Wintegra - Following up on a Comment

I received a good question on the Wintegra Inc. (WNTG) post I made last week. I felt the response was worth a post on it’s own. Please remember this is not investment advice, and not a negative outlook on Wintegra as a comapny, just my opinion of something that needs to be considered when attaching a multiple and valuation to the company. References to Teknovus and Passave are in context with the previous post.

From “Watcher” -

I don’t really understand your Cisco example: according to your example Cisco doubled its purchasing from Wintegra in 3 years (2003-2005): 27% of $4.5M in 2003 to 10% of $19.5M in 2005: can you explain this again (why doubling sales to Cisco is a problem)?

You ask a good question. In the interest of brevity I oversimplified my argument. Let me explain in detail.

Wintegra NPU Revenues
Fiscal year - Cisco - Total

• 2003 - 1.21M - 3.74M
• 2004 - 1.58M - 7.85M
• 2005 - 1.95M - 18.79M

Note the radical difference in growth rate.

Designing in network processor (NPU) silicon into telecom and datacom equipment requires high initial fixed costs. Companies invest the largest amount of capital to complete the first NPU design. This investment is primarily in heavy software training/learning curve climbing as well as software coding. Follow on products can build on this investment, so incremental design-ins require substantially less investment.

As an NPU vendor, securing the initial design win is a big victory, because once a company has made this large investment they will likely re-use the design for a lower cost, and the NPU vendor enjoys some degree of incumbency within the company. This gives them substantial pricing power and leverage on their customer.

During the previous bubble, the hope of NPU vendors was that a Cisco or Lucent or major tier-1 would acquire a hardware startup using their NPU, with the goal that the silicon would ‘go viral’ within the larger company. This did happen to a limited extent within Cisco.

The problem is, large companies like Cisco realize this incumben