I'm back from the H&Q Show, but I have to run up to NYC for a few days, so I will be briefly summarize main points:
1. A consistent theme of the H&Q show was that high tech stocks had crashed, particularly software stocks - discussed before hand on this thread. It was the worse crash most money managers had ever experienced.
2. I2O apparently is a major initiative of Intel with volume shipments probably starting in the second half of 1997. WIND has asked all analysts to refrain from estimating I2O revenues until the company experiences significant royalties from Intel. (I think this is more to do with timing than concerns about success of the I2O standard. After all, the timing is completely out of WIND's hands, depending on Intel and its customers.) Notwithstanding this request, WIND displays unbridled confidence in the ultimate size and ubiquity of the I2O segment, clearly believing that I2O will contribute perhaps more than any other product to the future bottom line. Despite this optimism about the I2O opportunity, it is clear that even if I2O were to fail utterly in the market place, WIND would not miss a beat since numerous other product royalties would come on line. For example, management implies many other I2O-like deals are in the making with semiconductor manufacturers. Expect estimates to include I2O toward the end of 1997.
3. A couple of months ago, I wrote that I had no knowledge of VxWorks beign used in any digital camera. Later that statement was corrected to account for Apple's new digital camera. It turns out that WIND is in at least six digital cameras, as well as numerous auto navigation systems, soon to begin flooding the U.S. Why aren't those deals announced? Because Japanese Electronics manufacturers are serious about secrecy. WIND cannot even announce they have a relationship with most of their Japanese customers.
4. We all know WIND does a lot with HP (deskjet printers, X-terminals, cable modems). Did you know they are in over 100 HP products developed in 30 separate HP divisions? And even though HP is one of their largest customers, they account for less than 3 percent of WIND's business.
5. Last year we learned from Ron Abelmann that GM would ship more computer power at the turn of the Century than IBM. This year we discovered that the next generation Mercedes-Benz would have 50+ microcontrollers, four to six of which will be 32-bit (read needs a RTOS), all networked together. My initial reaction: Neat, but not surprising. My delayed reaction: How did Ron know that? And even if it common knowledge, why mention it - unless, of course, VxWorks will used in those four to six 32-bit microprocessors. Then I recalled that GM has been working on a VxWorks fuel injector system since 1994, so clearly the next generation Mercedes is well past initial design and deep into development. Better than neat.
6. NC and Java are all on-track and will begin to be noticed in 1998, but as Don Dodge (who obviously sees me through rose colored glasses) says repeatedly on this thread, the NC numbers are not as gigantic as many other applications beginning to bear royalty fruit.
7. Military applications continue to grow nicely around 30% per year - just for the taking.
8. Telecomm/datacom/networking continues to show very strong growth, due to WIND's decision a while back to target internet infrastructure, i.e. all the black boxes that provide connectivity: routers, hubs, switches, etc. "You probably can't make a telephone call or connect to the internet without the help of VxWorks RTOS somewhere in the link."
9. Office automation continues rapid growth, much of which will involve I2O for connectivity.
10. While some pundits fear a slowing of the network infrastructure build out, and others see corporate management confused and stalling over needed infrastructure expansion (due to a plethora of competing technologies and the Y2000 problem), and still others notice recent consumer sluggishness in purchasing technology gadgets, the word from WIND is that the embedded systems sector is alive and very, very well indeed. WIND is gaining market share in an expanding market at the expensive of its peer group. Even in a recession WIND will do well, because then semiconductor manufacturers will be even more inclined to reduce prices, bringing even more 32-bit microprocessors within reach of embedded systems.
11. WIND is backlogging end-of-quarter sales to eliminate the so-called hockey stick. Consequently, it is certain that WIND will make the 9 cents this quarter, and at least 57 cents this fiscal year (not counting I2O) on at least $84 million in sales. The extent to which WIND beats this quarter's 9 cents is entirely up to management, and cannot be predicted mathematically. What does it mean when Ron says he is comfortable with 57 cents for the year on $84 million in revenues? It does not mean WIND will only do that much business, nor that these are his predictions. What it does mean is this: Management projected sales of at least $84 million for the year and budgeted outlays in accordance with projected sales. Since they execute extremely well against the annual budget, they know that if their revenue projections are met (at least $84) they will make their earnings (at least $57 cents). At this early date, Ron already has absolute confidence that the projected revenues will be met. What happens if the revenue projections are exceeded - to the point that they cannot practically even be backlogged? Additional profit. It happened last year, and it will happen again next this year, and next. This is why WIND's margins increase throughout each fiscal year. Now, what revenue do you think management projected for this fiscal year? My guess is something close to $84 million - about a 30% percent increase. Why? Because management would not risk budgeting outlays against a more aggressive, and therefore risky, revenue assumption. It is simple arithmetic to calculate the effect on EPS of expected, additional sales. Extra run-time royalties, say from I2O, essentially goes directly to the pre-tax bottom line. Marginal product license fees would enjoy gross margins at least equal to the average 82% for these revenues, say at least 90% would go to the pre-tax bottom line. Extra service revenues would suffer higher variable costs, probably taking only 50% to 60% to the pre-tax bottom line. Consequently, an extra $10 million in product sales would generate about $6 million in extra profits, or about 20 cents added to EPS. Add this to 57 plus cents would just about equate to Mitchell's 80 cent estimate for the year. (My estimate was closer to 70 cents.)
I hope to be back in town mid-week, at which point maybe we can say some things about valuations and controlling volatility. I received lots of encouragement to pursue these matters - even though many of you doubt that anything we might say or do would keep the momentum investors from their destructive speculative frenzies.
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To Mark Mccoy. SYSF will do better. The rally off this crash in software stocks will begin with leaders who have demonstrated flawless execution and face no sector slowdown. The leaders will pull secondary stocks up subsequently, including SYSF. And SYSF's 50 to 55 cents statement is not comparable to WIND's 57 cents, and the difference is more than 2 cents.
It didn't help when the SystemWizard demo at the H&Q Show FAILED TO WORK. We can all forgive the Demo Gods, as referred to by the SYSF representative (D'Angelo wasn't there), but it sure didn't add points to the presentation. I don't know what happened in the breakout session.
Allen |
