Care to elaborate any on your lily pond model? What are the three or four largest, and is there any reasonable way to quantify future returns? Is there a satisfactory way to estimate unit royalty payments?
When you collapse means of broadband access into a single lily pond, that pond alone may accrue more retained earnings than WIND has had in its history. If that pond is a node along a network of WIND lily ponds, then are there practical limits?
Anyone who asks such intelligent questions deserves thoughtful answers. The answer to your second question is that there are not practical limits. Your instincts are correct. To fully understand why is an interesting visionary exercise that I would happy to walk you through if you are want.
The top four lily ponds over the next five years probably are: (1) home and SOHO gateways (including DSL and cable modems), (2) Server Appliances, (3) network equipment(optical switches, routers, etc. with intelligent network processors) and (4) client Internet Appliances with Java. There are a bunch of others like auto navigational aides, printers/multifunctional office equipment, digital cameras, and set-top boxes. However, these and many other categories might rightfully collapse into one of the four top lily ponds. For example, IP Phones are client Internet Appliances. Even navigational devices for automobiles are becoming Internet Appliances. Ditto for digital cameras and set-top-boxes. Consequently, it is somewhat arbitrary where you draw the lines defining lily ponds.
Generally, if a significant category is well-defined and is, and should remain, relatively independent of other categories, and especially if it is supported by market research, then it is probably reasonable to retain the category as a separate lily pond. If a would-be category is expected to broaden downstream into a more generic category of device, then only the generic category should be maintained. Since I think cable and DSL modems will soon morph into the more generic home or SOHO gateway, I collapsed DSL and cable modem lily ponds into the gateway lily pond. The Server Appliance lily pond is a compendium of I2O related applications like iRAID, iLAN, network storage, network web servers, IxWorks applications and InfiniBand TCAs.
What you will find when you do the math is that the top four lily ponds, however restricted by definition, have such huge potential that you can safely ignore all other lily ponds, with minimal degradation of forecasted results. The math is NOT done with sufficient precision to enable me to pinpoint the quarter when WIND’s lily pond royalties go parabolic. But I think the company has given us enough guidelines about pricing opportunities in major lily ponds that estimates of both the timing and amount of future royalties can be roughed in.
I am sure you realize that management cannot be expected to include lily pond analysis directly in guidance provided to the Street. Even though WIND management has better resolution about pricing opportunities, market share and growth than we could ever hope to obtain, extrapolated results are so sensitive to assumptions that the company would never want to be held accountable for such expectations.
This is the reason why investors or analysts should do their own modeling of the company’s opportunities. WIND management can help us articulate meaningful lily ponds. For each lily pond, they are beginning to provide proxies for market share, detailed hints about ASP and factors that might be expected to enhance future ASP, and point out relevant market research. But they cannot take on the responsibility of doing our math for us.
Even if the most WIND ever will be is a 30% revenue grower, the investor still wants to know why even 30% growth is sustainable. The higher revenues actually ramp, the more the investor wants to know “why and how high”. Without this insight, the future is just a gamble for the investor, deserving of a lot lower P/E than possibly appropriate. Without this insight, WIND looks like thousands of other tech companies sporting expected 3 to 5 year growth rates in the 25% to 40% range that are not built into the price because they are at least as likely to under-perform as sustain expected or better growth.
When you do conservative lily pond projections, you will begin to see that royalties should escalate to sustainable triple-digit growth rates in a couple years, slowly driving total revenues to high double-digit growth within three or four years. If identified lily ponds track our theoretical expectations and, in the aggregate, reported royalties also track our theoretical expectations, then the Street might indeed get, and stay, excited about the company.
Allen |
