the wall street transcript

STEVEN SPRAGUE - WAVE SYSTEMS CORPORATION (WAVX) CEO
Interview - published 09/23/2002

These excerpts from:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00135&read=81384

TWST: What would you like to accomplish over the next two or three years?

Mr. Sprague:Our key objective and goal is to connect Wave to the deployment that ultimately drives our business model. We don't make money on trying to sell chips on a one-by-one basis. We make money when the chips are used in the marketplace. Each time an application is loaded onto EMBASSY we collect a fee for that application using our platform. So the key to our business model is broad-based deployment. If I look over the next two to three years, our primary objective is to have significant market share in the security co-processor market. Today we are a very significant player in that space from a technology basis and we'll license our technology to many chip manufacturers, who ultimately will supply the chips to the PC manufacturers.

TWST: Looking way down the road to the end-user, would it be possible for a person one day to say I don't need this today, so I'll just turn it on tomorrow?

Mr. Sprague:I don't think so. This is something that is really dramatically needed right now in the marketplace today. We have huge problems in and around everything from homeland security for the government, all the way to major issues like identity theft and when I do a credit card transaction is my personal information secure. So there's a tremendous need for this technology today. The challenge is, because no single company owns the Internet, there's no one buyer. So it's going to take time for the deployment of security because it has to really get deployed around very broad standards. In our belief, even with standards, it will be very hard to get people to agree. So the only solution is a programmable security solution that will run a broad range of applications. Wave is a leader in that market and we're making tremendous progress on a day-to-day basis right now. There's momentum behind bringing hardware security into these platforms being driven by government and being driven right now by Microsoft, Intel and AMD on the PC side.

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TWST: Will it be scalable to all levels?

Mr. Sprague:We believe so. The applications that we can support today really are across the board. From a scalability perspective, the real challenge here is, once the Windows operating system is secure, then the security co-processor only does a little bit of the work and then most of the work can be done on the main processor. That doesn't exist yet, so that's what Microsoft and others are trying to build for probable release in 2005 or 2006. Until that point, all the work gets done on a security coprocessor. So we think we have more than enough processing power to accomplish the applications people want, and to do very simple things like eliminate user ID and password to check your e-mail because your PC knows who you are and protect your personal information because now you can have selective release of that information, depending on what sites you're visiting. It will really provide some of the very fundamental things we, as end-users require every day that we can't get today because it's impossible to hide a secret inside a general-purpose computer because it's a completely open platform and anybody can see every memory location. That's part of the challenge.

TWST: Are you still paying heavy attention to R&D then?

The bulk of our investment today is still in technology. I wouldn't classify it really as R&D, as much as we have a very good architecture for what we call an open trust system, which means multiple independent service providers ' so a service provider could be my e-mail provider or my pay-per-view company or the corporation that I work for ' any one of these service providers can have their own trust infrastructure completely independent of the person standing next to them, even though one chip is used to do both. So the research to build that kind of architecture has been done. Most of the work now is in investing and building the key applications that run on EMBASSY, so that when you get it, it does something. It's a little like comparing it to your home computer. When you first got a computer, it did DOS, that doesn't really do anything for you. But it is very important to be able to load and unload applications in that manner. So we've completed the first step, which is building the sort of operating system for the open trust infrastructure. Now we're investing very heavily with a number of partners in building the applications that sit on top of Wave's EMBASSY system.

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TWST: What benchmarks might you be passing over the next few years that investors would want to note?

Mr. Sprague: The key benchmarks are two or three different things. The first one is our relationships with those companies that are creating very broad-based deployment, companies like HP, AMD, Intel, Microsoft, the major players in the PC space, Dell, NEC and others. So watch our progress with those major players. They control the deployment. The second one is that, on the application side, we're working with companies like Maximus, IBM, EDS, Mercer and others. And in many aspects, a number of the government contracts today are creating the revenue streams necessary to build the applications and will be some of the first users of applications. Although they won't be in massively high volume, they get the full application done. So showing that the applications are in place. The third one is really showing that the market is moving toward the support of hardware security. The beginning of that happened this summer. It has been important to us and the last four to six weeks have been just amazing. Five some odd weeks ago, Microsoft announced that they're going to support hardware security in the next operating system, so go build it. And when you're one of the key vendors to supply a hardware security co-processor, and the infrastructure for it, it gets a lot of people paying a lot more attention than they were before.

TWST: Could you sketch out the picture that you would reasonably expect to see for the company, let's say, three years from now?

Mr. Sprague: Our revenue base is built off of distribution, as I said before, as to how many devices we ship. So if we look forward three years, I think the key measurements on the company are going to be what are the baseline applications that Wave provides. What percentage of market share do we have in those applications between ourselves and our partners, and what percentage of the total shipping units that have security co-processors are market share for Wave because, at the end of the day, this is a business that could easily generate $10-$15 per year per customer with a total available market where the PC industry last year shipped over 100 million units. So it's a tremendous business, but the question is what marke share do you ultimately end up with?

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TWST: What are the large-scale economic, demographic and political factors that will affect you in the near future?

Mr. Sprague: Clearly, the largest thing that is affecting us today is that there's just tremendous market focus on security because of September 11. And trying to help that industry do the right thing I think is a real challenge. I'll give you an example. We have a conversation that's ongoing right now because all of our major infrastructure systems are controlled by computer in some way, shape or form. Yet most of our infrastructure computing devices do not verify the authentication of a person who gives them an instruction. So an example would be 'open the floodgates on the dam.' The system that controls the floodgates on the dam doesn't ask, 'Are you authorized to ask me to open the flood gates?' because there is no security infrastructure in all of that computing infrastructure. So when we look at these pieces, there are just tremendous things that we can do to help. The motivation is there and the dollars in 2003 will be there, but the real question is how fast all of that political muscle can move to understand the right way to do it. We think we have one of the key technologies and some tremendous influences are helping us in government and in the private sector to educate people on what it means to have security in the controller, not just in some central computer, and not just in the front door of the dam because then it can say, give me your smart card, show me your biometric and let me understand who you are who is asking me to do something before I, as the computing device, do it. So we think that's probably the most important thing that's going on politically right now, that there's just a huge amount of money being lined up to be spent in the space. So it gives us the opportunity to teach them how to do it right.

TWST: Are the barriers to entry pretty high?

Mr. Sprague: The barriers to entry for us have been very high for the last number of years and it's our market experience and our relationships that have been breaking them down. I don't believe that we're making it dramatically easier for the second guy. In general, the biggest challenge in competing with Wave is that you have to be an expert, not only in silicon and in security, but also in the systems that operate and manage that security. While there are companies that are very good at each one of those components, we're one of the only companies in the world that has put all the pieces together. So you can look at a big silicon company and say that they're shipping 100 million security devices as the competition. They are, but they're more likely a partner or customer than they are competition.

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00135&read=81373

TWST: Do you feel that Wall Street understands the company at this point?

Mr. Sprague: I don't think they necessarily have the information to understand the company. A lot of what is being done is not necessarily in the public and probably won't come into the public domain until major companies decide to announce what their plans are in security. The second one is that there's no real analyst coverage on Wave today. I have a very strong base of individual hareholders, who I think have a very clear picture of what's going on, but I'm not so sure I would classify them as Wall Street. So I think we have a very strong investor base and part of our challenge is showing the broader community in the investment community that we have the partners and relationships to execute on the technology we've built, and I think we will show that over the next period of time. I'm very comfortable in our ability that we've assembled those pieces and that those pieces will come out in a sufficiently public way so that people will feel comfortable that we're going to pull it off.

TWST: Could you give us the three or four best reasons why the long-term investor in particular should take a close look at Wave Systems?

Mr. Sprague: First, security is a very important space and is going to grow in importance over the course of the next few years. We're just at the beginning of the ramp on people having the budget to go and implement. Second, Microsoft has declared that this is an important space and generally, investing in places where Microsoft says it's important and in the companies that help facilitate that has been a positive and profitable strategy over the years. Third, I think that anybody who looks at Wave realizes that we have a technology lead in the space an that we have the right partners to go execute and fulfill the market opportunity.

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00135&read=81369

TWST: In the light of current investor concerns regarding corporate governance, what message do you have for your shareholders?

Mr. Sprague: Wave has been pretty conservative over the years in how we have managed the company and how we've accounted for things and the kinds of transactions that we've done. We're a company that is held by 40,000 individual shareholders. I have, I think, demonstrated, over the past period of time, my willingness to talk to them and our willingness to communicate with them broadly. We've had many of them who have helped the company achieve a number of different goals in the marketplace. So, if anything, we're a company where every employee in the company knows that we have shareholders, that they're really important, that talk to us every day and that it's important for us to run the company for them, and that's really how we've looked at it. I'm not saying that that's massively different from lots of companies out there, but this is not a company where there are four or five individuals who control 40% of the company and therefore they think they own the company. We recognize that our company is held broadly and we try to make those decisions that we feel are appropriate, where we would feel comfortable that if the shareholders were all sitting in the room, that they would make the same decisions.

TWST: Is there anything that you would like to add to what we've already discussed?

Mr. Sprague: The key thing I would like to add is that, for those people who have been watching Wave and participating in Wave over the years, as investors and as people looking to invest, the company is really entering a time where we're going to be in one of the strongest positions that we've ever been in. The market is really coming together to drive us in the direction that we need to go and I think that they'll be impressed by the results that we generate. So the key message that I would like to deliver now is that the market is coming to us. We spent a lot of time, energy and money setting the stage and the play is about to begin.