WIND Q4 - VDC's View

Despite the hit that Wind River has taken in the market (down 20% at 2pm), its Q4 and FY06 earnings have many positive components including:

• 1st Quarter over $70 million in 15 quarters going back to Q4 2002.
• Overall Growth of 13% and deferred revenue growth of 27%.
• $50 million in cash flow.
• Many big design wins, especially in military/aerospace.

So what did Wall Street investors not like about the numbers?

• The company missed the low end of its guidance of $72-74 million by turning in a $70.2 million Q4.
• Lower than expected Q1 guidance of $65-70 million or $0.34 to $0.39 per share less than analysts' $0.47.

Other factors to consider in evaluating the numbers:

The transition from paid up front product licensing to a subscription business model will not be always be smooth. In fact, there will be some jumps and some lags in it. This quarter was a jump. More of WIND’s business came in under the subscription model than was expected. Some OEMs in markets that typically prefer PUF, including military/aerospace and industrial automation opted for subscription. Has the inflection point been passed? Not by any stretch but OEMs appear to be considering alternatives to PUF growing numbers.

It appears that some bookings that were expected to be recognized because they would be under the paid up front licensing model were actually purchased under subscription models. Although this hurts WIND in terms of quarterly performance, this is better for the company in the long term. Subscription deals tend to:

1. Be larger deals
2. Lock in customers for the long term
3. Be renewed at higher rates than PUF
4. Include more products and services
5. Be standardization deals

Also mentioned were a number of deals that have yet to hit balance sheet that VDC believes to be quite large.

Bottom Line:

Certainly WIND missed its expected revenue number for the quarter, however there appears to be a number of mitigating factors including growth, cash flow, a movement to customers into subscription licensing which is better for WIND, and a number of deals that have yet to appear in the financial statements. WIND’s results are not simple to understand. They are neither all positive, nor all negative. There are no straight lines here; instead you need to look at all of the information. For VDC, the preponderance of that information is positive.