WIND 3rd quarter results surprised nicely to the upside. WIND investors should be jubilant with the outcome, given the staid performance recently registered by both INTS and MWAR. As you will see below, significant credit for the spectacular earnings growth is due to a management that continues to run a tight, disciplined organization, executing superbly despite having over $90 million for capital spending.
In a nutshell, WIND reported revenue of $16.6 million (up 46%) and EPS of 19 cents (up 90%). Both figures exceeded Street estimates, in particular the earnings. The street was estimating EPS in the range of 14 cents to 16 cents.
You might recall that earlier I estimated $17 million revenues with earnings of 17 cents. Let's see where I went wrong, for it will tell us a lot about what is happening with WIND. I had actually calculated revenue of $16.888 million, for an actual difference of only $288K. Almost all the difference was in my projected services revenue. To put it another way, I under-estimated product license revenue by only $11,000; I projected $12,286 vs. the reported actual of $12,297.
However, on the operating cost side, I consistently over-stated costs for all categories, except G&A which I slightly under-estimated. This was true even after adjusting services revenues. One reason this happened is because management continues to run a tight ship, not needing allowances built into my cost formulas to keep my estimates conservative. But I was almost 16% too high in my estimates of the product costs which cannot be explained by conservative assumptions. Indeed product costs actually went down about 10% serially from the previous quarter, even though product license revenue was up serially almost 15%. What gives? The answer probably is that the run-time license revenue component of product license revenue is increasing faster than I project. If I am right, then run-time license revenue now probably is starting to account for a percentage of total revenues that is in the low twenties.
The reason I over-stated Development costs by about 18% was partly due to my conservative formulas, and probably partly to the difficulty of finding good people quickly to grow the company.
My remaining mistakes consisted of over-stating interest income, somewhat compensated for by my underestimating the effective tax rate.
WIND has put in another great performance this quarter. Year-on-year service revenue seems to be trending toward a growth rate in the range of 25% to 30% per annum. Product licenses from tools is probably trending toward an annual growth rate around 30% to 40%, while run-time license revenue is probably growing at nearly 100% annually, bringing the total revenue growth up toward 50%. Since run-time license revenue should continue to accelerate, especially in light of all the recent news on I2O, I would expect growth at this level to be sustainable for many years, with ever-increasing profitability due mainly to the insignificant cost of sales associated with run-time license revenue.
This tentative analysis preceded the Analyst Conference Call, and may be refined if necessary.
Allen |
