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To: Carpe per Diem who wrote (9068)	1/13/2001 12:06:54 AM
From: Allen Benn	Respond to of 10309

Allen, analysts are forecasting EPS of .74 in FY02, to what extent do you think analysts are factoring in the incremental royalties as projected in the Lily Pond? Or, are the Lily Pond royalties purely incremental, and analysts are projecting off base WIND royalties and other income only? I'm not sure what you think analysts do, but one thing they do NOT do is forecast any revenues, much less royalties. The numbers they work with come from management guidance. (Any refinements they make reflect subsequent positive or negative scuttlebutt; refinements never reflect formal, bottoms-up forecasts.) Clearly, management guidance for revenue growth includes allowances for royalties in business segments associated with our lily ponds; although no doubt they are derived quite differently. On the other hand, it would be foolish for management to base their guidance on projected inflection points in anticipated business developments. Everyone knows the timing of inflection points is impossible to perfect, so any such indication by management as likely as not would be disastrous. This means guidance for next fiscal year includes lily pond royalties, but probably not quite to the extent that we might expect such royalties to develop. Here are some numbers to work with: 1. This fiscal year, we think our lily ponds account only for about one quarter of the total royalties, and royalties only account for about 21% of total revenues. 2. Next fiscal year our lily ponds probably will account for about one-half of total royalties, with royalties still comprising only about one-quarter of revenues. 3. Year after that, lily ponds should account for two-thirds of royalties, and royalties should grow to more than one-third of total revenues. Given that lily pond royalties start small, albeit significantly, lily pond royalties are expected to have little extra impact next fiscal year. Since lily ponds grow rapidly, the impact in the subsequent year (FY 2003) would be noticeable indeed, by as much as 50% higher than what analysts might be expecting today. However, that’s jumping the gun. Many of the individual lily ponds have yet to be refined sufficiently to warrant any conclusion about future earnings. First steps first. Seems too good to be true, it seems to me analysts must have some of this number built into their forecast. If it seems to good to be true, then it probably is. And alas, analysts do have some of the lily pond royalties built into their forecast – by dent of management guidance. But don’t despair. Out-year earnings and revenues will prove to be seriously underestimated as lily pond contributions grow from merely significant to explosive. Allen