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

To: James Connolly who wrote (9278)	3/3/2001 7:55:08 PM
From: Peter Church	Read Replies (3) \| Respond to of 10309

Oh wow, I thought it $36 million for the year. Are you sure about your numbers? They don't square with the lily pond royalty projections very well. Or is it that the lily pond royalties are only a small percentage (24%) of the total royalties at this time? futures.wharton.upenn.edu

To: James Connolly who wrote (9278)	3/4/2001 4:27:42 PM
From: peter grossman	Read Replies (2) \| Respond to of 10309

Thanks, James. Luckily, people like you keep careful notes, and help people like me. I had only recalled 3 published figures. Those four quarterly royalty figures represent 21.7%, 17.4%, 22.5%, and 27.6% of revenues, respectively. A very nice trend. Are royalties seasonal? Again, I'll ask for some help, but I recall a projection of FY 02 royalties as a percent of revenue at 25% - 30% ?? I am very interested in the increase in R&D spending versus the increase in royalties. If and when the royalties (lily ponds?) rise faster than WIND feels it needs to increase R&D in order to maintain/enlarge its competitive advantage is when -- all things being equal -- earnings will jump. That is, if other expenses rise in line with projected revenue increases (30%), than the larger rise in royalties vs. R&D will drop to the bottom line. That is why monitoring the historic numbers and the lily pond data is so important. Of note, G & A expenses actually declined YoY in the fourth quarter! I'm not sure how you got royalties increasing 50 to 70% YoY, but I think it is right. We know that that R&D totaled $83M, almost exactly 50% more than 2000. The fourth quarter showed a smaller 40% increase in R&D to $23M. We also know that royalties were $99.4M in FY2001, 22.7% of revenues, and equal to $16.4M more than R&D, or about $.13 per share, after taxes. In the conference call, guidance of 30% revenue growth was reiterated. One could easily argue that this is conservative given 43% growth in the "slow" fourth quarter, 50% growth in product revenue. Then again, the economy is uncertain. Also, they said several times that R&D will exceed $100M. This is noteworthy, I believe, in that it is not $125M. In fact, $100M is "only" a 20 percent increase from this year. If royalties stabilize in FY02 at 27.6% of revenue as in q4 and as I believe forecast (need help here), than royalties will increase 58% to $157M, and even if R&D spending is $108M (equal to revenue increase), then the difference, net to bottom line is .40 per share!! I believe that these increases must be due to the vertical solutions starting to kick in, not to mention the possible arrival of a lily pond or two -- I2O?? If non-royalty earnings increase at the same rate as revenues, then FY02 earnings would be .91, 30% higher than guided, but about equal to 20% net margins. This does not take into account opportunities for improvement on the services side, which was mildly disappointing. The explanation regarding WIND's apparent immunity from the downturn is very believable in light of their performance after the slowdown had already commenced. How the market values WIND is another question, but it appears that WIND will maintain and increase their growth while almost all others falter. If these figures hold, then WIND sells for 33x forward earnings of +73%, and beating estimates. If estimates are merely met, WIND sells for 43x forward earnings of +33%, quite a difference. I remember when estimates were raised throughout the year, and WIND consistently beat those by a penny or two. Could we be back to this performance while the rest of the country worries about a recession? Using similar assumptions for FY03 -- 30% revenue growth (to $741M, conservative with network effects, NT being only the first major to standardize?), 30% increase in all spending, royalties increasing to 30% of sales (to $222m -- +42%, conservative with lilies?), FY03 earnings total $1.29, +42%. -Peter