Welcome back to the free world!
I hope you enjoyed your trip. China is indeed going to be a pain in the neck for a long time to come. I'd like to respond to the comments you made about me.
It simply makes no sense at all to suggest that earnings should be accumulated for a number of years, and then discounted to establish value. That is not how you discount a stream of earnings (even if we loosely accept earnings as the equivalent of free cash flow).
This is true, but I was trying to be kind to you and Wind River. If you sum the NPVs of each future year, you'll find that the situation looks even worse because most of the earnings are way out in the future and the present value of those earnings is very low. Don't look a gift horse in the mouth!
Even more important, there is a missing term that should contain an approximation, estimate or whatever, for the future value beyond year 2011.
Again, I was being very generous. You projection called for a 6% growth rate at that point and a discount rate of 10%, so the situation keeps getting worse, the further out you project earnings into the future. The future value is negative when the future growth rate is less than the discount rate! Would you really have preferred it if I included that? You should never invest in any company if you believe that the growth rate will slow down to 6%, unless it's trading at book value. If you like, I can recalculate using NPVs, but I'm sure you're aware that the valuation is even less. Besides, your post on valuation incited little discussion other than people that admitted they didn't understand it (an accountant, no less!), so it would probably be a waste of time.
Moreover, the 10% bond return is presented meaninglessly. The present value of a bond is the discounted stream of after tax return plus the discounted value of the face value of the bond upon maturity (although these is a delicate issue about how to value reinvested proceeds).
I didn't take taxes into account because the tax rate on Wind River (i.e. - no taxes) should be the same as an alternative investment. You shouldn't have any trouble finding another stock that will earn 10% annually without any taxes. The delicate issue of reinvested proceed is irrelevent when the alternative investment is a stock. Again, I was very generous because you can get a 17% return from Compaq, HP, or Dell. Even an index fund should earn you 12%. Furthermore, both Compaq and the index fund have substantially less risk.
The most well thought out post came after you returned and was presented by Jason Cogan. As usual, I had been very generous in accepting the $1.50 unit price for i960 VxWorks sales, which was wildly overoptimistic. After listening to several conference calls and speaking to management, Jason showed that the deal was for a fixed price, which makes a whole lot more sense than the $75m (50m units @ 1.50) revenue some folks were expecting. I hope you're not the guy who led them to those false expectations, but I suspect that's just another false hope!
The comments Jason made here and Pauline Schumann made to EE Times make me suspect that the Wind River deal for IxWorks on the i960 is structured similarly to the deal Intel made with Phoenix to supply the BIOS for Intel motherboards.
Phoenix and Intel made a 7 year deal in Feb. 1996 for Phoenix to provide the BIOS for all desktop and server motherboards. Intel will pay a minimum $20m regardless of shipment volume and the unit price falls as the volume increases. Phoenix was paid $2m last quarter (~0.25/unit) and they make a profit, but it's not a windfall. Intel gets a good deal because they supply 25% of PC motherboards and they had alternative supply sources before the agreement was made. Phoenix has publicly stated that they hope PC vendors shun Intel motherboards because they receive $1.75-$2.00 from other customers, in addition to a one-time setup fee. They supply the BIOS for 25% of the desktop market (excluding Intel) and this constitutes 30% of their revenues, whereas Intel accounts for 10%. Like Wind River, Phoenix will leverage their position to sell developer tools.
The bottom line is that Intel is a tough customer that negotiates good deals and it makes sense to accept their offers because it leads to other business, but you shouldn't expect a windfall.
Intel considers the BIOS a strategic component and simultaneously with the announcement of the deal they agreed to purchase 13.5% of Phoenix. They also purchased warrants for an additional 6.5% that are in the money, so they effectively own 20%. If Wind River were producing a component that was going to be included in every PC, you can be sure that Intel would've bought a piece of the company. Microsoft would also be interested in any company producing an operating system for every PC, but they're more concerned with Netscape and IBM than Wind River. Microsoft paid more than $1b for a cable operator (despite an $800m shareholder defecit!) because they know the next big industry that produces the next great growth company is in broadband communications, not real-time operating systems. Desktop PCs don't need an I/O processor, so the market will be limited to servers. |
