Apollo:
There is nothing more rewarding to a writer than a serious and thoughtful reader. I gladly accept your congratulations and will do my best to answer your questions.
Q1: How does Wind stay focused on "core" and not get derailed by "context?"
The decision to commit to accepting the challenge of providing an embedded software solution for Intel's I2O strategy was the point of origin for the new Wind River. Providing the specialized IxWorks RTOS for Intel meant that they became part of I2O's reference design; their repayment was that Intel became their first VAR.
At a deeper level, their challenge is to become the leading software company in the era of ubiquitous computing. To achieve this core ambition, software solutions are required. And, solutions are not born overnight.
An important step in having the engineering wherewithal to both create and service a rapidly upgrading line of products was the acquisition of Integrated Systems, but the knowledge innovations required the ability to abstract: to achieve a higher level of understanding of a concrete problem that permits finding and testing a generative solution to the problem.
If you have a difficult problem that you cannot solve directly, then one strategy is to form a model of the problem that generates a creative solution, then using the model, generate and test to see if this meta-model's meta-solution solves the concrete problem. If you cannot open a can of worms, you invent a can opener. If you can open a can of worms, you can also open a can of spaghetti or tuna. Going abstract can solve problems that you haven't even dreamed of.
Chairman Jerry Fiddler and CTO David Wilner founded the company. Fiddler wandered through graduate school in the hippie era, enjoying his music and writing software. As a psychologist, I know that a music-mathematics combination characterizes some young geniuses; that combo beautifully identifies love of abstraction and the esthetic delight in it. (Think of Bruce Brown and Mike Buckley, of music and "valuation.") This is not to say that Fiddler is necessarily a genius, but, at least, he has that sort of creative and abstract mind that enabled him to assemble a creative computer project before he left the University, to be interested in abstractly creative jazz, and to start consulting to companies that needed embedded software. I believe the key conceptual skill that he and Wilner, who took the lead tailoring VxWorks into IxWorks, share is the ability to abstract higher-level principles in software design. (Of course, Tom M-H or sditto could better address what sets programmers apart.)
The first significant abstraction appeared to be the ideal of developing an open universally applicable set of tools. At the heart of the key issue of complexity, rapid increase in the variety and introduction cycle microprocessors is that an embedded system requires that the operating system be embedded into the memory of many specialized chips whose architectures and APIs differ. Fiddler's keynote speech suggested that the solution to dealing with such complexity required close collaboration between hardware-software companies, even co-creation of pre-integrated systems. Again, this is a significant abstraction: the solution to solving the problem of complexity can only be found by a higher-order integration of two disciplines by collaborators who jointly focus on integrating the borders between their overlapping arts.
Given the time-talent required to port to so many chips, only the leader, WRS, has the presence to become that universal resource; this may also just happens to lead to creating a natural knowledge monopoly buy standardizing on its solution.
I don't really know for sure, but I believe that Fiddler's solution was oriented toward solving this immediate complexity dilemma, in contrast to seeking a master business strategy that created a pre-formed strategy plan. To me, given my sketchy knowledge of him, he does not appear to have that kind of need for power. (Because I am a psychologist, I think of people in motivational terms even when I do not have the kind of information required to offer sound psychological assessments. Please don't read these comments about "genius" or "power" as psychological pronouncements when I intend to convey only common sense impressions that anyone might form.)
When I read that press release and saw Fiddler's a-day slides, I leapt to the conclusion that this would create lock-in. That is, I abstracted this winning strategy. I believe management is going in this direction; I assume that this strategy was/is/will become an emergent from a process of change in which the obvious wisdom of a general thrust only becomes clear after going down the road a ways. (At least, that is how my mind and many other minds work; the human brain and personality are complex systems with many distributed agents whose simple rules govern small actions that, taken together, when they come together, lead to an emergent adaptive solution for the whole enterprise.)
At times, it has been far from clear that WRS had kept its focus on core. Was building the new campus distracting them? Was Fiddler losing interest when he cut his jazz CD's? Was their conflict between Fiddler and the former CEO, Ableson, about the company's direction? Most important, if they had developed HA and protection domains two years earlier, they might already have secured far greater competitive advantage. That is, some say this move to HA and MPD was over due catch-up. (Still, Wilner did lead an effort that appears to have created a superior solution to MPD.)
Q2: Given a clever but intricate and convoluted strategy, can management stay on target?
I do not view their strategy as "convoluted." They have a clear vision and mission: "we help connected smart devices think by offering a complete embedded software solution." The strategy of leveraging CoEs and VARs is clever, but also it is a direct and sound business strategy. I imagine that what you are responding to might be my emphasis on an as yet "unrevealed strategy" that I believe will inevitably lead to their dominating multiple markets. But, this "coup" has two components elements, the universal modular building blocks, Tornado 2/VsWorks AE, and indirect network effects from the growing number of complementor relationships. Neither of which may have required the all-foreseeing vision of a strategic plan.
When Fiddler started his consulting he probably just needed an RTOS and tools to solve a consulting problem. Now, he may have said, "Hmmm, Microsoft is becoming dominant because their OS may-has become a universal standard; let's do that with Wind River; we will have the OS for the third era of computing." If he did, then he is a strategic genius. Did Fiddler develop this convoluted plan? "I've got it. I will have Intel, first, because it is the dominant semiconductor gorilla, come to me to ask me to develop something that works closely with the solution that they generate to solving the problem of how to manage I/O without using so much CPU processing time. Then, I will spread my dominion far and wide."
Of course, the thrust of your second question is "Can management execute?" To me, the evidence from recent news release is very exciting and comforting. St. Denis seems to be getting his job done, but more CoE-VARs and margin returns following the intensive R&D will tell the story.
Q3: Given the time lag in royalties, does that mean a dramatic rise is also two years away?
An astute question, and the logic of balanced time lags, slowdown-to-speedup, is sound, but two events might create exceptions. First, within the portfolio of design wins, some are far more significant than others. A few may be killer applications that demonstrate strong network effects; these could overshadow the returns of a few hundred also-rans. As we know, calling the timing of tornados is difficult to do. So, I certainly do not know when WRS might breakout by generating sudden increases in its stream of royalties. When it happens, we can all foresee the effect on stock price.
Second, as Benn has pointed out, rises in quarterly accounting indicators of revenues or net income and stock prices are loosely coupled. A respected pundit or group of analysts, who also recognize the strategic implications that I spelled out in my report, could boost WIND's price tomorrow. So, could WRS if they said, "Look, this is our clever, intricate, convoluted strategy. It's working. Do you want to make some money?" In June at the a-day, they gave the DSL example. That was a first. And the company has yet to offer the necessary info to mathematically fill in the dots. GAAP accounting does not require it; this is a common problem in Hi Tech investing, not having access to the most interesting information.
For me, it is also an exploitable gap in expectations. If I can figure out what most have not figured out, I can take advantage of this market inefficiency. Isn't that why we are here on the G&K thread? We have the shared belief that, together, we can figure out a few things about growth before they become priced into the stock.
Some analysts have strong buys on WRS, but, to my knowledge, none has drawn a complete picture. Neither management nor analysts can afford to be so revealing; they are limited to short-time frames and try to avoid overestimating.
I believe this leaves investors with an exploitable gap in expectations, but this assumes my argument makes sense, and it is just my humble amateur opinion.
I hope this helps.
Don |
