Embedded Linux promise helps boost Wind River earnings

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May 18, 2004

Wind River reported better-than-forecast financial results for its first quarter of fiscal 2005, citing a healthier economy, improving execution, and a strategic move to a dual-OS approach including embedded Linux. Subscription-based licensing, already the norm among embedded Linux tools and services providers, was also cited as a major factor.

During an early morning earnings call today, CEO Ken Klein called customer feedback overwhelmingly positive with regard to Wind River's announced strategy to:

Improve VxWorks to enable it to better interoperate with Linux, by adding memory protection and other basic features of modern operating systems. Klein said that the revenue pipeline for VxWorks has increased directly as a result of Wind River's strategic commitment to Linux.
Introduce subscription-based Workbench development tools based on Eclipse that will ship in June with support for both VxWorks and embedded Linux
Make a "deeper commitment to making Linux viable for 'device software optimization' [DSO] via our partnership with Red Hat." DSO is Wind River's broad term for its range of market-specific OS/middleware/application stacks and development services.

Klein said that the Red Hat partnership was "progressing nicely," that a team had been hired, and a specification written and reviewed for an embedded Linux distribution that should launch this year, targeting telecommunications applications. Klein declined to mention how revenues would be split with Red Hat, but called it an equal partnership, analogous to a marriage. Asked how Wind River expected to prevent customers going directly to Red Hat for embedded Linux operating systems, Wind River officials called this unlikely, as Wind River would be the distributor for Red Hat Linux in the DSO space; however, such customers might still buy development tools, DSO software, or Linux development services. "Red Hat is providing the expertise and brand in Linux. Our contribution is expertise in the device software optimization market, which we've been in 20 years," said Klein, who added that Wind River customers "are very enthused," and hope the partnership with Red Hat can "make some sense" out of a chaotic embedded Linux market.

Klein also said Linux was not appropriate for truly small embedded systems, such as digital cameras with a memory footprint of 100KB that need to boot in 10ms.

MontaVista's Jim Ready has long called embedded Linux an "unstoppable force," and Wind River officials borrowed that term in describing their DSO tools and services. "The trend that's really unstoppable... device software optimization is upon us," said Klein, who said customers are starting to understand the need to turn to commercially viable solutions from companies such as Wind River in order to meet time-to-market constraints and reduce the risks of embedded development.

Wind River has 1,046 employees, down from 1,078 a year ago. The company forecasts revenues between $53M and $55M for its upcoming quarter. It lists its top ten customers as Alcatel, Boeing, Fujitsu, Motorola, Nortel Communications, Phillips, Raytheon, Samsung, Siemens, and UTStarcom. Its revenues from subscriptions comprised 18 percent of earnings, up from 12 percent in the prior quarter. Subscriptions account for more than half of the company's deferred revenue balance. Revenues rose 9 percent for the quarter, for a net loss of $3.8 million, or 5 cents per share, down from a $10.8 million, 14 cents per share loss in the same quarter of the previous year.

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