Re: Per share calculations and absorbtion of development costs
Why would you ignore the most recent fiscal year in your calculation of annual growth or maybe that is obvious. Much more perplexing is the rationale for your calculation. You have got to help me with this, maybe I am not quick enough to get it. If I follow your logic and a company's revenues (let's say $100 mil/year) increase to $150 in the next year but they have a 3:2 stock split (say 20 mil to 30 mil shares) then we should calculate 100/20 = 5 for year one and 150/30 = 5 for year two and therefore conclude that the company has shown no true revenue growth. Is this what you really mean? It couldn't be. Please explain.
That's not what I meant. I'm assuming that when you count shares that you're taking splits into account. The reason I didn't include the last year is the secondary offering where the company exchanged a mixture of tangible and intangible assets (shares) for a tangible asset (cash). This means the ratio of tangible/intangible assets increased, so the ratio wouldn't be the same in the beginning and end of the comparison period if the endpoint was this year. Immediately after the secondary, the revenue/share went down, even though the company performed well. If fact, the revenue/share is going up even with the additional shares. Revenue/share is a more meaningful calculation if your endpoint is immediately prior to the secondary and the beginning point is after the IPO. You should eventually see the proceeds spent and the revenue/share increase, but it's too early to pass judgement. Earnings/share is more meaningful over time because the company is immediately earning interest from the proceeds of the secondary.
Mark, again I am going to need your help to understand how the license fees for Wind River's RTOS qualify as low margin.
I've been informed that the unit price is $1.50 and Intel expects to sell 7m units annually, which is not a large increase for a company like Wind River with $70m annual revenues. It cost many millions to develop the RTOS, so the small royalty isn't sufficient to generate a large increase in revenues and profits. There seems to be quite a lot of misunderstanding on this thread about the nature of the business that would be cleared up if there were more software engineers here. Basically, real-time systems are optimized to respond to interrupt sources rapidly and interrupt code is extremely difficult, time-consuming, and expensive to develop and debug. That's why Wind River has so many employees with master's degrees. If Wind River can produce developer kits that minimize time-to-market and development expenses, customers will pay them a lot of money. This is the reason Pauline Schumann of Wind River cited developer tools as the major opportunity, not run-time license royalties.
The operating margins should not be much lower since the software development costs for the VxWorks and IxWorks RTOS have already been absorbed. WIND follows a conservative policy of expensing rather than capitalizing almost all of its software development costs.
I would call this policy "responsible" rather than "conservative". Wind River and Phoenix have each increased their R&D expenses 50% in the last year and still reported respectable earnings, which means that they're earning money faster than they can count it and have a bright future. SystemSoft capitalizes their software development expenses and still reports poor earnings, which means that they're losing money hand over fist and have little prospect of reporting good earnings in the future. You should be willing to pay a much higher P/E for an expensing company than a capitalizer. Some contributors to this thread also own SystemSoft and don't understand accounting as well as you do, and you can tell who they are by the juvenile nature of their rantings here.
The software development costs have not been completely absorbed. If they had, you would've seen $4.9m in earnings last quarter rather than $2.9m. The other $2.0m of expenses is deferred obligations to employees for exercising stock options. If the company received 6% interest on the $100m, then $1.5m of earnings is attributable to interest income, leaving the remaining $1.4m as operating income. This is very small, but it should increase in the future, since the majority of the development costs have been absorbed. When you calculate the overall future earnings increase, you should also bear in mind that the interest income will not increase at a 40% rate for the next 5 years. To make matters worse, the unabsorbed development costs hang over the company like a cloud of doom and will increase over time, as well as increase even faster if the stock price rises. The company mitigated this problem somewhat by buying 250K extra shares last quarter.
Stock options are essentially a $30K loan that an employee worth $90K makes to the company in exchange for a $60K salary. The employee tells the IRS that he only made $60K and the management tells the shareholders that they only paid the employee $60K. Essentially, Wind River is greatly understating today's earnings and they greatly overstated earnings a few years ago. The option terms probably stipulate that they can be exercised any time within 10 years of the vesting date, so the IRS might have to wait a long time before they get their money. Any employee who exercises his options early is a poor tax planner or expects the stock price to go down. |
