Wave Systems Corp. (fka WAVXQ)

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Good Morninig Skeptics

I'd like to take a try at putting together a reasonable explanation at why some of the share prices we are seeing thrown around here are not as unreasonable as many here seem to think.

First and foremost I would hope everyone here has had an opportunity to hear the presentation Steven gave at the Needham conference this week. If you have not heard this, you owe it to yourself and your investment to take the 40 or so minutes to give it a listen. Here it is for the taking: http://www.wsw.com/webcast/needham35/wavx/

One of the major criticisms of Steven that I myself have voiced in the past has been the lack of clarity or guidance that we all have been given. It is my impression that this conference and the Automotive contract that preceeded it represent the first opportunity to substantiate Wave's role in this emerging market and give real guidance to where this role will take us 4-8 quarters going forward from here. In my world, I have been focusing on what an old time poster here labled the "critical application" that would eventually lead to the phenomenon of what economists call "demand -pull" of Wave's products. Some of you might know him as Alea iacta est or more recently as Cactus Flower. He soured on Wave's prospects some while back when it became obvious that TPM's alone failed to achieve any traction even after hitting a reasonable level of market penetration. I would argue he still is yet to recover from his soured state of mind, though there are a few hints that when Hewlett Packard falls into Wave's camp with bundling argreement he will be back in a more refreshed state of mind shall we say. The reason I think Cactus Flower is worth discussing, is that I firmly believe he is one of our brilliant mind here and therefore acurately represents those who are still entrenched enough in the past with respect to Wave's failures to be missing some of the key facts with respect to Wave's impending successes.

I adopted Cactus Flower's view or analytical framework myself quite awhile back, but unlike sir Cactus, I see that the critical application we have been waiting for has in fact arrived. Some of you may remember that a few weeks ago I asked the question "when will the OEM partners ship 2 million SED / SDD drives in a quarter? I believe that this is the central question to a share price north of $60-80 a share and here is the reason. This week Steven confirmed at the conference that wave gets paid $7.50 per drive old through their OEM partners. It is very important to keep in mind that this also leads to a predicted 25-50% ERAS attachment rate at $50 per seat.
When this quarter arrives, and keep in mind that Steven told the conference that market penetration of SED / SDD drives would hit 50% of ALL DRIVES SOLD in a 24-36 month window, the industry does ship 2 million drives a quarter Wave's revenue for that quarter (NOT YEAR) will be in the neighborhood of 15 million for drives and an additional 25 million for ERAS attachment using a conservative 25% attachment rate. That folks is a 40 million dollar QUARTER without including any tpm adoption or royalties for tpms etc..
Therefore it is within the realm of expectation that the demand pull for secure drives will drag Wave along withit to the tune of a 50 million dollar quarter in the next 4-8 quarters. When the street takes this 50 million dollar quarter and spreads it out to an annualized revenue projection you will get a minimum of 200 million dollars a year of revenue. Please note this will be during a time when secure drive penetration is expanding to reach that 50% of all drives sold level. You can attach any PE you like to an approximately 150 million dollars of profit. But if you decide to use worst case scenarios like 100 million outstanding shares, and business expenses growing to 50 million dollars a year you still get 1.5 dollars per share of earnings (and growing). I firmly believe that a growth stock multiple north of 40 dollars will be used that would give us at least $60 per share.

Other random tea leaves would have to include the multiple references Steven made about our relationship with HP. He has always stated that HP would be on board only when they needed to be. Me thinks that US government contracts of scale requiring bundled factory loaded tpm and SED / SDD management software is the tipping point for HP. I also firmly beleive that Wave is working as we discuss this on the engineering required to bring those features to the TPM's that HP delivers from its own supply chain. You may not like Steven's historical record of guidance, but he would not risk his credibility in front of the respected Needham venture capital crowd with misleading statements. HP is in fact going to bundle wave management software in a manner similar to Dell, it is just a question of when, not if.

When taken together, Wave at 2.16 is a steal, a joke, a representation of our past, not our future. I fully expect the people who were at Needham to not really care about our baggage the way many of us here do. They will not care, they will not worry, they will only see opportunity in an emerging market to make a killing. Don't think for a second they will hesitate because 10 years of unprofitability has a sour ring to it. They will focus instead on the future, and I would advise that many of you switch your mental gears into a forward thinking aspect as well. My suspicions are that many here will miss this opportunity to load up since I think the ramp has already begun and will only accelerate in the weeks and months to come. If we cross $3 dollars a share by the end of this month, or even sometime in Febuary the $4 dollar barrier will certainly fall by the time we get to the next conference call. Success begets success and the word is spreading now. I myself can attest to friends and people I know who bought loads of shares in the last few months and are planning to buy much more as the price heads to $4 dollars a share. I do not think for a second that I am the only one posting here that can say that. Make no mistake, this is not "wavoid" money, this is new money that hears the audio replay (linked above) and relly likes what they hear! For those who have indeed suffered through the 10 years of the desert, the water hole is right in front of your nose! I would hope you realize that in order to maximize your gains you would not wait until $4-5 a share to get your feet wet again.

We all know what momentum, margin, and institutional participation can do when we cross over the $5 dollar barrier. I would argue that we do not need to be in a "bubble era" to see rapid price appreciation when SDD / SED drive penetration is doubling from quarter to quarter. The fact that Steven dangled that $7.5 per drive royalty in front of the Needham people suggests to me that they have intellectual property and protected IP to maintain pricing power on this feature as these drives ramp up to mass production and market penetration. In summary, the era of "demand-pull" for Wave's products has arrived. I just wish for those who have reasons to be suspicious to recognize the opportunities in front of them. We have all asked for guidance, asked for clarity, and asked for progress. With the Automotive contract and the presentation this last week we have been given ALL we have been asking for. The last thing we all need to do is act on the information and realize that the market is telling all of us that the future is upon us NOW. It may indeed be true that 10 a share by the end of the year will turn out to be a low ball projection. I understand why no one would wish to put a bolder projection out there, I for one will state for the record that I will not be surprised in the least if we are well above that level come next winter.

RC