Guidance Gusto Ups Wind River - TheStreet

Wind River Systems

(WIND)

posted its first annual profit in five years and boosted revenue in the first quarter by 14%, the Alameda, Calif., company said before the opening bell Tuesday.

Although the software vendor's earnings guidance for the second quarter was light, investors focused on strong guidance for fiscal 2006, and in recent trading they bid shares up by $2.04, or 15%, to $15.50.

For the quarter, the company earned a profit of $6.1 million, or 7 cents a share, compared with $2.4 million, or 3 cents a share, during the same period a year ago. Overall revenue increased by 14% year over year to $63.6 million.

Like other software companies, Wind River is moving its business model away from perpetual licenses, whose revenue is recognized upfront, to subscriptions, which are recognized over time. Deferred revenue in the quarter grew by $18.7 million, or 32%, to end at $76.7 million, and up 96% during the year.

The company's results were modestly better than expected; analysts polled by Thomson First Call had forecast a profit of 5 cents on sales of $62.3 million.

Wind River develops software for use in automobiles, industrial equipment, networking devices, printers, cameras and defense-related equipment. In the past, said CEO Ken Klein, much of that software was developed in-house. "But the growing complexity and size (typical device software contains 1 million lines of code) are pushing companies to move from build to buy," he said in an interview.

For the second quarter, the company said it expects pro forma EPS to range from break-even to 1 cent on revenue of $59 million or $60 million. Wall Street was expecting a profit of 2 cents and revenue of $59.5 million.

For the full year, Wind River expects to earn a per-share profit ranging from 27 cents to 30 cents on revenue of $265 million to $270 million.

Despite the strong quarter, analyst Richard Williams of Garban Institutional Equities expressed concerns about the company's valuation, which he pegs at 61.9 times earnings in 2005, and 37.8 times in 2006. Its peers, he said, trade at P/Es of 28.8 and 25.7.

"We suspect that the justifications for pricing the stock so high are more closely related to bubble mentality than to reality and continue to believe that slower growing stocks will trade back to traditional fundamental valuation ranges," Williams wrote in a note to clients.