jm dutton conference call

Hosted by David Soetebier
June 22, 2006

Soetebier: Thank you Erica, and good morning everyone. Today we have with us Steven Sprague, President and Chief Executive Officer of Wave Systems. Steven has been President of Wave since May 1996. He's been Chief Executive Officer since March 2000. Wave Systems is the leader in Trusted Computing technology. This morning Steven is going to make some formal remarks and then as the operator said we will open it for questions. So without further ado, Steven, I'll turn if over to you.

Steven Sprague: Thank you very much David. Thank you everybody for joining us.

What I thought I'd do is start with the general progress that's been under way over the course of the last couple of months, and I will touch also briefly on sort of generically what we do, but my understanding is that most everyone on the call has a reasonably good familiarity.

So the opportunity that we're continuing to pursue is Trusted Computing, which is this industry standard technology for hardware security as part of the PC platform.

What's driving the adoption of this technology in the market is really a couple of different factors. One is the push of the technology into the market through Microsoft's logo compliance, which is that little sticker on your laptop that says, "Designed for Windows XP." When it says, "Designed for Windows Vista" all of the business machines that are logo compliant for Vista require a Trusted Platform Module in the box, in order to get the sticker. And so that's resulted in really all of the PC manufacturers putting this in the box.

This year we'll see the majority of all business platforms shipping with Trusted Platform Modules, and next year you'll see it on all business platforms and the beginning of some consumer platforms.

IDC's forecast for volumes are in excess of 50/60 million units this year, on it's way to over 100 million units next year, and then really moving towards full adoption in the PC space, which is over 200 million units per year in 2008/2009.

What we have done is we have partnered with the major PC vendors to supply software in the box, really as the first phase of our business model. And that first phase is very well underway. So we supply Dell, Intel and Gateway with the software that they bundle with the PCs that they ship that have Trusted Platform Modules in them.

And as we have articulated before, we have forecasts today from our customers for machines that have already designed our software in, where the product manager has accepted the software that we've supplied, in excess of 50 million machines anticipated over the next two to two and half years from those specific models that carry our software today.

We expect that number to actually continue to increase. We recently, earlier this week, announced a relationship with ST Micro - they're one of the chip vendors for Trusted Platform Modules - and we have licensing agreements with four out of five chip vendors in the market - ST Micro, Atmel, Winbond and Broadcom. The basic software licensing agreement that we have with the chip vendors provides a very very simple set of functionality, really just a little bit more than the drivers to operate the chips. And the reason the chip vendors license that is that way they have a completely normalized solution that is supplied to the PC manufacturer.

But, earlier this week we announced with ST Micro an enhancement to our licensing agreement where they are now licensed to sell our full PC software package, that same software that we license to Dell, to second and third tier OEM and ODM manufacturers in Asia and China. It's really a tremendous benefit for us, because it prevents us from having to have a direct contract relationship with a number of the Asian second and third tier manufacturers. It also gives us the full benefit that because ST Micro is shipping a physical product, i.e. a chip, the accounting for how many copies of software are supplied is substantially easier. Having them as our agent in Asia, bundling our software with their chip so they can offer a fully packaged solution to the ODM and OEM markets we think will be very beneficial. They have a couple of customers already who have indicated that they want the software, but we don't yet have forecast volumes from those customers and ST has not announced the specific names yet. Once we have forecast volumes, we'll add to the 50 million units in expected volume as well.

We expect to do similar kinds of deals with the other chip manufacturers, again for the second and third tier OEMs. We've in essence carved out the market for the top tier OEMs - Sony, Fujitsu, NEC, Dell, Gateway, Lenovo, etc. We really would like to maintain direct relationships with those companies as they're formed. And like I said before, we have direct relationships with Dell, Gateway and Intel.

That represents really the first phase of our business plan which is how do we put our brand out there in as many boxes as possible; ensure that we made it easy for the PC OEMs to choose our software because it came with the chip vendor's silicon; and then how do we make it easy for the enterprise to choose our software, because the PC manufacturer supplied it preconfigured in the box as available software. So if you get a brand new Dell machine today, our software is already installed on the hard disk, ready for the consume to use it, right out of the box.

The second phase of our business, which really drives both the medium-term and long-term revenue of the company, is the enterprise upgrade.

We've been down a couple of different of paths in marketing to the enterprise and I think we really have two very strong paths that are going today. One is that we have partnered with both Dell and Gateway, as well as Intel but they don't have as much resource in this space, to offer our enterprise solution software to their customers when they buy new computers. So today if you order 10,000 new laptops from your Dell sales contact, they will offer you Wave servers to enhance the security of your network and take advantage of this new Trusted Platform technology. We've really been doing those sales calls with Dell since the March time frame. We have what is forming up to be a very nice pipeline, but it's in its early stages.

Anybody who has every launched a new industry or a new product, we have fantastic building interest. We are gaining probably over a dozen strong leads a week at this point. However we are not yet at the point where I can tell you that in the last thirty days we closed this amount of business and we have this amount expected for the next thirty days, and there's enough experience where it's highly predictable.

So we're at the early engagement stages of it. The reaction from the market is very positive. We will go through the normal enterprise selling process of providing pilots and supporting the customer and having the software shipped as standard as they buy new machines.

We expect the software to be both supplied independently of new computer purchasing and especially within the context of Dell, they do something called "Configured to Order," where a company can ask for this collection of applications to be pre-installed and pre-configured on a machine. They actually do direct shipment to the individual employees' desktops. In "Configure to Order" Dell would then pre-install our full package of software and we'd be paid by Dell for that full package of software. That generates more in the lines of around $50 per seat for both the server and client software components. There are a range of different products and pricing, but it averages out to about that.

We have opportunities that are sitting in front of us, from 500 seat companies to 50,000 seat opportunities. In some cases I would tell you the 50,000 seat opportunities could happen just as fast as the 500 seat opportunities.

We're very excited about it. We're very busily pursuing it. There's no question that I would like to have good strong engagement on the enterprise side, so we've been talking about the companies that are using Wave's enterprise software. It clearly drives the long-term business. If we ship 50 million units and we get 50 cents a unit, it generates 25 million dollars in revenue. If 5 percent of those 50 million seats upgrade, it generates another 125 million dollars in revenue.

Our expectation in this market is that, and I think we've gotten this feedback from a lot of different sources, is that this is the type of technology that has a very sort of herd like mentality for people to adopt. Security is something that once it meets the threshold of what people want and they see others deploying it, it lowers the risk and it makes it a lot easier for others to buy in. So we're focused on who are some of the good leading brand companies out there who if they were to be a customer and adopt our software that they would clearly indicate to their market segment that this is a cool technology to solve this strong authentication and strong data protection problem.

There are really three reasons today why a corporation would upgrade the client machine. One is strong authentication, the fact that the IT department will know that every single PC on the network is the right PC.

The second is data protection, which is both file and folder encryption which ships on the PC client's today, as well as our relationship with Seagate, where Seagate has built a new disk drive called an FDE disk drive or Full Disk Encrypting disk drive, where actually every single bit written to the platters on the disk is encrypted. The really cool thing about this is that it completely eliminates this data theft problem if I lose a laptop. Because, all data on the laptop is encrypted and then the drive is bound to the Trusted Platform Module. If you don't know the password to unlock the machine, the machine is a brick. And no amount of forensic looking around in software on the computer will give you the password. If you take the drive out of the machine and put it in another machine where you know the passwords, the drive will only function in the machine it was originally designed for, unless you know the authorization keys to move the credentials from the Trusted Platform Module for that drive to a machine that has another Trusted Platform Module.

So Wave builds the software for the Seagate Trusted Drives, the OEM software. We've done a number of demonstrations. We have a number of very interesting client opportunities. They start shipping drives at the end of the summer, and it's really an OEM supplied item by the beginning of 2007. We think that will have a very strong driver. Any corporation that has to do public filings should only buy machines with FDE drives after January, because it will really eliminate this - your name gets in the Wall Street Journal because one of your employees got out of a taxi cab and left his laptop behind with sensitive data on it.

And, the third area for upgrade is something called Network Access Control. Network Access Control is a new networking technology. There are about 60 companies that are driving the standards. They include Juniper, Nortel and Meetinghouse and Microsoft and a bunch of others. The goal there is that before my computer is allowed to connect to the network, it provides a health certificate that all the right applications and all the right policies have been met on my client machine, before I'm allowed to connect to the network. Trusted Platform Modules are there to secure that health report on the PC, and we build the software to do the securing of the health report. We've demonstrated solutions with Juniper and Nortel and Meetinghouse, and IBM and HP were also involved in those demonstrations. This is going to be a very broadly deployed technology. It's a little bit early on on it, but people can begin to get ready. We won't ship our full production, what we call EMBASSY Endpoint Enforcer until the fall time frame and that's consistent with when the other technology pieces will be available as well.

So, we see the early stages of adoption. We see good enterprise awareness. The next step is for us to see good traction in the enterprise sales.

One of the places that we've made tremendous progress, which is visible, is within the Department of Defense, and really the Federal Government space. The US Army has now mandated that all machines procured by the US Army must have Trusted Platform Modules on them. We actually have recently talked to both the Air Force and the Navy. They're both going down similar paths. The Air Force's last procurement, they made it a voluntary requirement and all the machines they received had TPMs on them. And they're on their way to make it a mandatory requirement.

We are now working with them to understand how they're going to procure software to manage these Trusted Platform Modules. We think Wave has a really strong and unique value proposition there. We're the only company that builds truly interoperable software across all the known PC TPM combinations. So, our software will run on Lenovo and HP and Fujitsu and Panasonic and Gateway and Dell and Intel and all the others that are out there. If you get software from HP today, it only runs on HP platforms; the Lenovo software only runs on Lenovo machines; and that's really not a deployable solution for any large enterprise. So we have a very strong and unique advantage. We're also one of the - we're really the only US supplier. The HP software, while they're a US supplier, is actually sourced from Infineon, which is a German company, and Infineon really is our prime competitor in this marketplace.

So, we're making very strong progress on the government side. It's been a little challenging over the course of the last month because some budgets have been really tight in the Defense Department until this recent $94 billion emergency spending stuff came through. So, we're expecting it to loosen up a little bit. We have been working with one of the Defense Department agencies. We've been doing a design and architecture document, an evaluation of Trusted Platform Modules for them, which we've been paid for. And that's been a nice $300,000 plus contract.

We expect those projects to continue and we really expect broad adoption of the software within the Federal Government. The Veteran Administration loss of a hard disk, which notified every single one of our government customers, is just amazing. In essence, every person we talk to in government either has a family member who is a veteran or they themselves are a veteran or an active duty soldier and all of them are worried about their information being lost. It's very clearly been communicated by their commands that they don't want to have the same thing happen to them.

So, there's a very high level of interest in data assurance, in protecting laptops and in strong authentication. We're really in the right place at the right time. We expect pretty strong results out of the government sector. Government is always a challenge in timing, but they are a huge customer. The Air Force as an example has over 530,000 active desktops on their network, and they will upgrade all of them. So, there are great opportunities.

So with that I think I'll turn it over to questions. I'm happy to go into some of these other places in more detail. I think the most important thing is that we're starting to see progress on the enterprise side. We've got a great list of potential customers. And the OEM business is really beginning to ship for effect. Dell is shipping hundreds of thousands of units.

So with that let's open it up to questions and see if anyone has any questions they would like to ask.

Questions and Answers

David Arscott, Compass Technology Partners: My question is, could you just talk a little bit about the profit and loss - what we should be looking for and the cash flow issues that you see over the next six to twelve months, so that we have an understanding of what to expect.

SKS: Sure. We believe we could get to cash flow breakeven by the fourth quarter if we had strong engagement from the enterprise customers. We have between five and six million dollars worth of what we consider fairly hot opportunities sitting on the table right now, and we have a much larger list than that. The challenge for us is: are these opportunities that can close over the course of the next four or five months, and therefore the business arrives in fourth quarter of this year.

If the enterprise business takes longer to engage, the OEM business, that making of 50 cents per machine, drives the company to cash flow breakeven by second quarter of next year, just on the volume of customers that we have. So think of it as sort of an optimistic and pessimistic case. I have the business in hand to get the business to cash flow breakeven by, in essence, a year from today.

The company has been burning about 4 1/2, just a little north of 4 1/2, million dollars a quarter. We have cash right now, which carries us to the end of this summer. We would like to raise in the range of ten million dollars that we will believe carry us to cash flow breakeven.

Having said all that, I think the other thing that's important is that as the scale of engagement in the market grows - we have customers like NTT Data who we've signed a Memorandum of Understanding with to resell our software in all of Japan. They're a 20,000-person systems integrator. We will invest in making sure that relationship is successful if we understand that the opportunity is real. So today we have a great relationship with them. We're in the final stages of signing our licensing agreement for them to resell our software. And the next question is, "How much software are you going to resell?" And clearly if a large opportunity happens, will you go put the feet on the street in order to support that? The answer is always yes. But you'll do that because you have a known revenue opportunity, not a theoretical revenue opportunity.

So we're engaged in growing the business, and I think that as the enterprise business comes on, continuing to take advantage of our first mover advantage in this market, we'll continue to invest in growing the market.

So have I answered your question adequately?

Arscott: Yes. Appreciate that. Thank you.

SKS: Thanks.

Soetebier: Steven while we're waiting for questions, I get a lot of questions on the Microsoft Vista product and what it might offer relative to Trusted capabilities now that there are some beta sites out there. Could you address if there's been any clarification on that?

SKS: Microsoft has built some basic trusted platform management into the Microsoft Vista operating system. It only works on Vista. It does not provide any capability to either Windows 2000 or Windows XP. The primary application that Microsoft is deploying is something called Bitlocker. And what Bitlocker does is it's a software based Full Disk Encryption product. So, it provides a lot of very similar capabilities to what Seagate is doing in hardware in their drives. In general, if I were a customer wanting Full Disk Encryption, I'd probably prefer the Seagate solution in that it has no performance impact on my computer. Where the Microsoft solution uses the Pentium processor to do the Full Disk Encrypting, and results have varied, but let's say it's five to ten percent or as much as fifteen percent performance impact on my computer. But the capabilities are very similar for Full Disk Encryption.

We see the beginnings of Remote Management for the Vista platform, using Active Directory. We extend that capability to supply remote management not only to Vista but also to Windows XP and Windows 2000.

There are certainly components within our client software that will roll up into the Vista Operating System. We build a component called the CSP or Cryptographic Service Provider, which is how a lot of third party applications talk to the Trusted Platform Module chip and that's a very industry standard component. Microsoft has changed that architecture in Vista to support both CSPs and what's called KSPs or also Kryptographic Service Providers but spelled with a "K." There are no third party applications today that take advantage of the KSP architecture - it's the way Microsoft wants to go in the future. So actually on Vista we will implement the CSP, or support for the old platform. Microsoft will implement support for the KSP and maybe it takes five or seven years to transition. We're perfectly fine with that. If everybody has to buy our software to get the CSP for seven years on the client machine, we believe that there are lots of other values in remote management and cross platform interoperability, in the tools that we provide for example on the Seagate hard disk - there's no support for Seagate hard disks in Microsoft's software - that we have a substantial role today and for the foreseeable future. What Microsoft might do in four or five years, it's too hard to predict.

The tactic here is to engage on the client side. Build a strong presence on the client side today. And use that to build the server presence. And then frankly if in time the 50 cent business goes away because you're supplying the enterprise management infrastructure for subscription to services, that's perfectly fine. If that software got built into every copy of Windows, we'd be happy with that.

Brian Swift, Security Research Associates: Steven, I apologize I came on a couple minutes late. You were talking about the ST Micro announcement, and I have a related question. My understanding is that deal opens up another or adds another 20 million, potentially, computers that would be going out over the next two or three years on top of the 50 million from Intel, Gateway and Dell.

SKS: Our analysis of this at this point in time is that if you look at the PC market in general, about half of the machines are in essence unbranded computers, so that represents about 100 million machines in volume. Another half of that is consumer versus corporate machines. It's probably a little bit stronger in the unbranded boxes that more of them end up in the consumer hands. So you have an available market that's sitting in front of you that's in the 40/50 million unit range, and ST Micro is a very significant supplier to that. If they took 10 percent of that market a year, it would be a ten million unit volume. So we'll see how it develops. But this is the right way to support the second and third tier players, without us having to have direct contract relationships and direct feet on the street to support the day to day conversation with these guys as well. We're able to leverage the ST Micro's infrastructure into China and into Taiwan and the other Asian countries, where they already have long term established relationships and contracts in place. So these are just purchase order level purchases.

Swift: My question would be why wouldn't that deal accelerate the time at which you would reach cash flow breakeven? They're not early adopters, you're really not expecting that to ramp until next year?

SKS: I just don't have what I would consider solid volume numbers yet from their customers. I know they have a couple of customers. I know they're talking hundreds of thousands if not low millions of units per quarter. I need to do a little bit more validation and verification to ensure that I have full faith in those numbers.

Swift: So it could bring in a quarter or something like that.

SKS: It certainly could. Let's go see how... my experience with these guys has been they talk a big game and then sometimes it takes a little longer than you'd like to believe for it to actually engage. And I don't know how much pre-selling - we've been having this conversation with them for about four or five months - how much pre-sold this was into their customers.

Swift: Right. When will you be in the position to talk about the economics on your Seagate arrangement? I know they announced the product that it's going in, but I didn't think that you had negotiated your fee with them at that time.

SKS: We have not signed a Seagate licensing agreement yet. It is our expectation, and I'll put some caveats around this, but it is our expectation that we will get paid on a per FDE drive basis for software bundled with the drive. Having said that, that is a non-normal model for Seagate, and until I actually have a final signed contract I think there's always a risk that some senior level management person says, "Well that's not how we do business." They generally supply drives to people who then supply software.

Our OEM partners, customers like Dell and Gateway and others have made it very clear to Seagate that they would like a full solution, not half the solution and half the solution from Wave. And we've had a few examples of this over the course of the last probably almost nine months, where Seagate shipped a drive to a customer, we shipped software, and all the versioning wasn't properly lined up. So it didn't work when it arrived on somebody's desk and then it had to get fixed in 24 hours. Not because it didn't work in our labs before we sent it, but people sent the wrong things. And I think that's made it very clear to the OEMs that they don't want to be in a position where they have to constantly have the vendors saying, "Well gee it's not our stuff, it's their stuff." And vice versa. That, "Okay you guys get your act together. Give us a finished, completed solution. And we'd prefer to buy the technology that way." And so I think that message has come across loud and clear. Seagate certainly oscillated over the course of the last six months, "Well we want to license it. No we don't. Yes we do." So it's moving in that direction that they will pay us on a per FDE drive basis for software that we're providing. We agree that that's the right model, and hopefully we'll get this done relatively soon. We're getting down to the final endpoints of this.

I can probably put my thumb on about 100,000 units of opportunity. I know who the customer is; I've talked to them; they want FDE drives; and if they could have gotten them yesterday they would have liked them. So there's some significant demand out there.

Swift: Well, they ship a lot of drives.

SKS: They do ship a lot of drives. Their volume is about 100 million units a year. One of the other important things perhaps about Seagate that for anybody who knows anything about the chip business, today Seagate's drive is a two chip solution, a normal Seagate drive controller and a security, in essence, co-processor. In January, it's a single chip solution, where there's just a few more thousand gates on their normal disk drive controller that does the FDE functionality, Full Disk Encrypting functionality, which then obviously makes it very very inexpensive for Seagate to put this in everything they build.

And I think we will be successful in getting our government procurement friends to mandate FDE drives next year. I think if they could mandate them today, not only do I think... If they could mandate them today, they would. Seagate is not ready.

Swift: Thank you.

Fred Wursch(?), Dutton Associates: Another question to shed some light on that last comment you made about the mandate from the Federal Government, your order rate from the various connections. Are you working with the Department of Defense or do you have to go downstream into every one of the other connections, like the Army, the Air Force, the Navy, or do you have like a GSA or GAO purchase order number to cover the whole group from the Department of Defense?

SKS: We've done all three things. We are listed on the GSA schedule. Any government, any federal agency, can procure our products. We've partnered with a company called ORC to do that quickly and efficiently, and that's for all our software and enterprise products. We will also probably list our stuff directly from Wave on GSA. That just takes longer. But eventually you'll be able to buy it directly from Wave as well.

We have a relationship with both - there are really two influencing bodies at the DoD level. One group is called the NIST and the other is the NSA. So NSA kind of does security architecture and review. NIST is the one that sort of publishes policy. And there's also another group in there called DISA, the Defense Information [Systems] Agency, Those are where you could get a DoD-wide mandate to do this. And, they're just slow.

Where we found the best progress is that most of the different groups, so the Army or the Air Force or Navy, have now put in place commodity purchase groups or councils. So what they do is if this little Army base in Alaska needs 100 PCs, and the guys in Hawaii need 5,000, and the guys in Florida need 8,000, and they need 23,000 in Iraq, they consolidate it all. So the Army's Small Computer Program is only a dozen folks. What they do is anyone who wants to buy a PC calls them and then they consolidate the buy. They do two consolidated buys per year, one in the spring and one in the fall. And the consolidated buy required Trusted Platform Modules on all machines. Now, there's a new sort of blanket purchase contract for what's called ITES or Information Technology and Enterprise Services, but that also has a hardware contract. It's like a ten billion dollar blanket agreement. And ITES-2 hardware now also requires Trusted Platform Module version 1.2 or greater on all machines. And that again is an Army procurement vehicle.

We're seeing the same strength from the Air Force. They have a commodities council. Like I said they informally required it on their last buy, because it was very late in the process and now they're mandating it for their next buy.

We have conversations going on with the Navy.

So we found really good progress when you actually got down in the trenches with the right folks. And, frankly now that the Army has done it, this is a no-brainer. You go to the Air Force and say, "Well gee, the Army is buying all secure PCs, what are you guys doing?"

Fred: The Department of Defense doesn't dictate that kind of thing, I mean down to the various services?

SKS: They don't. They do dictate some pieces. So there are some pieces that different agencies have to be in compliance with, but...

Fred: Just to follow up real quickly, because I'll let somebody else ask a question. But in terms of expectations to go through this process, maybe we're asking for too much to have some efficiency within the government in general or the Department of Defense in particular, but your expectation is to be able to implement this with the various services on a broader scale rather than just maybe the Army this six months, and the Navy maybe in 12 months or 18 months.

SKS: Absolutely. We think we're seeing the herd mentality here pretty quickly. What's happened is that there are two, the software...

Fred: What's your time table on that?

SKS: Some of it could be very soon. The problem with government is it looks like it could happen next week and then all of a sudden something happens and things take two months longer or six months longer.

Fred: On their order rates in the spring and the fall, do you anticipate...

SKS: So the volume... [crosstalk]

Fred: Six month range?

SKS: Tens of thousands of units were ordered by the Army from their PC suppliers. All of them came with Trusted Platform Modules. None of them have software.

Fred: Okay.

SKS: They came with the software that came in the box, so to the extent that they bought a Dell machine, our software came in the box. The next conversation, which is the conversation we're in right now with them, is okay, now you need all the tools to turn it on. Really the way that they buy that is an Army Enterprise-wide license. You can get an enterprise-wide license level at each individual command and then eventually it flows up to a DoD enterprise-wide license. Now, the good news and the bad news. The good news is you negotiate one contract and the entire DoD buys your software. The bad news is they negotiate on price against their 4 million seats. So, you're not going to get $50 a seat. If we look at the model it's a substantial reduction in price. What the end dollars are, and it's only for the client PC software, the server products are then procured through completely different vehicles, because those are solutions that typically the integrators would deploy - people like Northrop Grumman or NCI or any of the big brand integrators would come in and turn it all on. But the software that they need to buy to put on every machine becomes an enterprise-wide license.

So there's still a few steps to go. But, what we're trying to convince them of is you want the PC manufacturer to pre-configure the machine, install the software, turn on the TPM, and deliver it turned on. So that when you contract with Northrop Grumman to spin up a system to actually use it for strong authentication on your network, you don't have to go touch every laptop or desktop, which today they'd have to do. So we think we can get the commodity buy across all PCs for the software done relatively quickly. Hopefully this year and then let the server implementations happen, which will happen over a period of time, depending on who's ready to turn it all on.

Does that help answer the question?

Fred: Thank you. Yes, again I was trying to quantify the time.

SKS: It is four or five million seats, so it's a really big number. It's hopefully measured in tens of millions of dollars in revenue for us. And these guys need to turn it on yesterday.

Fred: Great. Thanks.

SKS: Thank you.

Soetebier: Steven, while they're loading up new questions, I'd like a clarification on Fred's question.

SKS: Yes.

Soetebier: Could the Army go with someone else's application, say rather than go with EMBASSY Trust Suite, is there a competitive product out there that they could order?

SKS: I don't believe there is today.

Soetebier: Some people have mentioned Phoenix Technologies, so could you just clarify that?

SKS: Phoenix Technologies is building a proprietary solution in BIOS that offers some of the same baseline capabilities that a Trusted Platform Module offers for what's called Machine Authentication, the ability to identify the machine. The Phoenix software would not help me with trusted drives; it would not help me with network access control; it will not help me with integration of PCs to mobile devices using Trusted Computing standards. So you're not buying into an industry standard framework for security in the PC platform. You're buying a proprietary Phoenix technology. The Phoenix technology does not provide management capabilities for the Trusted Platform Module. So in many aspects, I would argue today that they've kind of missed the opportunity here, because once they start to buy Trusted Platform Modules, it makes no sense to go and reconfigure the PC to support Phoenix's trust infrastructure for machine identity. It is at the end of the day still a software solution and they've already procured the hardware to have a hardware solution, they just need to turn it on.

Phoenix's price point for utility software to manage on a per unit basis and our price point are relatively similar. These are utility software components. They're not hundreds of dollars a machine, they're measured in tens of dollars per machine.

So, we don't run into them very much as a competitor. We certainly are aware of them, but the customers that we're talking to aren't say, "Well, what about Phoenix?"

Soetebier: All right. Thank you then.

Another question on the burn rate before we go back to the Q&A queue, That four million a quarter, is there any way you could cut that SG&A / R&D in case again Seagate is a little slow or something else is a little slow to get your burn rate a little more in line with revenues?

SKS: There certainly are things we could do. Today we've been let out of the gate to go stake territory in the global market of Trusted Computing. There's no question the market is starting. And every piece of territory I can stake today is cheaper than me staking it tomorrow.

So, the expense involved in the kinds of relationships like NTT Data, I'm working today to find the same kind of integration partners in Europe. Do I have to do that? No. But if I secure a large European systems integration partner today, I'm doing it right now in a context where there's no competition. And so the sooner I get there, I can begin to establish long term relationships where these companies build on our brand and our software and our technology before there's substantive competition in the market place.

So, those aspects are very inexpensive to us in the overall scope of things.

That's the balancing act, is how hard to you run at it? I could use ten more sales guys tomorrow, but I think I need to wait for the real sign that the enterprise business is engaging strongly, that the software sell-through is starting to happen and then in essence feed the beast as the beast begins to grow. As opposed to anticipate the beast and get too far out in front of it. We've done a lot of anticipation, so we're trying now to grow as the market grows. And that's certainly the posture we're in. Will we make all the right decisions? Probably not. But hopefully we'll make more right decisions than we'll make wrong ones.

It's such a horizontal market. We got called by Dell the other day and asked what're our plans for distribution in Australia. It's like, how about somebody calls us when there's ten opportunities and we'll send a guy on a plane to spend two weeks in Australia. That's part of our challenge in the market place today. We also don't want to completely leave somebody abandoned, because they're shipping product in Australia. Somebody is going to step in to fill the gap the longer that I'm not there.

Soetebier: Fine. Thank you.

And back on installing the software.

SKS: Yes.

Soetebier: If it looks like a major corporation has purchased all these machines, and then after they're in their building they decide they want to upgrade to your software. What would be the amount of time it would take the IT department to come through and go box by box to upgrade them? Is it a complicated deal?

SKS: So it's not that complicated of a deal. It depends on what tools the enterprise already has. Some corporations have the ability to push software to every machine on their network, without really the user knowing, at which point it's a very easy solution. If the machines are shipped with the Trusted Platform Module turned off, then it does require two reboots of the computer in order to actually turn it on, and that's really what takes the longest. So ten minutes a machine is probably a fair number to install the software, reboot a couple of times, and be on the network.

The majority of customers we're talking to today, especially Dell customers, would like to have the full software package included when they buy the machine. They're not talking to us independently because they just bought a whole bunch of machines, they're talking to us because they're on the way to buy a bunch of machines and they want to have the software on every machine they buy.

Soetebier: Thank you. Back to the operator.

Timothy Collins, Security Research Associates: Hi Steven.

Steven: Hi there.

Collins: I don't know how many of your listeners or shareholders have bought anything from Dell since April 1st, but Dell had several models of computers which they said that they were going to put the software on and I needed a new notebook for use at home, so I bought a Latitude 820 and I was kind of curious to see if the software would show up. And it does! It's right in there! And it's the EMBASSY platform and it looks pretty easy to turn on. So I was pleased to see it in there, but you just look in your programs, you look in your program file and Wave is right in there. So that means that they're shipping, any Latitude 820s that they're sending out that Wave's software is resident.

SKS: It's on all 2006 commercial PCs. 420. 620. 820. It's on their Optiplex line that ships later on this summer and all of the mobile workstation machines as well.

I don't know Tim if you ordered a machine with a biometric sensor or not.

Collins: No, I didn't.

SKS: We do all the biometric software for Dell as well. We're not a biometrically-centered company. This not our claim to fame. We will be the largest supplier of biometrics within twelve months in the entire world. Because, Dell and Gateway use us as their biometric supply on their machines, and at the volume that they ship we will surpass Lenovo's million units installed with Dell easily within twelve months. And that will make us the largest supplier of what the consumer perceives the brand to be of biometrics in the market. And I think that has interesting implications to be used as well. About 20% of the machines that Dell ships are including biometrics at this point.

I think this is an interesting case example to understand how we're being positioned in the marketplace by a player like Dell. We made the argument last fall when they asked us to come and look at building the biometrics front end for the Dell machine, that what Dell wanted was an integrated single-supplied solution for all of their authentication security: smart cards, biometrics and Trusted Platform Modules. And they didn't want to confuse the user by having software from UTEK, who provides the sensor, software from Wave, and software from some smart card provider, that all of us did similar things, and that all of our software would sort of step on top of each other. And so, they agreed with that plan and we ended up in the position where our brand is in front of the customer whether they touch us through smart cards or they touch us through biometrics or through Trusted Platform Modules. It really gives us a fantastic foundation.

And so today if you're a software security vendor and you call Dell and you say, "I see you're making security more and more part of your platform. We'd like to put our stuff in your box." Dell tells you to come talk to Wave. And says, "If you can go do a deal with Wave, then Wave is our security provider, they'll provide the solution to Dell for future platforms." And we've had about a half of a dozen occurrences of that so far. They range from small / medium sized companies to a couple multi-billion dollar, multi-nationals. Who've basically been told by Dell, "If you don't do a deal with Wave, you're not getting in the box."

And so we've really secured a very strong position. We have to keep that going. We have to keep everybody comfortable and happy and feeling good about what we do. We've done a very good job of that so far. I think we have to continue to perform on that.

But, in answer to David's question before of "where's your burn rate going?" That's where my burn rate is going. When I had the opportunity to take on building the biometric solution for Dell, we raised our hand and said, "Absolutely. We'd love to do that for you." It probably cost us two to three million dollars, but it secured my role on being on every single Dell machine as the leading provider in the market.

How will we leverage that over time?

Any biometrics backend today could benefit from doing a deal with Wave. Because we will in essence ship more client machines, we're certainly at a run rate right now where we're shipping more client machines per month than anybody else.

Collins: I think the good news is that your cash register is ringing every day from Dell.

SKS: Absolutely. One of the most exciting things is the customer service phone actually started to ring. Which is great. You don't want it to ring too much, I'll be very clear on that. But having it ring a little bit, which means people are actually using the software and trying to figure it out, is an excellent thing.

Collins: Good work.

Soetebier: Alright Steven, I guess you can wrap it up.

SKS: In summary I would just say that the market is engaging on a revenue basis. We have a number of different entities that are paying us every month. It starts with the chip vendors, it's growing to the OEMs, and we need now to mature it to the next stage where it's every month we're getting a check from an enterprise for our software. So the business is engaging.

The most important fact is that this is a full up, PC, industry driven standard. It will be on every single machine. We think today there are really two players in the market. Wave and Infineon. We have absolutely the lead in the market place. Using our partners, companies like ST and Atmel and Winbond and Broadcom and Dell and others, to put our brand out there, we can capture a majority market share and then convert that majority market share into a long-term enterprise business. It's an enterprise business that's measured in tens of millions of end customer desktops.

There are times in history where this has been done successfully by other companies. It's going to get done again in the security space. And we think we're in the leadership position to accomplish it.

In many aspects I think that looking in the past at some of the macro examples of companies who were successful in the early stages of networking, in multi-media, in administration of PCs on the network, many of those are brands that you know today and use today and are very big companies. They got there because they were in the right at the right times to supply the software when the industry adopted the technology. And that's where we are today.

So some days it's a little rough when you're just watching the paint dry, but the market is moving very solidly and I think we're making mostly the right moves to win the business. I think if we continue to execute in that space - it's taken a lot of work to get ourselves into this position - and if the market grows we'll ride along with it.

I thank you for your interest and your support. If anybody has any further questions please don't hesitate to send me an email or call me.

Soetebier: With that we'll close it. On behalf of Dutton and Associates, and our clients we thank you Steven. You have a good day and all of our clients have a good day.

SKS: Thank you very much.