Limp sales don't deter Wind River
Company's growth tied to repeat business, Japan
By Thom Calandra, CBS MarketWatch
Last Update: 2:02 PM ET Aug. 17, 2001
SAN FRANCISCO (CBS.MW) -- The last time we touched base with Wind River Systems, the developer of software for smart devices, founder and Chairman Jerry Fiddler was explaining how embedded computing would turn the California company into a juggernaut, its products to be found in kitchens, cars, maybe even clothes.
That was in April, when the company's market capitalization was $2 billion and before the company cut a quarterly profit target and trimmed its work force. See the interview.
Now, sporting a market capitalization of $1.1 billion, Wind River (WIND: news, chart, profile), whose operating systems are found in space shuttles, Cisco routers, Formula One race cars and a Compaq digital jukebox, is hoping for a pick-up in business from Japanese customers such as Toshiba and from cost-cutting technical staffs at U.S. companies.
For the disappointing $80 million of sales and $6.5 million net loss that Wind River delivered in the second quarter, executives at least can thank repeat customers, including Cisco Systems (CSCO: news, chart, profile), Nortel, Lucent and Motorola - all of those companies nailed to the crosses of their own painful quarterly statements.
Cisco's spending on research and development, down 7.9 percent quarter to quarter, is bound to send ripples, if not waves, across the smart little software companies that look to the giant for licensing and OEM sales. "That's a pretty significant change," Wind River Vice President of Strategy and Business Development Curt Schacker says about the Cisco spending cuts.
To Wind River's credit, analysts and fund managers turned out in force for the company's quarterly conference call this week. The call went for 90 minutes, leading analysts such as Richard T. Williams at Jefferies & Co. in New York to stay the course on the company's flagging stock.
Wind River "remains the Microsoft of the embedded, post-PC world," Williams and his team of analysts said after the call. Of course, the 10 or so investment banks that follow Wind River are not thrilled with a flat pace of wins by design (458 this quarter vs. 452 last quarter), a money-losing quarter and license fees of only $54 million for the three months vs. what some had hoped earlier in the year would be $67 million or more for the three-month period.
One Wall Street bank, Needham & Co., cut its investment rating Friday on Wind River's Nasdaq-traded shares to "hold" from "buy."
Still, after subtracting $315 million of cash, cash equivalents, investments and restricted cash on the company's books, Wind River sells for about two times expected revenue for the coming fiscal year. That's considered by some to be fairly cheap for an 18-year-old software company that the world's now-ailing telecommunications and chip giants could rely on if the idea of hands-free computing ever takes off.
Dennis likes the big companies
Chief Executive Tom St. Dennis, who has been at the helm of the company since 1999, tells the story of meeting a top executive at a Toshiba consumer electronics company. Wind River's operating systems are in about 20 Toshiba (TOSBF: news, chart, profile) products. " I asked him how many embedded (operating) systems he used and he didn't know, but then he said, 'We can't go on that way.' They can't continue to write in-house operating systems." Watch the interview with Dennis.
That is the kernel of hope for Dennis, Fiddler and Wind River's 1,800 employees. "Internal staffs (inside our customers' companies) are cut to the bone," Fiddler told the analysts who follow Wind River this week. "The result could be an increase in outsourcing."
Wind River by some estimates has about a third or more of the commercial market for embedded operating systems. Dennis, the CEO and president, says he is not afraid of relying on repeat customers for his company's sales.
"People have drawn quick conclusions that that is a liability," said Dennis on Friday. "The Nortels and Alcatels in their embedded technologies have not had a major platform that they have worked off of. It is only a matter of time as the big telecom companies standardize their platforms."
Dennis estimates Wind River will spend $100 million this year on researching and developing the software tools and technologies that are used to build embedded operating systems. "Our customers spend nowhere near that on core product building, and they shouldn't have to," he said.
Wind River's competitors in the commercial market for smart-device operating systems include Microsoft (MSFT: news, chart, profile), Palm (PALM: news, chart, profile) and several other companies, including one in Europe. As chief investment officers review the haphazard mesh of operating systems across their companies' products, Dennis the optimist expects improving business, especially in Japan and across Asia, which accounts for less than a fifth of total sales.
The question for Wind River investors is simple: Like several publicly traded software tools and support companies these days, Wind River is admirable in its technology focus and creativity. But how long will it take the $14-or-so stock to return to the $25-range price targets that Wall Street banks are slapping on their investment reports?
"The communications area is beat to death but it (the telecom industry) is still a buyer of $100 billion of equipment," Dennis says. "Telecoms, automotives and consumer electronics have a good deal of opportunity for us as more and more functionality gets built in."
Thom Calandra is Editor-in-Chief of CBS MarketWatch.
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