Wave Systems Corp. (fka WAVXQ)

[Magdelina]

Dear CM,

Now that I've had 24+ hours to cogitate on your thoughts lets discuss VISION.

What is the Wave Systems' VISION?

Taken from the most recent 10Q,
http://biz.yahoo.com/e/040514/wavx10-q.html

"In 2003, Wave began the market introduction of its first commercial products designed to support the emerging products that include TPMs in this marketplace. Wave has developed additional products supporting these TCG products, some of which are to be introduced during the second quarter of 2004. Wave also has several other products in development that it plans to release during 2004, and will continue to develop product enhancements to products that have been released......Wave's products are unique in the fact that they support cross platform interoperability for the currently available TPM chips from National Semiconductor, Atmel and Infineon and have been certified for usage on TPM platforms shipped by Intel, IBM and HP."

The OPPORTUNITY, from the 10-Q:

"• There is an emergence of TPM-enabled PCs being sold into the marketplace. This emergence is complementary to Wave's business model, which largely relies upon providing services for Trusted Platforms rather than selling the hardware itself.
• Business and security strategies are becoming more closely aligned due to the increasing rate of significant high profile and costly security breaches and the associated risks presented by this phenomenon.
• In-house security expertise remains in short supply. Wave seeks to capitalize on its expertise as awareness of TPM-enabled solutions increases. "

"Management is also focused on developing the client and server-side applications and tools that will enable enterprises to manage an IT infrastructure that relies on TCG hardware-enabled security. Wave is devoting a significant portion of its research and development budget to address this opportunity, as this will be a key ingredient for enterprises to successfully implement a Trusted Platform solution. Wave has begun to offer these tools and applications to satisfy this need in 2004."

"With respect to sales and marketing, management is focused on broadening our distribution strategies to include resellers and systems integrators and expanding our presence selling directly to OEMs. We have re-organized and shifted the focus of our sales force during the latter part of 2003, in order to achieve these objectives."

"Management is also focused on opportunities for its eTM product suite to provide digital signing and document management solutions to the financial services and other vertical markets in which there is a clear and identifiable value proposition in implementing these solutions. Although we have met significant implementation challenges and long sales cycles with this effort, we have also experienced significant interest in these products and we continue to pursue this opportunity."

The CHALLENGES, again from the 10-Q:

"• Tight enterprise IT budgets - industry data appear to show that while enterprise security will be a priority, it will be challenged by tight budgets.
• Long sales cycle due to continued lack of support for enterprise spending on security solutions - information security continues to be viewed as an IT issue versus a business issue.
• Market awareness - need to educate the marketplace of the advantages of utilizing hardware trusted platforms as a security solution.
• Limited availability of capital resources - Wave continues to rely on financing the development of its business by issuing new equity."

"While management has committed to pursuing the business opportunities and objectives described above, it recognizes significant risks that are involved with pursuing its strategy. Hardware-based computer security is but one approach to information security, and one that has significant hurdles to overcome. There remains a high level of uncertainty as to whether hardware-based computer security will become a major category within the information security market, how large this category will be in terms of sales value and the length of time that it may take for these products to become a widely utilized information security solution."

"The EMBASSY Trust Suite.....Wave has released two separate versions of the EMBASSY Trust Suite: Business Edition and Professional Edition. Wave has also produced a version of the EMBASSY Trust Suite, which includes a client version of Key Transfer Manager("KTM") (see below), which is scheduled to be released in the first half of 2004. Wave plans to continue to develop and enhance the current products being developed within this product group and will develop new applications and services as the trusted computing market continues to evolve. Current planned development costs for this product group are expected to be approximately$1,500,000 for the twelve months ending March 31, 2005."

"EMBASSY Trust Server Applications and Tools....The EMBASSY Trust Server applications include KTM and Attestation CredentialManager ("ACM") — essential enablers for managing and determining authenticityof Trusted Platforms......Both products are planned to be released for availability sometime in 2004. Current planned development costs for this product group are expected to be approximately $4,100,000 for the twelve monthsending March 31, 2005."

"Digital Signature and Electronic Document Management....No further development activities are planned for this product group other than routine updates. Future development will be based on specific customer opportunities. Wave will continue to allocate resources toward marketing and sales to promote these products."

"The EMBASSY Trust System.....
Prior to the formation of the TCG, Wave developed its pioneering EMBASSY (EMBedded Application Security SYstem) Trust System. The EMBASSY Trust System is Wave's proprietary co-processor cryptographic subsystem and supporting infrastructure: a separate chip with its own processor designed to provide security functions; such as, hidden processing of software applications, protected storage of cryptographic keys and encrypted data that works with client and server software applications that provide and/or manage various security functions. Products that make up the EMBASSY Trust System include hardware and software. The hardware products that make up this product group are the EMBASSY 2100 security chip (referred to above) and secure user input devices such as EMBASSY Smart Card Readers and EMBASSY Smart Card ReaderKeyboards that use EMBASSY 2100 chips. These devices are being marketed to government, military and financial services markets. The software products included in this product group are the Trust Assurance Network, which is the back office security infrastructure of the EMBASSY Trust System; Assistant, a client interface that allows the user to securely enter and store their personal and financial data, personal identification numbers, passwords, digital certificates and other information that requires security; the Cyber-Comm applet, a secure French banking application that runs on an EMBASSY chip, and FINREAD, a JAVA interface for online transactions. No further development activities are planned for this product group. The primary assets of this product group have served as the basis for the development of the TCG-compliant products in the EMBASSY Trust Suite."

Revenue Outlook, from 10-Q:

"During 2003, Wave began licensing its EMBASSY Trust Suite software through bundling arrangements with OEMs with whom it signed contracts during the year. In addition, Wave received revenues from software development and other services. Total cash received from all revenue sources in 2003 totaled approximately $227,000. Wave has received forecasts from its partner OEMs with which it currently has bundling contracts that will generate license royalty revenues. Although these forecasts indicate an upward trend in revenue for 2004, because of the early stage of Wave's market and other factors, a high level of uncertainty exists with respect to the ability to forecast future revenues, although we do not expect to generate revenues at a level to cover our total operating costs for the same period. We continue to work with our current partners and customers to introduce and promote our existing software products and new software products, which are under development in an effort to expand the market for hardware-based secure computing and thereby increase our marketshare and revenues. However, because TCG hardware security is still a new, developing category within the computer security market, the ultimate size of this market and the timeframe for its development are unknown and difficult to predict. Wave will also continue to pursue hardware sales and licensing of its proprietary EMBASSY Trust System, primarily in government-related security markets and financial markets. In addition, Wave is exploring and pursuing contracts that will pay Wave for non-recurring engineering development services, although no such firm orders currently exist."

Chris, reading the 10-Q I see limited opportunity for Wave's VISION and substantial risk. Dilution is an absolute given. The EMBASSY Trust System is dead in the water. The application for DOD certification remains pending after a year plus.
http://jitc.fhu.disa.mil/pki/vendor/wave_systems_smart_safe_signature.html
Is any effort being made by Wave to get the application approved? If not, why? If so, when?

By Wave's own assessment, the market for TPM enabled machines is uncertain and difficult to predict which implies that Wave's role within that environment is even more uncertain. The opportunity for the EMBASSY Trust Suite remains underwhelming to me and appears to have competition. I see better opportunity for substantial revenue with the EMBASSY Trust Server Applications and Tools, however, that requires further monies in R&D and the cost of support of those services remains unaddressed by management.

Please explain to me your excitement for the potential of this investment. And consider my points when speaking with management at the upcoming shareholders meeting. Thank you.

Magdelina
PS It is helpful if you make a public reply to the post you are responding to. The thread becomes more coherent.