WIND preannounced they expect to fall short of revenue and earnings expectations. Estimates had been for $0.14 but WIND now expects $0.11 on 25% revenue growth in Q1. WIND cited a delay in some new networking software that would not ship this quarter. WIND management on their conference call said that while business in general was robust, WIND was transitioning to become a more solutions oriented company with considerable investments in new products and support. The new Tornado 2.0 is also now slated to ship on April 22. After hours trading was halted. The last reported after hours trade was $11 3/4 down from the official close at $11 7/8.
With INTS at $12, INTS share price edged ahead of WIND today for the first time in several years. But with twice as many shares out, WIND is still valued at twice the value of INTS on a capitalization to revenues basis.
While WIND has been growing faster and has deserved a higher valuation, maybe the market has been telling us that INTS is about to reaccelerate its growth versus WIND. I don't think it is insignificant that ISI recently signed a corporate agreement with HP which has been WIND's largest customer over the last several years. pRISM 2.0 has shipped on time while Tornado 2.0 will ship about two months later. ISI has their new CEO in place with a quarter of housecleaning out of the way (and still beat EPS expectations).
I think the most interesting way to look at INTS valuation here is from the perspective of someone buying the company. What kind of return could they get? With just under 23 million shares at $12, someone could buy ISI for about $275 million. With $80 million in the bank, the net outlay of cash would be $195 million. Their building is worth about $35 million. So the business is valued about $160 million. On EBITDA, ISI's business should provide a return of at least $25 million this year - almost a 16% return. Next year ISI would provide an EBITDA return of nearly 22%. Better than treasury bills. No wonder ISI and most of the insiders have been buying shares.
ISI's CEO Boesenberg also plenty of room to improve operating margins. He has said his goal is 25% operating margins. This year was only 9%. With improving revenue growth, earnings growth will look even better. ISI should be able to show 45-50% earnings growth over each of the next two years. In two years, on $195 million in revenues (only a 20% growth rate) with 25 % operating margins, ISI's earnings power would be $1.59 per share. Anything close to that would look very good indeed.
WIND has over 30% operating margins - pretty hard to improve on that. Assuming WIND can continue at a 30-35% revenue growth rate (with no more hiccups), WIND's EPS growth would only be in the 25-30% range. Analyst estimates had been for about 30% this year before today's announcement. (WIND's management did think they could still make the full year estimate of $0.77).
The embedded market should show very good growth the next few years and both companies should do very well. But, with INTS putting out a mature pRISM+ integrated with the rest of their product portfolio, WIND won't have the open field they have had the last several years. The tide continues to turn.
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