, as we know, are working with Seagate, Intel, etc so they can keep their customers by offering them hardware encryption as well as software, thus becoming "full service" encryption vendors.
Now, where will this leave SafeNet when software encryption disappears, as it is expected to over the next few years? Maybe they have other lines of business with their customers. But even if that is true, why would they be willing to lose the PC side of the encryption business?
Possibly they saw that it would take too long to duplicate what Wave has done with Seagate/Intel? That would be good news for us in terms of when other software FDE vendors become competitors. But still, SafeNet is going to lose their PC customers. Very curious.
Investing vs. Doing DD vs. Observing
Snackman,
You wrote, “Why stay invested in a company that does not have any revenues? Do you have an answer? Would you stay invested in a company that, according to some, will never have meaningful revenues?”
I’m wondering if there are really investors on the board who believes that Wave will NEVER have meaningful revenues. I think it is the PACE of revenue growth that is freaking people out, COUPLED WITH
1. The company’s financial condition
2. Emerging competition
3. Past inaccurate revenue estimates from management
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And most importantly all of this is in the context of Wave as an INVESTMENT, not an EXERCISE IN DD or a PASSIVE, NON-MONETARY INTEREST in the progress of trusted computing.
#1 is important because of dilution, which reduces the value of our investment, and the remote possibiity of bankruptcy.
#2 is important because it would be better if Wave could establish a large base of customers before competitors start to take customers that otherwise would have gone to Wave. (In other words, currently Wave can take most, if not all, of Seagate FDE customers. Soon – how soon we don’t know – that will not be the case. The software FDE companies will be supporting Seagate and also Intel vPro. And the McAfee’s of the world may also start to support TPM’s. As noted in Berger’s recent presentation, companies want one central management console.)
#3 is important because a person needs to be able to make near-term decisions on whether to
-- hold
-- buy more
-- sell now and see how things go, possibly being able to buy back later at a lower price, or buy back later when risk is lower.
The past inaccuracies make it impossible for investors to know if they can rely on current/future estimates, and it is also emotionally maddening.
+++++++++++
All of this has been said a hundred times except, perhaps, the distinction between investing, doing DD, and observing.
littlefish, Investments
This does not focus on the difference from Q3 to Q4, but is for the whole year, but may help. Your posts got me interested....
From the 10KSB:
FROM THE STATEMENT OF CASH FLOWS:
$ 855,860 Gain on Sale of Investments
$ 1,400,000 Proceeds from Sale of Investments
$ 544,140 Difference (= Cost of Investments Sold)
$ 1,214,455 Cash Purchases of Investments
FROM THE STATEMENTS OF STOCKHOLDERS’ EQUITY
$ 1,197,841 = Value of 2,889,399 Shares Issued for Investment
FROM THE BALANCE SHEET
$ 1,018,269 Investments at Cost 12/31/06
$ 2,886,427 Investments at Cost 12/31/07
$ 1,868,158 Difference (= Investments made in 2007)
RECONCILIATION
$ 1,018,269 Investments at Cost 12/31/06
Minus $ 544,140 Cost of Investments Sold
Plus $ 1,214,455 Cash Purchases of Investments
Plus $ 1,197,841 Value of 2,889,399 Shares Issued for Investment
Total $ 2,886,425 = Investments at Cost 12/31/07
++++++++++++++
This part is covered in Mike’s post #195.
FROM THE STATEMENTS OF STOCKHOLDERS’ EQUITY
2,889,399 Shares Issued for Investment
137,500 Shares Issued to Consultants for Services
= 3,026,899 Total
FROM “RECENT SALES OF UNREGISTERED SECURITES” SECTION
1,433,928 Shares for consulting services (July 16, 2007)
1,592,971 Shares for consulting services (August 23, 2007)
= 3,026,899 Total
RECONCILIATION
Of the shares listed in the “Recent Sales of Unregistered Securities” section as shares issued for consulting services, actually only 137,500 of those were for consulting, the rest were for investment. Or perhaps a more correct way of expressing it is that the value of all but 137,500 shares was capitalized.
helpfulbacteria, thanks for the response.
If you don’t see your post as offensive, well, I guess we come from different worlds. I will take your current response as a semi-apology and move forward.
I expect to enjoy your future posts and hope that you will be able to give mine the benefit of the doubt.
Best wishes.
More on Sales/Marketing
The point of my post #162084 was that salespeople directed by a really fine sales department and supported by excellent, clear literature can overcome the confusion we keep hearing about. My belief is that one of the reasons the pipeline has not matured into sales is because there are a lot of confused people in the pipeline. I could be wrong but, as an investor, I am concerned about this.
I was not trying to “discredit” Wave. I don’t have some ulterior motive. While it doesn’t do any “good” to post my concerns, I expected to have a little interaction with other owners on the subject, maybe learn some information I hadn’t considered. I thought the topic was worth discussing.
I’m not sure that people who direct animosity at another poster understand the effect that can have on the person it is directed at. When I saw a response to my post from helpfulbacteria, I thought, “Oh, good. Let’s see his take on the sales organization.” Instead I ran into a hornet’s nest. I tried to stay calm in my response, but I was not calm. In fact, I still haven’t completely shaken the distress I felt.
So maybe I just have to be tougher if I want to post on this board. But I don’t think I should have to be tougher. I don’t go on tirades against other posters and I don’t question their integrity – and I expect the same basic respect in return.
I once responded in an unintentionally harsh manner to Snackman when he was arguing with player about deferred revenue. After I re-read my post and realized how it might sound to the recipient, I posted again with what amounted to a semi-apology. When I re-read that one, I thought I should have apologized outright, but didn’t want to go on and on with it.
One more note: When someone tries to talk about one aspect of a company, that doesn’t mean they think there is nothing good in the company or that the company won’t eventually succeed in spite of its shortcomings. Ramsey’s post #161884 set forth the reasons why Wave should succeed sooner or later. But I, like everyone else paying attention, am concerned about the pace of success due to the financial condition of the company and the approaching competition. A “really fine” sales organization could speed up that pace.
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Ramsey made an interesting point in his post # 162090: “Another thought is, would Wave have been better off to concentrate on the smaller customers, get a good number of smaller accounts up and running and use that experience and references to move on to the larger prospects?”
++++++++++++++
And finally, there have been other comments by Steven about marketing that have fed my concerns that I didn’t mention in my post.
His comments complaining about not having hundreds of millions of dollars for marketing, for example. Another poster spoke about e-mails that his company sends to leaders in its field, keeping them informed of events in the marketplace, keeping them up-to-date on the company’s products. That’s an example of something that doesn’t require hundreds of millions of dollars, but could be effective if done well.
And in the Q1 2007 conference call, while talking about the TJ Maxx situation, Steven said, “…they've had two years worth of 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 the 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?”
When I heard this I said to myself, “What does he mean, ‘get wind of!’ If he sees the accounting firms as a lever, why doesn’t Wave develop a program to contact the accounting firms and educate them? That wouldn’t cost hundreds of millions of dollars.”
I was happy to hear in one of the recent calls that some accounting firms have contacted Wave. I guess Wave never did contact them.
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Anyway, I'm still betting that Wave will succeed eventually even without a good sales organization. I sure hope so.
Re: Order Takers
So, helpfulbacteria, once again you have responded to a post of mine with distinct unfriendliness. I think if you met me you would be dismayed at the inappropriateness of your response.
I’m still long Wave, but I’m very concerned about their sales ability. So I wrote a post about it. As to it’s length, there was a section to address each of Ramsey’s points, there was a short section on salesmanship, and then a section on SKS speaking at a conference call. I thought Stevens's comments were relevant and informative, and I had a little fun with them while trying to make a point about Wave’s approach to selling.
Your specific points:
SALESMAN AS HERO
We’re talking about selling something complex, not something that companies don’t need. Heroics are not necessary, but well-thought-through, complete, and clear documentation and sales presentations are. This doesn’t take heroics, but it does take commitment, work, and an ability to distinguish between what is clear and what is not. My initial introduction to Wave's documentation was the old website, and I think I have never gotten over it.
SALES BY OTHERS
As far as I know, TPM’s are still an afterthought for HP. Possibly also for Lenovo. So I don’t believe that what they have done is too relevant. HP doesn’t even have server software yet from Infineon. It’s Wave that has the products and has focused its energy on selling TPM use.
TIMMERS EXAMPLE
I think the timmers example was pretty clearly presented as an example of Wave’s lack of commitment/ability to produce a focused sales effort or literature (and my understanding from timmers posts was that they did spend some time on it). The point had nothing to do with whether a sale was made. I think we all understand that there was no immediate sale possible, just a chance to sow a seed with a potential future customer by presenting a well-done case for FDE drives on future computer purchases for a company which has software FDE on legacy machines. Wave would be well-advised to develop a good presentation on this subject as I believe many companies do have software FDE.
+++++++++++++++
I post occasionally and I try to be responsible.
I don’t want to get into some kind of unpleasant argument, and I don’t want to be on the receiving end of heavy-handed negativity.
Ramsey was able to respond with some useful points without being so unfriendly.
ORDER TAKERS
There have been some recent posts concerning salesmanship and marketing. Ramsey touched on it, for example, in his excellent post #161884 setting out the overall positives.
On the subject of salesmanship, though, he said, “Why there was so little traction 2006-2007 in TPM management sales will remain an enigma until history makes available the details. I think Wave was just too early and several factors come into play...remote adminstration, insufficient penetration of TPMs into the installed base, lack of FDE drives, waiting on NAC, low awareness in the industry. I don't think Wave's failure in 2006-2007 was poor salesmanship or for lack of trying...they were just too early.”
I think the specific reasons Ramsey suggested for the failure may indeed have contributed to the lack of wholesale adoption of TPM’s by hundreds of companies. But these reason may they have little to do with what caused individual companies in Wave’s pipeline to stall.
-- Remote administration – This has been available now for over a year.
-- Insufficient penetration of TPMs into the installed base – An individual company which Wave had sold on using TPMs might, I think, tend to start small anyway, turning on TPM’s department-by-department or node-by-node, for example.
-- Lack of FDE drives – This is relevant only in the sense that having FDE will serve as a positive intro to putting trusted computing to work – in other words, having it should be a positive but not having it is not a negative.
-- Waiting on NAC – A company would probably start by installing EAS to identify the computers on their network first, and worry about their “health” later. This is SKS in Q2 2007 cc: “Well, I think we certainly hope to show folks how you can approach this on a two-step basis. One is just machine identity, which is actually something that most corporations could begin thinking about deploying today in anticipation of managing the health certificates on their machines, which is a much, much more complex policy conversation for any IT organization.”
-- Low awareness in the industry – This I believe is not relevant when talking about a company that is aware, except to the extent that this might contribute to inertia/fear on the part of a single customer not wanting to be out front.
++++++++++++++
So if these are not the main reasons, what are?
I think almost certainly the main reason IS poor salesmanship. A specific example we have is timmers attempt to get Wave to compare the Seagate/Wave solution with SafeBoot. Wave was only able to speak to the Seagate/Wave features and could not / would not directly compare their solution with SafeBoot. It just makes no sense from a sales point of view.
I think Steven did a good job of setting out what the problems are for customers in adopting TPM’s in the Q2 2007 CC (see below):
-- complexity
-- customer confusion
-- customer inertia/fear
But it is the JOB of a salesperson and a sales department to clarify complexity, dispel confusion, and overcome inertia. That is their JOB. By definition they did not do that. By definition they did a poor job of selling.
My father was a salesman. There was one thing that was so important to him that he mentioned it around the house on more than one occasion: his disdain for mere “order takers.”
++++++++++++
This is SKS in Q2 ’07 Q&A:
…very frustrating…. You know, here's a technology that's free, that everyone can leverage, that can really provide an advantage for their corporation, so what the heck are you doing? [Hey, customer, what’s the matter with you? Why aren’t you giving Wave an order?]
What our experience and feedback from the customer has been is there's no question there is continued education within the customer base of what is the capability of this? How do I turn it on? What does it do? [This I referred to above as "customer confusiion." But this is not rocket science. But it is complex enough that it needs tremendously clear sales literature. I don’t think Wave has that.]
I think we continue to run into the fact that the documentation that exists in a lot of the networking equipment, which is how TPMs would talk to the enterprise, is pretty poor. We've had to supplement documentation for a variety of network suppliers on how does a TPM actually work and get turned on and plug into a Cisco router or a Juniper Unified Access controller, or pick the product of choice. [This I referred to above as "complexity." Here he seems to be COMPLAINING about having to show customers how to implement this brand new technology on their network equipment. Did he expect the customer to go figure it out? Did he expert equipment makers to have a section on the TPM? Even if network equipment documentation was perfect, isn’t it standard procedure for software companies to have high-quality "professional services" to help their customers implement software?]
I would say the -- so one is a technology hurdle of just understanding; one is an education of all the different components so that they work together. The third and perhaps the hardest one is one of policy. The policy one is that they really haven't thought through the problem of what does it mean to have the PC as part of the security apparatus of the enterprise? That's where the most time has been spent, in saying "So, how do I enroll it? Who should enroll it?" [That’s right, customers, you haven’t thought it through. Go figure it out and come back to Wave when you’re ready to order.]
You know, today, in a lot of companies, you can walk in with a laptop. If you have your user ID and password, man, you can go to Wal-Mart, buy a computer and bring it to work, and plug it in and it works. Obviously, there are issues with that because that machine might have a gadzillion different viruses on it. It's not an enterprise-managed machine, and yet it might still connect to the network. Now, lots of IT guys will say no, no, no; that would never happen on our network, but it's still works in a lot of PCs. So we've found a very interesting dialogue around what are the policies that we should have to actually improve the security of the laptop and then use it as part of the authentication into the enterprise. [Does Wave have good documentation on this? Have they worked and worked to clarify it, to dispel the confusion? Not likely.]
Can someone interpret these prices c. 11:25 am?
These are observations/questions from a person with very limited trading experience. If too idiotic, please ignore.
About 150,000 shares is bought and absorbed at the ask of $.41.
Then 7,500 shares is sold at $.42. I wasn’t watching the screen, so I don’t know if all the $.41 asks were gone at that point, or if it was somehow a trade done on another platform for a higher amount, if that’s possible.
Immediately 10,000 hits the $.405 bid, which seems surprising.
Then the ask fills up again at $.41. If there is a big seller, why don’t they move the bid up - at least to $.42?
Overall, does this heavy hand on the ask indicate that the big seller is not yet done?
A question suddenly occurred to me.
Is the company profitable only because they have been paying for services with stock rather than cash?
Against this would be their earnings guidance for 2008 coupled with the "promise" in the cc to stop issuing stock the way they have been.
To Organize The Financial Possibilities
We know from the cc that Steven could have raised more money at the last PP (whether at, or slightly below, the price he got). We also know that he believes Q1 revenue will come in below (possibly well below) $4 million.
In addition, we know that Wave will probably run out of money before the end of Q2 at likely cash usage rates.
+++++++++++++
So there are only two reasons for him to have taken less money than he could have gotten at the recent PP.
1. He has a financial transaction of another sort lined up (debt, strategic buy-in, other.)
2. He knew of something that will raise the share price before the next PP, which has to be either:
-- A. At the time of the PP, he believed that Q1 revenues would be greater than he now believes, enough to raise the SP.
-- B. He believes that Q1 revenues of less than $4 million (probably substantially less) will raise the SP.
-- C. At the time of the PP, he thought the Lenovo announcement would raise the SP, but couldn’t wait for it.
-- D. He has another revenue-related or customer/OEM announcement that he believes will raise the SP.
+++++++++++++
If it’s 2A, 2B, or 2C, there should be another PP at a lower price.
If it’s 2D, that would be good.
If it’s 1, that might be good.
+++++++++++++
Any other alternatives (other than SKS having finally lost it)?
Player, I did notice that the quote was brought up again in the last conference call, and I have now found the discussions around the Dutton presentation. Thanks for the suggestion.
As noted in my response to Down And Out Man, it looks like another mis-assessment of the market and not a lie, as he was referring to expected growth in business from current OEM partners.
Thanks for responding.
Mark, thanks very much for the response.
It looks like Down and Out Man found the quote in the Dutton presentation from June 2006.
A source for past transcripts is accessmylibrary.com. See post #160850.
Down And Out Man, thank you very much!
I think it is important to note that he is referring to OEM business not enterprise business, and that it is “merely” another of his inaccurate assessments of the market and not an outright lie.
Eventually I will look at some of the discussion on the board about the presentation, as suggested by player.
Thanks again.
player, quest for the “in hand” quote
I am still looking for the source of the “in hand” quote. Since you mentioned it, do you know the source?
I have found plenty of over-enthusiasm and inaccurate projections from SKS throughout conference calls, but no statement about breaking even based on business or orders “in hand”.
In my post #160123 I find Barry Clermont as a source, in the Q4 2006 cc. And there are some “in hand” quotes from SKS in the Q4 2005 cc, but he is not saying that break-even will come from that business.
It’s interesting that he doesn’t deny having said it, but I would like to see it in black and white (or hear it)
It’s the difference between being out of touch with the reality of the marketplace and lying.
Thanks for any light you can shed on this.
Accessmylibrary.com for Wave Transcripts
This is a source for many cc transcripts, useful when they are not provided on seekingalpha.com. I mentioned it in a previous post.
It is accessmylibrary.com. They seem to be about 10 days behind in posting press releases and other news stories, so the Q4 transcript should show up next week or the week after. In the case of Wave, the transcripts have been produced by Fair Disclosure Wire.
You will need to register (free) to see the entire transcript. If your library does not subscribe, choose a nearby library system.
Also, you must search on the company’s name not the stock symbol, as this is not a stock site.
Last quarter I must have forgotten about this or had looked and didn’t find the Q3 transcript. Anyway, the Q3 transcript is there now as well as many previous ones and, as I said above, I think the Q4 should be there in a week or so. The transcripts are not always beautifully accurate, but are serviceable.
More on in hand; old transcript source
You know, Wildman, I can’t even find the original quote, and I actually think it would be nice to get this clarified - for those who are not clear - because it's a such a lightning rod. I’m in a rush at the moment and can’t do a proper search or reporting job (and this is probably an unwelcome re-hash for old hands) but as far as I can tell SKS used the phrase a few times in the Q4 2005 CC. Then in the Q4 2006 CC, Barry Clermont said this:
BARRY CLERMONT: “But besides that, the thing that worries me at this point is two quarters ago, you said that you expected breakeven in the second quarter of 2007 with business that you had in hand. Last quarter, you backpedaled a little and said you still thought you'd break even in the second quarter of 2007 with a few upgrades coming in. Are you still projecting breakeven in the second quarter?”
At this point, I don't think that SKS actually said that. As I said above, I’m rushing at the moment, and this needs more attention, but this what I find so far.
+++++++++++
ACCESSMYLIBRARY.COM
My source for the old conference call transcripts is accessmylibrary.com. To see the whole transcript, you need to register (free). If your local library does not subscribe, just pick a near-by library. Also you need to search on the company name not the symbol.
++++++++++++
QUOTES FROM Q4 2005 CC:
1.
One of the things that we're trying to accomplish is to provide a little bit more visibility into Wave and into our market, on the kinds of volumes that we're shipping. And so what we're -- we're trying to provide guidance on is the volume of units that are based on the customer design wins that we have in hand. What I mean by this is that, if we take the relationships that we have with our three major OEM partners, we have a number of products that they've selected to include our software bundled with those platforms, and today that volume, based on forecasts from our customers, is in excess of 50 million seats over really the shipping life of those products, which for all intents and purposes is approximately three-year time frame. So over the next three years, based on deals we have in hand today, we believe we can achieve over 50 million deployed units. Now we receive a revenue stream on each one of those units that's based on a royalty for the bundled software. But we also believe some percentage of those units will upgrade to the enterprise solutions. We think we have compelling reasons why a company would upgrade the software on all of their machines. And really, I think the question becomes how many companies choose to take advantage of this technology, not that it's something that a few desktops deploy on one or two desktops. It's really something you deploy enterprise wide.
2.
TIM BAXTROM: Now, if we start from premise that there won't be any meaningful sale of the entire ETS system until sometime in calendar 2007, is there any scenario that you consider plausible where the royalties from the deployment of the compliant level software alone will lead to a cash-flow-positive situation before then?
STEVEN SPRAGUE: Yeah, I do believe so. I think that if we look at our existing customer design wins and forecasts we have today, we're about halfway there already. And I think we have pretty good deal flows sitting in front of us that would help drive the company the rest of the way to getting to break even, even by the end of this year, early part of next year. So, some of it is what I would consider birds we have in hand and that's a really excellent position for Wave to be in. And a lot of it still exists as opportunity that sits in front of us. This is a growing and emerging market, so there's tremendous opportunity sits in front of us. Our economics are based on the fact of lets get this OEM transaction engine running underneath the company to help sustain the company, reduce the burn rate, and begin covering some of the investment costs it needs to support companies like Dell and Intel and others in the market, and let the enterprise market develop. You know, you can do the mathematics on it and realize that even the sale of a couple hundred thousand seats, if you average $50 a seat, is another $10 million in revenue. So, it doesn't take a huge number of seats against the volumes that we're shipping to have a significant impact. But what we don't have today, and why we're not sort of providing quarter and quarter guidance yet, is we don't have a pipeline that says last quarter we sold this many upgrades and have this many customers in the queue, and so we kind of know what the execution was of that pipeline, and we have a really good set of targets in front of us, but we don't have enough execution data on how that pipeline is going to convert. And I just think it's premature to state that the enterprise business is starting tomorrow.
A Note On the "in hand" Phrase
Initially I also thought that “business in hand” meant customers who were committed to buying the software. But in the Q2 ’07 CC, SKS used the term "in hand" to mean “active prospects.” This is how he answered a question about the size of the sales force at about minute 40:
“I think part of that is also just even on the sales force side. If you look at the sales guys today, they are at or reaching capacity to manage the accounts they have in hand today, and so that's something we are very focused on now.”
So I think that “business in hand” may have meant “active prospects” to SKS, while it meant “committed customers” to his listeners. So I think it was most likely a mis-communciation and also a lack of ability to accurately gauge customers' intentions (both serious problems for a CEO), but not an intention to deceive.
SRA Presentation Transcript
I don’t know what happened to my previous post of this transcript. I listened to the presentation over and over in order to transcribe it, which I did over many hours. I understand from subsequent posts that a transcript was also available for a fee on the SRA sight. I have not seen that transcript.
If there is something wrong with posting a personally-produced transcript of a publicly-webcast presentation, possibly someone will let me know… In the meantime, here it is again.
SRA Presentation Transcript
STEVEN SPRAGUE
SRA Presentation
February 11, 2008
Let me start with just a general description of Wave. We’ve been around for a while. We have over 15 years of experience in the software security space. We have – I’ve listed brands of a number of our leading customers: Dell, Seagate, Intel, NEC, and others.
We are a software company building support for a new hardware security standard. I’ll talk some more about those specific details.
We’re also a Board member of the Trusted Computing Group. It’s a pretty strong group of organizations: over 140 companies today belong to the Trusted Computing Group. Our Co-Board members are players like Intel and Microsoft and HP and Seagate and Infineon and a number of others.
We’re about 125 people worldwide. We’re headquartered in western Massachusetts. We have our engineering team out here in Cupertino, California. And we’ve been public since 1994, and we’re on Global Market NASDAQ under WAVX.
Let me start by introducing everybody to the concepts of hardware security. So hardware security is something that’s been around and we all use every single day. So if you turn the channels on your cable system or satellite set-top box, you have a very cool aspect where you don’t have to log in. You go from ESPN to HBO and you don’t log in. Miraculous.
If you pick up your cell phone when you get off the airplane, you can dial a number and automatically get connected to a tower. It didn’t always work that way in a manner that was secure. If you go back to your first, original analog cell phone, remember the deep deep[?] tone after every long distance call where you had to push “Send” a second time to assure that you were the person using your handset. That went away. It went away because they added hardware security in the form of GSM, it came as a SIM module, a little chip you could take in and out. Or in the form of a Verizon phone or other phone it was actually embedded on the motherboard of the phone. And it’s wonderful. I can go buy a ringtone for my phone, download it. I don’t have to type in a credit card, I don’t have to type in a password. It just magically knows that it’s my device.
And so this is really about bringing hardware security and the capabilities of that to the PC platform at large. So why is hardware security so important? It’s really three fundamental reasons. One is, you can’t change it with software. So you can’t write a little application to go out there and physically re-wire the chip. It just doesn’t work that way. Secondly, I can hide a secret on a chip, which means for the first time I can have, inside the silicon, a secret that says, “This is my unique PC.” And I can have secrets for a variety of different organizations. And finally, I can process that secret, so I can do things like supply a PIN number to release the use of this secret, or release this key for encryption, and unless the PIN number matches inside the silicon chip you’ll never get the rights to use that secret key.
And so it provides some very fundamental, very important capabilities that you can’t duplicate in software. And while the industry has for the last twenty years tried to accomplish software security, it really has been an abysmal failure. And I could go through in an hour of presentation on which organizations have lost data, or lost PC’s, or lost infrastructure. We read about them almost daily in the major publications.
So the problem with the PC industry, however, is there’s no one person in charge. There’s no T-Mobile to say, “This is the security we want in every device.” And so as a result, you have to go through a standards process to drive consensus towards a common solution, and that’s what’s happened. There today are hundreds of millions of devices that have now shipped that have hardware security on the PC motherboard. We are seeing the evolution of the next security device, in storage. And this has been driven by Microsoft and Intel. And you’ll start to hear more and more about the use of hardware security to secure all our networks.
4:20
So what are these trusted platforms? Today there are two commercially in the market. The first is a TPM, or Trusted Platform Module. This is on the motherboard of my PC and probably most everybody’s laptop here. It’s on both laptops and desktops and workstations, commercial machines. If you’ve bought a commercial machine in the last 18 months from any of the branded players in the market, and even the white box manufacturers in the market, you most likely have a TPM in your box.
The second is hardware-based full disc encryption. So this actually has been pioneered by Seagate, although there is a very strong standards group within the Trusted Computing Group with all the storage manufacturers as part of it. And this is about adding hardware security to your hard drive, so in the case that you lose your hard drive you don’t lose any of the data. If you don’t know the password to open the hard drive, you’ll never actually steal the data off the drive no matter how much you physically attack it.
And finally, the third point is a fingerprint sensor. And I’ve added this. This is not part of the standards body’s effort to define biometrics, but now many laptop and desktop PC’s have biometric sensors as part of the machine.
And what we do is we build the software that connects all these parts together. So how do I use my fingerprint to unlock my Trusted Platform Module, how do I use my Trusted Platform Module in connection with my full disc encryption, etc.
So our revenues have been growing primarily on the licensing basis and I’ll go through what makes this up, but to give some sense of kind of where revenues are at this point in time.
Our business is really predicated today on three fundamental business models. The first is from bundling software when the PC is actually sold. So in this case we get paid when software ships with the OEM PC, somewhat whether the customer wants the software or not. We then provide them with after-market server capabilities, which is really the third point. The second point is from bundled software when a full disc encrypting drive is sold. This is specific today with Seagate and our relationship with Seagate, and Seagate and Dell. And finally, the sale of a server product. And you need the server product to provide central management of these hardware devices. So if you’re an IT guy you don’t want to put your sneakers on and run out and try and manage each PC by itself. You want some nice tools in a properly air conditioned room, kind of like this conference room here, but we have a window so we’re way up on the IT guy. And the ability to reach out and manage all the PC’s across the enterprise.
6:46
So the first piece of this economic model is our client software. We call this our Embassy Security Center, and it really provides lifecycle management for the hardware devices. How do I turn on the Trusted Platform Module? Are users allowed to use it? Very importantly, how we integrate with all your existing Virtual Private Network and/or wireless solutions. So if you use a Virtual Private Network to get your e-mail or you use wireless as part of your enterprise solution, we can harden and secure that using the Trusted Platform Module on the client end point.
And finally, it provides the interface for the remote server to come in and help manage these client devices as well.
7:30
What’s our business model? Our business model on a per-machine basis is between 25 and 50 cents per machine. We today ship standard on Dell, Intel’s motherboard group, NEC Computer in Europe, MPC, who just bought Gateway’s corporate group. We actually supply Gateway and so now we also supply the Gateway machines that MPC ships. ASI distributes our technology as well.
We’ve been tested on and we’ve certified our software on Lenovo, on HP, on a number of the Asian brand manufacturers as well. So we provide a very strong level of interoperability across the market. We also have licensing arrangements with a number of the chip vendors. And so the chip vendors pay us for a smaller component of software we ship with each one of the chips. And we today have licensing agreements with Atmel, Broadcom, ST Micro, and Winbond. There are actually five players. Infineon is the fifth player that’s building any volume of chips.
Infineon is basically our competitor in this marketplace. They’ve built a very nice desktop client software solution. They really don’t have a matching server component. So today we have tremendous advantage in two ways. One, our software runs across all the different chip-based platforms; Infineon only supports Infineon. And secondly, we provide the central management, which is really critical if you want to use this technology in any scale.
There is, however, a new entrant in the puzzle, which is Intel’s ITPM. What that is is an integrated TPM. And this will become very important for two reasons. One, we’re about to see the full force of Intel’s marketing muscle. And secondly, this is how ultimately we’ll see Trusted Platform Modules on all consumer brand PC’s at some point in the future. Once Intel sucks the technology into the chipset then it becomes very easy for them to put this in every machine built. And we’ll see first chipsets available in the market, springtime this year. That was announced last fall.
So we’ve been shipping a little bit of quantity. This is cumulative numbers, and I show these as cumulative numbers on purpose because when you think about upgrading this market with server software – we collect almost $50 a seat on the server software side – you really want to think about what the installed base is. And realistically for right now that installed base you want to look back no more than three or four years because typically a three or four year old laptop has fallen off the conveyor belt and is most likely no longer in active use.
So last year we shipped – we reached a cumulative point of over 20 million units. You’ll see we’ll have pretty substantial growth against this over the course of the next few years, and we should be well through 100 million units by 2010.
So some of the key things that have developed in the market: We are now shipping 100% of Dell’s commercial PC platforms. We just extended our Dell contract, actually our pricing went up. We [_______] that business in springtime of 2007. We now have an extended contract through 2011. We’re very pleased with our Dell relationship. I think we’ve really performed for them in providing them a very aggressive security solution. Dell has some of the best security software today available in the market. We provide the best interoperability, fully integrated biometric and smart card support, and a strong central management solution. It’s that central management that really becomes important.
Let’s look to the next piece of the economic model, which has just started, which is Seagate’s full disc encrypting drive. So what they’ve done is taken a standard 2.5 inch drive and they’ve added to this drive something they call Drive Trust Technology. And what Drive Trust Technology provides is an encryption core inside the drive controller chip. And so every single bit you send down the wire gets encrypted before it’s written to the platters. As a result, if you were to physically take apart one of these drives all the data’s encrypted all the time.
They’ve also added an access control system so you have to supply a password when you boot your machine and the supplying of that password opens the machine. And if anybody’s is interested after this I have one of these in my laptop and I can show you exactly how it works. I’ve carried one for almost a year now.
And so this produces what they call the Momentus 5400 FDE.2 drive. Clearly we need some more marketing branding around this product than this. [Laughter] But this is by far the highest performance hard drive encryption product available in the market today at a consumer price point. You will see this type of functionality ultimately permeate the entire drive market. Seagate’s first. It’s brought great margin to their product. They put it in their 2.5 inch drives. They’ve already announced their next generation of 2.5 inch drives, and their 3.5 drives will have encryption. Ultimately I think you will see this across their entire product line.
12:35
And my expectation is you’ll see this across all other drive manufacturers’ product lines as well. This completely eliminates the “I lost my laptop” problem. If this laptop is lost, there are very, very few people in this world today who would be capable of actually breaking it, and it’s probably a 10 to 20 million dollar problem per drive. And breaking one drive shouldn’t help you break a second drive.
The other interesting - there’s some very interesting side benefits to this beyond just encryption, things like cryptographic erase. So if after three years you want to give 500 laptops to the local school system, I can from a central server console delete all 500 drives by just changing the key that’s on those machines. And once you change the key, the data is unrecoverable. So it has interesting military applications as well.
But you don’t now need just a drive, you also need software to help manage the drive, and ultimately a server. And in this case, you really need a server. And the reason is if you forget your password, there’s nothing you can do but throw the drive away. So unless you wrote your password on the bottom of your desk drawer – a good safe place to hide it – the reality is, what you want is your IT department to be the recovery agent. So you can call up the help desk and say, “Look, I’ve forgotten my password.” or “I have Jerry’s PC, and Jerry got hit by a bus so I still have to get my PowerPoint, so can you give me Jerry’s password and I can type it in.” At which point the drive opens and it’s a normal drive.
The second reason you need a server is because you need to be able to prove to the state of California that when you lost that machine, it was encrypted. And if you don’t have an adequate audit log that shows that your laptop is encrypted then you’re not going to be able to prove to the state, and the burden is on the corporation.
It’s very interesting, if you read the press releases carefully that come out that say, “I lost…” My favorite one is The Gap lost 300,000 or 600,000 job applications. Some contractor had them on their machine. And the reason I like that as an example is, you’d of never written that down as a list of sensitive information inside your company. You’d of thought “health care, employee records, customer data, vendor data.” You would never have thought of the 300,000 job applications that were collected from people we didn’t hire. Right? But they’re an incredibly vulnerable group because typically they’re probably younger, applying to The Gap. And it’s all of their data.
14:42
So a little bit of what the experience looks like. You get a simple BIOS-based screen that’s actually presented by the drive, not by my laptop. I take my drive out of this laptop and put it in a different one, it works in the same way. I supply a password, it opens my drive, and I have a completely normal hard drive. All your existing software tools of all types will work with this drive.
So what’s our economic model here? We’re paid by our OEM’s when the drive is selected as an option. So today if you go to Dell.com, click on Latitude, click customize, it lists seven or eight different hard drive options and you can pick an encrypted hard drive and when you pick that encrypted hard drive, Wave gets paid.
Today we make around the $7 - $7 ½ range per drive when that option is selected. We don’t know that that price point will last forever especially as prices come down in this category eventually we’ll see some pressure on that price point. But for the next period of time, six months to a year, I think we’ll be very solid on that point. We also will license our software through Seagate to OEM’s. In that case we make less but we also provide a lower functional version of the software, and we have no support obligation.
So volume’s just starting. Dell just converted from what is a custom-configured option, where you can go kind of if you know your Dell guy you can get it added after-the-fact to a standard factory image. The standard factory image went effective first week of January, last week of December, which means globally today if you go to Dell’s web site and you click on Latitude you will find the encrypted drive as an available option. We ship in a dozen plus different languages in the marketplace today.
16:36
One of the things that has been really missing from this market, and it’s actually fun to show it in real paper – has been the need for some advertising. So this is the back of the WSJ – what - January 8. And there’s also Fortune magazine, which is the edition that just came off the retail shelves. Business Week. This has been really helpful for not only ourselves but the Dell sales channel in articulating that security is now a key component of these platforms as something that’s available. And there’s no question that it’s driving a broader awareness that hardware security is now built in. It’s something that I can use.
We shipped 20 million copies of software and basically nobody turned them on. And the reason is not because it doesn’t provide incredible value, but because if you went and interviewed your IT guy you’d discover he doesn’t know what it is. And so this is what really begins the process of helping to educate the market at large that there is broad advertising and marketing and a concerted effort. We’ve seen it now from Dell. I think we’ll also see it from Seagate in some strength in 2008. We’re already starting to feel the warm and fuzzies from Intel around this space, as hardware security as part of the Intel chipset is going to be a key platform for them during the summer.
17:52
So we secured Dell as an OEM for Seagate. We were very helpful in that process. We see the strong national advertising campaign. We also manage the Trusted Platform Module, the biometric, and the Seagate full disc encryption software all as a common solution. So it becomes much easier to select Wave as a PC manufacture. In many cases that’s why NEC Europe chose us because we can - they just announced in December – because we can provide a complete solution.
We also announced in the fall timeframe our support for Intel’s Danbury technology. This is where they’re bringing full disc encryption, but on the motherboard side of the equation. So not in the drive but actually encrypting every bit before it goes down the wire to the drive. So we’re going to see this come in a variety of different forms. Our job is to support all the solutions with a common platform and a common set of interfaces.
Ultimately hardware encryption is going to win over the existing software solutions and the reason is it is a dramatically easier and faster system to deploy. Today if you take - the leading company is Pointsec - if you take Pointsec’s software and deploy it on this machine, it will take hours before this machine is protected. It has to go through and protect each bit of data on this drive. Even with automated tools it can take as much as an hour to an hour and a half for an organized IT guy to configure a machine. With a Seagate drive it takes less than a minute. And that’s an enormous saving if what you’re doing is going out and deploying 10,000 machines with data encryption.
So the final piece of this economic puzzle is the Embassy Remote Administration Server. So this is the central server that provides administration and management of these trusted hardware devices, first the Trusted Platform Module and now the Seagate Full Disc Encrypting drive. And ultimately as we see other hardware functionality show up in the platform we’ll continue to expand this portfolio of service to support those other capabilities as they appear.
19:40
We can do this in a way that the IT person doesn’t have to go out and physically touch every endpoint. You can configure machines remotely so I can still go through the path of having Dell ship a machine to my remote office without any difficulty and yet my centralized IT person can go out and take control of and ownership of that computer. It provides all the remote recovery and the remote audit capabilities that are necessary to meet both state compliance today and certainly we’re watching carefully to watch what the federal compliance requirements will ultimately be, assuming they actually eventually pass a data protection law.
What’s our business model on the server? Here retail is under $100 per seat. We’re netting about $40 per seat on average based on the sell-through we have today. Maintenance, we find that the vast majority of our customers take maintenance; it’s very close to 95%. We’re averaging $11 per seat per year. So using $50 as kind of a round number for simple math as to what we think server seats are – is possible a good number to use.
We also offer capabilities that are above and beyond just the management server and back-up and recovery of keys, and there we net $25 per seat.
What we’ve discovered is that those people who are buying the Seagate Full Disc Encryption option as a $100 option on their machine or a $50 option on their machine are subsequently going and buying the server. We have a very high sell-through rate on the server product after the customer buys drives. What we’re seeing to the extent that a customer gets educated that drive is available they buy it on every laptop going forward. This is - no one should be buying a laptop without buying a Full Disc Encrypting hard drive. It’s just a foolish activity. The liability exposure is so vast compared to the incremental cost for a laptop.
And so as the market gets educated - we’re a few weeks into volume production of these drives and volume sell through Dell – but we see everybody from Fortune 50 companies to a big chunk of the Fortune 500 to little companies and law firms and others. And I would say that this has now reached the meat of the market in that it’s not just the financial services or education guys. We have people like a large dairy producer who is trying to protect their production data on their cows. They don’t want to lose a machine and lose any data.
22:00
So what we’re doing is leveraging the existing Dell and Intel [sic] channels to help move this product through the market. We have global distribution today. We’re selling product in Asia, in Europe, and in North America. We’re working on various countries in South America, some of South Africa, to make sure that we have response. A really good example is we had a Ministry of Defense for one of the countries in the EU contact us last Monday and say, “We’re buying 2,000 new Dell machines. We’d like Full Disc Encryption on it. Can you have somebody come down and educate us?” And you know we had feet on the street in Europe who were there, I think they’re there this week, speaking in the local language who can provide them with support and infrastructure around that. And that’s what’s really necessary for us go and help close those sales.
The nice thing is we haven’t had to go spend 5 years developing a relationship with this country’s defense group because it’s a relationship that Dell already has. We work with them to enhance the quality of the security on their sales.
23:20
We have today delivered orders within the U.S. Army, within the Office of Secretary of Defense, a large tech manufacturer, a number of law firms. We’re working towards getting these case studies public. Most people don’t want to talk too much about their security implementations, but it’s moving forward with some pace. I would say that we’re still in the early stages of adoption of the full disc encryption, but what it’s doing is dragging through awareness on the Trusted Platform Module side.
If you think of my business – at 20 million units shipped at 50 cents a unit, I make $10 million in revenue on a pretty solid basis in licensing in 2008. The question really is what’s the adoption and take rate of drives. Just to give people some metrics, Dell shipped just a little over 10 million laptops. If you said 10% of those laptops, or a million laptops, were to select the Seagate drive, it generates for us another $7.5 million in revenue in licensing for selling software with the drive. And then the question becomes, “Well, what percentage of those take the server?” And looking at that today we have about an 85% attach rate. If half of those people took the server, it’s another $25 million in revenue.
So you can add all those numbers up, but it’s all somewhat dwarfed by the fact that for every 1% of last year’s 20 million units that shipped, for every 1% or 200,000 seats that buy the server it generates $10 million in revenue to Wave. So the question is when does your IT guy wake up and begin to secure the enterprise that you already have because you want it secure and provide the tools to accomplish that.
So what we’re dong is we’re feeding the beast, we’re building the infrastructure to support it, we’re educating the sales channel, we’re looking for the kind of marketing campaigns like this out of Dell that helps broaden awareness because we’ve really seeded the market with a tremendous volume of equipment. There’s a billion dollars worth of Wave-branded upgrades. Forget all the machines that have chips on them that don’t have my software for a second. What we need to do is help them ultimately convert.
25:20
So we’re seeing the beginnings of the revenue growth in that process. We have real customers. The largest customer we have to date has 800 machines deployed on their enterprise network that they bought last November and they’re fully operational today. We have customers that we’re talking to that have tens of thousands of machines on their network that are in the process of selecting the software. The largest one to date has 150,000 employees who have selected the solution but they’ve only shipped a couple of hundred end points at this point in time.
So we’re the only guys with a comprehensive suite of management tools for this that provides strong audit. We have a great relationship with Dell that helps bring us momentum on a global basis, and we see these marketing campaigns really broadening across the market.
That’s my presentation. I think we might have time for [Moderator: Yeah, we have time] a question or two. If anybody has one. I think we have a break-out room [Moderator: Yeah, we have a break-out right next door] right next door after this [Moderator: will be available]. No questions. [Moderator: inaudible] Well….
Mike, Thanks for the response./eom
Question for Mike re Motorcycle Product
Mike, this is what they said in the Q4 cc about the motorcycle product:
“And then in regards to, as you mentioned, the motorcycle market. We’re looking at that from a couple of different perspectives, whether it be something similar to a helmet cam that would apply in that arena or maybe something that would actually be permanently installed on the motorcycle. Those developments and the process are moving along very nicely, along with a couple of other products that we’re developing.”
in a few of your previous posts (143, 152, 231) you indicated that you expected a motorcycle mirror retrofit in Q1.
Can you tell me where your information on the motorcycle product came from? Was this from a previous conference call? I’m asking because
1. I was surprised that that they would even be considering that the helmet cam would be sufficient for motorcycle police and the mirror retrofit you mention sounds logical.
2. I like to follow management’s pronouncements and see how accurate/trustworthy they may be.
3. The prior conference calls don’t seem to be available anywhere.
Thanks very much.
Re: NY TIMES comment on trusted computing
From the article:
“But they said they had proved that so-called Trusted Computing hardware, an industry standard approach that has been heralded as significantly increasing the security of modern personal computers, does not appear to stop the potential attacks.”
It looks like the writer needs a better copy-editor in addition to a fuller understanding:
“But they said they had proved that so-called Trusted Computing hardware…does not appear to stop the potential attacks.”
Transcript of Q4 CC
This is a transcript of the Q4 2007 conference call. I left out some of the pleasantries but everything else is here. Also, I can’t yet distinguish between the voices of Stan and Ken, so in the Q&A section the answerer is identified only with "A"
DGLY Q4 2007 CC
February 21, 2008
Stan Ross, CEO
Tom Heckman, CFO
Ken McCoy, VP of Marketing
STAN ROSS
Thank you very much. And thank you everybody for joining us. This is quite an exciting conference call for us to have today. 2007 ________ was quite a growth moment for us and we’re very pleased to say that we look for a very bright 2008. With me today is Tom Heckman, the company’s CFO and also Ken McCoy, our VP of Marketing.
Today what we’d like to do is do a quick recap of the fourth quarter and year-end numbers. I’ll ask Tom to be doing that. Then I’ll elaborate a little bit on our 2008 guidance in regards to not only the financial side, but new product side, production capacity, so we’ll bring you up to speed on that front. And then we’ll open up the floor to the Q&A session in which both Tom and myself and Ken McCoy will be available to answer any questions that you all may have. Hopefully we do good job of educating you on Digital Ally’s history and also the outlook for 2008.
With that being said, I’d like to turn the call over to Tom Heckman, our CFO.
TOM HECKMAN
Thank you, Stan. If everybody could go to the Statement of Operations for the year ended December 31, 2007 and also the quarter then ended. What I’d like to do because of the magnitude of the changes and increase in activity, 372% increase in revenues year-over-year, 283% increase in revenues between the quarter ended December 31, 2007 and 2006. I won’t spend a lot of time just on the gross changes between the two periods. What I would like to spend a little bit of time on is talking about some of the ratios that now exist in our financial statements and some of the main drivers that affected our numbers for both the quarter and the year-end.
With that said, the main thing in terms of revenue to understand and communicate is that our fourth quarter was dominated by the international sale to an international customer that we previously released. It was roughly $5.1 million in revenues. All that was shipped and billed in the fourth quarter. By doing the math, that single international order was 72% of our total revenues for the quarter and represented 29% of revenues for the year ended.
You look at the _____ year, we only had 2% for the entire year representing international sales so you can see that the swing and the trend is upward in the international sales arena. With that said, that had an impact on our cost of goods sold and related gross margin. International sales are typically lower margin and also there’s the impact on the commission schedule as we also pay less commissions on that. With that said, our gross margin for the year was 61%. For the quarter it was 58%, so you can see the effect of that large order on our margins for the fourth quarter.
Want you to go down to the operating expenses. We were 46% of total revenues in terms of operating expenses for the year and 37% during the quarter. So you can see the trend, each quarter getting better and better. We’re at 37% operating expense to revenues in the fourth quarter vs. 46% for the year. The main drivers in that, R& D expense actually declined $153,000 in the fourth quarter and that was primarily due to the fact that in the third quarter we spent a significant amount of money on external R&D efforts, but they weren’t internal. That research concluded in the third quarter, did not reoccur in the fourth quarter. We have added headcount in the engineering group and added capabilities in the engineering group so that trend probably won’t continue. We’ll probably see that increase over time. For the year over year period, there was a $315,000 increase in R&D expense. And like I said before, we continue to add engineers and we have a lot of research projects in the pipeline.
Stock compensation expense declined $244,000 year-over-year. That’s primarily from the standpoint that we lengthened the vesting period on stock options granted.
Our legal and accounting expense increased about $420,000 year-over-year and that’s primarily because we’re now a fully registered, fully reporting, fully traded public company. We did just recently get listed on the NASDAQ. Prior to that we were an OTC Bulletin Board company obviously. There were expenses associated with that. And then FD2 expense, which is nonrecurring, happened back in May ’07. And then obviously we have the periodic reports, the 10-K’s and 10-Q’s, that add to that cost. So we had a $420,000 increase year-over-year in legal and accounting expense that helped increase operating expenses.
From an overall standpoint, just our workforce increase contributed to an increase in the operating expenses in terms of total, not percentage. Just to give you a flavor for the amount of people we have, at year-end, 12/31, we had a total workforce of 72 people. That’s an increase of 49 people year-over-year, so we more than doubled our size. For the quarter we increased headcount 16 people for the third quarter to the fourth quarter. Most of those, 12 of those people, were in the production area as we continue to increase our production capabilities and efforts[?].
As you go down, our financial income, we now have no short-term or long-term interest-bearing debt so you’ll continue to see the financial income getting better and better for us, although the interest rates we’re earning on our cash and cash equivalents is declining somewhat on a percentage basis because of what’s happening with the Federal Reserve.
If you go down to pre-tax income, our percentage was 15% for the year ended ’07. For the quarter it was 21% of revenues, so you can see the trend is improving. The 21% in the fourth quarter for our operating income ratio compared to 16% in the third quarter, which shows nice improvement. We had a total of $820,000 of pre-tax income in the third quarter, $1.4 million in the fourth quarter, and for the year $2.8 million. So the fourth quarter represented roughly half of our pre-tax income for the year. Nice trend to have.
The income tax provision/deficit line, I think we’ve discussed that previously. Because of our positive operating results and our projection of future operating results, the company and the auditors agreed that we should book the benefit of our NOLS that we built up over the years, which amounted to $1.6 million of income tax benefit for the year. For the quarter - that was actually booked back in the third quarter. For the quarter ended December 31, 2007 we booked income tax expense of $490,000, which is an effective tax rate of about 33%. If you look out into the future that rate may increase a little bit, but expect a 33 to 36% effective rate on a go-forward basis.
The bottom line for the year ended 2007 we had $4.5 million worth of net income as compared to $3.3 million loss in the prior year. For the quarter we had $983,000, almost $1 million in net income for the quarter and that’s fully taxed vs. $165,000 loss in the previous year period.
If you look at cash flow, if you back out the non-cash items, both the tax benefit that was non-cash and the stock comp expense and depreciation and so on and so forth, for the year ended 2007 we had total EBITDA _____ cash income of $4.7 million compared to a cash loss of $1.3 million in the previous year. For the quarter alone, fourth quarter, we had almost $2 million of cash earnings compared to only $13,000 in the previous year period. So all and all a very good set of operating results to discuss.
What I’d like to do now is just briefly touch on some of the balance sheet changes and some items on there. First of all the cash and cash equivalents. Predominantly all the income we had for the year is now sitting in our cash and cash equivalents. We have $4.2 million of cash and cash equivalents.
You’ll see that our accounts receivable went down to $523,000. That’s primarily because the large international shipments that we made in the fourth quarter were all pre-payments. We got paid up-front. We were not able to ship a lot of our regular orders which we typically send out on trade credit. So if you look at the ratios, at the end of the year we had nine days of sales sitting in accounts receivable, which is very good.
Inventory increased 2.9 million. Even looking at the past year of comp sales, we’re still turning our inventories over 3 times and if you use an average inventory, 6 times, so we believe our level of inventory is appropriate given the size of our activity.
At the end of the year our working capital is over $7.2 million, a large improvement from the prior year. Obviously the cash and cash equivalents is a big driver in that.
If you go down the line, our interest bearing debt is all gone. The note payable was actually converted to 500,000 shares of stock during the year, so that was a non-cash payment there. The line of credit was paid off in early 2007 so we have no interest-bearing debt.
Our total Stockholders Equity improved by $7.2 million year-to-year. The components of that increase are obviously the $4.5 million of income we had for the year plus $1.7 million in stock option expense that gets credited to capital. We had the $500,000 in promissory note converted to capital and then half a million dollars of proceeds from the exercise of options and warrants. So all and all a nice increase of $7.2 million in Stockholders Equity.
I got just a couple of comments on the cash flow statement. The big driver in that is obviously our net cash provided by operating activities. In the prior year we had $3.4 million used in operating activities. This year we had a provision, we actually got cash from operating activities of $4.9 million, an improvement of $8.3 million year-over-year, very nice improvement. And then obviously you saw on the balance sheet that most of that ended up in the ending cash balance.
STAN ROSS
Great. A couple of things I want to point out - maybe Tom can elaborate on it - but you know the number that we’ve been throwing out there, sort of using with regards to our 2008 guidance. I believe we used a 21% figure in regards to operating income because that was a number that we did in the fourth quarter. I want to point out that that number that we’re using, we feel very comfortable in that number and that we might be able to improve on that due to the fact that in the fourth quarter, again, the majority of our revenue was generated from the large international order. So if we’re looking at a quarter where we may have a lot more domestic production, correct me if I’m wrong, but that number should increase. But anyway we wanted to make sure to get something out there to help with the modeling due to the growth the company’s having but also did want to point out that that was based upon product that was sold at a greater discount that what we normally are selling our stuff at.
Also we indicated, I believe it was in the early fourth quarter last year, that we were moving towards expanding the production capabilities of Digital so that we could get to the point where we could produce in excess of 1,000 units – I’m talking about the DVM – a month. That has occurred. If I’m not mistaken I believe they have successfully built and shipped over 1,000 units just in, I believe, in the month of December. So they do – Digital does have the capability if the sales continue to increase or we would land another large international order, production capabilities are there for us to step it up on just a regular 40-hour work week type of one shift to do over 1,000 units a month of the DVM. That was a very great milestone that was accomplished by our ________ out in Green Valley [?].
Also wanted to point out that the estimates that we are giving on the $40 million for 2008, again we’re trying to do the best we can but not sticking our neck out too far. But a majority of that number is based upon products that we currently are marketing today, the large portion of it being the DVM. And then some added sales coming in from the flashlight. We’re really not taking into effect any sales that we may be generating from the mass transit market, school bus market, and some other items that we have in the pipeline that we’ll probably be talking more about in the second quarter than I feel comfortable tipping our hand at right now. So again the $40 million number again I think is something that’s driven greatly by the products that we have currently selling.
We also had anticipated a number less than 20% being coming from international orders, so the 40 million, again, is largely domestic orders that we’ll be generating. Although we did have the very large order in the fourth quarter, the international order, I believe that we would have still achieved our consecutive growth record even without that order. Therefore we went ahead and gave guidance because we did carry over such a large back order that the first quarter in ’08, we look to be a record quarter as well. I’m not comfortable in giving that ______ number because there’s still a lot of things that may develop, but obviously if we’re looking to do $40 million for the year you can anticipate a very [?] strong first quarter number out of the box.
The other thing that I think what we’ll do is there were some questions that were asked last time, and again feel free to fire them at us, but Ken you may elaborate - last time they were asking us about new orders vs. existing orders, you know, re-orders. Do you want to just want to touch on that a little bit and then we’ll open up the floor for Q&A?
KEN
Sure, be glad to Stan. Yes, in 2007 we went back and looked at our re-orders vs. new orders, and we’re running actually about 50% of orders in 2007 were re-orders from existing customers. Some of those could have been in ’07, early ’07, and came back in mid to late ’07 and ordered more. So it’s a real good indication in my mind that one, we’ve got a lot of satisfied customers out there that’s re-ordering from us on the equipment that they have, and also we mentioned before that a lot of orders are very small to start with and then as budgets open up they come back and order larger quantities from us, and that’s accounted for a lot of that reorders as well. And then on the other side of the coin, half of our business is generating new customers that will be reordering from us we feel like in the future years, too. So I’m very pleased with really that number that came about on the re-orders vs. new orders. So I think we’ve got a good combination going.
STAN
The other thing I’m very pleased that we were able to accomplish is the fact that we’re now selling products in all 50 states, I believe, 12 different countries now.
KEN?
That’s correct.
STAN
We continue, I believe we have on our slate somewhere around 200 trade shows that we will be having a presence in here in 2008, whether it be more the county-oriented show in certain areas of a state or statewide or even a national audience, let alone we have recently been doing a few shows abroad, getting our name out there through the international communities and hopefully those will pay off here in 2008-2009 as well.
So with that being said, I think we’ll open up the floor for the Q&A session.
Q&A
[Operator instructions.]
BRANDON AUSTIN - _______ CAPITAL
Q. Hi guys, how you doing this morning?
A. Hi Brandon. How about you?
Q. I’m doing great now that I’ve seen these awesome numbers you guys put out. It’s amazing, you guys came from basically start-up phase to market leader in about 12 months, so that’s incredibly impressive. Just wanted to move through some of the numbers, some of the guidance. I guess your SG&A, you guys say it’s going to ramp and that’s understandable. Why would the SG&A expense, after backing out the stock-based compensation expense, why would that have been down in Q4 vs. Q3?
A. Well, Q4 vs. Q3, the big driver of that is the drop in R&D expense, that big old project that was out at an outside shop. That was a big driver. And also the commissions paid dropped significantly because of the international order in the fourth quarter, which is paid less commissions on international orders. Those are the primary drivers.
A. Brandon, to give you an example, on an international order, because we are taking the haircut on the top end, commissions may be somewhere around a 2% number vs. domestically there may be a commission as high as 9%, somewhere on average. So that does become one of the bigger numbers, as well.
Q. OK. On your _______ guidance, you said that you guys think that 21% pre-tax can be a number that’s achievable off of your $40 million in revenue guidance. But that that 21% in Q4 was a GAAP number. If I back out the stock based comp you really did something like 25% operating margins in Q4. So if you’re saying 21% GAAP, does that mean that basically you think you can do 25% non-GAAP off of the $40 million?
A. Correct.
Q. OK. Great. And I guess you guys are indicating that there’s some catch-up to do in Q1 because this large order took up a lot of your manufacturing capacity. But even if Q1 was a record number, your full year number of $40 million suggests that you in no way expect Q1 to be your best quarter of 2008. Is that a fair statement?
A. That’s a fair statement, as well.
JOHN _____ - PRIVATE INVESTOR
Q. How large is your sales team?
A. Our U.S. sales agents - we have 15 U.S. sales agents that are commission people, and then we have about 30 of what we call sub-agents that are installers, maybe multi-equipment dealer, something along those lines, an end user – not an end user but an installer. And so then we have about 12 international sales agents around the world.
Q. ________ extensive [?].
A. _________ covered extremely well at this point in time.
Q. A quick question in reference to that $5.1 million international order. Is there any truth to the fact that some of those units did not work properly and they had to be sent back and re-ordered or re-done?
A. No. That’s not true at all. We have not had any problems whatsoever with them.
Q. OK. That’s all basically that I wanted to know.
BILL KITE – KITE IMAGING
Q. Congratulations on your record _____. We’ll all be watching you on the NASDAQ. Quick question on the motorcycle product and the redo of the Digital flashlight that you mentioned. Can you talk about that?
A. We’re trying to do a couple of things. We’re expanding on not only the flashlight that we’re selling to law enforcement but trying to maybe take some of the features that are currently in that device, lessen it [?] a little bit to where we can open it up into more of an industrial setting, whether it be security guards or in different applications, even adjusters, that have been asking for the product. We think we can bring the price down considerably. It won’t be as rugged and as durable as the current model, but there appears to be a market for that ______ flashlight.
And then in regards to, as you mentioned, the motorcycle market. We’re looking at that from a couple of different perspectives, whether it be something similar to a helmet cam that would apply in that arena or maybe something that would actually be permanently installed on the motorcycle. Those developments and the process are moving along very nicely, along with a couple of other products that we’re developing.
Q. Also, just a quick question, it was interesting to read that you’re in 50 states and 12 countries and then the characterization of half new sales and half re-orders. What is your philosophy about letting us know when you get big things? How big do they have to be?
A. Yeah, I mean, we sort of tried to on our last call to give a little guidance as to where we’re going to get away from any type of just new orders that are, say, 50-60 units if it’s not a major contract. There again there may be a small order that comes in, 50-60 unit contract, that is tagged with the statewide contract where you know you’re going to be looking at additional orders on down the road that may be sizable. So that __________ announce, but it’s going to have to be something sizable before we want to go ahead and - basically it’s got to be a material news event before we’re going probably say anything with regards to the sale.
Q. Are most of your sales in smaller cities or have you penetrated into large metropolitan police departments?
A. To date, I would say most of them are in the smaller to middle size communities. We are – one of the reasons that happened is that in most of’’07 we did not have the ability to download our recordings wirelessly, which is a factor that larger cities they want that capability in the units. We’ve since then, actually we introduced it at the IACP Convention in October-November, whenever it was, down in New Orleans. We have that capability now and we’re seeing some very good interest from some of the larger cities and everything with our product. We feel like ’08 we will see some nice increases in the larger cities, but that being said, actually the biggest percentages of all police departments are really in smaller to mid-sized cities, so it goes hand in hand.
A. There were a lot of times where we knew there were municipalities that were looking to acquire some video equipment, but unfortunately the specs that they had written, we were not prepared to submit our unit to be evaluated. That now has since changed and we do have quite a few products out there being looked at at the larger municipalities.
JEFFREY SCOTT
Q. You talked about the - you couldn’t be written into the purchase orders because of the specs. Was that having to do with the wireless download?
A. Yes. That’s what we were referring to.
Q. In terms of small municipalities and big municipalities. What is your definition of small vs. big?
A. I look at it as about three breaks to it. 10,000-20,000 and smaller, is what I consider a small community.
Q. 10,000-20,000 population?
A. Population, yes sir. And then the larger ones I think of 100,000 and above. And then you have the medium between t hose two figures.
Q. OK. What are your typical selling terms for a U.S. domestic sale?
A. Our typical is net 30
Q. And international is prepayment or letter of credit?
A. Yes sir.
Q. OK. Great quarter. Look forward to hearing the next one.
JOE _______ - KM CAPITAL
Q. These numbers that you gave us for ’08 - looks like we’re going to have triple digit growth on both sides, the top line and bottom line, and we’re just talking about the products we actually have in queue right now. These numbers could change dramatically if we get into more of the government aspect of the business, the busses and stuff like you mentioned. Boeing just got a contract for 40 million for new border surveillance. I know one time we were talking about that and they were going to use video. Is this something that former A.G. Ashcroft and stuff is going to help us penetrate those markets so we can capture some of that revenue?
A. Absolutely. You’re dead on. What we’re trying to do is get some kind of guidance out there with what we know today. And while we do have some product ____________using our existing product and going into some new doors, I just don’t have a good enough gut feel to put anything out there in print in regards to some guidance. What we have queued up right now, what we’re selling today, is what we feel we’ll be able to achieve the $40 million number, roughly. Now, new products that we’ve got, new markets that we get into, I just don’t have a feel for that number yet.
Q. I bet it’s safe to say, and of course this is loaded. Is it safe to say if this is your bottom end number and you have all these products in your inventory and which you go out and market and you’re going to extend - you’re going to utilize our strategic relations with Sessions and Ashcroft to go in the government market, that an upside number, an upside surprise is definitely in the - could be in the works.
A It definitely could be in the works. That is correct.
Q. Which leads me to my question. You’re opening the NASDAQ next Thursday. At what point - when you have triple digit growth, this is something the Street needs to learn about. What is your plan to get more eyes on Digital Ally from an investor standpoint?
A. Well, this is - today was the real driving factor in that. We needed to get some year-end numbers out there - we needed to be on the NASDAQ first – we need to get year-end numbers out there, and now we can go and get in front of different audiences and really start to sell the story, you know what we have going on, what we can offer going into ’08 and ’09. So you will see a lot more of Digital Ally making presentations at bigger conferences, brokerage conferences throughout the country this year.
Q. I don’t think there are many triple digit growth stories out there.
A. I don’t believe there is.
BRANDON AUSTIN - ________ CAPITAL
Q. I was kind of interested, this, I’m not sure where this rumor came from that some of the product in the international order go returned, but in your press release didn’t you guys say you got a reorder from those guys now?
A. Actually, I don’t know if we put it in a press release or not, but let me - this is Ken – and let me re-emphasize that we certainly haven’t had any problems with our international order, and in fact yes, they have reordered from us twice since December.
Q. OK. Those re-orders, I guess, they’re not in the $5 million range, otherwise you would have said so. But are they sort of incremental like they’re gone through first ______ and now they’re just ordering a thousand units at a time kind of thing?
A. I think it’s more that they’re ordering at a level that they can get these units installed and as they get them installed they’re continuing to order from us. Almost a continuous cycle is what we’ve been having coming in now. They did a big push just to start getting a bunch of them out there and now we’re seeing, now an order a month. Before we got all the units shipped in the fourth quarter, I believe, they already – at least they indicated to us that they were going to be re-ordering in January, and all of this is coming. So we are setting aside a portion of our production continuously it seems like every month or at least every other month for - to continue to send to them.
Q. OK, that’s great. And maybe you guys can get a little bit into, I mean I know it’s still small, but there’s big potential there in the flashlight. How many units of the flashlight have you actually got out there being evaluated right now?
A. First let me say that we are in full production now with the DVM flashlight. And we have approximately 200 out and about from ’07 that we had actually – many of those we had actually sold and we’ve now – are in the process if we haven’t completed it, that we’re almost completed replacing those with our production type flashlights. We didn’t want anybody to buy something from us that wasn’t production quality and we sold it to them with that promise, that we would replace it. So we’re in the process of doing that and we have - nothing large - but we have got orders in’08, the first quarter here of _____ flashlights for continuation of test and evaluation. So I feel very positive that by the last half of ’08 we’re going to see some significant numbers in the DVF.
A2. One of the things – I don’t want you to think that the flashlights that we’re swapping out are going to be trashed. The bottom line is what we’ve done there, we’ve been able to upgrade some software, add the features that they have asked us for from the field, whether it be some dimming capabilities, so that when they’re doing eye tests on DUI pullovers, that it’s not blinding them and stuff like that. So we’ve made some refinements to the units. These units that we have we will continue to update with the latest software and then they will still go out there and be utilized as evaluation units in the marketplace.
KENT MACY - ________ CAPITAL GROUP
Q. Thank you, I think I speak for many of us, we appreciate your regular conference calls and willingness to discuss this. And appreciate too the time that you made available for many of us here in New Orleans at various shows. And Ken thank you for that. My question first of all is you got, as I recall, statewide clearance from 6 states and you’ve got orders in 50, so it sounds like you’ve got your foot in the door in 40 more other states. Do you continue to purse that statewide blessing - that city, municipal, county, statewide approach? Is that continuing to be effective?
A. This is Ken. Yes, we continue to make calls and try to get inroads into the State Police or Highway Patrol or whatever the situation may be. And of course we’re always out hammering the doors of the cities and counties. And some of the states will give statewide contracts, where patrols buy and it filters down to the cities and counties and others they just want to buy for the patrol and let the cities and counties do what they want. We actually are working very closely with some states and hopefully here in the very near future we’ll have a few more state contracts that we can make announcements on.
Q. That sounds good. And regarding the flashlight, I notice there’s some competition out there. Can you just comment about how, what the status is with that, how yours are different and how you’re doing with that other competition?
A. There’s a couple of other companies that have similar type products. We feel like ours is superior in – one, I believe if you check with the other competitors, you’ll see that ours really is the only one that truly looks like a law enforcement flashlight and can be used as a law enforcement flashlight – and is as durable as a law enforcement flashlight. This is important in that if the officer’s out there using our equipment and he’s going to need it one, for a flashlight and secondly to be able to perform the other thing all with one hand and so not hinder his other duties that he’s going to do. So the other thing that we have, I think if you’ll check, is we have longer memory and longer battery life and one of the most important things – and again I can’t say this is all the other competitors, but some of them - they actually have volatile memory, meaning that if their batteries go dead they lose any recordings they have on it. Ours is non-volatile memory and therefore even if they are out and about somewhere and the battery runs dead, they haven’t lost any of the recordings that are stored on that flashlight. So we feel likes, yes, there are some competition out there but when it comes to a head-to-head battle, we feel like we stand right in there above everybody and we’re very price competitive with everybody else’s as well.
Q. When’s your next big show, international or domestic?
A. Like Stan said, there’s about 200 of them, so I’m trying to think of which one might be classified as a big one. The National Sheriff’s Show is in June. And then there’s a huge show out on the East Coast in June as well. There’s several in between now and then. I’m going out to Portland to the Lifesavers Show, which is in early April, I believe. That’s a national show, brings in safety people from all over the United States. And then we continue to be in all the state shows on a regular basis. We’ve been in several already in ’08 and continue to get great reception and great leads from those shows. So we feel it’s money well-spent.
Q. Very good. Well done, guys.
A. Ken, the ISAP [?] will be I believe it’s in October this year in San Diego.
A. I believe it’s November.
A. We’ll be out there attending at that show in San Diego. Come out and see us.
KEVIN THOMPKINS – ANDERSON _________
Q. What is the monthly run rate right now on the mirror?
A. Well, as far as manufacturing, they have the capability of producing north of 1,000 a month as far as the manufacturing side. On the sales side, it comes in spurts. You can have a large international order comes in and it’s going to bury production there for a month or two. But right now on the production side we’re capable of handling north of 1,000 units a month.
Q. OK. And you’re still not seeing any budget cutbacks due to increased fuel costs or the erosion in the tax base due to falling realty prices or anything like that?
A. No, not really. That’s one of the things that they are definitely continuing to fund security issues that are out there, and so while there has been a little bit of a cut back if you’re looking at year-upon-year numbers that the Feds have funded a certain department, you may find something. But we’re still talking about a $2 billion market that’s out there for us and we’re just trying to, right now we’re predicting we can get 40 million of it, so it’s very large.
MIKE ____________ – PRIVATE INVESTOR
Q. Yes, do you have a backlog number for December 31st?
A. We have not published that but I think that, you know, being clear that even without the large international order we felt comfortable that we would have still had a record fourth quarter.
Q. Thank you very much.
A. Back into that a little bit.
Q. OK. Thanks. That’s all I had.
JEFFREY SCOTT – SCOTT ASSET MANAGEMENT
Q. Quick follow-up. The percentage of the fourth quarter revenue that was the DVM-500, was it virtually 100%?
A Yeah, it’s predominantly that – it’s upper nineties.
Q. OK. Do you sell an absolutely standard unit or is there some way for your customer to customize what he needs?
A. One of the things that we’ve been able to do – I think that’s a real advantage that we have by building our product here domestically vs. abroad is that we can tweak the units to meet more of their needs. There are certain areas where they make requests. This may not be a good example, but GPS isn’t as important to them as additional memory or something along those lines. So we do have the capability of tweaking the units on the fly and meeting what their needs are.
Q. What is the current selling price for a DVM unit?
A. It’s $3,995.
A. $4,000 bucks.
Q. That’s list. Do you actually sell it for that price?
A. We do. Yes
BRANDON AUSTIN - ________ CAPITAL
Q. On the flashlight side, just getting back to that, you talked about different products for property and casualty or different products for different walks of life. Do you have a sense of your release schedule there ____ new products _______ second half of the year?
A. Probably most likely second half of the year.
Q. And just on the competitive front, you guys are really taking off here. Have you guys – I mean there’s other competitors located in the area. Are you guys starting to get calls from regional sales people _____ looking for jobs with you guys?
A. This is Ken. We do get inquiries for employment and naturally we take a look at each and every one of those that come in, so - I noticed an increase in that in the last few months.
Q. Great. Thanks guy. Great stuff.
[Operator: No further questions.]
STAN
I’d like to thank every one. I do want to make one little comment. Tom Heckman joined us here a little over a few months ago, or whatever. I can’t go without saying that it wasn’t due to any changes or disappointment in the efforts that we had with our former CFO. Just, with a lot of companies that grow at the rate that we’re growing, and the rules that have changed and everything else, we thought it was important to bring in someone that had the experience that Tom had. In no way was it anything negative upon our former CFO. Anyway. He’s still here working with us. And it’s just one of those growing things, as Tom had mentioned earlier _________.
We will keep you all posted. If some additional questions come up that we can answer, feel free to give us a call here at corporate headquarters and we’ll do our best to, if we can answer them, answer them. Otherwise, we’ll do the best we can to keep you informed of our 2008 progress. Thank you all and look forward to talking to you again soon.
What I like about the upcoming products (motorcycle and bus video plus the flashlight) is that these products put a premium on compactness and clever design, even more so, I think, than the police car video, where many cars actually have laptop computers in the car.
Compactness and clever design seem to be DGLY’s strength.
I went looking for on-motorcycle video and this is the one I found, from mobile-vision, the L3 Communications company. According to this page, it is the “only solid state digital solution for motorcycles.” If this is the best that competitors have to offer, DGLY should be pretty successful here. It will be interesting to see DGLY’s design. Note the rear view mirror at the right of the picture.
http://www.mobile-vision.com/Products/digital_systems/flashbackcyclevision.htm
Ralph, I don’t know what the type of audience was. Maybe someone else on the board knows.
As for questions, my understanding is that when a presenter ends a little early, questions can be asked in the presentation room before they move to the break-out room for the official question-asking session. In this case, apparently no one had questions right there, but they were heading for a break-out, where presumably someone did come up with questions. These break-out sessions are not webcast.
Interspersed in Steven’s last comments were comments from the moderator as follows. Also, it sounded like Steven’s last sentence may have been cut off. Only “Well” is on the webcast.
"That’s my presentation. I think we might have time for [Moderator: Yeah, we have time] a question or two. If anybody has one. I think we have a break-out room [Moderator: Yeah, we have a break-out right next door] right next door after this [Moderator: will be available]. No questions. [Moderator: inaudible] Well...."
http://www.wsw.com/webcast/sra6/wavx/
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P.S. I appreciate the thank-you's from the board for the transcription.
Policeone.com
This page on the policeone.com site is full of information on in-car video.
http://www.policeone.com/police-products/vehicle-equipment/in-car-video/
(There was a link to the policeone site in the news/events section of the L-3 Communications mobile-vision site. The link to the mobile-vision site was provided by Mike in message #31).
I haven’t had a chance to look at much other than to see that Digital Ally is included in the “In Car Video Sponsors” section, of which there are many. I did read the Hilliard Ohio article and see that they are buying a competitor's product which costs $6,500.
"If the images were included we would know more."
Freepatentsonline.com gives access to pdf's of patent applications and issued patents, which show everything including images. You have to register to get access to the pdf's, but registration is free.
(I just discovered DGLY day before yesterday. I'm glad to have found a good board.)
Note of thanks for the detailed replies to my post.
Lots of stuff to mull over and sort out. It’s going to take a while for me to clarify my thoughts here and see what questions may remain. I didn’t want more time to pass without acknowledging the replies.
Thanks again.
Software Encryption Companies
A link to an article was posted which stated that the software encryption companies now get it. They are working with Seagate, they are working with Intel to support vPro. I expected this to bring forth some concern, or at least some interest, about how Wave will face this competition. Only orda seemed to read the article accurately. Other responses were, for example:
“When WAVX starts seeing serious competition 5 years from now, I will probably be out of WAVX. Hopefully I will have sold at or near the top. At least that's the plan.”
“This board has speculated the demise of the software FDE companies. To my knowledge this is the first admission of it directly from one of those companies leaders.”
Internet, I wasn’t trying to insult anyone by characterizing such statements as “putting your head in the sand.” I think it’s a reasonable, even restrained, description. I mean no offense to the posters personally.
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I tried to make some simple, important points that I hoped would stimulate some discussion.
One, it appears to me that the software encryption companies are in an extremely strong position because suddenly everybody wants encryption. And not just for their new laptops, which is all that Wave/Seagate can provide. Every company, every government agency, every state that wants encryption for its legacy machines needs the software encryption companies now. The article calls it “their boom.” Doma, if that’s not a strong position, I don’t know what is.
Two, the article indicates that the software encryption companies now realize where they need to go for the future, which is to support hardware encryption and, most likely, the TPM (Intel’s vPro is leading them right to the TPM). I don’t know what took them so long to catch on, but they’ve caught on now. And through SafeBoot, even McAfee is now in the mix.
Are none of you alarmed, or concerned, or even interested that these competitors have finally awakened?
If you put points one and two together, you have a situation where thousands of customers and millions of seats (and more every day) are in the hands of these companies that will soon be able to offer what Wave offers and more. Intel and Seagate are not saying, “Wave helped us to develop our products, so we will not help their competitors.” Intel and Seagate are working with every company that wants to support their products. Naturally.
So, internet, what’s the point of listing all the nickel and dime (Steven’s words) arrangements that Wave has with these companies? They’re happily supporting Wave’s competitors in spite of these close relationships. What difference does it make that Wave turned the DOD on to the TPM? When the government finds that their software encryption vendors will encrypt all their old machines, support Seagate on their new machines, and support the TPM, why would they switch to Wave? If there’s an answer, that’s what I’m trying to find out. How will Wave compete with that?
And that’s why I spoke about the time element. That’s why I wonder how long it may take these competitors to get up to speed on hardware encryption and the TPM. Does Wave have time to establish a position? If the Seagate drive is immensely popular and hundreds of thousands or millions are sold fairly quickly, that would do it. So far, we don't see evidence of that. Hopefully Q4 will show some evidence of that.
Awk, you say, how can these companies compete with Wave? They compete by keeping the customers they already have, by offering them new services like support for hardware encryption, support for the TPM. How does Wave take these customers away? If you know the answer, I’d like to hear it. That’s what I’m trying to find out. The only competitive advantage that Wave has that I am aware of is that they support all the TPM’s currently on the market. Maybe that’s enough. I don’t know.
Doma, I don’t understand the point you’re making by saying that “Dell bundles/offers Wave’s software for TPM & FDE key management….they offer Utimaco’s software for encryption.” What will Dell do when Utimaco also offers support for TPM and FDE key management? Even Steven recognizes that Wave’s position with Dell is essentially one of “what have you done for me lately?”
Internet, it is good that Dell highlights Wave in its ads. That does give Wave credibility with customers. Good. That’s a positive. Wave needs credibility. But how can you compare the 20 million bundled ETSL units with millions of seats at customers who chose a company’s product, are paying an annual license fee, and know the software is there?
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I’m not trying to rain on anybody’s parade. I’m not trying to get people mad at me. I’m trying to bring up points that I think are important to our investment, and I’m trying to get information on these important topics.
Have a nice weekend.
Software Encryption Companies as Competitors
I don't believe this is an admission of any demise. This is an "admission" that they are moving right in to Wave’s space. I think a serious discussion of how Wave can compete with these companies would be very helpful.
The software encryption companies have thousands of customers and millions of seats which they will do all they can to hold on to. And since encryption has suddenly become so big and companies now want it for their legacy machines as well as their new ones, the software encryption companies will get more and more customers. This is the whole point as to why the software encryption companies are suddenly in the catbird seat. And the article shows that they see clearly in what direction they have to move.
Time may be important here. Does Wave have time to establish some kind of a position here with a large base of customers? Is that what is needed to compete? And let's just put it out there: the government is starting in on software encryption. Why would they switch to Wave once Seagate and TPM's are supported by the software encryption companies?
These are real questions which I think we need to address.
If there is anyone who has ideas on a timeline here or a path for Wave to compete once these companies come in to the space, it would be most helpful.
Putting our heads in the sand will do us no good.
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In the excerpt, Pollman’s statement could be construed to mean that they will be focusing only on encrypton and not the TPM, which would be a help to Wave, but that seems very unlikely. With Intel putting both encryption and a TPM in vPro, they almost certainly will manage both.
And of course this passage is not saying they will be competing in five years. It is saying they are working now with Seagate and Intel and five years from now they will be a different company. (The link is in Weby's post # 156839.)
"Where does this leave software encryption companies like Credant, Utimaco, PGP, and Safeboot (recently acquired by McAfee) and Check Point (which acquired Pointsec)? Recognizing that their boom will last only as long as it takes hardware-based encryption to take hold, they are partnering with Seagate and Intel to offer integrated solutions. While the hardware companies handle the encryption processing, software vendors will focus on what they day do best--policy creation and implementation, key management, etc.
" 'In five years, we probably won't sell encryption software,' said Malte Pollman, Utimaco vice president of products, but key and other management services for Intel, Seagate and any other hardware encryption companies."