>Any idea why earnings growth is expected to slow over
>the next quarter (.16-.18 vs .13)?
The full answer to this question is important because it tells volumes about WIND management. So here goes.
Start by thinking of WIND as three separate entities, the first being a market leader that still must aggressively build on its base of customers, continually adding more. This requires unending marketing, sales, services and product development. WIND to date is entirely comprised of the first entity. The second entity consists of block-buster royalties, the first of which will be I2O royalties from Intel. We all anxiously await additional block-busters, possibly such as the NC, automobile ignition controllers, wireless EIDs, or whatever. The third entity is a rain-making Venture Capitalist.
I believe Ron Abelmann and Dick Kraber budget and execute on the basis of making the first entity the best that it can be in the long term. That means that a consistently excessive EPS growth (say over 30% to 40%) associated with this aspect of WIND would be viewed by them as an error. It would be an error because the building of a world-class company would be put in jeopardy by a reluctance to invest at an appropriate level in the business, presumably because of the false appeal of high earnings growth.
Notice that the quarterly distribution of revenue changes very little year to year. This means that expenses cut proportionately more deeply into second-half revenues with each passing year. As WIND grows, management can fine-tune the budget and execution to keep earnings within acceptable bounds. To put this into perspective, FY 1996 EPS grew 100% year-on-year; FY 1997 EPS grew 87% and FY 1998 EPS will grow about 50%. I suspect that this trend for the first entity will converge asymptotically to EPS growth in the range of 30% to 40%.
However, there is the second WIND entity - the block-buster. Block-buster royalties layer on top of the first entity, and simply are not budgeted. This means also there is no plan, at least early on, to spend block-buster royalties. Consequently, I2O royalties will tend to simply add to earnings and EPS in a fairly straight-forward fashion - and probably I2O royalties alone are sufficient to kick WIND's EPS growth next year back up to 75%.
I2O alone should be capable of keeping WIND's EPS above 50% growth well past the turn of the century. As the years unfold, I would expect additional block-buster royalties to keep elevating WIND's EPS to growth substantially above the nominal 30% to 40% range.
I'm not sure exactly how the VC component of WIND will record investments and gains, but I suspect on the cost of purchase basis. This means that VC investments will not be reflected in operating statements until the gain is realized. Accordingly, this suggests that in future occasionally WIND will surprise us with significant gains from the sale of investments, the value of which would not have been apparent by examining the balance sheet. While these gains will not be reported as operating profits, they should become sufficiently commonplace to be appreciated by the market almost like operating profits.
Allen
PS - By the way, thanks for the well-done conference summary. The one item that stood out from the conference, of course, is the confirming information that Intel I2O royalties range between $1.40 and $1.75, and that DEC's royalties are higher. |
