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Executives

Anne Marie McCauley - Vice President, Investor Relations

Ian R. Halifax - Chief Financial Officer, Senior Vice President - Finance & Administration, Secretary

Kenneth R. Klein - Chairman of the Board, President, Chief Executive Officer

Wind River Systems, Inc. (WIND) F1Q10 Earnings Call January 30, 2008 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to Wind River's Q1 fiscal year 2010 earnings conference call. (Operator Instructions) Ms. McCauley, you may begin.

Anne Marie McCauley

Thank you. Good afternoon and welcome to Wind River's Q1 fiscal 2010 conference call. Joining me today is Ken Klein, our Chairman, CEO, and President; and Ian Halifax, our CFO.

Before we start, I would like to remind you that this call is being webcast. The webcast and the first quarter update presentation can be accessed on the Wind River investor relations website at www.windriver.com. A replay will also be available shortly after the conclusion of the call and will remain available for approximately one year.

During today’s prepared remarks, we will discuss our first quarter financial results and today’s announcement that Intel has entered into a definitive agreement to acquire Wind River. We will not be hosting a question-and-answer session, nor providing financial outlook on today’s call.

The purpose of this call is to provide you with information regarding Q1 FY10; however, some of our comments will include forward-looking statements, such as statements regarding the execution of our definitive agreement to be acquired by Intel and the completion of the transaction, potential design wins, or market opportunities, expected business or market development, and expected new products or product features or the benefits of new products.

These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties. Actual future results may vary materially. I encourage you to read the risk factors described in the company’s annual report on Form 10-K for the fiscal year ended January 31, 2009, as well as other reports filed with the SEC after that date, including our Form 8-K filed today.

I would also like to point out that certain results discussed today include certain supplemental non-GAAP financial measures. We provide these non-GAAP financial measures because we believe that they provide important supplemental information about our core operating results. These non-GAAP financial measures have not been prepared under any comprehensive set of accounting rules. All non-GAAP financial measures should be read in conjunction with the comparable GAAP information.

For a description of non-GAAP financial measures and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of Wind River's earnings release issued today entitled “About Non-GAAP Financial Measures” and supplemental information posted on the Wind River Investor Relations website at www.windriver.com.

Finally, please note that under the agreement with Intel, a tender offer for the outstanding shares of the [construct] of Wind River is planned but has not yet commenced. Once commenced, there will be documents filed with the SEC and made available to our stockholders by Wind River for the tender offer, and by Wind River with respect to a solicitation or recommendation of the offer. These documents will contain important information that should be read carefully before any decision is made with respect to the tender offer.

With that, I will turn the call over to Ian Halifax.

Ian R. Halifax

Thank you, Anne Marie. Good afternoon. I would now like to review our first quarter fiscal year 2010 financial performance. Before we discuss our Q1 performance, it is important to remember that Q1 last year was extremely strong, from both a revenue and earnings perspective, due to one large customer transaction.

For the first quarter of fiscal year 2010, net revenues were $82.5 million, reflecting a 6% decrease over the first quarter of fiscal year 2009. Subscription revenue for the quarter declined 12% to $29 million, compared with Q1 a year ago, due to further adoption of the term license model.

Product revenue, including project-based perpetual and term licenses, as well as production licenses, was $30.2 million, down 8% compared to $32.9 million in the first quarter of fiscal year 2009. Perpetual and term licenses contributed $16.1 million to product revenue, growth of 16% compared to Q1 a year ago.

Production license revenue was $14.1 million, a decrease of 26% compared with Q1 a year ago. [The cost], or run-rate production license volume stemming from our customers’ device production last quarter, was affected by the macroeconomic environment. A lower level of block purchases also contributed to the decline. The level of compliance or customer audit activity improved compared to both last quarter and Q1 a year ago.

Services revenue, including maintenance, professional services, and training, was $23.3 million, up 6% compared to the same quarter a year ago. Deferred revenue for the quarter ended up $121.3 million, representing a 16% decrease compared to the first quarter of fiscal year 2009.

At the end of the first quarter, we had services backlog of approximately $14 million, representing a decrease of approximately 27% compared to the same quarter a year ago. The combination of deferred revenue and services backlog this quarter is approximately $136 million, representing a decrease of approximately 18% compared to the first quarter of fiscal year 2009.

VX Works revenue for the first quarter of fiscal year 2010 was $59.3 million, a decrease of 13% when compared to the first quarter of fiscal year 2009. Linux revenue this quarter was $13.7 million, an increase of 71% compared to the same quarter a year ago. Other revenue, including revenue from non-core products, design services, tool and device test for the first quarter of fiscal year 2010 was $9.5 million, a decrease of 20% compared to the same quarter a year ago.

In terms of geographies, the Americas represented 53% of total revenue for the first quarter, EMEA contributed 20%, and Asia-Pacific, including Japan, contributed 27%.

In terms of bookings, come of the top customers in the quarter included Alcatel-Lucent, Boeing, General Electric, Huawei, Konica Minolta, L3 Communications, Mitsubishi, Ratheon, Samsung, and Sumitomo Electric.

We had 114 deals greater than $100,000 during the quarter and we had six deals that were greater than $1 million during the quarter.

Our bookings profile by end market for the quarter was as follows: network infrastructure accounted for 28%; aerospace and defense, 39%; industrial and automotive, 20%; and digital consumer, 13%.

Gross margin on a non-GAAP basis for the first quarter of fiscal year 2010 was 79%, up from 76% in the first quarter a year ago. This was driven primarily by the increase in revenue from term licenses and stronger services margins.

Non-GAAP operating expenses decreased in Q1 from Q4 levels to $58.2 million. The sequential decrease of [$9.6 million], or 1%, was primarily due to lower compensation expense and sales commissions. We continue to manage costs and expenses extremely carefully.

Non-GAAP operating income in the first quarter was $7 million, compared to $5.5 million in the same quarter a year ago, an increase of 28%. This translates into first quarter non-GAAP operating margin of 9% compared to 6% in the same quarter a year ago.

Interest and other income on a non-GAAP basis was [$9.5 million] for the quarter.

The impact of FAS-123R, expensing of stock-based compensation in the quarter, was $4.2 million.

We incurred the impairment expense of [$9.4 million] relating to a small component of our investment portfolio.

Net income on a GAAP basis in the first quarter of fiscal year 2010 was [$9.6 million] compared to net income of [$9.5 million] in the same quarter a year ago.

Non-GAAP net income in the first quarter of fiscal year 2010 was $7.3 million compared to $7.8 million in the same quarter a year ago.

On a diluted share base of 77.1 million shares, GAAP net income per share in the first quarter was $0.01, the same as Q1 a year ago.

On a diluted share base of 79 million shares, non-GAAP earnings per share in the first quarter were $0.09, also the same as Q1 a year ago.

Q1 FY10 ended with $169.8 million in cash, cash equivalents, and investments. Cash flow from operations were $5.5 million for the quarter.

The account receivable balance as of April 30, 2009, was $61.9 million. Days sales outstanding was 68 days.

Depreciation in the first quarter was $2.6 million. Capital expenditures were $1.9 million, including approximately $1.4 million for internal use hardware and software projects.

At the end of April, our total headcount was 1,661, including a sales headcount of 417. We had roughly 165 quota bearing sales personnel at the end of the quarter.

That concludes my comments on Q1 financial performance. Given this morning’s announcement with Intel, we will not be providing revenue and earnings guidance.

At this point, I would like to hand the call over to Ken.

Kenneth R. Klein

Thank you, Ian and good afternoon, everyone. I am pleased to share with you today what I believe to be the most exciting news in Wind River's 28-year history. This morning it was announced that Intel, the number one semiconductor company in the world, has entered into a definitive agreement to acquire Wind River. Under the terms of the agreement, Wind River will acquire all outstanding Wind River common stock for $11.50 per share in cash, or approximately $884 million in the aggregate. This represents a 44% premium over yesterday’s closing price.

The acquisition is expected to close this summer, subject to typical regulatory approvals and other conditions specified in the definitive agreement. Further details will be made available when the definitive agreement is filed the next day or so, and when Intel files its tender offer statement and Wind River files its recommendation statement.

Upon completion of the acquisition, Wind River will become a wholly-owned subsidiary of Intel, reporting into Intel’s software and services group headed by Rene James.

Let me tell you why we believe this deal makes business sense for both companies. Intel is targeting significant growth in two strategic market segments -- number one, embedded, aerospace and defense, telecom, industrial, medical, energy, transportation, and automotive. And number two, mobile, encompassing smartphones, mobile Internet devices, and other consumer electronics devices.

Intel has made significant investments in chips for these two markets, including Atom, Nehalem, and others. It has become clear over the past 12 to 24 months that customers carefully consider both hardware and software when they evaluate any silicon company’s parts. Simply put, hardware is viewed as necessary but no longer sufficient for a total solution. It is Intel’s belief that we can significantly help them reach their growth targets in these markets in two ways -- it is expected that we will help them accelerate hardware sales, ensuring that deeply integrated and optimized Wind River software will be available for their silicon, and that we will be able to help Intel create a growing software based revenue stream. In the process, we expect to be able to transform FSG to a profit center.

Let me tell you why this makes sense for Wind River. It is expected that we will have the ability to dramatically increase our reach and revenues, and we will be able to sell Intel software products, including some highly differentiated tools offerings.

We will maintain our commitment to providing multi-OS solutions on multiple architectures, including PowerPC, ARM, and MIPS. We have proven and will continue to prove that we can deliver world-class solutions on multiple hardware architectures without compromising the strict confidentiality and trust that we have built with our partners.

Why now? Our two companies have partnered together for a long time, and the closer we work together the more it became apparent that we have similarly innovative and passionate employees, mutual growth goals, and philosophies. Together, it makes it even easier to tightly integrate Intel’s great hardware with our software, combined with our global services and support, and take advantage of the Intel technology investment, employee base, global sales force, and brand, creating even more compelling sales propositions.

As I mentioned earlier, upon completion of the acquisition, Wind River will be run as a standalone business and wholly-owned subsidiary reporting into Intel’s software and services group, or SFG. SFG is a 3,500 person software organization inside of Intel.

We will maintain our own brand, culture, and identity but will be embedded in a strong and exciting company. Throughout our discussions, Intel repeatedly reiterated the importance of the breadth of our product line and services capabilities, including VX Works, Linux, tools, testing, support, and professional services. They are excited about our legacy, experience, and progress in all of our target vertical markets.

It is expected that the entire executive staff, including me as President of Wind River, will remain in place.

As with any transaction of this size, it is expected that some minimal number of positions will unfortunately be eliminated. Beyond that, I do not expect to make major changes to our product division structure, engineering, marketing, sales, support, or services.

In summary, we believe the combination of Intel and Wind River’s strengths will be of great benefit to our existing and future customers. We remain committed to continuing to develop innovative commercial grade software platforms across multiple hardware architectures and delivering the same world-class support to which our customers have grown accustomed.

And finally, I am thankful to the Wind River team for building a great and valuable company, and we look forward to the opportunity to continue our business under the auspices of a great company like Intel.

This concludes our comments for today. Thank you for joining us.

Operator

This concludes today’s conference call. You may now disconnect.

Question-and-Answer Session

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Source: Wind River F1Q10 (Qtr End 4/30/09) Earnings Call Transcript

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