Picked this up from Yahoo.
Company: Integrated Systems
Price: 36
Recommendation: Buy
Notes: a, b, f, e
Date: 12/17/99
ISI Crushes Expectations! Wind Deal Passes Major Milestone with Flying Colors.
* ISI reported a blow-out third quarter. Record sales of $43.6 mil and 17½ earnings crushed our estimates.
* Sales accelerated to 25% growth as strong demand for ISI's tools outpaced all expectations.
* Importantly, visibility strengthened as deferred revenues rose $3 million or 16%.
* The strong third quarter results send a clear message that not only are customers enthusiastic about the pending Wind River merger but that expectations for the combined company are likely conservative.
* We have raised estimates to reflect the strong quarter, though the deal will likely close before Q4.
* We reiterate our BUY rating.
1999 A 2000 E 2001 E
Q1 EPS $0.07 $0.01a $
Q2 EPS 0.13 0.08a
Q3 EPS 0.17 0.17a
Q4 EPS 0.19 0.18
FY EPS 0.55 0.44 0.74
FY REVS (M) 133.5 157.3 188.7
CY EPS 0.47 0.65 --
CY P/E 76 55
FY Ends Feb Current Price $36
52-Week Range $8-40 Market Cap (M) $897.5
Shares Out (M) 24.93 Book Value $4.41
Net Cash/Share $1.80 3-Year EPS Growth 25%
CY00 P/E-to-Growth 220%
Summary Integrated Systems reported simply stellar third quarter results after the close. Revenues of $43.6 million and earnings of 17½ blew past our $38.9 million and 12½ estimates. Without question the focused effort put forth by largely new management over the past 3-4 quarters has begun to pay off. While the results are certainly vindicating, the more important message is that momentum is clearly building for not only ISI, but the embedded systems industry as a whole. Recall Wind River (WIND, $40, BUY-Focus List) reported strong revenues of $44.6 million versus our estimate of $41.9 million on November 19th. Though still very early in the opportunity, the post-PC era is clearly upon us as evidenced by surging demand in the networking equipment and consumer Internet market areas. Against this backdrop we continue to view Wind River's acquisition of ISI with strong optimism, as the marriage of the two will empower Wind with far greater critical mass than any other pure embedded systems player, public or private. Though the deal will likely close before ISI close its fourth quarter, we have raised our estimates moderately to reflect the strong results and our belief in ISI's strengthening momentum. As such, we believe ISI's strong results send a clear message that our first pass at estimates for the combined company will likely be proven conservative. We reiterate our BUY.
Highlights from the Quarter
*Revenue growth accelerates to 25% year over year. Up from 9% in the prior quarter.
*Product sales of $28.1 million crushed our $22.9 million estimate, growing 36% year over year
*Deferred revenues increased 16% to $21 million, adding visibility
*Growth in the core embedded tools business rose 58% year over year
*Royalties from shipping products rose to 28% of embedded revenues
*PRISM+ development seats increased 34% year to year
*Consumer design seat wins rose to 19%, from 13% sequentially
*New wins with Motorola (just announced on call), AT&T, Samsung, Rockwell, Raytheon and others
ISI Signs Significant Agreement with Motorola On the conference call, management disclosed a substantial win with Motorola for ISI's pSOS+ operating system and Diab-SDS tools. The license covers future Motorola wireless cellular and subscriber devices. The formal announcement will come over the next week or so, so until then details on this arrangement are limited. That said, this clearly represents a significant win for ISI given the sheer scope of the addressable market. Importantly, it also represents a strong validation of ISI's strategy in acquiring both SDS and Diab as platform- agnostic tool vendors. We view this component of ISI's business as a key asset in the pending Wind River merger as it will provide a means by which Wind gains further visibility and likely penetration into non-Wind River accounts. Furthermore, the acquisition of these vendors drove and will continue to drive better gross margins as ISI is no longer required to pay royalties on their sale.
Estimates Likely Conservative Following the strong results of both ISI, and Wind River (November 19th), we believe preliminary estimates for the combined company are likely conservative. While we will not publish formal pro forma estimates until the deal closes around the end of January, on November 2 we took an initial pass at it and came up with the estimates represented in Table 1 below. We have now refreshed this table to provide what we believe is a more accurate representation of the potential of the combined entity.
Table 1 - Calendar 2000 Estimates (in millions, except per-share data)
Previous Current
Wind ISI
Revenues 190 173.5
Earnings 0.75 0.58
Share Count 44.7 24.1
* Preliminary estimates only; formal estimates will be published once deal is closed.
Raising Estimates We have made only slight changes to our estimates to reflect the stronger than expected November quarter results. We have raised our calendar 2000 revenue estimate to $180 million from $173.5 million and earnings to 64½ from 58½. As stated above, we will publish formal pro forma estimates when the deal closes.
Next Step : Wait for the SEC The next step in the merger is to wait for the SEC's comments, due sometime over the next week. The timing of those comments will dictate Wind's ability to mail the proxy to shareholders in time for a January vote. We view next Thursday as the cut-off for a January close. |
