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To: J. Kerner who wrote (2966)	4/1/1998 1:17:00 PM
From: Allen Benn	Read Replies (2) \| Respond to of 10309

>I would be interested in your thoughts on Integrated System's Q4 earnings and conference call. This is my top-of-the-head reaction to their quarter. Frankly, since INTS is a secondary player in the embedded systems space, I'm not looking nearly as closely at the company as I did in the past. The good news was that the sector was strong enough to provide an uplift for INTS, enabling them to increase product revenues year on year by a respectable 17% (respectable given that the company is considered a turn-around). The disturbing news is that MATRIXx revenue was flat. Also disturbing was when the CFO indicated that royalties were flat. And even more disturbing was that services only increase at 11% year on year, particularly since INTS is emphasizing services. Skeptics might wonder if the increases in product revenues came mainly from upgrades of the existing installed base, which is consistent with the reduced gross margins that surprised the H&Q analyst. In theory, pRISM+ is supposed to enable INTS to increase gross margins, because more, if not all, of the components of pRISM+ should be internally supplied by INTS (thanks to INTS recent acquisitions). In fact, gross margins continued to deteriorate, suggesting that customers are upgrading and choosing to keep their tried and true third party components. It is simply not consistent for St. Charles to claim (1) no pricing pressures and (2) lots of new customers and (3) gross margins were down because customers are still committed to third party tools (the tools needed with pSOS). I didn't think that St Charles statements about INT's relationship with HP and Microsoft were confusing, just misleading. The issue is not winning a design from HP, but winning hundreds of designs. Glossing over this difference does not enhance St. Charles' credibility with analysts-especially when the analyst asking the question specifically said something like "it appears like that one of your competitors has HP locked up." His statement about Microsoft and INTS possibly becoming a team in the future automobile was disingenuous in the extreme. The correct statement should have been, "Yes, Microsoft is making a concerted play for the so-called AutoPC and may win out, but our main thrust is under the hood where we think pSOS+ easily can hold its own against Windows CE (but not VxWorks!)." The projected 5,000 pRISM+ seats within a year, equating to $50 million in product license revenue, was a masterful way of hyping the stock without actually forecasting anything. Apparently what happened is that INTS sold about 400 new or converted seats during each of the months of January and February, their biggest months by far. If they could keep this up, they would sell 5,000 seats over the coming year. If. But maybe they can continue selling pRISM+ at that rate, which would be great for INTS and their stockholders. To put this into context, WIND has sold over 25,000 Tornado seats in the 2 plus years since it was announced. This suggests that even if INTS meets its sales goal, new Tornado seats are selling at least twice as fast as new and converted pRISM+ seats. And this is no if. I was pleased to see that deferred revenues were up substantially for the quarter, suggesting that the new CFO is not being reckless in booking revenues, at least not with maintenance revenues. Part of my skepticism about pRISM+ is due to the exaggerated claims about the benefits of the CORBA backbone connecting pRISM+ tools (but not the target!). I think CORBA is too weighty and complicated for most embedded systems projects, and it needlessly complicates using Windows 95/NT development environments-the fastest growing. You probably noticed WIND's recent announcement about the WindView 2 release in which it was pointedly stated that clients could now access debugging information from spreadsheets using COM. Try to do this with pRISM+ and you would have to go through a COM to CORBA gateway, which would add needless and probably unreliable complications. Summing it all up, the jury is still out about INTS and their pRISM+ bet. However, of all the suspicious tidbits I gleaned from the conference call, probably the lack of substantial services growth should be most disturbing to a stockholder. But on a positive note, as I recall, the gross margins on service revenue showed improvement. Allen