It [I2O] seemed to be a rather hot topic on the Q3 conference call, but not even mentioned here even though Ron stated that revenues should be seen starting in Q1. Has anyone seen any analyst summaries? Does anyone know if Sheila Ennis has spoken?
Sheila issued a report on Feb 3 of this year in which she said that "I2O Revenues Proving More Elusive." Nevertheless, at that time, she bumped estimated revenues for FY 1999 by $5 million and EPS by $0.04. The bump factored in something for I2O and presumably accounted for additional revenues associated with the acquisitions (NCI graphics and OST).
I am certain that Ron Abelmann made that strong opening remark about I2O being on track to counteract any concerns about I2O stemming from Sheila's Feb 3 report.
On March 2, Sheila reported out positively on WIND, focusing almost exclusively on I2O. She seems as convinced as the rest of us that I2O ultimately will prevail, but she expressed concern about Sun committing to the standard. She also expressed the belief that big I2O numbers will await the introduction of upgrades of all the major operating systems, like Windows NT 5.0 (due 1998 year end), SCO Unix (due Mar 1998) and Novell's NetWare 5 (due June 1998). In any case, she is including I2O revenues of $2 million in FY 1999 and $5 million in FY 2000. These revenues correspond to about 1 1/3 million I2O units this year and about 3 1/3 million units next year. She obviously heard Ron's remark that I2O is ON TRACK, because the report makes no suggestion that I2O is questionable, nor does she make any mention of INTS entry into the I2O space.
As for the apparent inconsistency between Ron's remark and the latest expectation that I2O units are not expected to meet Intel's initial estimate of 10 million within two years, there simply is no inconsistency. Ron's position has been clear from the get-go. I2O looks good, everything is on track, but let's wait and see how soon and how fast I2O ramps up. With 80+ I2O design wins, 25+ announced products, and I2O being shipped, from Ron's perspective everything is on track, and I2O looks successful, very successful.
At this time, Sheila estimates FY 1999 revenues of $127 million, and FY 2000 revenues of $170 million, with corresponding EPS' of $0.87 and about $1.17. Note Mitchell's Post #153 on the other thread, in which he added 2 cents for each of four quarters to an average analyst estimate of 86 cents for this year, to form a more realistic estimate of 94 cents for this year. (Actually Mitchell made a minor mistake. The 2 cents per quarter are not determined at the outset of the fiscal year, but during the year as analysts continually make slight additional increases following positive earnings and revenue surprises each quarter. This implies the 86 cents can be expected to end up closer to $1.00 than 94 cents.)
When Ron says at the start of the year he is comfortable with revenues in the range of $123 to $127 million, that was the range analysts were already estimating. Sheila had already put forth the $127 million in February. It was not his range, although it is probably slightly less than what management is assuming for budgeting purposes, or else he wouldn't express his comfort. Since the company budgets conservatively, once again I believe there is a good chance revenues will exceed $127, and come close to $140 million. The reason is that the number of royalty-paying design wins is becoming significant, leading to run-time license growth much closer to 80% than 40%. Since the royalty base must now be large, perhaps nearly one-third of sales, the high-growth of royalties provides a pleasant upside to overall revenues. And don't forget that I2O, whatever the level, is cranking up this year as well.
If sales are being pushed by accelerating royalties, what do you think will be happening to earnings? Hint: Cost of Royalties Sold is zero. I expect EPS growth to notch up significantly this year, much like it did a couple years ago after reporting only 33% growth in a 4th quarter. Add it all up, and WIND seems likely to approximate or exceed $1.10 in per share earnings this year, not next.
It seems to me that everyone is missing the obvious fact that WIND is constantly improving all margins, gross, operating and hence net profit margin. (Even Mitchell subscribes to the theory of the market winding down expectations about the NC and I2O, as reflected in revenue growth converging asymptotically to around 40%, and EPS growth decelerating from well above 75% to a last reported 47%.) I think the analysts keep missing these changes in margins because they rely on crude models for making estimates. I believe they estimate profits by applying margins taken from the latest operating year, relying on management for guidance on any appropriate changes. Guess what? Conservative management will not issue aggressive guidance about improving margins. They never have and they never will.
Since you heard the conference a couple of times, you might recall Dick Kraber's tongue-in-cheek complaints about not getting any of the budgeted 150 new hires for the business office. Look at G&A expenses over the last two years and what do you see? They jumped up in the 4th quarter of FY 1997, as Dick got Project 100 in place, but they have been absolutely flat ever since. And now we know they won't be growing much beyond wage inflation this year either. This means that G&A will grow around 10% while revenues grow 50%. This item alone will generate about $5 million pre-tax savings over proportional growth, or after tax 10 cents per share, due simply to economies of scale related to G&A.
The fact is that WIND could blow away the numbers this year if that was the liking of management. It is not. WIND will accrue revenues, including royalties, in the most conservative way possible, and spend heavily on R&D, new employees, office space and marketing. Why? Because the object is not to have a blow-out couple of years. The object is to have a blow-out company.
I have to say all this reminds me of an early question I fielded on this thread following the 33% EPS growth 4th quarter alluded to above. The questioner wondered if WIND was slowing down, as large companies do inevitably. (Reference the second paragraph in Message 58800 )
The answer given in April 1996 is applicable today Message 62922 . Curiously, the P/E then was a high 60, about what it is today, but the price was only about $13, about a third of today's price. Does this suggest that the price will triple again in another two years. Yes.
Allen |
