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Technology Stocks : Phoenix Technologies (PTEC) -- Ignore unavailable to you. Want to Upgrade?

To: John B. Dillon who wrote (3173)	2/26/1999 9:51:00 AM
From: Mark Brophy	Respond to of 3624

Check out Andy Grove's Merced forecast at search.nytimes.com. No one has a better understanding of the pace of change in computing, and the risks inherent in each new generation of technology, than Andrew Grove, Intel's chairman and driving force. "When a change in how some element of one's business is conducted becomes an order of magnitude larger than what that business is accustomed to, then all bets are off," he wrote in his 1996 best seller, "Only the Paranoid Survive" (Currency/Doubleday, $27.50). "There's wind and then there's a typhoon, there are waves and then there's a tsunami." Merced has the potential to create that kind of computer industry tsunami, and Grove obviously believes he knows how to ride it: Cautiously. Asked recently how long it would take for the chip to become the heart of the company's product line, he said: "It will be very slow. Not in the next five years. I don't see Merced appearing on a mainstream desktop inside of a decade." He's making a realistic projection, not some overly cautious statement to avoid the possibility of a shareholder lawsuit. "All bets are off" means that anything is possible - including failure. A 10 year desktop ramp implies that the server ramp will be 5 years. If server apps were compute-bound, the DEC Alpha would've been a smash hit. Apps are I/O bound, so mainframe-style I/O processors are needed, but a standards war is being waged by I2O (Intel and Wind River) against FutureIO (3 of the top 5 server vendors - Compaq, IBM, and H-P). Phoenix will get 3-10 times more for Merced BIOS than an x86 BIOS, but it's unclear whether that will compensate for the slow ramp.

To: John B. Dillon who wrote (3173)	3/13/1999 12:23:00 PM
From: Mark Brophy	Read Replies (3) \| Respond to of 3624

The dynamics are similar to the RTOS industry. Any engineer at Phoenix can develop his own BIOS in 2 years, and some can do it in 6 months. Since the productive engineer doesn't get paid 4x as much as the unproductive, there's a strong incentive to vote with your feet by joining a startup or a company that dispenses employee stock options and whose stock price is likely to rise. The result is a fragmented industry of people who believe they're above average. Successful companies tend to attract better employees and losing companies are stuck with the rest, so there's something to be said for momentum investing. All of the above can also be said of the RTOS industry. In addition, the royalty rates are similar. Something like 70-80% of PCs contain a BIOS from a BIOS company and the remainder are developed in-house. About 40% of RTOSes are produced in-house. A big difference between the industries is that the BIOS companies get paid only by the PC vendors, whereas the RTOS vendors get paid by the application developers and the processor companies for ports. A comparison of service revenues is interesting. Integrated Systems gets 56% from services, Wind River gets 75%, Phoenix gets 82%, and Award before the merger got 83%. Essentially, the success of a BIOS company is dependent more on it's ability to predict customer success. Award prospered partly because they correctly predicted that the Taiwanese would gain share at the expense of Intel motherboards. Naturally, Phoenix failed for taking the other side of the bet. They also failed to realize that DEC would lose share and Compaq would gain. Integrated Systems has the lowest margins because their high service revenues implies their unwillingness to accept risks. Wind River won many of their bets and was rewarded with higher margins, but their stock dropped by 1/3 in 15 minutes and hasn't recovered because they failed to realize how long it would take I2O to be accepted, if at all. This is fairly similar to the mistake Phoenix made with USB, 1394, and Merced. Intel and Microsoft have now ossified so much that they're as slow as IBM was when it was the leader of the PC industry. If this continues, the Sony Playstation will win the fight of the next century in the home and their followup attack will be in the office. Phoenix potentially has the best of both worlds now. They could enjoy the large margins of a risk taker, yet the large base of customers reduces risk. If they can avoid big company inefficiency, margins could substantially increase. It won't be easy if stock options remain underwater. Phoenix needs to announce an aggressive repurchase that aims to reverse the momentum by retiring shares, not merely to fund stock options. The loss of pooling business combinations is no longer as important now that Award and Sand are part of the company. Survival takes priority and the unparanoid will be eaten alive! Another difference between a BIOS and an RTOS is that greater processor complexity is increasing the value of an RTOS, whereas an x86 BIOS remains stuck in a 64K house. Merced will increase the value of a BIOS, but we'll have to wait for that growth driver. In the meantime, semiconductor IP is growing much faster than the BIOS and RTOS industries, and will continue to do so for years to come.