Welcome to the thread Darryl. I may not be able to answer all your questions, but I can tell you what I think about them.
>But as WIND's royalty receipts (hopefully) begin to dwarf these [license]
>revenues as a percentage of overall revenues (and even more so as a
>percentage of income), how can WIND control the timing of this?
WIND enjoys bountiful zero-cost-of-goods-sold revenues from royalties, but not to the extent that it affects management of revenues. Will I2O change this? Probably not much, since once I2O royalty income starts to flow from Intel, it should be reasonably predictable quarter-to-quarter. The reason management has asked analysts to exclude I2O until proven is to prevent any disappointment with I2O revenue start-up timing.
Other royalty income lends itself to management similar to product license income.
>But wouldn't it be nice to know, at least internally, when these revenues [I2O]
>(and respective cash flows) will be arriving?
Yes. I suspect that WIND management is privy to Intel's I2O chip production schedule, which must provide much more information than we know. With that detailed information, WIND can plan adequately.
>If management itself cannot depend on this cash, it seems as if an extraordinary
>amount of other cash must be on reserve. Is this the reason for WIND's such
>large cash position?
No. WIND is throwing off cash with or without I2O. WIND likes to keep their war chest full; they anticipate spending around $45 million on property and buildings within the next year or so; and they obviously anticipate investing in technology. If you think about it, WIND is perfectly positioned as a Venture Capital company. They are involved in everything that is going on in the emerging third wave of computing. Their clients express needs WIND may not want to satisfy through R&D expenditures, suffering the burden on expenses and reduced immediate EPS. WIND can off-load opportunities onto bright eager-beavers, investing a few million dollars for a 25% of the action, then make the company successful by providing market access. The company succeeds, goes public or sells the rest of itself to WIND, and WIND's EPS ratchets up. A run-of-the-mill VC might hope for a 30% return. WIND should easily be able to beat that. Alternatively, WIND might use the money to cross-invest in already emerging technology, similarly to the way MWAR invested $5 million in Unwired Planet. The payoff comes from a special relationship, and from increased stock valuation when the entity goes public. The point to remember is that all these investments have minimal immediate impact on EPS, unlike R&D. Also, unlike traditional acquisitions, these investments are easy to digest.
>One of the best parts of the WIND story is the business model that includes
>royalties. Does anybody see a point where these types of deals will no longer
>be the norm? I am afraid it is too good to be true.
If you code a program in C++ and compile it using Borland's C++ compiler, you can distribute it royalty free. But the people running the program have already paid plenty for the right to execute your program. They paid Microsoft, Apple, IBM or someone for the operating system that runs on their computer and executes the code.
If you decide to build an embedded product, you similarly write a royalty-free program, containing your intellectual property, but that program cannot run without an operating system. The difference is that you must supply the OS with your product, since you product does not run on an everyday desktop computer. If the OS is Windows CE, you will have to pay upwards of $10 per unit in large quantity; if it is VxWorks is depends on the number of units, cost of product, etc., but might be as low a $1 to $2, as in the I2O situation. One way or another, you have to pay for the OS, which is WIND's primary source of royalty revenues. (Some no-name OS vendors sell unsupported, royalty-free, source code for a one-time charge. There are at least 1000 reasons why embedded systems developers are rarely tempted to go this route, and even more over time.)
This "too good to be true" situation will change when Microsoft starts giving away copies of Windows 95 and NT. In other words, why should you have royalty-free access to VxWorks anymore than you would expect to have royalty-free access to Windows?
Allen |
