Is is possible that WIND will now [after the NCI technology purchase] find themselves both a competitor and partner to NCI's own vision, creating conflicts down the road?
Anything is possible, but competition between NCI and WIND seems extremely farfetched. More likely, NCI could conceivably find itself competing with a customer of WIND's that is able to level the playing field by using NCI's embedded browser/graphics. But even if that were to happen, NCI probably would view it positively. Why? Because the more NCI's browser/graphics becomes the preferred standard, the better off is NCI. As Microsoft moves to integrate Internet Explorer into the OS, Netscape rooted browsers fill a vacuum for a standard browser for non-Microsoft environments.
For this reason, to fear that the Netscape browser and its offspring will give way to the Microsoft juggernaut is to misunderstand completely the interests and likely actions of the titans of the computer industry. IBM, Oracle, NCI, Sun and the DOJ have no intention of allowing Microsoft to reign supreme on the internet-and together they wield enough power to at least force a draw.
I have never been attracted to Netscape as an investment, and I have never seen Netscape as a serious threat to Microsoft (I believe early on I labeled the Netscape-Microsoft browser was as a red-herring, with the real battle of the desktop being the NC). Nevertheless, the balance-of-power alliances being established need to establish the Netscape browser as a defacto standard on all non-Microsoft operating systems, and on as many Microsoft operating systems as they can muster.
What do you think of the price tag?
First, no one ever said the technology cost WIND $10 million precisely. That is just the amount being written off. However, that being said, $10 probably is very close to price paid. We know this because software technology buys have almost no tangible associated assets or cost basis, and accepted accounting procedures allow the intangibles to be written off instantly. The write-off could include restructuring of capitalized in-house graphics development that the new technology replaces, but I don't think there was any. (Accounting standards require that R&D costs be expended until product feasibility has been established. Afterward all additional development costs SHALL be capitalized.)
As to the price, assuming it was about $10 million, my sense is that Asia did indirectly contribute not only to the price, but more important, it helped make the deal. While NCI does not show in Oracle's consolidated operating statements (Oracle only owns 66% of NCI after merging NCI with Navio), it does show below the line in Minority Interests. Further, due to the Asian impact on their core businesses, Oracle and the other owners may feel added pressure to increase NCI's revenues and /or reduce expenses.
Clearly having the ability to integrate quickly a fully functional, mainstream internet browser/graphics into the standard Torndado for EID offering is worth a lot to WIND. WIND aims to be a major player in the Embedded Internet Devices space. While the lion's share of these devices will not require a browser per se, many will. WIND can not expect to dominate this space without having a first-rate capability in the browser/graphics realm. Unix programmers may be comforted by the XWindows arrangement with Willows, but XWindows is not the first windowing system that springs to my mind when thinking about embedded internet devices. Nor is the Spyglass browser announcement sufficient to enable WIND to dominate this space. The NCI technology purchase is. So what's it worth? More than $10 million dollars.
My fear is that the reality of a nominal loss, as evidenced by Ron Abelmann's statement, is leading to the recent selling.
We agree the $10 million write-off will effectively cancel out net earnings. Net earnings will be reported at about breakeven, but without the writeoff they would have been about 23 cents.
Every single professional money manager, without even one exception, will view WIND, today and after they next report earnings, as though they continued on a roll and produced 23 cents EPS from operations. There simply is no other sane way to view the earnings report. Maximum writeoffs of technology purchased, or acquisitions of any kind, is viewed by management, accountants and Street as a given, and is totally, 100% ignored. (Because WIND will retrieve 35% immediately from Uncle Sam through reduced taxes, management has no choice but to invoke the allowable writeoff.)
Only private investors sometimes get confused about the meaning, or even the existence, of writeoffs. However, sometimes even the dumbest of investors escape the mistake of misinterpreting these kinds of writeoffs-when their data service correctly adjusts EPS to compensate for non-operating costs. For example, your local newspaper may report P/E based on actual earnings, while better services like the IBD routinely use the adjusted figure.
If novice investors get confused about the proper interpretation of the next earnings report, they will be punished by the market for their ignorance. Since it makes no sense to put a negative spin on earnings presented this way, a novice who does is someone about to have another confidence-shaking experience.
To see why this is true, think about what the investor properly thinks. What does the past performance of the company, and now this most recent performance, tell me about how the company is doing operationally, and how it is likely to perform in the future? Operationally, WIND just made 23 cents and enjoyed continued revenue growth. Now that it has the NCI technology, the certainty of its continued revenue and earnings growth is even more ensured than before, so my confidence in WIND's stellar future performance has just increased. The cost of this improved situation is a little over $6 million after taxes, or about 23 cents a share.
I don't know what novices might do; and I certainly don't know what momentum-playing pros will do. But one thing I do know is that I don't care. There is only one way to interpret the $10 million writeoff, and life is to short to worry if some novice investors and most traders make the wrong interpretation.
Allen |
