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Author: nanotechnologist One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1036  
Subject: L5: WIND Date: 1/28/2001 10:05 AM
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L5: WIND

Wind 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 sales

Wind 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:
Boeing
Cisco Systems
Ericsson
General Motors
Hewlett Packard
Hitachi
Hughes
Lucent
Intel
Lockeed Martin
McDonnell Douglas
Mitsubishi
Motorola
Network Computer
Nippon Electric
Nortel
Raytheon
Seimens
Sun Microsystems
TRW

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 $18.8M

Looking for numbers a little more current I checked the recent 10Q and found things not
to my liking:
Nine months ending Oct 31
2000 1999
($75.8M) $14.6M

For three months ending Oct 31
2000 1999
($17.7M) $7.7M

This 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 other
expenses 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 $56.3M
Gross profit 235.6M 174.5M
Gr.pr / fixed assets 3.7 3.1

Net Income ($75.8M) $14.6M
Net I / fixed assets n/a 0.26

I 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 competitors
Finally, 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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