Wave Systems Corp. (fka WAVXQ)

[tampa123]

CyberSource - Just one opportunity for Wave to ask their third-party-integrator partners to help get them in the middle of.

Wall Street Transcript
Electronic Transaction Processing a key topic of Wall Street Transcript Business Services Report
Wednesday April 12, 8:29 am ET


67 WALL STREET, New York--April 11, 2006--67 Wall Street, New York-The Wall Street Transcript has just published its Business Services issue, a report offering a timely review of the sector to serious investors and industry executives. This 57-page feature contains an industry commentary through in-depth interviews with top management from 10- firms. The full issue is available by calling [phone] or via The Wall Street Transcript Online.
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Topics covered: Valuation expectations, Corporate profits impact, Outsourcing, Call centers, Bundled business services, BPO segment, Transaction processing market, e-Commerce retail sales, stock picks and stocks to avoid.

Companies include: Cbiz Inc. (CBIZ), Conversion Services International Inc. (CVN), Iceweb Inc. (IWEB), IHS Inc. (IHS), Impart Media Group Inc. (IMMG), International Monetary Systems Ltd. (INLM), Newmarket Technology Inc. (NMKT), Standard Register (SR), USA Technologies Inc. (USAT), Vistaprint Limited (VPRT). Analysts Include: Brandt Sakakeeny, Deutsche Bank Securities, Jim Macdonald & Todd Van Fleet, First Analysis Securities Corp., Gary Prestopino, Barrington Research Assoc.

In the following brief excerpt from the 57 page report, Gary Prestopino discusses the outlook for the electronic transaction processing sector and for investors.

TWST: What's the appeal of this transaction processing market?

Mr. Prestopino: All of the companies in this space have a high degree of visibility in both revenue and earnings growth with significant operating leverage and contractual transaction based business models. Growth for these companies is being driven by the long-term secular trend of increased usage of credit cards and debit cards in electronic transactions for payments at the point of sale. Industry studies cite expected growth rates in the use of credit cards between in the US at 9%-12% on a transactional basis over the next five years and from 14%-20% growth on a transactional basis in debit card usage-with higher growth rates expected for each in the international market, driven by the worldwide shift from paper to plastic for payments for goods and services.

TWST: What's at the top of your list today?

Mr. Prestopino: I have three companies that I want to focus on today, two of which are in an emerging growth space of electronic transaction processing within the electronic payment gateway space, CyberSource (CYBS) and Lightbridge (LTBG). The third company is a recent addition to my research coverage, Rewards Network (IRN), which is a leading provider of dining awards and loyalty programs in North America driven by the use of credit cards registered with the company's loyalty and rewards program.

Both CyberSource and Lightbridge provide electronic payment gateway services to online retailers. The electronic payment gateway business facilitates the use of card-based transactions for payments for goods and services purchased over the Internet. Very simply, an electronic gateway enables a computer to act as a point-of-sale terminal in an online transaction. When a purchaser uses his/her credit card for on online purchase, the online merchant needs an electronic payment gateway provider to facilitate the transaction. The electronic payment gateway will take the data from the credit card submitted by the purchaser and encrypt it, transport it over the Internet, and then send it to the respective electronic transaction processor that is processing the transaction.

The overriding secular growth theme for both CyberSource and Lightbridge is the movement toward e-Commerce transactions by both consumers and businesses. e-Commerce is currently a very small percentage of total retail sales, yet e-Commerce is growing quite consistently and rapidly as consumers continue to embrace the Internet for online retail transactions. Since 2001, e-Commerce sales have increased 20% to 25% annually totaling over $177 billion in the US and over $130 billion in Europe in 2005. Even with this solid growth, total US e-Commerce retail sales currently represent only a little more than 2% of annual retail sales.

TWST: What gives them that competitive advantage as a bundled product?

Mr. Prestopino: It gives them a competitive advantage in that it makes it very appealing to online merchants in that CyberSource becomes a single source vendor through the creation of an integrated payment hub with direct links to financial institutions in over 140 countries for all of the payment processing needs of the online merchant. With its product line rolled out, CyberSource is now an execution story versus a development story, which it was a couple of years ago.

In 2005 the company more than doubled its merchant base to 13,000 merchants and processed over 637 million transactions representing a 46% year-over-year increase. Global acquiring clients totaled 900 at the end of Q4/05 from 31 at the end of 2004. I firmly believe that if the company correctly executes its business plan over the next five years, this stock is going to reward investors on a long-term basis. Currently the company has operations in the US and Europe. Over the next two to three years I anticipate that CyberSource will be serving a worldwide client base, particularly in the high growth Pacific Rim region of the world.

In addition to its growth potential, CyberSource generates excess cash flow and has a $130 million net operating loss carryforward. Although the company will report the payment of taxes in 2006, it will not actually pay any federal taxes, which will enhance free cash flow generation. In December, at the end of Q4/05, CyberSource had $1.30 per share of net cash on its books. This should increase every year, barring any major acquisitions, as capital investment is minimal since the company is currently utilizing only about 15% of its processing capacity - which is also a very attractive facet of the story.

TWST: Who do they compete with, Gary?

Mr. Prestopino: Competitors in the electronic gateway payment space include Lightbridge and PayPal, although both focus on different segments of the online merchant market that includes small and medium-sized retailers. First Data (FDC) and eFunds (EFD) also have a gateway product as well, yet gateway services are not a core competency of the larger processors. In my opinion, there is no company in this space that has the depth and breadth of product line with bundled gateway and acquiring services serving both domestic and international markets to match CyberSource.

TWST: What's to stop some of these bigger guys from really focusing on this attractive business?

Mr. Prestopino: Well, if you combine the revenue of Lightbridge, CyberSource, and PayPal's businesses, you only have, at most, $200 million of revenue. There is nothing really to stop the merchant acquirors/processors from getting into this market, but the market is still a very small market relative to acquiring/processing. As companies such as CyberSource and Lightbridge attain critical mass, driven by the growth of online transactions, they may become attractive acquisition candidates for a larger electronic transaction processor who would rather buy than build a presence in the electronic payment gateway space.

http://biz.yahoo.com/twst/060412/zbx800.html?.v=1