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To: umbro who wrote (7917)	6/7/2000 12:11:00 AM
From: lkj	Read Replies (1) \| Respond to of 10309

I know that some of the promise for WIND is the annuity idea of making money as their customers ramp production, but IMO the current run rate of 20% of sales/so is about as good as it'll get. After all, WIND has been at this for a while, so if the biz model were going to yield higher returns on royalties it should have done it already. Probably the current strategy of selling more "stuff" per design win is the better way to go. Umbro, Don't mean to be personal, I will have to disagree with you again. Today WRS is focusing on the high growth consumer/networking/server markets. Much of the new focuses are royalty driven. I2O, TMS, Auto computer, cell phone, printers, digital cameras, and last-mile boxes are meant to be high volume products. Besides the printer market, the others have not ramped up yet. Take the last-mile boxes for example, there were probably 4 or 5 million units sold last year. In 3 years, the number will increase at least 10 fold. Take a look at TMS, much of that market is only begin to move out of the R&D stage. An explosion in this market will happen, and I believe that we will see the effect by the end of this calendar year. Take cell phone as an example, if we get into the MSM5000 series chip, this will be HUGE. I can go on for a long time, but you see my point. Regards, and I have enjoyed your company on this thread, Khan

To: umbro who wrote (7917)	6/7/2000 11:02:00 AM
From: Allen Benn	Read Replies (1) \| Respond to of 10309

most big deals are "buy outs"; they don't pay by the unit. Not true. Buy-outs were common for all RTOS companies in the early days of embedded systems, but not for WIND for the last several years. Nowadays, buy-outs generally are limited to so-called source-code sales, in which a chunk of software, such as a protocol module is bought by a developer to be integrated into a larger package. Cisco's purchase of the QNX kernel to be morphed into a replacement of IOS would be a buy-out. GM's contract with WIND to construct a tailored RTOS, called Windstream, is another example. Pre-paid royalties are common. Since many design wins never get to market, pre-paids at a discount are equivalent to WIND underwriting an insurance policy for the developer. Since R&D budgets often are better able than production budgets to absorb royalties, pre-paids often are used by customers to lower downstream production costs. Pre-paids, when they occur, usually cover expected unit shipment for the first six months or year of production. Finally, and this is important, significant pre-paid anything is NOT taken as revenue when booked; it is prorated over the expected life of the deal. IMO the current run rate of 20% of sales/so is about as good as it'll get. After all, WIND has been at this for a while, so if the biz model were going to yield higher returns on royalties it should have done it already. Not true at all. I did an analysis of WIND in a post about March or April of 1999, in which I imputed the royalties at about 28% for WIND at the time, having been about 18% a few years earlier. Further, I concluded the tendency would be for royalties to continue growing as a percentage of revenues. I still stand by that analysis. The reason royalties currently run at 22% (not 20%) of total sales is flip-flop reaction to the Asian crisis and the merger with ISI. The first impact of the Asian crisis was to slow design wins, causing royalties to increase a little faster than expected as a percentage of total sales. The second, much delayed, impact of the Asian crisis is that design wins have re-accelerated, while royalties, WHICH REALLY DO TEND TO FOLLOW, have yet to re-accelerate. It was common knowledge that WIND's royalty stream was at a relatively higher level than ISI's, although unreported. (For example, it was easy for me to impute it, and management gave a number of specific hints.) Thus, the merger combined with the acceleration in design wins to produce the first quarter royalties on the low end of what might be expected as a percentage of total sales. Probably the current strategy of selling more "stuff" per design win is the better way to go. I don't agree or disagree with you about this. Ultimately, WIND's pricing model is limited by the value its products and services brings to the customer. In economic terms, you can put an upper-bound on this by calculating the cost for a customer to switch to an alternative supplier. The pricing mechanisms WIND uses to allocate its revenues to customers and projects need not be viewed as immutable to change. Allen