That's interesting data on the operating income of INTS.
You could've wrote something similar about Wind River's operating income. The company
has $102m in cash and if they earn 6%, that's $1.5m/quarter. After the tax provision
that's $1.0m, or about 1/3 of the reported after tax profits of $2.95m last quarter.
However, the basis of presentation is different. INTS expenses all software
development as incurred, whereas Wind River capitalizes costs of unreleased products
over 18 months. The company might not have had any operating profits at all last
quarter if they had expensed costs as incurred like INTS! We can't really tell because
the management has given themselves the flexibility to report whatever earnings they
want to report, as indicated by the following passage from the 10K:
Costs incurred to establish the technological feasibility of a computer software
product are considered research and development costs and are expensed as incurred.
When the technological feasibility of a software product has been established,
development costs are capitalized. Capitalization of these costs ceases when the
product is considered available for general release to customers. Amortization of
capitalized software development costs is provided on a product-by-product basis at
the greater of the amount computed using either the ratio of current gross revenues
for a product to the total of current and anticipated future gross revenues or the
straight-line method over the remaining estimated economic life of the product.
Generally, an original estimated economic life of eighteen months is assigned to
capitalized software development costs.
To get an idea of how this works, examine the data below from the secondary offering
prospectus (before the most recent 3:2 split):
JANUARY 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments.......... $ 6,415 $ 20,653 $ 20,851 $ 29,837
Working capital.......................... 5,637 21,486 24,220 27,817
Total assets............................. 14,712 33,880 39,183 45,480
Total stockholders' equity............... 6,671 24,612 28,345 32,813
Net income per share..................... $ 0.16 $ 0.02 $ 0.17 $ 0.35
Shares used in computing net income per
share................................... 10,455 13,317 14,300 15,491
Stockholders' equity/share............... 0.64 1.85 1.98 2.12
The company increased the per share value from $1.85 to $2.12 in 2 years (1994-96), or a
7% annual return. T-bills paid about 6% during that period, so Wind River broke even
from an operational basis for about 8 quarters, which is 7 quarters more of abysmal
earnings than INTS! The big jump earlier is attributable to the IPO.
Even more interesting is comparable data of INTS prior to their secondary offering in
May 1996:
FEBRUARY 28,
-------------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................. $27,150 $33,156 $36,517 $49,476
Working capital........................... 13,005 12,298 17,783 31,431
Total assets.............................. 40,918 52,970 66,101 85,264
Total shareholders' equity................ 32,447 38,032 47,948 58,276
Earnings (loss) per share................. $ 0.18 $ 0.21 $ 0.33 $ 0.24
Shares used in per share calculations..... 18,636 19,122 19,964 22,088
Stockholders' equity/share................ 1.74 1.98 2.40 2.63
INTS increased the per share value from $1.98 to $2.63 in 2 years (1994-96), or a 15%
annual return, which easily topped Wind River's 7% return and the T-bill's 6% return.
Wind River will need quite a bit of future success to make up for their poor past
performance!
Wind River is currently experiencing a rare period of good profitability (if you accept
the aggressive accounting) for a historically poorly managed company. INTS is
experiencing poor profitability (if you accept the conservative accounting) for a
historically well managed company. You can buy INTS for less than 50% of the 1996
secondary offering price or Wind River for more than 50% higher than the 1996
secondary offering price. Our esteemed visitor's diversification strategy of owning
both companies since IPO is a much wiser course than that pursued by the irrationally
exuberant cheerleaders on this thread. |
