My guess is the recent drop is due profit taking, to lock in sizable profits for year-end institutional reporting. I also suspect some investors are concerned that WIND could slip in sympathy with INTS - if INTS reports a poor quarter.
Well, INTS did report their quarter, which was not good. Product revenues were up 45% year-on-year, but services revenues were down, with the result that the revenue target was missed. (Also, it is not clear to me how much of the product revenue increase was due to operations that were not part of INTS last year, e.g. Diab Data.)
Even after ignoring extraordinary costs, all expenses save the cost of product revenue were excessive compared to last year. Marketing and sales was up almost 50% for example. On the other hand, the marginal cost of product that produced almost $6 million in increased product revenues was a mere $553K, strongly suggesting that some significant licensing fees contributed.
The earnings report leaves unanswered lots of questions about the performance of the company, on both the revenue and the cost side. While missing targeted revenues, the large increase in product revenues could be the beginning of a takeoff in run-time license revenues, which would be very positive. Alternatively, the decline in services revenue raises a red flag. What if the large jump in product revenues was due to a few large one-time buyouts, which also is consistent with the low marginal cost of product revenues? This would be extremely negative for INTS near-term performance.
The cost side is unambiguous. INTS is struggling trying to meld all their newly purchased acquisitions into an integrated set of tools, while needing to continue marketing existing products. The costs are killing them. Even after a virtually free $6 million extra in product revenues, the extra costs reduced operating EPS by one cent compared to last year. Expect restructurings and write-offs to contain the bleeding.This suggests, INTS will have to struggle to beat 50 cents a share next year (from operations), which is much less than the already lowered 80 cents currently estimated. Since this is going backwards, the multiple the market will put on the stock can only be guessed at, but it could be as low as 20 or 25, or even lower, taking INTS stock price significantly lower.
WIND definitely benefits from INTS troubles, and should become the undisputed leader, and fully priced as a reward. However, in the short-term, the market may punish WIND and MWAR along with INTS, for fear that the sector weakness is contagious - although the big jump in product license revenues should contain that fear.
It will be interesting to see how the market reacts to this news starting Thursday morning. The only thing that seems certain to me is that the market will quickly make up all the recent sell-off in WIND's stock and any more that might come in sympathy to INTS or year-end profit-taking.
Allen |
