>>H&Q's estimate . drop on the first quarter estimate to 0.14 puts it in line with the Wessels estimate if that has not been changed this week.
H&Q shifted earnings from the first two quarterly estimates for FY 1998 to the last two quarters - based on a spreadsheet technicality. In the November conference call, Dick Kraber explained that year-end quarters can be more profitable than percentage-based spreadsheets might expect - especially when revenues exceed company expectations. Why? Because the company establishes an annual budget based on expected sales, and lives within that budget throughout the fiscal year. This sound management approach flattens costs across quarters compared to what might occur otherwise. This magnifies the effect on earnings of the seasonal variation in sales.
The first two quarter reductions in H&Q earnings estimates is a result of trying to compensate for annual budgeting in their model. The reductions were not meant to suggest that WIND should under-perform earlier estimates. In fact, H&Q raised the FY 1998 estimate, albeit barely more than the 3 cents by which WIND exceeded the FY 1997 4th quarter estimates.
H&Q emphasizes repeatedly that they have excluded I2O run-time licenses fees from their revenue estimates, but expect these revenues to begin to have significant impact in the second half of the year. What might this omission add to earnings in FY 1998? Since everyone seems to agree that Intel plans to sell 10 million chips within the first 18 to 24 months of production, a reasonable expectation would be for 3 to 4 million this fiscal year, bringing in $4 to $5 million dollars in pre-tax revenues. This would add about $.16 cents to pre-split EPS. That would suggest that a more reasoned estimate FOR H&Q, not me, would be to add $.16 to their current $.85 for FY 1998 to get an estimate of $1.01 pre-split EPS. (The post-split equivalent would be $.67.)
You might recall a few months ago that I berated all four analysts following the stock for projecting FY 1998 EPS within a very tight range, something like $.80 to $.84, when in fact EPS should be around a $1 - all pre-split. It seems like they agree with me, but they just won't say it yet.
In summary, H&Q has raised, not lowered, its estimates for WIND, and more is expected later in the year. This omission of I2O revenues really starts to have an impact in out years, starting in FY 1999 - which is less than one year away. I2O revenue growth should easily enjoy triple digit growth for the next few years, none of which is captured currently by H&Q.
Allen |
