WRS had a great quarter, but did the management guide the expectation down enough for this year? Let's take a look at the end-to-end internet/communication market that's 60% of WRS' sales….the main piece of revenue is licensing. As we heard from the CC, design wins are slowing using historic method of calculation. This leads me to think that licensing may encounter some problem this quarter, but no one will know until the last two weeks of the quarter.
As I indicated, I can’t balance out the negative factors, most of which you detailed, against a large number of plus factors to prove that the near-term is entirely rosy. But I do believe you may be seriously misreading the implications on an emerging company with WIND’s market position in a huge market that surprised everyone with its rapid collapse. Let me explain, starting with a example pulled from WIND’s history.
Everyone knows the U.S. military budget tanked after the end of the Cold War. If you put the budget decline in real (after inflation) terms, and if you realize that manpower costs do not abate, nor do commitments for politically-protected, large-asset procurements programs, you can better appreciate the enormity of the decline in military procurement spending. Thus, it might surprise you to learn that for a few years starting in 1994 WIND’s revenues from the military out-paced most if not all revenue categories. Why? Because the U.S. military finally had to get realistic and loosen its antiquated Mil-Spec requirement – these are the specs that produce $700 hammers and coffee machines. The budget constraints forced the military to accept COTS wherever appropriate, creating a windfall for product companies like WIND. Despite whatever traditional military contractors like General Dynamics thought about a $250 billion military budget in 1994, WIND beginning in 1994 found itself in a cookie store.
Could anything like that be happening today in beat up sectors like telecommunications? Clearly its happening today in Nortel. Since WIND is an ant compared to NT, if NT has decided to take off the gloves and get serious developing new products, WIND could be winning big, not only the long term, but right now, today.
Cisco has just announced a layoff of 5000 people. We know Cisco’s IOS is long-of-tooth, supported by hundreds of software engineers, who, for at least a couple of years, have been trying to upgrade IOS using the QNX kernel as a starting point. Meanwhile, we know that VxWorks and pSOS have permeated many Cisco products through acquisitions and new joint ventures such as the global thrust to extent broadband capability to the home and small office. (Cisco acts as a VAR for WIND in this program, which claims Intel, Sony, Samsung, etc. as customers.)
I don’t know about you, but if I were Chambers I would make the VP in charge of IOS one of the 5000 mentioned above, and partner with WIND by effectively outsourcing the OS, tools and development environment. This would enable Cisco instantly to be state-of-the art, save buckets of money, better enabled to get products to market, and be able to concentrate on Cisco’s core capability. Meanwhile, the immediate benefits to WIND would be huge because Cisco still is a giant compared to WIND.
Intel already has been traveling this path, but Intel’s announced slowdown will accelerate its partnership with WIND. You can bet Intel will get the Web Tablet to market ASAP, for example. Intel will push really hard on Gigabit Ethernet, introducing many products under development with WIND even sooner than possible.
Think about Lucent and Texas Instruments in IP Phones, an emerging market with huge near-term potential, in addition to DSPs in wireless 2.5 and 3G communications.
This same story seems to apply to IBM in network processors; Motorola in everything they do, etc. etc.
None of these effects is reflected in the design win metric, a metric which has proven itself consistently misleading through the whole of last year. There are reasons for this, which you yourself alluded to about a year ago, and which I promise to detail soon.
Surely there are negatives associated with a Fed-induced crash in the technology economy, but by no means does that spell disaster for a small, emerging company with incredible credentials and market position. I can’t guarantee on balance WIND will not suffer noticeably in the slowdown, but I can absolutely guarantee that overall WIND will benefit enormously from the strengthened relationships that obviously are gathering steam in the current turmoil. It may even benefit enough to keep it perfectly afloat during the bleakest period.
Allen |
