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Tuesday, May 10, 2011 at 4:30 P.M. ET
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Wave Q1 Revenues Rose 27% to a Record $7.5 Million

— Cash Rose 171% to $9.7 Million —

Lee, MA — May 10, 2011 Wave Systems Corp. (NASDAQ: WAVX — www.wave.com), a leading provider of trusted computing software, today reported financial results for its first quarter (Q1) ended March 31, 2011.

Growth primarily in enterprise server software drove a 27% increase in Q1 ’11 net revenues to $7.5 million, versus $5.9 million in Q1 ’10, and a 6% increase over Q4 ’10 net revenues of $7.0 million.  Q1 ’11 net revenues included $448,000 in enterprise license revenue resulting from Wave achieving vendor specific objective evidence (VSOE) for the fair value of the maintenance component of Wave’s software license agreements within its “small” customer class (those with orders of less than 5,000 licenses).  Wave achieved VSOE within the quarter for enterprise server licenses for “small” customers because it had developed a sufficient class population of full year maintenance renewals.  Having achieved VSOE for its “small” customer enterprise orders, Wave was able to record as earned licensing revenue the full value of the license component of such contracts during the quarter in which the order was fulfilled.  For its “large” class orders (those with 5,000 or more licenses) where VSOE has not yet been achieved, Wave continues to recognize the total billed for these license agreements as earned revenue ratably over their maintenance term which is typically twelve months. 

Services revenue in Q1 ’11 and Q1 ’10 was pursuant to a $1.6 million fixed-price contract with the U.S. Department of Defense to provide consulting services for a study to evaluate the implementation of trusted computing solutions for the U.S. government.  The seventeen month contract was completed during February 2011. 

Total billings were $5.6 million in Q1 ’11, in line with the Q1 ’10 level, but below Q4 ’10 total billings of $14.2 million, which reflected $8.1 million in orders from a global automaker.  Net revenues are reconciled to total billings below.

In Q1 ’11 Wave continued to invest aggressively in both sales and marketing and R&D initiatives aimed at building Wave’s product portfolio and sales pipeline while also growing global awareness of the benefits of trusted computing solutions.  In aggregate, SG&A and R&D expenses rose by approximately $1.6 million (20%) over Q4 ’10 levels and by approximately $3.1 million (49%) over Q1 ’10.  Wave increased its investment over the last two quarters in additional sales, marketing and engineering personnel and resources to support broader OEM engagement with Wave solutions, increased direct-sales activity with enterprise and government prospects and expanded development focused on new product features, including the development of a web management service and preliminary R&D in the mobile security space. As a result of increased personnel and higher fair value calculations for stock options awarded during Q1 ’11, Wave’s non-cash stock-based compensation expense increased 108% to $1.2 million in Q1 ’11 as compared to $0.6 million in Q1 ’10 and increased 63%, as compared to $0.7 million in Q4 ’10.

Reflecting higher operating expense levels, Wave recorded a Q1 ’11 net loss of $2.3 million, or $0.03 per basic and diluted share, compared with a Q1 ’10 net loss of $0.8 million, or $0.01 per basic and diluted share.  Wave’s Q4 ’10 net loss was $1.2 million, or $0.01 per basic and diluted share.  Per-share figures are based on a weighted average number of basic shares outstanding during the first quarters of 2011 and 2010 of 82.2 million and 77.2 million, respectively, and 81.2 million in Q4 ’10.

Wave recorded negative EBITDAS of $0.9 million in Q1 ’11 compared to negative EBITDAS of $0.1 million in Q1 ’10 and negative EBITDAS of $0.4 million in Q4 ’10.  EBITDAS is a non-GAAP measure defined as earnings before interest income (expense), income taxes, depreciation and amortization and stock-based compensation expense that Wave reports in order to highlight its operational performance on a cash-flow basis.  A reconciliation of net loss to EBITDAS is below.

Wave’s cash position improved significantly during Q1 ’11 principally due to the receipt of $8.1 million related to Q4 ’10 orders from a global automaker.  As of March 31, 2011, Wave’s cash and cash equivalents rose to $9.7 million from $3.6 million on December 31, 2010.  Cash and cash equivalents at March 31, 2011 do not reflect proceeds from a $3.5 million enterprise order fulfilled on May 3, 2011.  Wave expects to receive the proceeds from this order prior to the close of Q2 ’11.  As of March 31, 2011, Wave’s total current assets were $13.3 million and total current liabilities – including $6.6 million of deferred revenue – were $10.4 million.

“2011 is off to a strong start given year-to-date progress with enterprise sales,” commented Steven Sprague, Wave CEO and President.  “We are pleased with developments in the global market for trusted computing, as well as Wave’s ongoing leadership in this growing PC standard.  We were heartened to see the Obama administration release its ‘National Strategy for Trusted Identities in Cyberspace’ in April, which we believe will be a significant step forward in building a framework designed to assure that security, privacy, interoperability and ease of use are available online.  We believe that trusted computing technology can play a key role in this initiative, providing safe storage of user credentials built into hardware inside the device.

“On the financial side, our first quarter revenues extended a multi-year track record of annual and quarterly improvement.  Wave has made a strategic decision to continue to make significant sales, marketing and R&D investments consistent with our operating cash flow resources.  Given our assessment of current demand and future opportunities in the trusted computing marketplace, ramping investment within our means remains an important objective for Wave.  It is also important to point out that most of our significant milestones over the past few quarters – including some of our largest enterprise sales – have been linked to Wave’s investments in expanding engagements with OEMs, partners and customer prospects.  Accordingly, we believe that continuing these investments is in Wave’s long-term interests.”

Summary of Recent Progress/Developments:

Wave Logo

About Wave Systems Corp.

Wave Systems Corp. (NASDAQ: WAVX) reduces the complexity, cost and uncertainty of data protection by starting inside the device.  Unlike other vendors who try to secure information by adding layers of software for security, Wave leverages the hardware security capabilities built directly into endpoint computing platforms themselves.  Wave has been among the foremost experts on this growing trend, leading the way with first-to-market solutions and helping shape standards through its work as a board member for the Trusted Computing Group. 

For more information please contact:

Gerard T. Feeney, CFO
Wave Systems Corp.
413-243-1600
info@wavesys.com

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

 

 

Three Months Ended     March 31,

 

 

 

2011

 

2010

 

Net revenues:

 

 

 

 

 

    Licensing

 

7,264,119

 

5,693,521

 

    Services

 

212,117

 

175,907

 

Total net revenues

 

$7,476,236

 

$5,869,428

 

Operating expenses:

 

 

 

 

 

   Cost of net revenues – licensing

 

298,881

 

202,125

 

   Cost of net revenues – services

 

74,047

 

149,535

 

   Selling, general, and administrative

 

6,060,907

 

4,090,126

 

   Research and development

 

3,298,787

 

2,187,309

 

   Total operating expenses

 

9,732,622

 

6,629,095

 

Operating loss

 

(2,256,386)

 

(759,667)

 

Net interest expense

 

(1,301)

 

(4,508)

 

Net loss

 

(2,257,687)

 

(764,175)

 

Loss per common share – basic and diluted

 

            $(0.03)

 

  $(0.01)

 

Weighted average number of common shares outstanding during the period

 

82,168,105

 

77,186,505

 

 

 

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Supplemental Schedules
(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

December 31,

 

 

2011

 

2010

 

2010

Total net revenues

 

$7,476,236

 

$5,869,428

 

$7,037,239

Increase (decrease) in deferred revenue

 

(1,898,859)

 

(242,723)

 

7,197,729

 

 

 

 

 

 

 

Total billings (Non-GAAP)

 

$5,577,377

 

$5,626,705

 

$14,234,968

Net loss as reported

 

$(2,257,687)

 

$(764,175)

 

$(1,213,295)

Interest expense

 

1,301

 

4,508

 

3,251

Income tax (benefit) expense

 

 

 

Depreciation and amortization

 

123,808

 

68,184

 

57,293

Stock-based compensation expense

 

1,193,883

 

573,163

 

731,403

 

 

 

 

 

 

 

EBITDAS (Non-GAAP)

 

$(938,695)

 

$(118,320)

 

$(421,348)

 

 

 


Non-GAAP Financial Measures:

As supplemental information, we provide the non-GAAP performance measures that we refer to as total billings and EBITDAS.  Total billings is provided in addition to, but not as a substitute for, GAAP total net revenues.  Total billings means the sum of total net revenues determined in accordance with GAAP, plus the increase or minus the decrease in deferred revenue.  We consider total billings an important measure of our financial performance, as we believe it best represents the variations in our software license upgrades.  Total billings is not a measure of financial performance under GAAP and, as calculated by us, may not be consistent with computations of total billings by other companies.   EBITDAS is defined as net income (loss) before interest income (expense), income taxes, depreciation and amortization and stock-based compensation.  EBITDAS should not be construed as a substitute for net income (loss) or net cash provided by (used in) operating activities (all as determined in accordance with GAAP) for the purpose of analyzing our operating performance, financial position and cash flows, as EBITDAS is not defined by GAAP.  However, we regard EBITDAS as a complement to net income (loss) and other GAAP financial performance measures, including an indirect measure of operating cash flow.

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

 

 

 

March 31,

 

December 31,

 

2011

 

2010

Assets

 

 

 

Current assets:

 

 

 

  Cash and cash equivalents

$9,733,374

 

$3,595,076

  Accounts receivable, net of allowance for doubtful accounts of $-0-

 

 

 

       March 31, 2011 and December 31, 2010

3,264,607

 

11,594,549

  Prepaid expenses

327,529

 

319,209

      Total current assets

13,325,510

 

15,508,834

  Property and equipment, net

610,483

 

507,247

  Amortizable intangible assets, net

898,333

 

953,333

 Other assets

114,469

 

114,469

Total Assets

14,948,795

 

17,083,883

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

Current liabilities:

 

 

 

  Accounts payable and accrued expenses

3,780,734

 

4,399,579

  Current portion of capital lease payable

68,059

 

66,770

  Deferred revenue

6,555,170

 

8,454,029

      Total current liabilities

10,403,963

 

12,920,378

  Long-term portion of capital lease payable

99,228

 

116,734

  Long-term deferred revenue

1,350,000

 

1,350,000

Total liabilities

11,853,191

 

14,387,112

 

 

 

 

Stockholders’ Equity:

 

 

 

Common stock, $.01 par value.  Authorized 150,000,000 shares as Class A; 
 82,578,744 shares issued and outstanding in 2011 and 81,331,737 in 2010

825,787

 

813,317

Common stock, $.01 par value.  Authorized 13,000,000 shares as Class B; 35,556 shares issued and outstanding in 2011 and 2010

355

 

355

Capital in excess of par value

356,686,081

 

354,042,031

Accumulated deficit

(354,416,619)

 

(352,158,932)

Total Stockholders’ Equity

3,095,604

 

2,696,771

Total Liabilities and Stockholders’ Equity

$14,948,795

 

$17,083,883