Wave Systems Corp. (fka WAVXQ)

[vickers2]

Dutton

Symbol (Nasdaq)
Wave Systems Corp.
Robert Goldman
WAVX
Industry: Computers, Technology & Internet
Recent Price: $2.00
52-week Price Range: $1.65 - $3.85
Target Price (12 Months): $4.00
Avg. Daily Vol. (3 mo.): 126,606
Fiscal Year Ending: December
Year EPS P/E REVS PSR
2005 A $-0.63 - - - $1.02 88.0
2006 A $-0.51 - - - $3.12 28.8
2007 E $-0.37 - - - $10.2 8.8
2008 E $0.08 25.0 $39.0 2.3
2009 N/A - - - - - - - - - - - -
Balance Sheet Data (mil) 06/30/07
Cash Equivalent: $12.5
Working Capital: $9.7
Long-Term Liability: $0.0
Shareholder's Equity: $11.2
Ownership and Valuation (mil)
Shares Outstanding: 44.90
Inside Ownership: 4.00%
Institutional Ownership: 9.00%
Equity Market Value: $89.8
Current Rating History
Date Assigned: 5/17/2005
Price at Rating: $0.69
Original Price Target: $2.00
Time Frame: 12 Months
Notes on Quantitative Data
EPS data adjusted for 1-for-3 reverse split of July 2006.
Rating: Strong Speculative Buy
08/09/2007
Wave Systems Announces 2Q07 Results; Reducing 2007 Estimates; Reiterate Strong Speculative Buy Rating
Summary and Conclusion
After the close on Wednesday, August 8, 2007, Wave Systems Corp. (NASDAQGM: WAVX) announced 2Q07 results, for the
period ending June 30, 2007. Revenue for the period was lighter than our forecast. We attribute the shortfall to shipments of
Wave's software bundled with Seagate's Momentus 5400 (Full Disc Encryption) FDE.2 hard drives not commencing until the third
quarter, and lower-than-expected enterprise revenue.
Given that the Seagate-related business has essentially been pushed out one quarter from our original forecast, we are reducing
our top-line estimates for the balance of 2007 to reflect lower Seagate-related revenue. We have elected to leave our FY08
projections unchanged at this time, pending greater clarity on this front and enterprise sales during the balance of the third
quarter. In our view, despite the soft sales figures, demand for Trusted Computing technology is strong and the Company remains
uniquely positioned to benefit from the expected demand. Furthermore, Wave management is doing an admirable job of
strengthening the ties to its key technology partners which we believe will pay considerable dividends in the future.
Financial Highlights
Revenue for 2Q07 was $1.4 million versus $910,000 in 2Q06, and was lower than our $2.375M estimate. Loss per share was
($0.11) as compared to ($0.13) in the year-ago period, and was greater than our forecast, reflecting the lower than expected
revenue. SG&A expenses of $6.1 million were incrementally higher than the projected $5.8 million. In general, profit margins were
essentially unchanged from recent quarters. Shares outstanding of 44.1 million for the period increased by 7 million shares from
the first quarter of 2007 which reflects a greater number of shares outstanding resulting from a $15.0 million offering that
concluded during the period. The raise enabled Wave to end the quarter with $12.5 million in cash and equivalents and no longterm
debt.
Company Highlights
Although financial results did not meet our expectations, the Company has achieved important milestone achievements recently.
As noted above, Wave software-integrated Seagate FDE drives shipments commenced shipment only a few weeks ago. In
addition, these sales and pipeline and the associated Remote Administration Server (which achieved first sales in the quarter),
have been enhanced by the deployment of Wave evaluation kits to very large prospective enterprise customers. The Wave/Dell
relationship has been strengthened with the co-marketing of this important product as Dell is now the only PC producer offering a
TPM and management of a FDE laptop from the same vendor. During the quarter, Wave also released the next generation of the
EMBASSY Trust Suite to Dell, which offers greater authentication functionality, more features, supports Microsoft Vista, and is
easier to use.
Separately, by working closely with Juniper Networks and to a lesser extent Microsoft, the Company has positioned itself nicely
within the Network Access Control segment with its endpoint integrity software solution. The Wave offering complements these
two firms' offerings to provide strong, tamper resistant machine identity, in conjunction with network access control. When
incorporated with the Wave TPM and server, remote management of this endpoint is achieved, as well as the production of a
certificate illustrating regulatory data compliance.
Estimate Changes
We are reducing our top-line numbers for the balance of the year to reflect the delay in Seagate-related product shipment, and
slow enterprise sales. Our new estimates for 2007 include revenue of $10.2 million, down from $14.2 million, previously, with a
loss per share forecast of ($0.37) versus our prior ($0.27) estimate. We are leaving our 2008 estimates unchanged at this time,
pending greater sales clarity following the third quarter 2007 reporting period.
Despite the soft sales, Wave is well-positioned with its partners and in our view, its pipeline, to generate meaningful revenue for
the first time, beginning in 2H07. In addition, we believe that the current price reflects these factors, and as such, the risk/reward
at current levels is favorable. As a result, we reiterate our Strong Speculative Buy rating.
Current Dutton Associates disclaimer and 17b disclosure information regarding Wave Systems Corp.
Information, opinions or recommendations contained in Dutton Associates' research reports or research notes are
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obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such
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Research Reports, typically published quarterly, and requisite Research Notes. Dutton Associates received $65,000 from the
Company for 8 Research Reports with coverage commencing on 05/17/2005. Reports are performed on behalf of the
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