Added information and corrections about WIND's 3rd quarter results:
First a correction: I had posted that I thought that the cost-containment, particularly in regard to product costs, implied that run-time licenses fees are now increasing at a faster rate than I was projecting. For this reason, I suggested that run-time license fees were probably growing at about 100% per year. Dick Kraber (CFO) said it would be wrong to draw that conclusion about run-time license fees increasing at a materially faster rate. He said run time license fees are over 20% of revenues, and this percentage is growing at a rate of about 20% per year. (The model I used to project revenues produced results that were close to these figures, and has subsequently been adjusted to incorporate them almost precisely.) Further, Dick said the reductions in many of the operating cost categories over what I projected were due to the controlled execution of a plan and budget laid out at the start of the fiscal year. Marginal revenues exceeding the plan tend to be very profitable because of the nature of the software business - in which the marginal cost of goods sold is insignificant. (This is a difficult aspect of modeling costs. It is easy to statistically estimate costs using functions that take full advantage of marginal revenues, but there is risk of understating out-year costs drastically, leading to an overly optimistic projection of expected results. The reason for this is that out-year figures are out of the range of those figures used in deriving the statistical estimates. For this reason, and also so as not to limit my estimate of management's need to continually invest in the business, my model currently does not take much advantage of high revenue growth. I will probably do something better about this in my model over the winter.)
As a consequence of the above, I need to amend my statement that run-time license fees are probably growing at about 100% per year. I now think they are now growing at about 75% per year. (But I think they will be growing at 100% by FY 1999!)
What else of importance was discussed:
1. The Oracle/Sun JavaOS/WIND NC development is targeted for a variety of platforms, just as had been supposed in this thread. There is not a concrete Oracle NC, but rather an NC OS that can be adapted to virtually any platform for virtually any purpose, be it a Java client or a multi-media processor such as a set-top box. The physical form of the NC can vary almost without constraint, both at the microprocessor level and the overall box itself. Look for announcements with impressive partners regarding the roll-out of NC's. (This is also a targeted market niche of INTS and MWAR.)
2. As you mentioned, I2O is going well - along the lines reported recently in a couple posts on this thread. About 20 to 25 new clients are now using Tornado to develop I2O products, including about 18 premier computer/component manufacturers demonstrating I2O at Comdex. Production quantities of I2O product should begin to hit the street around the middle of 1997, which will also be the beginning of a growing I2O run-time license revenue stream to WIND.
3. Noting that PrimeCo is rolling out CDMA-based PCS service in 16 cities simultaneously, and that NorTel's PowerTouch series of smart phones are in production, management would only say that WIND announced working relationships with both companies a while ago, and could not comment on whether VxWorks is used for these products.
4. The automobile business continues to progress at its usual snail-like pace. Actually, lots is happening, particularly in Europe, but nothing specific can be announced at this time. Automobile applications is one of the most exciting opportunities for WIND, and it absolutely will happen over the next five to ten years, but it progresses like molasses.
5. In response to a probe, Ron Abelmann indicated that the company realizes that consulting services is a natural follow-on to a successful product like Tornado, and the notion of enlarging their business model to include application development consulting will be considered at a management retreat next month. They are being forced into the consulting business, for example, with existing contractual requirements to have personnel on-site to help developers optimally utilize acquired tools. Also to be considered is how to organize a consulting unit, particularly in regard to existing Engineering Services, which basically does ports and other custom tailoring work under contract. (Hint: A consulting arm should be added to the business, because of the complicated nature of making design decisions, getting high utilization of sophisticated development tools, and knowing what tools and libraries are available in a design setting. The business could grow rapidly, but not with the same cost model as the primary business. Moreover, application consulting is a difficult business to manage, and must not be allowed to drain inordinate time and energy away from existing managers.)
6. There are now over 6000 Tornado users. At the end of the last quarter there were 4000 users. To put it lightly, Tornado is a tremendous success, and seems to have become the de facto standard development environment for Embedded Systems. This is aided by the fact that Tornado was the first commercial software package receiving Windows NT 4.0 certification, and along with its Windows 95 certification, is the only Windows-certified development system for Embedded Systems.
7. Telecommunications/Datacommunications provided a little more business opportunities for WIND during the quarter than number two, Office Automation. But I was heartened to learn that the strength of the Defense business (VME bus applications) was surprisingly strong. Recall the many times I have harped about the high potential for military business for WIND, even though so far the military consumes a small portion of 32-bit microprocessors. It seems to be happening!
8. WIND does not report a backlog, but they would say that it built up during the quarter
In summary, you can buy WIND because it is a great way to play the Wintel opportunity (I2O); or you can buy WIND because it is a great way to play the NC or Internet Appliances; or you can buy WIND as a terrific Internet/Intranet infrastructure play (switches, routers, hubs, data cells); or you can buy WIND to play the telephony market (handsets, smart phones); or you can buy WIND as a the best automobile electronics play (injector, transmission, brakes, traction controls, navigation and smart highway apps); or you can buy WIND as a defense electronics play (signal processing, simulation, communication); or you can buy WIND because of Office Automation products (printers, faxes); or you can just buy WIND because you want to go to Mars (Pathfinder). If you don't like story stocks, then buy WIND because of its numbers: high sustainable earnings growth.
Allen |
