I make it that Wave (the company) made a loss of around $4.2m in Q4 (assuming a Safend loss of approximately $400k, which is the unexplained remainder of the expressed group losses for 2011). This Q4 loss was primarily attributable to increases in staff-related, acquisition and third party development costs.
The ironical thing is that an increase in non-Safend total sales of $8.3m in 2011 was nevertheless offset by an increase in sales staff costs (stock-related and salary increases) of .... wait for it .... exactly $8.3m.
One might say, what about R&D staffing costs - how much of the increase reflects growth in the development staff? And that is likely a factor here. But Wave itself goes out of its way to explain the increase in staff costs as resulting from the need to support an increased customer base. So they cannot complain if one analyses the numbers on the same basis.
Now as an investor, one might hope that increases in staff costs in support of customers will lead to increases in sales revenues of - at a minimum - twice the staff-related costs of generating them. I don't think that is unreasonable. Indeed, one would like to see a more encouraging ratio of sales to sales staff costs.
So using Wave's numbers, the sales team is operating at around 50% of my minimal expectations in a demand-rich environment. $8.3m in increased sales related costs might result in an increase in sales of at least $16.6m. So one might then conclude that either the demand isn't present (management hiring booboo) or the sales staff hasn't been cajoled into performing up to expectations (management operating booboo).
I could be thinking there's a management performance issue emerging in the numbers. It isn't surprising the price is sinking. Wave's performance is not encouraging. Sales remain a hard grind. The business doesn't generate sales at a cost which makes sense currently.
That's the historical impression. And unfortunately, the unreliable nature of the safe harbour means that many investors will be loathe to look forwards. Which is why the NIST instruction and the DoD letter are critical to my thinking about Wave's opportunity.
Now if Wave had explained increased staff costs the way I have been - as in part representing an investment in Wave's future - the situation looks more constructive. But that isn't what they themselves appeared to be saying with this sentence: "an increase in non-Safend salaries and related benefits totaling approximately $5.7 million in support of its growing customer base." It may be pedantic on my part. But if the company wants to spin a tale which seems to justify its performance, it might wish to take more care of the details.
My own conclusion, in spite of the commentary: Q4 was disappointing on its top line, probably as a result of lost momentum in SMB sales; and not so impressive on its bottom line either. But 0.8m of stock-related costs (which have little or no effect on company cash flows) exacerbated the losses. The acquisition costs in Q4 are an exceptional item and represent a one-off hit. And setting aside these items, Wave's continued investment in R&D once again looks responsible for the operating loss. At current rates of expenditure relative to sales, dilution is inevitable in 2012 unless demand picks up or expenses are trimmed. And indeed, the failure to replace the GM deal means that sales in Q1 are likely to dip further. The decreasing stock price is not inconsistent with these conclusions. But strong progress on the demand side may reverse this analysis.
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