Stock of the Day
Dec 08, 1999
Wind River Systems: Chips, Chips Everywhere
Senior Analyst: Garrett Bekker 12/8/99
It is certainly no revelation to state that electronics and computers are
revolutionizing the way we live.
Most of the attention, so far, has gone to companies that make
computers and the chips that go inside them, such as Dell Computer
(NASDAQ:DELL - news) , Compaq Computer (NYSE:CPQ - news)
and Intel (NASDAQ:INTC - news) .
However, much of the future growth in the microprocessor industry
will come from more mundane applications of processors in everyday
items such as alarm clocks, automated teller machines, car braking
systems, robots and traffic lights, as well as more exotic items such as
jet fighter control panels. This class of computer chips is known as
?embedded? processors, since instead of residing inside PCs, they?re
used in appliances and other electronic equipment.
Founded in 1983 by chairman Jerry Fiddler, Wind River Systems (NASDAQ:WIND - news) is
the leading pure-play developer of embedded processing software. The company counts Boeing
(NYSE:BA - news) , Hewlett-Packard (NYSE:HWP - news) , General Motors (NYSE:GM -
news) , Siemens (NASDAQ:SMAWY - news) and Lucent Technologies (NYSE:LU - news)
among its customers.
According to Dataquest analyst Tom Starnes, of the 4.8 billion microprocessors that were sold
in 1998, only about 120 million of them, roughly 2.5%, were intended for PCs. The remainder
were embedded chips used in everyday electronic devices.
Already, the typical non-PC-owning middle-class American household has about 40
microprocessors in it, with chips in everything from digital bathroom scales to irons that turn
themselves off automatically. Electronic toothbrushes contain over 3,000 lines of programming
code. A typical car might have 20 processors, while luxury cars can have up to 60.
Starnes estimates that in five years, the number of chips in the average home could grow to 280
and the number of embedded chips sold to 9.4 billion.
Perhaps the most mind-boggling statistic is that Furby, that annoying little stuffed creature that
created a lot of fuss last Christmas, contained more processing power than the electronics inside
NASA?s original lunar lander.
A few years ago, someone even invented a condom with an embedded chip in it; but we don?t
know if it ever went into production.
Wind River has been the leader in the embedded systems market, and recently strengthened its
position with the acquisition of number two producer Integrated Systems. According to a report
by Hambrecht & Quist analyst Matt Belkin, there is very little overlap between the two
companies, with each company?s strength matched by the other?s weaknesses, and vice-versa.
The acquisition should help fortify Wind River in the near future, as computing moves beyond
PCs to ?smart? devices such as screen phones, personal digital assistants (PDAs), set-top boxes,
car navigation systems, digital subscriber lines and cable modems.
Each of the products requires embedded processors, which should add to the demand for the
company?s products.
To meet the massive demand, Wind River offers several products. Tornado II is a development
platform that allows customers to build their own embedded software applications, and is used
by more than 40,000 developers. VxWorks is a real-time embedded operating system that runs
the embedded applications software.
To meet the needs of these new Internet-enabled devices, Wind River created networking
technology to help these embedded applications connect to each other. The company also is a
leader in embedded development software for Java, which is quickly becoming the lingua
franca of the ?Net.
According to management, more Java products are built with VxWorks than all its competitors
combined.
For customers that don?t have the time to train developers fast enough, the professional services
division provides consulting design, development and integration to help them build devices
quickly and cost-effectively.
Wind River also recently announced a number of strategic alliances with significant upside
potential. The company will work with Liberate Technologies (NASDAQ:LBRT - news) to
provide next-generation TV set-top box technology for its customers, which include America
Online (NYSE:AOL - news) , Cable & Wireless (NYSE:CWZ - news) , and US West
(NYSE:USW - news) .
Wind River will receive royalties on each box enabled with its technology. According to Belkin,
Liberate?s service provider customers control over 160 million users.
The company also has similar royalty agreements with Lucent and Intel. Intel?s royalty payments
alone contributed $1.3 million in the last quarter, a 400% increase from the previous year.
Total revenue for the third quarter was $44.6 million, beating estimates by over 6%. Annual
sales have grown faster than 40% for each of the past two years, and are on a pace to grow
another 25% this year.
During the quarter ended October 31, the company earned $7.4 million, or $0.17 per share,
compared to earnings of $7.3 million, or $0.17 per share in the year-ago quarter.
Through the first nine months of fiscal 2000, the company has earned $0.42 per share on sales of
$117.7 million compared to earnings of $0.40 per share on sales of $92.7 million through the
first nine months of fiscal 1999.
The competition will come from Microsoft?s (NASDAQ:MSFT - news) Windows CE, Sun
Microsystems (NASDAQ:SUNW - news) and 3Com?s (NASDAQ:COMS - news) alliance with
Symbian, Mentor Graphics (NASDAQ:MENT - news) and Microware (NASDAQ:MWAR -
news) .
Despite a strong November that saw the shares gain more than 50%, the company is still trading
at only 8.1 times fiscal 2001 revenue forecasts. Belkin has recently raised his 2001 forecast
from $190 million in revenue to $205 million, with a price target of $60, meaning there?s still
plenty of headroom above Tuesday?s closing price of $38.75.
Bottom Line:
Wind River has a dominant position in the rapidly growing market for embedded processing
technology. We think the stock is attractively valued at current levels, and should benefit from
the increased synergies from its acquisition of Integrated Systems. |
