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Technology Stocks : INTS - Integrated Systems

INTS 0.412

-1.0%

Jan 12 3:59 PM EST

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To: Neil H who wrote (326)	12/20/1999 5:01:00 PM
From: Alan A. Hicks	of 327

While ISI's revenues grew 25% to $43.6 million, ISI's embedded software products grew 58% year over year. Analyst revenue estimates had been around the $39 million. Consumer design wins exploded up 70%. EPS were $0.17 versus analyst estimates of $0.12. It is understandable there might be speculation that ISI was pulling in everything they could in their last quarter as a public company. But that doesn't seem to be the case. Deferred revenues rose by $3 million. Management said the pipeline of business is very strong. Dr. Design services are being held back, as a team of engineers complete java reference platforms and porting of pSOS to Java under the agreement with Sun. These engineers would normally be producing revenues. Also, the Motorola agreement to put pSOS into cell phones will not begin until Q4. This is a major multi $million design win over several years. I believe it is also the first design win for either ISI or WIND in cell phones. Expenses were also at a high level with heavy spending on R&D and Sales and Marketing. So they weren?t skimping to make the EPS look better either. After the merger both pSOS and VxWorks should each have very bright futures. The embedded market has many dozens of OSs because application requirements can be quite different. Very, very different than the desktop environment. pSOS has always had a smaller footprint with a focus on winning high volume custom applications where size is very important. WIND/ISI will have the opportunity to optimize each OS to address two different segments of the market even more effectively than they do now. pSOS can be the slimmed down OS for very high volume consumer applications while VxWorks adds on more functionality for such things as telecom/internet infrastructure applications. Oversimplified but the general idea. My guess is that customers already understand this and is why pSOS sales were so strong last quarter. Dr. Design has already done VxWorks projects in the past. Now WIND will be sending a lot more business to Dr. Design in addition to the Sun Java/pSOS projects that should start rolling in next quarter. So Dr. Design should start reporting very strong growth by the second half of 2000. CEO Boesenberg has indeed done a spectacular job in one year at ISI. He will be leading the integration of the merged companies over the next year. Jerry Fiddler and the whole WIND team also have a reputation for moving very fast addressing the embedded market. The merger should create a real powerhouse in the emerging Post-PC embedded software market. ISI's strong results also support the idea that the merged companies should at least maintain the current valuation of WIND on a multiple of revenues. WIND recently hit $45 or about 12 times revenues. The combined companies should be at about $400 million in revenues in 5 or 6 quarters. A similar valuation would place WIND/ISI at $70 per share 18 months out. Very Happily Long INTS (soon to be WIND) aahicks

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