wall street reporter

December 16, 2003

Good day from Wall Street. This is Scott Banks reporting live from the studios of the Wall Street Reporter. And today our company and focus is Wave Systems Corp. Wave Systems Corp trades its shares on the NASDAQ under the ticker symbol WAVX. And we're happy to be joined on the line today by the company's President and Chief Executive Officer, Steven Sprague.

Steven, good afternoon, and welcome back to the Wall Street Reporter.

SKS: Thank you for having me.

WSR: Steven for those in the audience who may not be familiar with Wave Systems, let's again begin with a brief introduction and general overview.

SKS: Sure. Wave Systems is a company that has spent a number of years helping to build the infrastructure for really a new market segment called trusted computing. This entails a hardware chip that has now been standardized by the major PC manufacturers, that is being added to new computers - some of which are available in the marketplace today from companies like IBM and HP. And we expect will be continued to be more broadly added across a number of manufacturers in the marketplace.

The purpose of this new technology is to have the ability to do very strong authentication to different Web services. So ultimately, we hope it will help eliminate the need for user ID and password to all the different places that we as end users or ultimately consumers go on the Internet, whether it's our corporation, our family web site, different commerce sites, etc. And we will have much better protection of our identity and security of our connections on the Internet.

WRS: Steven I know in recent news there's been a lot of key developments within WaveXpress, a part of your business which is a very core part here. Can you talk about these key developments and really what's going to drive the growth for WaveXpress throughout '04?

SKS: Sure. WaveXpress is a division of Wave Systems, originally started as a joint venture between ourselves and the Sarnoff Corporation, and built a product targetted for interactive television that has since been modified for use purely on the Internet. And anyone who is listening can go to www.wavexpress.com and download the application TVTonic. And what it does is put content from the server directly down onto your hard disk, and we do that overnight on your broadband connection, so that when you view the content the next day, it is full screen, it plays without any interruptions or any jumpiness in the video, so it's really a DVD quality video [??] And what we've done is, we've offered that capability to a number of different third parties who use it to reach their specific audience. So we're trying to be an infrastructure provider to enable third parties to reach their audience.

So, recently we announced with UkrainaTV and they have content that's done in Ukrainian. They're trying to reach the Ukrainian audience that's living outside of the Ukraine, and reach them with their local programming. We've also done content for Howard Dean's Presidential campaign, where they film content on the campaign trail, and they themselves post it to the internet and using our technology they have now thousands of supporters who download that video every night and then share it amongst their different Meetup groups when they get together. So in essence we've built what almost looks like a private satellite channel for the campaign to reach and project their message out. They have instead of two minutes a day on CNN, they can have an hour a day of video type communication with their support network.

So it's a very powerful technology and really anyone can use it. It's actually relatively inexpensive to deploy, and is appropriate for a corporation, government, media companies,,etc. So we're very pleased with the progress we've made so far. And, I think we have good reference accounts now. And, we think the revenue growth of that will be reasonably solid over the course of next year.

WRS: What really differentiates this product in the marketplace?

SKS: One is, I think is its ease of use. And second is that we're really properly leveraging the hard disk. So unlike streaming video where everytime I go to a website I have to start up a new stream; I have to go select the specific video; this can be designed to play very seamlessly for the those places I continually go back to. By using the unused bandwidth, in essence bandwidth when your computer is on but you're not actually roaming around the internet, we can trickle charge your hard disk overnight, and put lots of content. So I can put ten music videos on your machine overnight. When you sit down and go back to a website that's playing the videos, or even just play them offline, they play seamlessly and they play fullscreen.

So it's ease of use. And finally the internet from a media perspective is the way we think we want to have it. It makes it feel like I have a 100mbs connection to the internet or 10mbs through connection to the internet opposed to only having a DSL connection at 300 or 400 Kbs, because we're able to use the hard disk to buffer that content. It's quite unique. There are a couple of other companies who are doing it over peer-to-peer network. In some ways our experience in the past as a consumer, our experience in the past with players like Napster and Kazaa and others in the marketplace that do peer-to-peer, create a similar effect right? Where I get files, and play the files after I get them. It's just in this case, I automatically get the files, and they automatically clean up after themselves. When I connect that then to the security of trusted computing, you can have secure content delivery to a corporation. They can put their marketing material there and know that only the specific end users are the ones who have access to download that content, etc.

WRS: Interesting. You have given us a good analysis of the WaveXpress side of things, but where is electronic commerce today and more importantly in '04 where's the adoption going to be that's going to continue to drive the growth for a company like Wave Systems?

SKS: So, clearly electronic commerce is making great strides in the marketplace. I think that it will be interesting to see what the numbers are at the end of this holiday season, but I would expect them to be very strong in the marketplace. The challenge, of course, is that as we all conduct commerce on the internet there are risks that are associated with either sharing my personal information or sharing my credit card details, who really am I doing business with, etc. And those risks have been substantial, continue to be substantial, if anything are growing stronger year to year, and really the industry has done a lot of bandaid patches to fix that. The trusted computing effort is trying to take the first really strong step by the industry to establish long term secure relationships between an end user and their web service. That could be for commerce. That could be for different types of enterprise computing. The initial efforts of trusted computing are directed at the enterprise, because they have the technology department, the information technology department, to figure out how to use this technology, and how to turn it on and make it easy to use. As the technology matures more and finds its home ultimately in the hands ultimately of consumers as well, then it will be possible to do much more secure banking transactions then or purchase transactions. And, we actually did a demonstration of that out at the Cartes conference with a French savings bank called Caisse d'Epargne, which is one of the larger French savings banks. We demonstrated how when you do a credit card transaction with a trusted computer, it will also authenticate that that is the computer associated with that credit card. And so for the first time I know that as a merchant that you're shopping from a computer that you've shopped from before, and so the probability that your card is good because you've done a few hundred transadions from that computer and that card, gives me a much greater level of assurance. It also says from the consumer's perspective that if my card is found somewhere on the internet, my card number, that perhaps they can't do the same kind of transaction that I can do off of machines that I own and control.

WRS: Steven, what should we keep an eye out for throughout '04?

SKS: I think in '04 you're going to see a much stronger adoption by the PC industry. The momentum is really good right now. The PC industry players are adopting this technology. IBM has shipped millions of units. HP is shipping units today. We're partnered with Intel on a motherboard which is using our software. And we continue to see a number of the PC manufacturers adopting the trusted computing standards and moving them into the marketplace. So I think that during the course of '04 we'll really go from a technology that's been in its early phases of distribution to one that's becoming much more mainstream, especially in the enterprise, where the major customers are demanding [..] and ultimately those drive the experience of the broader market as well. Microsoft is building a core for trusted computing into their next operating system which is, they've stated, to be released sometime in 2005. And we think that the major PC vendors will all be in a position to be shipping trusted computing platforms to support that new operating system, which will be able to take advantage of the features as well. So this will be a good strong growth year. And I think that in '05 you'll see it across the majority of machines that ship, and continue forward from there. The objective to bring a more secure and safer computing environment, and a more reliable computing environment, is something that everyone is interested in and we're happy to be a company that's helping to accomplish that.

WRS: Steven, given your analysis, why is this an opportunistic time for an investor to really take a hard look at Wave Systems Corp. as a long term play?

SKS: Well, I think that it's important to understand what role we play in the trusted computing market. Wave is a company that's invested heavily in building technology to support the trusted computer. And so today we supply software that's bundled with the PCs, so in the case of an Intel motherboard if you buy the Intel motherboard that has a trusted computing chip on it, then our software also comes along with that motherboard. And ultimately more importantly we're building the services to help users backup and manage the keys that the trusted computing chips store. And so that way I can have as a user relationships with many different service providers, but have a single entity with whom I have a backup, recovery and maintenance relationship - my company, or my bank, or Wave will also offer one of these services, but primarily we intend to license our technology to others to operate. And, what happens is that makes it possible for me to buy a new computer and take all of the relationships that I have on my old computer and move them from one machine to another. Or if my computer somehow becomes corrupted or is lost that I can recover all of those relationships, hopefully in just a single keystroke. Not too differently than if I drop my telephone on the ground, my cell phone on the ground, it gets run over by a car, I can run into the Verizon store, buy a new phone and it comes with the same number, and it gets the same voice mails and it just works - because it's a managed device. So Wave's built the infrastructure to manage these. We think that having a small piece of territory in the box, so that when the platform ships, it gives us an important initial relationship with the customer. And then to be able to move that customer to a long term service relationship, with either ourselves or our partners, is what will put Wave in the forefront of this market.

WRS: Does Wave have the technological infrastructure in place to stay at the forefront of any changes in the industry? SKS: Yeah, we've invested heavily in this space. I think we have certainly one of the leading implementations today. We don't have really strong competition nipping at our heels today. I think there are some big companies who could become very strong competitors, but they're not yet focused today. So I think we have a very good first mover advantage. We're doing a good job of satisfying our initial, original equipment manufacturer customers, or OEMs, companies like Intel. And we hope to continue to win their business over the course of the next couple of years. If we are able to do that, we think we're going to be in a really strong position to be one of the industry leaders in providing the infrastructure to support trusted computing, which will be very much a utilities services business, but we think it will be a very strong revenue generating business, and a very strong recurrent revenue business. Once you have a hundred places where you belong, you have keys to all those places, at the end we as a user want to have one password for our machine and have our machine all of our relationships with the network. And if you do that, then want to have that environment managed so that if it breaks I can easily recover it and I don't have to go and rebuild each one of those relationships and descriptions and accesses. And whether they're corporate or family or consumer or commerce based, it really doesn't matter. We have a fairly complex environment, we want to be able to keep that environment together and keep adding to it, growing it organically and not have to think, "Oh my God, I've got to go reconstruct all of my relationships again."

WRS: Steven, before we wrap things up here today, any other points or messages you'd like to leave the audience with?

SKS: I think the key message is that, this is a brand new and emerging marketplace. It's one that is driven in volume and adoption by the PC industry itself. So Wave doesn't have to work very hard any more to get the industry to go from zero to 100% adoption. That's going to happen with or without us. We're now a company that's trying to satisfy the need for specific capabilities and features to support the deployment and make the deployment more valuable. But we then get to go along for the ride on the momentum of the industry adopting the technology. That's been a very successful curve for many companies in the past, if you look back at the adoption of multi-media or the adoption of color or the adoption of the internet. We think the adoption of security is going to be a market that's ultimately measured in many billions of dollars and we hope to be able to carve off a small piece for ourselves.

WRS: Steven, I do want to thank you for taking the time to join us here at the Wall Street Reporter, and want to wish the rest of your company the best of continued success.

SKS: My pleasure. Thank you Scott.

WRS: This has been Scott Banks, senior analyst with the Wall Street Reporter and today the company in focus has been Wave Systems Corp. The company trades its shares on the NASDAQ under the ticker symbol WAVX and further information about the company can be obtained by going to www.wavesys.com