Pacific Growth Report (Page 2)
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equity research
Steve Olson 2 Wave Systems Corp.
(415) 274-6880 WAVX:Nasdaq
solson@pacgrow.com Strong Buy
Wave's EMBASSY Technology Brings Trust to the PC, Enabling
E-Services EMBASSY (Embedded Application Security System) is Wave's
next-generation firmware technology. As a discrete chip-based
solution, EMBASSY provides an isolated environment for execution
and storage (i.e. secure from Windows), a ‘system within a system' for secure electronic commerce.EMBASSY's core functions include encryption, authentication, content metering and execution protection, and transaction management functions.
By securing the client this technology transforms PCs into trusted
devices, enabling the secure delivery of e-services such
as Wave Direct, the Company's content distribution service. Listed
below are capabilities unique to EMBASSY-enabled
PCs compared to standard PCs:
· Secure distributed applications, online or offline
– EMBASSY leverages local PC resources securely, so applications
can be distributed to PCs without the need for
constant monitoring over a network
· Persistent local protection of content
– EMBASSY acts as a diligent watchdog, monitoring and metering
content use and ensuring that content providers
are compensated
· Media and network independence
– Because of the client-side security design (versus server-side)
EMBASSY is indifferent to the means of content
distribution whether delivered over networks (dial-up Internet, cable,
satellite or terrestrial broadcast) or physical
media (floppy disks, CDs or DVDs)
Market Timing Appears Ripe for Wave's Solution
While Wave's positioning has been fairly stable for the last 2 ½ years,
we believe that market timing has only begun to
work in the Company's favor over the last six months. Recognizing
that the most significant execution challenge for
Wave are deployment alliances with the major PC hardware vendors,
we believe that recent market developments have
elevated the perceived value of Wave's solution. Wave's technology
addresses two fundamental issues in the PC market:
securing PCs and enabling e-services.
Intel's Moves to Address Security in PCs While Intel has given lip
service to security for years, the industry bellwether
finally provided a security roadmap at the 1999 RSA security
conference in January. Intel plans to add basic security
features to its chips over the next two years, starting with random
number generation (a base function for encryption).
Though these are modest first steps, they are highly visible given
Intel's status, elevating the security issue and pushing
the other chip makers and the PC vendors to move in response.
Price Erosion and Margin Compression in the PC Market According to
IDC, the average PC sold in the U.S. consumer
market went for $1,600 in 1997. That average has now fallen to $950
and the fastest-growing segment is the sub-$600
market. Given this extreme price pressure, the major PC vendors are
actively exploring other revenue streams, particularly
ISP services. Over the last year, most major PC vendors -- including
Compaq, Gateway and Dell -- have bundled third
party Internet access services with their platforms, receiving a bounty
from the ISP for each customer.
In early July several initiatives were announced by ISPs and computer
retailers that take this concept to the next level. The
retailers will provide consumers with a “free” PC if the user commits to
a multi-year ISP contract. For example, Best Buy
is offering $400 off any PC with a 3-year commitment to Prodigy at
$19.95 a month, making a low-end computer
essentially free. Circuit City has partnered with AOL's CompuServe,
and Microsoft with Staples, for similar offerings.
Following the precedent of the cellular phone industry, PCs are being
commoditized as service providers subsidize the
hardware cost with their recurring revenue stream.
With the advent of free PCs, hardware vendors are being forced to
change their revenue model. In 1998 about 14 million
PCs were sold to consumers in the U.S., each sale representing a
customer acquisition by a PC vendor. The opportunity
for PC vendors is to leverage that customer acquisition to capture
follow-on revenue in addition to one-time product
margin. In our view, Wave offers the most comprehensive solution for
PC vendors to capture such revenues including
consumer software sales, e-commerce transactions, and secure
networking. Wave's agreement with PC Free demonstrates
the need for Wave's technology and services for PC vendors targeting
these revenue opportunities. |
