WIND Assessment
From email: thanks tm
Ok folks, I've had some time to ponder and I spoke with management this
morning. For the record, they tried to contact me last night but I was tied
up with other business. In short, management firmly believes they met every
investor/analyst expectation with yesterday's results and conference call.
I, and I don't think I'm alone here, felt they did a poor job of
communicating expectations. In the end, I honestly believe this experience
boils down to a growing pain. While it wasn't promised, I do expect we will
see a concerted effort going forward at improved communication and
consistency and that we will see progress as early as Q2.
That said, here's a detailed recap of management's thoughts, my opinions and
our takeaways.
1. Investor/my frustration: Inclusion of the Liberate and e-Sim gains in
Operating EPS. These transactions were not given as guidance on the 8-k
call and as such, were not believed to be included in the First Call
consensus estimate of 8c.
Management response: In reality, Wind River management had guided
analysts to expect roughly $5.0 million in gains from the sale of these
positions shortly after the 8-k call. This guidance was in turn
disseminated to institutional investors, but needless to say, reached few in
the retail arena. Obviously the resulting divergence in expectations
accounted for the operating "surprise". Almost ironically, management felt
they had outperformed on this metric with realized gains of $6.4 million.
The future: To achieve the greatest parity in expectations, management
will aim to provide more detailed guidance on conference calls and highlight
any and all significant non-recurring events which may impact results in any
given quarter. This approach should encourage the broadest dissemination
across institutions, retail investors, and traders.
2. Investor/my frustration: Management broke out royalties but neglected
other, previously reported-on metrics like I20 and Tornado for Managed
Switches. Along a similar vein, management promised four new transparency
metrics, but only delivered on two. Why must we, as co-owners of the
company, pull teeth to get basic stats? How can the market be expected to
fully appeciate this stock with an ever-changing set of datapoints by which
to gauge the business? Moreover, why has this lack of transparency been a
recurring theme over the past several years?
Management response: The integration of 8 disparate reporting platforms
has clearly taken its toll on Wind's reporting ability. While management
made every effort to deliver on the promised metrics, it was technologically
near-impossible to do so at this juncture in the integration. At the same
time, Wind management made an internal decision not to report on
historically popular areas like I20 and TMS because management felt those
areas were rendered insignificant compared to the value of royalty
disclosure. Finally, the sheer evolution of the business from a
single-product company to a multi-dimensional market leader dictates that
some metrics will invariably slip in priority while other new ones gain
stature (i.e. Dr. Design services and Royalties replacing Tornado revenues
and I20).
The future: Wind management is committed to transparency and focused on
establishing a set of key business metrics which can be reported
consistently, quarter to quarter. They've isolated several desirable
metrics and I contributed quite a few, but again there are no promises and
it will be a gradual effort as the disparate financial platforms are
consolidated. Management is also committed to discussing the rationale
behind any changes in reporting practices going forward -- on the conference
call, with all investors.
3. Investor/my frustration: Management changed guidance again -- lowering
Q2 margins and increasing Q4 (essentially back-end loading margins).
Management did express comfort with the full fiscal year First Call eps
estimate of 51c and raised revenue guidance slightly to 37%, but why the
change in guidance so shortly after the 8-k call? What has changed?
Management response: Tom discussed this somewhat on Thursday's conference
call, and to a large degree I heard little that was different this morning.
There are several key R&D investments Wind would like to pursue and will
come at the expense of near-term operating margins. Additionally, the
expense of the integration and platform consolidation is running higher than
originally thought and this will impact margins as well.
The future: Not much can be done here other than to issue guidance and
stick with it. Obviously it is the goal of every management team to meet
this objective, but there are always bumps in the road and this is simply
one of them. Wind has grown rapidly, through acquisition and organically,
and it will take time before management learns how to fuel the new engine. I
expect this is the last downward revision we'll see for the remainder of the
fiscal year.
4. Investor/my frustration: Analysts are asking softball questions and Wind
management responds in generalities. Specifically we've seen a score of
high-profile competitive wins, most recently with AOL, Gateway and
Transmeta. Most notably, Gateway elected to use both the Transmeta chip and
tailored Linux OS. Does Wind consider this a competitive loss, was Wind
even considered for such a design, and is there a business-model issue
preventing Wind from winning such lucrative deals?
Management response and the future: Unfortunately this was my last
question and we had little time to discuss it. I plan to follow up on this
issue next week and will update you all then.
5. Investor frustration: Couldn't ask questions on the conference call.
Management response: In no way intended.
The future: Improved coordination with conference call company and
operators.
OVERALL TAKEAWAY: So net net, as I'm fond of saying, I believe Wind remains
an exceptionally well-positioned company in a fantastic market. The
acquisition spree is fueling some internal indigestion, but based on 847
design wins, I'd say the customers love it and in the end that's who really
matters. I look forward to the analyst meeting later this month to clear
the air and reinvigorate the shares.
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