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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: James Connolly who wrote (8246)	8/12/2000 2:43:12 PM
From: peter grossman	Read Replies (1) \| Respond to of 10309

I agree that it would be nice to hear about DSL, for many reasons, maybe much more important than nice. I believe that when WIND changed to the "new WIND," it instituted many, many announced and unannounced changes, mostly good. One was to favor revenue growth and market share over earnings growth for an unspecified period. We've seen this in both guidance and actuality, as revenue growth now exceeds earnings growth, whereas the opposite was true in the "old WIND." I don't quarrel with this decision. However, when we talk about Allen's prediction of the stock price doubling every two years, one interpretation is 40% earnings growth per year (1 x 1.4 x 1.4 = 1.96) We no longer have this consistency, though we have a path much more likely to arrive at dominance, necessarily enduring inconsistencies along the way. Personally, I think WIND can manage to have everything, revenue and earnings. Because the earnings expectations is low, the best of all worlds -- right now -- would be to go back to beating expectations by one or two cents without fail and without ambiguity, while top line growth is high and accelerating. This seems plausible to me right now -- without an extraordinary lily pond explosion -- because royalties are already 22% of revenues, with a run rate of about $80 million per year. Coincidently, we've been hearing that WIND's R&D expense exceeds their next largest competitor's revenues. The number is also about $80 million. So we have about $1.10 falling to the bottom line, and about $1.10 falling away from the bottom line. If the R&D expense were $75 million, there would be just about an extra $.02 to beat estimates every quarter. So, it seems reasonable to ask, what benefits WIND more: the last $5 million in R&D, or the leverage afforded by a certain rise in its stock currency from a presumed return to its consistent earnings performance? I am oversimplifying -- after all, they do need to integrate ISI, EST, Oddysey -- but I would like to see the company managed in such a way that optimizes the seeding and nurturing of lily ponds without jeopardizing bottom line performance. Then, if and when lily ponds do start to double noticeably, there will be new dollars available for both accelerated R&D spending and accelerated earnings growth. Which brings us to DSL. To my mind, the TSD era ushered in an implicit bargain trading the emphasis on revenues for greater "transparency," primarily defined by reporting new metrics to shareholders and promoting the story to the investment community. The new WIND offers, and will offer, fuller vertically oriented solutions in the embedded space. I have no question but that this is a good approach. The model may not be Microsoft, but Oracle. Shareholders need a way to see if this transition is working. Whereas the revenue / market share vs. earnings change is easily witnessed, the transparency is only partially. Reporting design wins is new and good; analyst shows are very good, reporting royalties is very, very good. But we have not seen reporting on verticals, as suggested. David Fraser hinted at the DSL vertical -- explicitly Tornado for DSL, and the market size potential -- in the last cc. Perhaps this was the beginning of reporting progress on creating TMS like solutions and the numbers associated with them. I hope so. We've heard about 47 out of 52 modem vendors. I wonder what this means for market share. Can we conclude that on average, WIND will be in 47/52 or 90% of DSL modems? Or do the five remaining vendors account for 50% of the market. Or are WIND's design wins limited to, say "advanced function" DSL modems which themselves are expected to account for only 15% of the market? When Tornado for DSL is available -- and carries with it 2 to 5 times the royalties -- will it apply across the line or to a limited percentage of unit sales? The difference in these interpretations arguably amounts to as much as $.75 per share in 2003 or 2004 earnings, or presumably enough to double the stock price. I'd like these doubts clarified. Can we reasonably extrapolate from one vertical solution to another. For instance, will I2O numbers be reported? Will TMS unit royalty numbers or sequential growth be reported? Would these numbers supply a glimpse into what to expect for DSL? Or digital cameras and printers, or set top boxes, or VOIP, etc.? This conference call can go a long way in answering these questions.