Getting back to the question of which RTOS horse to bet on, INTS reported its 2nd quarter tonight, so let’s compare it to WIND’s.
Total revenue was up 31.5% to $26.1 million, exactly meeting the latest H&Q estimate. Operating costs, excluding acquisition expenses, were $22.3 million, a little more than expected, so operating margins stayed at last year’s 14.7%. Adjusted EPS was $.13 versus last year’s $.11, an 18% increase.
On the surface, INTS appears to be growing revenues OK, but not at the increasing rate of WIND. EPS growth was relatively lethargic given the healthy growth in revenues. I say this not only because WIND’s EPS growth is far greater, but my rule of thumb is that software product companies growing revenues at healthy rates should grow EPS at least as fast as revenues, unless there is a bona fide excuse. And if INTS has an excuse, it probably would be that acquisitions are being digested, which takes both effort and more money than would be required once the process is complete. Frankly, INTS is not priced to grow EPS at 18%, again unless there is an acceptable excuse, and the expectation that higher growth is in sight.
But speaking of acquisitions, this means revenues from operations on-going for at least one year did not grow by 30.5%, but by some amount less, maybe a lot less - because INTS has had multiple acquisitions since last year. This means the on-going INTS operation is growing revenues at no more than the Embedded Systems RTOS market as a whole, loosing market share to WIND and MWAR.
I am not against acquisitions. While I am always against acquisitions for purposes of diversification, I fully expect and encourage WIND to extend its core capability through occasional acquisitions. And I would not be surprised if MWAR acquired needed capability. But I am not comfortable when acquisitions become such an engine of growth that it clouds the assessment of inherent revenue growth and expected future costs. This makes it difficult for me to value such a company. Not that it isn’t valuable; I just can’t determine what it is.
Now you can see why I am not invested in INTS. While the company probably will prosper, all their acquisitions confuse the issue. Costs are higher than expected, perhaps suggestive of duplicative or wasted efforts or lack of accountability - expected after any acquisition, but INTS had a continuous stream of them. Meanwhile, revenues from on-going operations are not growing at rates expected of a market leader, as are revenues of WIND (48.5%) and MWAR (42% qtr ending June).
Why take the chance, I would underweight INTS and buy mostly WIND and some MWAR. Later, when things settle down and INTS becomes better understood, there may be reasons to buy back the stock.
Allen, |
