L5: WINDWind River Systems is still my favorite Rule Breaker candidate in spite of some scary numbers you'll see below. I appreciate the support and additional questions you are providing about WIND and its future. I hope to get them all answered as we progress through the homework. For the following info, I am paraphrasing and quoting from the Notice of Special Meeting of Shareholders regarding last year's merger between Wind and Integrated Systems and the most recent 10Q for quarter ended October 31, 2000. How does it generate salesWind River "develops, markets and supports advanced software operating systems and development tools? for imbedded computers."(italics mine) Wind's products are found in telecommunications products such as routers and switches; office products such as faxes and laser printers; vehicle anti-lock brakes and navigation systems; consumer camcorders, video games; medical instrumentation; industrial automation and robotics; and aerospace devices such as NASA's Pathfinder. The customer list is an impressive who's who of high tech and manufacturing:BoeingCisco SystemsEricssonGeneral MotorsHewlett PackardHitachiHughesLucentIntelLockeed MartinMcDonnell DouglasMitsubishiMotorolaNetwork ComputerNippon ElectricNortelRaytheonSeimensSun MicrosystemsTRW Does it earn a profit?A strong yes until recently. For the years ended 1997, 1998 and 1999 the data provided shows pro-forma combined Net Income to be positive for the three years ended Jan 1999.Jan 1999 Jan 1998 Jan 1997$35.2M $10.4M $18.8MLooking for numbers a little more current I checked the recent 10Q and found things not to my liking:Nine months ending Oct 312000 1999($75.8M) $14.6MFor three months ending Oct 312000 1999($17.7M) $7.7MThis is not an insignificant recent swing to the loss side. I delved into the 10Q to find the cause of this hemorrhaging."Amortization of intangibles totaled $28.4 million and $64.8 million, respectively, for the three and nine month periods ended October 31, 2000, compared to $2.5 million and $3.6 million for the same periods in fiscal 2000. The increase in amortization of intangibles is due to the amortization of identifiable intangibles and goodwill related to purchase transactions completed this year, including Embedded Support Tools, AudeSi Technologies, and ICESoft. During the three and nine month periods ended October 31, 2000, Wind River amortized $25.2 million and $57.1 million of goodwill and $2.9 million and $7.5 million of identifiable intangible assets, respectively. As a result of acquisitions accounted for as purchases, Wind River expects to amortize $385.1 million and $62.5 million, respectively, of goodwill and identifiable intangibles over approximately 4 years or a total of approximately $31.9 million per quarter."Acquisition-related and other expenses were $100,000 and $31.8 million,respectively, for the three and nine month periods ended October 31, 2000,compared to $1.7 million and $9.3 million for the same periods in fiscal 2000.For the three month period ended October 31, 2000, acquisition-related and otherexpenses are comprised of $100,000 related to the write-off of in-process research and development costs of ICESoft. For the nine month period ended October 31, 2000, acquisition-related and other expenses are comprised of $27.0 million in costs associated with the acquisition of Integrated Systems and $3.7 million relating to the write-off of in-process research and development costs of Embedded Support Tools, $1.0 million related to the write-off of in-process research and development costs of AudeSi Technologies and $100,000 related to the write-off of in-process research and development costs of ICESoft."My interpretation is that while acquisition costs were high they were anomalous with a one time cost of $32M. What looks bad to me is that Wind will be painfully amortizing intangibles and goodwill at the rate of $31.9M per quarter or $127.6M per year for the next four years. This will cause them to be unprofitable for some time. I"ll look into how long when I do homework for later lesson on valuation. Will it have high margins?For the nine months ended Oct 31 2000 1999 Gross Margins 76% 77%Operating Margins (25%) 6%Net Margins (21%) 5%I would say that gross margins are high enough to be respectable, but that high net margins won't return until after the four-year amortization period. High fixed asset turnover? nine months as of Oct 31 2000 1999 Land, equipment $63.9M $56.3MGross profit 235.6M 174.5MGr.pr / fixed assets 3.7 3.1 Net Income ($75.8M) $14.6M Net I / fixed assets n/a 0.26I don't really know how to interpret these yet, I don't have a good feel for what ranges are good and bad. I need a lesson on asset turnover. How will it protect profits from competitorsFinally, I get to be qualitative again. Wind will protect itself from competitors if the industry does standardize on its products. Current competition is from in-house software developers working each with ones own code. Having all of these in-house developers come together to create a competitor is highly unlikely. What WIND needs to do is get all of these in-house developers to drop their internal development efforts and start using WIND products ? WIND states this well "Wind River's operating systems and development tools allow customers to create complex real-time embedded software applications more quickly, more economically and with less risk than creating such applications using internally developed systems and tools."til next time,gd
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