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Technology Stocks : INTS - Integrated Systems -- Ignore unavailable to you. Want to Upgrade?

To: John B. Dillon who wrote (286)	4/5/1999 4:50:00 PM
From: Alan A. Hicks	Respond to of 327

The embedded software market was featured in Michael Murphy's California Technology Stock Letter last Friday, April 2. Murphy was very bullish on the embedded industry. Murphy noted the overall embedded software market is growing 23% per year. While telecom/datacom has been the most significant engine of embedded growth, Murphy thought the internet and consumer appliances will be areas of strong new growth for the embedded market. Murphy noted a report from IDC (International Data Corp) looking at internet appliance growth compared to PCs. IDC forecast embedded internet appliances growth a 156% compounded annual growth rate (CAGR) to 518 million units in 2002 while PC internet access units would grow at a 40% CAGR to 126 million units. Murphy liked both INTS and WIND as leaders in the industry. While Murphy noted INTS had been late to market with pRISM+ and lost momentum over the last couple of years, he said he would be able to meet the new CEO at the upcoming Hambrecht & Quist Conference and “see what they have been up to. If they can get growth back to industry averages, they should have a winner on their hands.” Murphy liked WIND but with a “Wait to Buy” recommendation. He was concerned that the technical price action indicated WIND could fall as low as $12. Murphy last did a major update on the embedded industry in 1996. While he felt the industry future was very bright, he thought the stocks were too expensive at the time. The California Technology Stock Letter has a website at CTSL.com. My own perspective is that while both WIND and INTS should both do well, I do like INTS more here. INTS is still valued at less than half of WIND based on a capitalization to revenues basis. But more importantly, I believe INTS is at the beginning of a new product cycle with pRISM+. INTS has a kept its strong customer base in datacom/telecom (about 45-50% of RTOS sales), consumer and auto markets through its product transition period. They have put together what I see as a treasure chest of embedded technology over the last couple of years acquiring Epilogue (embedded network and internet access products), Diab (Java and C++ compilers), Dr. Design (embedded services), TakeFive (programming tools) as well as several smaller product acquisitions. With a new CEO at the helm, I believe INTS is primed to fully participate in the next wave of growth in the embedded industry. WIND has been down nearly 5 points to a two-year low on nearly 4 million shares the last 3 trading sessions. There has been no news although analysts have recently pointed to the slowing growth rate at WIND. I have also heard that Tornado 2, which was announced last October, has still not completed beta testing. Possibly WIND is being impacted by product transition issues. INTS began shipping their pRISM+ 2.0 in February, which they also announced last October. At embedded trade shows I have talked to customers and third-party tools vendors who feel it is much improved over previous versions of pRISM+. INTS also recently announced their corporate agreement with HP which I believe has been WIND's largest customer for several years. Insiders were buying INTS shares a few months back in the $14-$15 range. Also the company has said they paid as high $13 in the share buyback program last year (they bought back 1.1 million shares). INTS has always been a cash generation machine so I would not be surprised to see them using their cash to buy more at these levels. INTS generated well over $20 million last year and should generate close to $30 million this year. With almost $80 million in the bank, INTS could easily buy the 850,000 shares remaining on their buyback program.

To: John B. Dillon who wrote (286)	4/7/1999 7:57:00 PM
From: Alan A. Hicks	Read Replies (1) \| Respond to of 327

WIND preannounced they expect to fall short of revenue and earnings expectations. Estimates had been for $0.14 but WIND now expects $0.11 on 25% revenue growth in Q1. WIND cited a delay in some new networking software that would not ship this quarter. WIND management on their conference call said that while business in general was robust, WIND was transitioning to become a more solutions oriented company with considerable investments in new products and support. The new Tornado 2.0 is also now slated to ship on April 22. After hours trading was halted. The last reported after hours trade was $11 3/4 down from the official close at $11 7/8. With INTS at $12, INTS share price edged ahead of WIND today for the first time in several years. But with twice as many shares out, WIND is still valued at twice the value of INTS on a capitalization to revenues basis. While WIND has been growing faster and has deserved a higher valuation, maybe the market has been telling us that INTS is about to reaccelerate its growth versus WIND. I don't think it is insignificant that ISI recently signed a corporate agreement with HP which has been WIND's largest customer over the last several years. pRISM 2.0 has shipped on time while Tornado 2.0 will ship about two months later. ISI has their new CEO in place with a quarter of housecleaning out of the way (and still beat EPS expectations). I think the most interesting way to look at INTS valuation here is from the perspective of someone buying the company. What kind of return could they get? With just under 23 million shares at $12, someone could buy ISI for about $275 million. With $80 million in the bank, the net outlay of cash would be $195 million. Their building is worth about $35 million. So the business is valued about $160 million. On EBITDA, ISI's business should provide a return of at least $25 million this year - almost a 16% return. Next year ISI would provide an EBITDA return of nearly 22%. Better than treasury bills. No wonder ISI and most of the insiders have been buying shares. ISI's CEO Boesenberg also plenty of room to improve operating margins. He has said his goal is 25% operating margins. This year was only 9%. With improving revenue growth, earnings growth will look even better. ISI should be able to show 45-50% earnings growth over each of the next two years. In two years, on $195 million in revenues (only a 20% growth rate) with 25 % operating margins, ISI's earnings power would be $1.59 per share. Anything close to that would look very good indeed. WIND has over 30% operating margins - pretty hard to improve on that. Assuming WIND can continue at a 30-35% revenue growth rate (with no more hiccups), WIND's EPS growth would only be in the 25-30% range. Analyst estimates had been for about 30% this year before today's announcement. (WIND's management did think they could still make the full year estimate of $0.77). The embedded market should show very good growth the next few years and both companies should do very well. But, with INTS putting out a mature pRISM+ integrated with the rest of their product portfolio, WIND won't have the open field they have had the last several years. The tide continues to turn.