Only recent report I could find (from Prudential).
Sorry about the formatting, it came from a PDF.
EQUITY RESEARCH
NOVEMBER 16, 2001
WIND: EPS HITS ESTIMATES IN A TOUGH ENVIRONMENT-RAISING TARGET, REITERATING BUY
Wind River Systems WIND | $17.52 | OTC
John P. McPeake • 212.778.8304 • john_mcpeake@prusec.com Current: Buy
Joshua P. Friedlander • 212.778.1482 • joshua_friedlander@prusec.com Risk: High
Frederick H. Patzman • 212.778.1373 • rick_patzman@prusec.com Target: $23.00
Industry: Market Perform
The senior analyst(s) does not have a material position in any of the stocks mentioned in this report.*
FY EPS P/E 1Q 2Q 3Q 4Q
Actual 1/01 $0.52A 33.7X $0.11A $0.10A $0.12A $0.19A
Current 1/02 ($0.03)E NM $0.06A ($0.08)A ($0.01)A $0.00E
Prior ($0.04)E NM $0.06A ($0.08)A ($0.02)E $0.00E
Current 1/03 $0.40E 43.8X
Avg. Volume: 500,000 Div/Yield: NA EPS Growth: 30.00%
Market Cap: $1,396 m 52w Range: 45.90-9.70 P/E / Growth: NM
Shares: 79.67 m
Wind River Systems (WIND), located in Alameda, CA, develops, markets, supports, and provides consulting services for advanced software operating systems and development tools. The Company's services enable customers to create real-time software applications for embedded computers. Wind River's TORNADO product standardizes design across projects and shortens product development cycles.
HIGHLIGHTS
· Wind River Reported F3Q EPS Loss Of $0.01, In Line With Guidance Of A $0.02 Loss To Breakeven
· Pro Forma EPS Upside Compared To Estimates Came From Effective Cost Controls In The Quarter.
· Book-to-bill Greater Than One For First Time Since F4Q01 (Jan), Services Booking Up 40% Q-o-q.
· Management Is Targeting Neutral To Positive Cash Flow From Operations.
· Weakness In The Communications Vertical Was Made Up For By Storage And Automotive/Industrial.
· Visibility Remains Somewhat Limited As Guidance For The F4Q Alone Was Issued.
· Biz Likely Bottomed–Reiterating Buy Rating And Raising Target From $20 To $23.
DISCUSSION
Last Night After The Close, Wind River Reported F3Q (October) Pro Forma EPS Losses Of $0.01. This is a penny better than our (and consensus) estimates of a $0.02 loss. Total revenues came in at $80.1 million, $3 million shy of our estimate, but in line with the bottom end of guidance for flat to 5% Q-o-Q growth. Cost cutting appeared to be effective as operating expenses came down to $65.5 million from $70.3 million last quarter. Cash flow from operations was $5.4 million, and management indicated WIND would target neutral to slightly positive cash flow going forward. The company viewed this quarter’s revenues as at or very close to a bottom, and expects any possible top line upside would improve margins and flow through to EPS. Guidance for F4Q only was given on the call – revenues flat to up 5% (implying $80.1 to $84.1 million), and pro-forma EPS of a $0.02 loss to breakeven. We think visibility remains somewhat limited as Wind River’s clients have low visibility for future plans, and the IT spending environment has held even but not yet shown signs of improvement. On a positive note, WIND indicated that business operations had returned to more normal levels since the September 11 events, and the company has seen signs of increased outsourcing among its customers. Looking at vertical markets, we think WIND’s decreased reliance on the communications sector (falling from 45% to 41% of total revenues) was a positive for the quarter, and could lessen the effects of further slowness in that industry going forward. We are tweaking our revenue estimate for F4Q down from $87.3 million to $84.1 million - near the top of WIND’s new guidance band – and keeping our projection of breakeven pro-forma earnings. Although the stock has appreciated over 70% since October 1, we think valuation is still reasonable at 3.8x revenues. We are maintaining our Buy rating and raising our target from $20 to $23 for WIND.
Pro Forma EPS Upside Compared To Estimates Came From Effective Cost Controls In The Quarter. Figure 1 summarizes F3Q’s revenue and pro-forma EPS earnings results. This quarter saw a continuation of the trend of services accounting for a larger percent of business. We think this could be a positive leading indicator for companies outsourcing development efforts to Wind River. Considering the difficult environment, and business interruptions in September, we think WIND’s flat revenues and small EPS upside are positives. The earnings success was largely the result of cost-cutting measures announced earlier in the year taking effect. Head count was reduced by about 300 people net (14%) to 1,811. Operating expenses have come down for four straight quarters, from $80.4 million in F4Q’01 to $65.5 million for F3Q’02. Looking at the sources of revenue, we were encouraged to see that the communications vertical accounted for a smaller fraction of business than in past quarters. That segment went from 56% nine months ago, to 45% last quarter, and 41% of revenues in F3Q. In its place, the defense/aerospace and computer storage verticals increased to 19% and 6% of business, respectively. We think that less exposure to the volatile communications sector could help visibility for the company. On the call, the company announced products in a number of interesting fields that could also shift the mix further away from the communications vertical. Their tools have recently had compelling design wins in applications including bomb-sniffing robots, touch screen voting machines, the Mars Odyssey spacecraft, TV digital set-top boxes, and automobile telematics. Many of these fields are still in their infancy, and success at such an early stage could lay the groundwork for further participation in these high potential areas.
Figure 1.
Actual Estimate Actual Actual
F3Q'02 F3Q'02 F2Q'02 F3Q'01
Revenues
Product/Royalty 53.0 56.2 54.6 82.6
% of Total Rev 66% 68% 68% 72%
YoY % Change -36% -32%
QoQ % Change -3% 3%
Services 27.1 27.0 25.7 32.2
% of Total Revs 34% 32% 32% 28%
YoY % Change -16% -16%
QoQ % Change 6% 5%
Total Revenues 80.1 83.1 80.2 114.8
YoY % Change -30% -28%
QoQ % Change 0% 4%
EPS (Pro-Forma) -$0.01 -$0.02 -$0.08 $0.12
Note: All revenue figures are in millions of dollars.
Source: Prudential Securities.
Management Is Targeting Neutral To Positive Cash Flow From Operations. For the quarter, CFFO was $5.4 million, and the overall book-to-bill ratio was above one for the first time since F4Q’01. Given the difficult environment and limited visibility, the company is managing toward neutral to slightly positive cash flow until clearer signs of the ability to grow revenue emerge. The company also repurchased $64.2 million of its remaining convertible debt at a below par cost of $63.3 million, leaving only about $65 million outstanding from the original $140 million issue. With cash and investments at over $247 million, we think the company is in a very solid position to handle the rest of this debt when it comes due in about 10 months. DSO’s fell sequentially one day to 88 days for the quarter.
Visibility Remains Somewhat Limited As Guidance For The F4Q Alone Was Issued. Wind River’s guidance for the F4Q is effectively the same as what they issued for the F3Q. Revenues were targeted at flat to up 5% (implying $80.1 to $84.1 million), and pro-forma EPS was again estimated at a loss of $0.02 to breakeven. Other income was projected at $2 million for the F4Q, and the tax provision rate should stay at 37.5%. DSO’s were targeted in the 85-95 day range, and shares out were projected to increase by 1 to 2 million. No guidance was given for FY03.
We Are Tweaking Our Revenue Estimates For F4Q. Based on a relatively flat outlook for the F4Q, we are adjusting our revenue estimate down 3.7% from $87.3 million to $84.1 million. With operating expense cuts as well, we are keeping our projection of a breakeven quarter. Our FY02 pro-forma EPS estimate goes up a penny from a loss of $0.04 to a loss of $0.03 for the year.
Flat Revenues Not So Bad, We See Positives In The Quarter–Reiterating Buy Rating And Raising Target From $20 To $23. Under the difficult and interrupted circumstances of the most recent quarter, we think Wind River’s ability to meet their guidance and improve their financial position should be seen as good execution. The shift to a positive book to bill--services bookings were up 40% q-o-q--is a significant change in business tone. Wind River indicated that business operations had returned to more normal levels since the September 11 events, and the company has seen signs of increased outsourcing among its customers, but remains cautious. We view stabilization as a good first sign that growth may be in the not too distant future, and we think many technology companies would see this as a positive as well. In our opinion, Wind River’s increasing diversity of customers along with design wins in solution level products at the larger enterprise scale should help bolster revenues going forward, and helps shield the company from the more volatile communications equipment sector. Over the long term, we think Wind River’s solutions will look increasingly compelling and provide higher ROI’s, because as computer equipment increases in complexity and power, outsourcing embedded software code to run on it becomes more cost effective than developing “in-house” solutions. Although the stock has appreciated over 70% since October 1, we think valuation is still reasonable at 3.8x revenues. We are reiterating our Buy rating and raising our target from $20 to $23 for WIND. At $23 the stock would be trading at 4.4X revenues, 58X still-depressed EPS. |
