Perspective...Ill wind blows for Wind River
Outlook for vaunted embedded vendor appears grim
Interim CEO Gupta
By Alexander Wolfe
August 6--Is once proud embedded-software vendor Wind River, of Alameda, Calif., teetering on the brink? With $544 million in losses since 2000 and only about $50 million in cash on hand, things don't look rosy for this real-time technology pacesetter, best known for its respected VxWorks R/T operating system and the Tornado integrated development environment.
Now, as the company prepares for an August 14th conference call to discuss with analysts its financial results for the quarter ending July 31st, talk is swirling that the company may be looking to sell. (A call to Wind River for comment had not been returned at posting time.)
For the past month, rumors have been rife on the Yahoo Wind River message board frequented by investors. Such boards, of course, are frequently trafficked by both stock touts and by woefully uninformed outsiders. Nevertheless, some of material seems to make reasonable inferences from information which can be factually verified.
The talk kicked into high gear at the end of April, following a fiscal quarter in which three-month revenues dropped 27 percent to $48.5 million and the red ink which has plagued the company for the past three years showed no signs of letting up. On June 24, Wind River removed president Tom St. Dennis and brought in embedded luminary Naren Gupta as interim chief executive in a bid to stabilize operations.
Recent messages have also made much of the information that the company is down to only $50 million cash on hand--a fact borne out by examination of the financial statements it has filed with the Securities and Exchange Commission. (The company's complete financial position, in the turgid language of accounting statements sent to the SEC, reads like this: "As of April 30, 2003, we had $150.0 million in outstanding indebtedness under our 3.75% convertible subordinated notes and $40.0 million in other long-term debt. As of April 30, 2003, we had cash and cash equivalents of $25.9 million, short-term investments of $24.3 million, investments with maturities of greater than one year of $160.7 million and restricted cash of $46.1 million.")
Further, a detailed examination by EmbeddedWatch.com of some of Wind River's filings turned up a apparent robbing-Peter-to-pay-Paul item related to the company's cash position. It appears Wind River, which was leasing its office space, and thus showed the lease payments as a hefty expense on its operating statements, went out and bought the buildings. This turned the expense on the balance sheet into an asset--it now owned the buildings. Moreover, Wind River borrowed against the value of its newly owned buildings to improve its sagging cash position.
The relevant statement from its SEC filing states: "In January 2003, we notified the lessor of our intent to exercise the purchase options under the synthetic leases. In April 2003, we completed the transactions, terminated the synthetic leases and purchased the buildings for a purchase price of $57.4 million. As a result of our completion of the purchase options, we reflect the buildings as an asset on our balance sheet. Additionally, restricted cash of $60.3 million held under the leases was released...In connection with the termination of the synthetic leases, in April 2003, we entered into a loan facility for an aggregate principal amount of $57.4 million, consisting of a $37.4 million non-revolving loan commitment and $20.0 million term loan, both of which mature in April 2005. During the quarter ended April 30, 2003, we borrowed $40.0 million of the facility at an interest rate currently equal to 1.84%."
Amid the company's falling revenues and poor cash position, some investors are holding out hope that the company is either poised for a sale or on the verge of a major design win for VxWorks. There's been no talk about either prospect from Wind River itself, and no real sign from within the embedded community. Apparently, the Yahoo message board denizens are fueling their hope from the news that a company insider has made major stock purchases recently and thus must "know something."
The insider, board of directors member William Elmore, has purchased 235,000 shares of Wind River stock in the past month at an average price of $5.60. (Wind River stock closed on August 6 at $5.74.) Elmore is a venture capitalist who also sits on the board of e-commerce house Onyx Software Inc.
Some of the sales talk revolves around a possible Wind River link with "business technology optimization" (read: enterprise) software house Mercury Interactive. However, there's no explicit basis for such talk. It has been driven by the July 24th appointment to Wind River's board of Ken Klein, chief operating officer of Mercury.
There's also speculation that next week's conference call may be used as a coming out party for a new CEO to replace interim chief executive Gupta.
Unpromising past
Regardless of what happens during Wind River's upcoming conference call, there's no easy fix for the troubles of the venerable embedded software house.
After a heady run-up during the tech bubble of the late '90s during which Wind River purchased embedded competitor Integrated Systems Inc., networking software house Rapid Logic and compiler vendor Diab, the company has been on a slide.
Over the past three years, revenues have continued on a downward trend while the company has lost gobs of money. Fiscal 2001 (calendar-year 2000) revenues were $438 million, producing a net loss of $76 million. Fiscal 2002 revenues of $351 million, in a year which saw several acquisitions, yielding a mind-blowing loss of $375.6 million. Revenues for fiscal year 2003 were $249 million, a 29% decrease from the prior year, with a net loss of $107 million.
As mentioned, things haven't improved recently. For the 3 months ended 4/30/03, revenues fell 27% to $48.5 million. (On a mildly positive note, the net loss fell 40% from the year-earlier quarter to $10.8 million.)
So, just what the heck is going on here? Despite the fact that Wind River booted out president Tom St. Dennis this past June, the problems besetting the company aren't management driven.
Unfortunately for Wind, the storm buffeting the company is stoked by more than just the poor tech economy. If that were the case, Wind could tough things out until the business cycle righted itself.
The big problem for Wind, which won't change, is that Microsoft has forever changed the fundamental economic rules of the commerical embedded-tools market. That's ironic, because Wind--along with Integrated Systems Inc. a company it acquired in 2000--helped found that market back in 1981. (Prior to the emergence of Wind and a coterie of other companies, embedded software was done on a "roll your own" basis by individual developers.)
Throughout the 1980s and 1990s, embedded houses such as Wind built up a small but lucrative software market where tools commanded typical license fees of $20,000 per seat. In the '90s, Microsoft made several false starts toward entering the embedded market, each time slinking back to Redmond to lick its wounds after being rejected by the majority of experienced embedded developers.
But around the turn of the century, through a combination of persistence, the release of an acceptable version of Windows CE, and the graduation from college of the first generation of software developers brought up on Microsoft products, Microsoft began to gain traction in the embedded market. And it began to offer complete software development environments for $995. This in one fell swoop redefined the price tools vendors could charge and also pulled the rug out from the $20,000-per-seat Wind Rivers of the world. And that's where things stand today.
Finally, the rise of the open-source software movement has buffetted Wind River, and its customers have become increasingly acclimated to the idea of free tools.
As Wind River sums up the sorry situation in another of its SEC filings: "During the first quarter of fiscal 2004 and during fiscal 2003 and 2002, some of our customers have decreased research and development budgets; sought to increase the value they receive from vendors, including us; attempted to leverage a more competitive bidding process when spending research and development budgets; and deferred or canceled projects."
Wind River's explanation continues: "We [also] believe that some of our customers have undertaken development in-house, selected solutions they perceive to be less expensive or have relied on existing licenses rather than making new product purchases from us. Also, we cannot anticipate or calculate the potential adverse impact of open source or in-house software on our revenues or market share particularly where our customers' budget constraints may make such software, which is royalty-free, more appealing than our products for their initial project development."
--(c) 2003 EmbeddedWatch.com
