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Wave Systems: About to go Tidal?

Wave Systems (Nasdaq: WAVX) may be ready to surge now that years of developing its hacker-proof security hardware are about to pay off.

Shares were up 1 1/8 to 16 11/16 Monday, or 8 percent, but still far below a 52-week high of 50 3/4 reached in March. At that time, the company was finally relieved of shorting pressure on the stock, got a private placement of $122 million, and announced its partnership with Advanced Micro Devices (NYSE: AMD). "And then the Nasdaq fell apart and we got whacked like everybody else," said President, CEO and Chief Operating Officer Steven Sprague.

Sprague said in an interview Monday with ZDII that he expects the stock to at least match that high again by the end of the year, as revenue streams start to spring from the company's deals.

"Our fundamentals are really awesome," said Sprague.

Wave stock has plenty of upside, Sprague said, because of several factors: the beginning of a new product cycle; technology that hits all the key e-commerce movements; cash for three or four years of operations; partners like Hitachi, Compaq (NYSE: CPQ) and AMD; and a deal with the French banking industry.

And security is a hot sector to be in, following this year's love bug disasters and the recognition of electronic signatures as valid authentication.

The company originally went public in 1994, was de-listed from the Nasdaq in 1996, and was re-listed just a year ago.

"Some days, I liked the pink sheets better," said Sprague, who has been frustrated with the shorting pressure that kept the stock down from last August to this spring.

Wave's e-commerce system offers a means of securely distributing multi-media content over the Internet, cable or satellite. Its "Embassy" product broadcasts encrypted content, manages authentication and decryption, monitors customer use, and collects transaction data.

Embassy is a unique offering, Sprague said, because of its open-source architecture which loads and unloads applets. Starting in August, Wave will be distributing tools for other companies to build their own applets. The technology works across a range of consumer electronic devices, including computers, personal digital assistants, and interactive televisions.

The Embassy product also allows for non-authenticated anonymity, hides keystrokes from the operating system, and is virtually hacker-proof, Sprague said.

Wave's deal with Cyber-COMM, a company formed by an alliance of French banks, is a major validation of its technology, though it's too soon to tell if U.S. banks will adopt the company's technology, Sprague said. Cyber-COMM will use the company's Embassy technology for its next generation of Smart Card readers. That means that anyone who wants to do e-commerce in France -- a market of 4 to 5 million -- will be using Wave's technology.

The company's agreement with AMD, which will put Wave's technology on PC motherboards and other platforms, also has big potential, though Sprague now estimates the technology could end up on anywhere from 5 to 50 percent of AMD's chips.

Sprague said the company also has deals with Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) in the works.

Wavexpress, a new subsidiary of the company, which is developing infrastructure technology for digital TV, is also expected to be a boon to the company when it is eventually brought public. The company has already signed up 6 broadcasters.

Sprague said he sees Wave Systems' revenue increasing to the "hundreds of thousands to millions" for the next year, as services revenues are expected to kick in the first quarter.

The company, which had sales of just $200,000 in 1999, and net loss of $28.1 million, doesn't expect to reach profitability any time soon, but that's not what investors want, Sprague said.

Like a cable company, "the trick is revenue per unit, not profitability," Sprague said. He said the company's short-term goal is saturation. Sprague is comfortable with analysts estimates going forward.

The one analyst that covers the company, Steve Olsen for Pacific Growth Equities, sees the company bringing in $19.8 million by 2001, but losing 64 cents a share for the year.

Sprague said that though more analyst attention would drive the stock up, it would also result in more volatility, something he's not ready to face again quite yet.

"In March, with our stock around 50, we were a $2.5 billion company, with just one analyst!... It's important and it's not important. We're not looking at this as a quarter-to-quarter business."