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TMF Interview With Wind River Systems
President and CEO Ronald Abelmann
With Brian Graney (TMF Panic)
October 14, 1998
Based in Alameda, California, Wind River Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIND)") else Response.Write("(Nasdaq: WIND)") end if %> develops software tools that enable its customers to get the most out of microcontrollers, which are the embedded (or hidden) devices controlling products ranging from automotive anti-lock brake systems to video games. By using Wind River's systems, the firm's clients can standardize the design of their products and bring their new products to market quickly, allowing them to compete better against their rivals. The company, which started as a consulting firm, has been designing its software development systems since 1987 and became a publicly traded company in 1993.
TMF: Why do companies use Wind River's embedded systems tools, rather than develop their own in-house?
Abelmann: The fundamental tenets of a customer-designed environment using operating systems are basically to have the right operating system for the job, the right software tools to allow [clients] to write their application programs in as efficient a manner as they can, and then the customer support necessary to help the design engineers actually design their application software. That's the software that really defines the difference between our customers' products and those of our competitors.
Product differentiation is almost totally software-based, [rather than] in chips and hardware. Our customers' main goal is to get the right product out to market as quickly as they can, so it's a whole time-to-market game. And the two most important of the three parameters I mentioned earlier in facilitating time-to-market
are tools and customer support. It's pretty axiomatic that if a customer has to write their own application programs, develop or use operating systems, enhance software tools, and do the support of their engineers doing design, it will take a lot longer that way than buying standard off-the-shelf software from companies whose living it is to make sure that they're contemporaneous with what the market needs.
TMF: What are some of the attributes that set Wind River apart from the other embedded software systems makers?
Abelmann: I think, fundamentally, it's market perspective. We're a highly fragmented market with a lot of small players. Last year, if you looked at the commercial suppliers of operating systems and tools, their total revenues probably amounted to $250 million. Wind River was a little over 35% [of that figure], roughly $92 million. So, it has a lot of the trappings of a techie start-up type of market.
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"I think in our context we have a very, very good market perspective -- not having products that are at the market before their time."
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I think in our context we have a very, very good market perspective -- not having products that are at the market before their time. For example, there were other people in the embedded business who started chasing the set-top box market four or five years ago. We had to make a strategic decision with our limited resources at that time. Rather than chasing that market -- which we regarded as pretty dusty space -- we chose to focus on the core of the Internet infrastructure, [which is] the switches, the routers, and the hubs. They didn't have the same long-term potential, but they were much surer bets. Whereas people chasing set-top boxes five years ago may have had a 1 in 20 chance of hitting a winner, we had basically a 19 out of 20 chance of working with the right companies and the infrastructure. So, selecting your products I think is important.
The other thing is really focusing on the business success criteria, investing in tools and the way customers would like to see them. Customers basically want to have the best tools, [with] selection ability both from Wind River tools as well as from the outside. We've developed an open environment built around a framework called Tornado that allows customers to plug their own tools or third-party tools into it.
We have a tremendous investment also in customer support. In the last two quarters, for example, 27% of our people in the company were in customer support-type functions internally and in the field. The implementation of a better product from 32-bit processors is very, very complex, particularly now that the processors have come down to the $10 price range. You're getting down in the food chain to people designing products that have never dealt with sophisticated products before -- let alone software -- and there's a tremendous dependency on the handholding customer support that we can provide.
So I think we've basically designed the business to resonate very much with the customers' hot buttons. And then we've had an exceptional management team and a very stable employee staff. Our turnover last year was 8%, and the year before it was 7%. So I think we're executing right in a market that still has the trappings of techie start-ups.
TMF: On your website, you indicated a 5-year annual earnings growth rate of 62%. Revenues have grown at 31% annually over that same span. What has driven that growth so far, and how does the company plan to maintain that growth rate?
Abelmann: The main driver for the growth [has been] the 32-bit processor, primarily. When you're working in the 4-, 8-, and 16-bit modes, there isn't as compelling a reason to go to outside products or outside vendors as 32-bits. As it turned out, the competitiveness of the semiconductor market domestically in Europe and Japan has been such that the price of 32-bit products or processors has been driven down to the $8, $10, $15 range. So as you drive it down that far, you go down the food chain to a much, much higher volume product.
You're seeing Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> printers that use our operating systems that you can buy for $200 to $250, which three or four years ago were $2,000 or $3,000. You're finding consumer products -- personal digital assistants, portable phones, phone/Internet access combinations -- that can be built and sold for $500. And as you go down that food chain, you just get a tremendous buildup of volume. And I think it's that type of thing that's stimulated the growth.
I expect that growth will continue. In the Wind River context, what we're doing to try to maintain that growth is to add new capabilities to our products that are of value to customers. We're currently going through a series of seminars rolling out our graphics technology platform, for example. Until recently, for all intents and purposes, we had no graphics in our products. But as soon as you start thinking of productivity, you have to think of how does the user of our products access continuity, which means graphics, Internet interface protocols, [etc.].
On the graphics platform, we're rolling out a platform that we've developed that includes the Java Virtual Machine. We're working with Java, with Sun <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>, and with HTML technology for browsing the Web. This is a strategic relationship and investment that we made with Network Computer, the spin-out of Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>. We acquired a company a few months ago called Zinc Software that provides a very scalable graphics environment for C++ developers. So if you look at this whole graphics repertoire, that certainly adds to the basic baseline of our product growth.
In addition to that, we're doing vertical market work. We've made investments in companies that have a vertical market orientation. One of them, for example, is a German company called ThreeSoft. We're very focused on the German automotive market, which happens to be the heart of electronic technology in automobiles today. They've built around a standard called OSEK and we have worldwide distribution rights of their technology integrated into our environment. So, that's a vertical market. And we're doing some others in the telecommunications switching business.
So, there are a number of areas that we can add. Probably the most profound is an initiative called I2O, which is a new standard for interfacing to CPUs and server environments. The CPUs have become heavily weighed down with input/output (IO) demands, which has been the justification going back a few years to put in distributor processors -- IO processors -- and manage all of the IO from different ray devices and other devices that tie into servers and allow the CPU and the server to have the cycles to do its computer-intensive chores. This is essentially distributed processing. But now this is distributed processing on a motherboard, so you can add the CPU on that motherboard and one or a number of IO processors to handle all the IO.
[This has] tremendous advantages through performance, as well as eliminating the need to rewrite drivers whenever a network operating system vendor like Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> or Novell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> has a revision in their operating systems. This is a market that could result in millions of units a year over the next few years. We have worked with the I2O consortium over the last three years, and we're on the steering committee today. It's a consortium that numbers over 130 companies, including Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>, Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, HP, Microsoft, Intel (Nasdaq; INTC), etc. And we're in a rather unique position being the only supplier of an operating system compliant with the I2O standard. So, this again is incremental business that should build on the baseline that we've had over the past few years. Hopefully, it may even accelerate our growth rate.
TMF: As new business opportunities develop in the future, does Wind River intend to get into those new markets through acquisitions or is that going to be funded internally?
Abelmann: I think we're pragmatic. We look at both. We do a lot of internal funding. We probably invest about 17% of sales internally. But the market opportunities are so great that there are a lot of niche suppliers that have great solutions. In three cases, we took very small interests in key companies in return for exclusive distribution rights and for developing symbiotic relationships. We acquired the Zinc Company in Utah, which has its own level of sales that we expect to build up in the embedded space. We acquired Source Code from NCI approximately a year ago to give us this very important HTML technology. So we're fairly open to that.
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"Whatever we do in terms of acquisition has to dovetail with the priorities and the strategic nature of products we want to have in our repertoire. Anything strategic we want to own, everything else can go by way of partnerships... "
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But our focus is in the embedded marketplace. I think we've executed very, very well and whatever we do in terms of acquisition has to dovetail with the priorities and the strategic nature of products we want to have in our repertoire. Anything strategic we want to own, everything else can go by way of partnerships at different levels. And we have something in the range of 270 partners that are integrated into the Tornado tools environment. There we have a pretty symbiotic relationship -- some of those partners, in fact, could be prospects for acquisition.
TMF: There's been a great deal of attention lately given to the Year 2000 problem. Some people fear their coffeemakers aren't going to work or their cars aren't going to start. What are you views on that? And how is the Year 2000 going to affect Wind River, if at all?
Abelmann: In the Wind River context -- and we do have a statement on it on our website -- we're providing an operating system and we're providing tools for users to write their apps. Those are fairly inert. They're not time/clock based, calendar/clock-based. So, the issue really is much more of an issue of how our customers build their products and what their apps code is. So we have warnings to our customers to make sure that their apps code is year 2000 sensitive. But in our context it really is fairly passive. It's an operating system on a chip and all the rest [are] application tools. So, we don't see that as an issue at all.
TMF: What are the major challenges that Wind River sees as far as executing its business plan right now and also down the road?
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"From my perspective, the ideal balance is maintaining the enthusiasm and entrepreneurship of a small company and not letting size get in the way of that. I think we've been doing that quite well."
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Abelmann: Basically, right now we're inflecting through the $100 million [annual revenue] mark. Analysts expect us to do about $130 million this year and at our growth rate we very quickly start pushing $200 million or $300 million. So, it's growing from a small company to a bigger company. This requires us to implement disciplines that you didn't have to implement when you were smaller. And the challenge then is maintaining the enthusiasm of a small company -- having employees who are really charged up on the company -- while we put those necessary disciplines in place. So, from my perspective, the ideal balance is maintaining the enthusiasm and entrepreneurship of a small company and not letting size get in the way of that. I think we've been doing that quite well. The fact that two years ago our turnover was 7% and last year it was 8% probably attests to it.
Then we're going to have to look at different sales paradigms. We've been basically direct sales so far with some partners. Basically, we're going to see more partners -- certainly less experienced customers, as I've talked about -- and therefore there is the need for more hand-holding, professional services. All of these represent challenges and opportunities for us. We're really enjoying the experience and we will very successfully meet them.
TMF: I'd like to thank you for taking the time to talk with us.
Abelmann: I appreciate it.
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