Point taken. Interestingly the relationship between the two have been more acrimonious as of late Witness:
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Wind River Systems
Price: 15.5
Recommendation: Market Perform
Notes: a, b,f
Date: 8/25/99
1 of 2 Wind Reports Mixed July Quarter. Maintain Market Perform.
* Wind reported July quarter results with EPS of 14½ below the consensus of 16½.
* Near-term we remain cautious as Wind has embarked on a significant internal
reorganization, continues to seek a CEO, and continues to invest in
infrastructure and new product initiatives.
* Management did take a strong step forward towards improving visibility by
revealing the revenue contribution of many products (i.e. I20, Tornado for
Managed Switches) in the qtr.
* We believe the shares will trade horizontally, or at a modest discount to
the expected 25% growth rate, until visibility improves and the near-term
transition risk subsides.
* We maintain our Market Perform.
1999 A 2000 E 2001 E
Q1 EPS $0.11 $0.11a $
Q2 EPS 0.14 0.14a
Q3 EPS 0.17 0.17
Q4 EPS 0.20 0.22
FY EPS 0.61 0.63 0.85
FY REVS (M) 129.4 161.6 190.0
CY EPS 0.63 0.85 --
CY P/E 25 18 --
FY Ends Jan Current Price $15.50
52-Week Range $11-34 Market Cap (M) $677
Shares Out (M) 43.74 Book Value $3.83
Net Cash/Share $1.96 3-Year EPS Growth 25%
CY00 P/E-to-Growth 92%
Summary Wind reported mixed July quarter results with revenues of $39.6
million ahead of the consensus estimate and earnings of 14½ short of the
consensus 16½ and our original estimate of 17½. Recall we lowered our
estimates to 12½ for the quarter and 63½ for fiscal 2000 when we downgraded
the shares on July 8. Following the July quarter, we continue to remain
concerned with the lack of visibility and transition risk associated with many
of Wind's new vertical initiatives and a vacant CEO post. Wind also announced
a formal reorganization along business units which adds to the near-term risk
but represents a logical step forward as the company seeks to lay the
foundation for growth reacceleration into fiscal 2001 and beyond. Now that
the Street has lowered fiscal 2000 estimates to our 63½ range, we believe the
shares will likely trade horizontally through the remainder of this transition
period. Management did take a strong step forward towards improving visibility
by revealing the revenue contribution of many products (i.e. I20, Tornado for
Managed Switches) in the quarter. While this provides a snapshot of the
business today, management did not commit to providing such details in the
future which is a step back in our opinion.
Hunting for the Next Leg of Growth As we discussed in previous reports, we
believe Wind River is at a crossroads in the embedded market. Over the past
three years, the market opportunity has matured from 40%+ growth to a more
ambient 25% level due to a confluence of events including greater competition,
increasing device complexity (i.e. the need for more customization), overall
softness in semiconductor demand, weakness in Asia, and slower than
anticipated ramp in consumer demand for embedded devices. In an effort to
reaccelerate growth, Wind and other vendors like Integrated Systems have
focused on several key verticals that comprise the bulk of the embedded growth
opportunity including telecom, transportation, consumer, and office
automation. Over the past three years, building on acquisitions and internal
development, Wind has released several subsets of its flagship Tornado
development environment tailored for many of these verticals. Specifically
those are :
Product Announced First Shipment
Tornado for I2O February 1996 October 1997
Tornado for Embedded Internet June 1997 Third Quarter 1997
Tornado for Java July 1997 March 1998
Tornado for DSP September 1997 Fourth Quarter 1997
Tornado for PersonalJava March 1998 Second Quarter 1998
Tornado for Digita April 1998 April 1998
Tornado for TrueFFS July 1998 July 1998
Tornado for Automotive Control February 1999 February 1999
Tornado for Managed Switches October 1998 Second Quarter 1999
Gauging Wind's Vertical Success Traditionally Wind management has been
tight-lipped about the performance of these products so gauging Wind's
vertical success has been a qualitative and challenging exercise. The July
quarter marks the first in which management unveiled some details on these
initiatives and recent acquisitions. In general we believe it is still too
early to say which verticals will ultimately drive the reacceleration in
growth Wind management is hoping for. Clearly some have shown success while
others lag expectations considerably. To the degree management is willing to
provide details on vertical performance, we believe the next several quarters
will be most critical in assessing Wind's growth potential and investment
merit over the next several years.
Tornado for I2O has been a huge moving target since its initial release in
1996, fueling much speculation as to when and if a significant ramp in
royalties would ever occur. In the July quarter, I2O royalties were reported
at $1.5 million (5.2% of total license sales). I2O royalties are generated
from multiple streams, the most substantial of which is Intel. Due to an
acceleration in Intel's accounting of i960 shipments in the June quarter, Wind
recognized royalties for both the March ($363k) and June ($408k) periods in
the July quarter ($745k total). The other two royalty-bearing relationships
are with Symbios and StrongArm (formerly DEC, now Intel). StrongArm and
Symbios contributed $745k in aggregate, reflecting guaranteed prepaids that
extend into Q1 of 2000 rather than actual royalties. As a result, it is
plausible that Wind may experience a rather significant (at least half) drop-
off in I2O royalties in the second quarter of fiscal 2001 unless end-market
demand ramps up on these platforms.
Tornado for Managed Switches underperformed as we had suspected in our recent
downgrade. While Wind announced the product in October 1998 and has more or
less maintained roughly $2 million in bookings since that time. In the first
quarter, roughly $300k was recognized as the product was delayed and the bulk
of bookings carried over into Q2. Yet despite shipping "on-time", only $326k
in revenues were recognized in the second quarter, essentially flat on a
sequential basis. The confusion here relates to two different versions of
TMS. TMS version 1 was released June 30 and we believe is most appropriately
described as a prerelease. While the product is fully functional, it does not
incorporate all the functionality originally promised when the $2 million in
booking were logged. That incremental release is version 2, which as we had
expected, will not be available until sometime next month. As a result, Wind
cannot recognize the remaining bookings until that time. In addition,
management mentioned that 3 customers require functionality that will not be
available until TMS version 3, though the company has yet to commit to a
release date for that product. Despite these near-term speed bumps, we
believe the longer-term prospects for TMS are impressive given that the
product carries a significantly higher ASP than that of the stand-alone
Tornado offering (up to 5x) and considering that initial customers include MMC
Networks, Ardent, Cerent, Broadcom and PMC-Sierra.
Routerware turned in a decent quarter considering the usual disruption caused
by acquisitions and personnel integration. Revenues grew 100% year over year
to $1.2 million, (4.2% of total license sales). Through both the Routerware
and Xact acquisitions, Wind has added an incremental 50 engineers with
expertise in the telecom vertical which will likely prove valuable in
establishing the new Wind Networking unit.
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at
this time and are subject to change. We do not undertake to advise you of
changes in our opinion or information. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market, as a market maker,
or otherwise. In addition, we may perform or seek to perform investment
banking services for the issuers of these securities. Most of the companies
we follow are emerging and mid-size growth companies whose securities
typically involve a higher degree of risk and more volatility than the
securities of more established companies. For these and other reasons, the
investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. This report is not a recommendation or a solicitation that any
particular investor should purchase or sell any particular security in any
amount, or at all.
on suitability considerations, please contact your account executive.
RESEARCH NOTES: H&Q publishes brief Research Notes covering very recent or
developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as
a result of subsequent additional information and analysis. Please contact
your
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment position.
(f) Options are available on these issues.
(g) Entities associated with Hambrecht & Quist LLC have an aggregate
beneficial ownership of more than 5% of the outstanding equity securities of
these companies.
(h) Hambrecht & Quist acts as a financial advisor to this company.
(r) Restricted. No recommendation at this time. May, but does not
necessarily, designate company in registration.
And this:
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Wind River Systems
Price: 17.38
Recommendation: Market Perform
Notes: a, b,f
Date: 7/7/99
Near-term Outlook Clouded by Transition: Lowering to Market Perform.
We are lowering our rating on Wind River to a Market Perform from BUY. We
believe results over the next 2-3 quarters will be impacted by a slower ramp
of newer products and greater infrastructure investment, in addition to other
transitional issues including the hunt for a new CEO. We have lowered our
estimates for the remainder of fiscal 2000 and 2001, though management has not
issued any official guidance. Wind is due to report July quarter results
Thursday, August 19th.
2000 E Previous Est 2001 E Previous Est
Q1 EPS $0.11a $0.11a $ $
Q2 EPS 0.12 0.16
Q3 EPS 0.17 0.20
Q4 EPS 0.22 0.25
FY EPS 0.63 0.73 0.85 0.90
FY REVS (M) 155.0 162.6 190.0 200.0
CY EPS 0.85 0.90 -- --
CY P/E 20 19 -- --
FY Ends Jan Current Price $17.38
52-Week Range $11-34 Market Cap(M) $740.4
Shares Out(M) 42.6 Book Value $3.49
Net Cash/Share $1.71 3-Year EPS Gth 30%
CY00 P/E-to-Gth 66%
Summary We are lowering our rating on Wind River to a Market Perform.
Over the past month we've spoken with over 35 Wind customers and believe that
newer products, specifically Tornado II and Tornado for Managed Switches, are
ramping slower than expected. This slower ramp will render the next few
quarters more challenging for Wind in our opinion as the Street has factored
in a fairly aggressive reacceleration of revenues as we exit the fiscal 2000
year. Given that management has also guided investors to expect a healthy
uptick in spending, we suspect July quarter earnings per share will come in
below the Street consensus of 17½. Though management has remained fairly
tight lipped about the quarter, we are lowering our estimates for July and the
remainder of fiscal 2000 to reflect our concern about the near-term outlook.
The transition to a new business model and the prolonged search for a new CEO,
while temporary hurdles, adds to our concern.
Why the Downgrade?
We have lowered our rating to a Market Perform for the following reasons :
*Slower ramp of new products (Tornado II, Tornado for Managed Switches)
*Expected uptick in infrastructure investment
*Transition to new business model
*Prolonged CEO search
Slower Ramp of Newer Products
Based on our recent conversations with Wind customers, we believe Tornado II
and Tornado for Managed Switches are ramping slower than originally expected.
Tornado II represents the second major release of Wind's flagship development
environment Tornado, which had been shipping for close to 3 years. Since
general availability on May 12, Tornado II has gained moderate traction in the
marketplace but we haven't seen the huge surge in customer demand that was
originally forecasted to occur. Most customers we spoke with expressed an
interest in upgrading based on new target chip support and some newer third-
party BSPs (Board Support Packages) but only a handful have actually
bought Tornado II and in limited quantities. By contrast, new customer
demand for Tornado II appears solid and provides us with a sense of comfort as
to the product's overall strength and competitive integrity. That said,
we believe Tornado II's overall performance will render the quarter a more
challenging one.
In March management indicated that the Tornado for Managed Switches (TMS)
product was the primary culprit behind the $2-3 million April quarter revenue
pushout. With the acquisition of Xact, a privately-held concern developing a
portion of the product, it was believed the TMS would ship early in the July
quarter and the bulk of the $2-3 million in bookings would be recognizable
this quarter. With three weeks left in the quarter, we believe TMS is
still in beta and likely won't ship for another 2-3 months. As a result, we
expect little or no TMS revenues will be recognized in July with a moderate
ramp in October - well below our forecast.
Loosening the Purse Strings
Since the April quarter, management has guided the investment community to
expect a meaningful increase in spending as Wind embraces the post-PC
opportunity. Specifically Wind is focused on further research and development
expense with several new product introductions slated for the next three
quarters and the recent acquisition of R&D-intensive companies Xact and
Routerware. Secondly Wind is ramping up sales headcount as the company seeks
to establish a strong presence in larger accounts which require dedicated
personnel and strong Field Application Engineer (FAE) support. Thirdly we
expect several new marketing initiatives will also come online and drive a
moderate increase in expense. All told we would have expected this higher
level of discretionary spending to soften the bottom line a penny or two.
However, coupled with a more challenging revenue outlook, we believe the
impact will be greater. Our new estimate for the quarter is 12½, down from 16½.
Transition to New Model
On June 4 Wind announced a new business model aimed at expanding penetration
into smaller development shops that historically have been unable to afford
the steep upfront cost of Tornado (approx $16.5k). Under the new model, there
will be two parts to the Tornado sale. The development tools will be sold
first, under perpetual license, in six different configurations priced between
$2995 and $8995. Customers can more or less develop applications with the
tools, but must purchase a second part, the OEM libraries, to deploy it. The
OEM libraries cost roughly $15k. The idea here is obviously to saturate the
developer community with Wind tools at a minimal cost and reap the rewards
from those projects that actually make it to production. Once in production,
Wind will still receive the royalty for use of its VxWorks operating system.
While we believe the model will indeed expose Wind to incremental revenue
potential over the long haul, in the short-term we believe in adds greater
risk to the story. By shifting to the new model, Wind's license growth
becomes more dependent on the production and end-market success of customer
designs. The initial sale goes from 100% of the development license to
perhaps a mere 10-20%, with no guarantee of deployment. We think the strategy
is clever and potentially very lucrative but choose to remain cautious while
Wind and the salesforce transition over the next few quarters.
Prolonged CEO Search
Wind has yet to appoint a new CEO following the announced resignation of Ron
Abelmann on April 22. Our latest conversations with the company suggest they
are still early in the process and have not yet narrowed it down to final
candidates. While we have the utmost confidence and respect for current
management, including Founder and Chairman Jerry Fiddler, given the extent of
the transition issues currently weighing on Wind's shoulders, we feel more
comfort on the sidelines until a replacement is found.
Reducing Estimates
While we have not received official guidance from management, we are reducing
our estimates to reflect our expectation of slower growth and higher
infrastructure spending. For the fiscal 2000 we are moving to $155 million in
revenues and 63½, down from $162.6 million and 73½. For fiscal 2001 we are
lowering our estimates to $190 million and 85½, from $200 million and 90½.
The table at the top of this report highlights our quarterly EPS changes.
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at
this time and are subject to change. We do not undertake to advise you of
changes in our opinion or information. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market, as a market maker,
or otherwise. In addition, we may perform or seek to perform investment
banking services for the issuers of these securities. Most of the companies
we follow are emerging and mid-size growth companies whose securities
typically involve a higher degree of risk and more volatility than the
securities of more established companies. For these and other reasons, the
investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. This report is not a recommendation or a solicitation that any
particular investor should purchase or sell any particular security in any
amount, or at all.
on suitability considerations, please contact your account executive.
RESEARCH NOTES: H&Q publishes brief Research Notes covering very recent or
developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as
a result of subsequent additional information and analysis. Please contact
your
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment position.
(f) Options are available on these issues.
(g) Entities associated with Hambrecht & Quist LLC have an aggregate
beneficial ownership of more than 5% of the outstanding equity securities of
these companies.
(h) Hambrecht & Quist acts as a financial advisor to this company.
(r) Restricted. No recommendation at this time. May, but does not
necessarily, designate company in registration.
I find this optimistic outlook refreshing. I always look ofrward to your comments.
Voop
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