INTS reported out its quarter tonight, after warning of a shortfall in net income, and taking a beating over the previous two days. Since even dead cats bounce from tall heights, the stock was up today. Although I never claim to know about short term market movements, I would not expect INTS to recover notably until it demonstrates that it is on the mend and can grow both revenues and earnings appropriately. In my mind, it is almost certain that INTS stock price will leak off to form a base while awaiting a move to the upside on positive fundamentals. In the absence of positive fundamentals, INTS will dissipate until acquired - like Microtec Research.
Now let's review the facts from the quarter to see the basis of these conclusions. Revenues were under everyone's expectations; costs were admitted by management to be out of control - no doubt because of indigestion problems left over from the acquisition spree. On the full year, revenue grew 25% over FY 1996, with MatrixX now showing maturity and growing only 6% year-on-year.
Management's strategic initiative is pRISM+, which was announced last September at the ESC. pRISM+ is needed to reduce 3rd party payments and to complete their primary toolset. To this day they have to fill in their primary offering with 3rd party tools (compilers and debuggers), which cost them dearly in royalties.
But there are huge problems unforeseen by management with this strategy at this late date: (1) pRISM+ keeps getting delayed and consumes tremendous development resources. (2) At this stage in the product cycle, management should be oriented toward pulling 3rd party toolmakers into their overall toolset, rather than trying to program them out. Third party vendors will not want to invest in supporting the unproven pRISM+ environment when the company policy aims to exclude them whenever possible. (3) INTS lacks the resources to provide an overall toolset with best-of-breed components. A veto on any one of their components might torpedo a sale. (4) Fielding an inadequate pRISM+ invites comparison to a robust Tornado which is open to all 3rd party toolmakers, including most of the ones recently acquired by INTS.
The product strategy for pRISM+ is flawed, and can be fatal if not corrected immediately.
The new CFO is doing exactly what we predicted three months ago, and exactly what he must do. When asked repeatedly by exasperated analysts exactly what cost items would be trimmed to control runaway costs, he answered that they had just put in place line-item budgets based on a zero-based budgeting exercise, and line-item expenses would be reviewed monthly and all managers would be held accountable. I cannot fault the CFO for what doing what must be done. I fault the top management for letting things deteriorate to the point where these kinds of controls are necessary. At this stage in the embedded systems wars, the winner will not be the company using zero-based budgets and line-item controls on expenditures. What a sad setting for trying to blend various acquired corporate cultures, seeking synergy and bursts of creativity needed to invent the products and services to win market share. (Don't misunderstand, a well-run company executes cleanly without waste, using plans, budgets, line-item controls, etc. But in competitive high-tech businesses, accounting must be kept secondary to strategic issues, and viewed as a necessary means to further the development of the company, not as an end in itself. It simply cannot be allowed to become the primary focus and concern of industrious employees.)
This means that one way or another, INTS will reduce costs. But at an unacceptably high cost in employee productivity.
INTS must continue to advance MatrixX (read spend money on development), even though it no longer is growing noticeably. The hope is that the new version to be delivered in August will spur on sales of MatrixX.
INTS is targeting niche markets, as it should. Specifically, the company is targeting Digital TV (Set-top boxes, STB), digital cameras and automobile navigational systems. They also are fielding the mandatory Java capability. I am sure they believe they have an edge over the competition in consumer products, especially with regard to Asian electronic conglomerates.
They claim 30 STB design wins, of which they would hope that at least a handful will produce large quantities of STBs. (This causes me to wonder how MWAR can be the dominate Digital TV RTOS vendor and not have most of these wins. Is it possible that MWAR STB design wins have been converting to INTS? Is Davic and the DAVID OS out of fashion?)
INTS claims a handful of wins in each of the digital camera and automobile navigation product categories.
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By the way, WIND has been instrumental in automobile navigation for some time through Nisson's Birdview system, which has been spun off to Xanavi Birdview in a joint venture with Hitachi (or some other similar company). WIND is active in STBs through Hyundai of America and very active, if not dominate, in what will actually be fielded in the short term in this area: cable modems.
As far as I know WIND is not involved in digital cameras.
Allen |
