Some days you just have to love Wall Street. Software development company Wind River Systems (Nasdaq:WIND) reports results that beat estimates, shows solid year-on-year growth (even though the year-ago was boosted by some one-time items), reports that the backlog is up 20%, and announces very solid growth in the Linux business. The reaction?

The stock dropped almost 11% on Friday.

That Nasty "G" Word
As you might have guessed, it was the company's guidance that apparently soured some investors. Although management did give a slight bump to its full-year estimate for earnings, the numbers for the third quarter are coming down. I have never really understood why some investors put so much emphasis on the quarter-to-quarter variations in earnings, but the reality is that they do and the rest of us have to live with it. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Perhaps in the case of Wind River, a company that has had a fair bit of volatility in both financial performance and stock performance over the years, it makes sense for the professionals to be a bit more skeptical. Then again, maybe this is a chance for more patient hands to pick up some shares at a better price.

Moving past the Momentum and onto the Meat
Looking at the meatier details of the quarter, I see some encouraging points. Earnings growth was solid, operating margins improved, and the company's bookings were well-apportioned between its core customer categories (network infrastructure, aerospace/defense, industrial/auto, and digital consumer). Moreover, Linux bookings more than doubled as participation in the Open Handset Alliance (a group that includes Google (Nasdaq:GOOG), Motorola (NYSE:MOT), Samsung, and Qualcomm (Nasdaq:QCOM) among others) seems to really be paying dividends. (To learn more, see Analyzing Operating Margins.)

All of this supports the notion that the ongoing efforts to simplify the business are showing some results. The company has changed its sales model to increase the focus on named accounts, and there were eight deals worth more than $1 million this quarter. Now, it's probably fair to wonder how much of the benefit is from the new model and how much is coming from collaborations like the Open Handset Alliance and LiMo (a mobile platform operating system alliance that includes Texas Instruments (NYSE:TXN) and Verizon Wireless (co-owned by Verizon (NYSE:VZ) and Vodafone (NYSE:VOD)), but either way, something is going right for Wind River.

A Company in Good Company
I don't want to turn this column into a roll-call of all of the bigger companies that work with Wind River, but I think it is a significant point for investors to consider. After all, the software industry is exceptionally competitive and when you go up against the likes of Microsoft (Nasdaq:MSFT) in the market, it helps to have allies. To that end, then, I would point out that Wind River also has an expanding partnership with Intel (Nasdaq:INTC) and virtually every major networking company uses its software tools.

The nature of product development and new product launches, not to mention the short-term impacts that the broader economy can have on the business, suggests to me that Wind River will probably never offer metronome-like predictability with its earnings growth. But perhaps that's not such a bad thing. After all, if a little quarterly volatility ups the institutional perception of risk in this stock, the patient individual investor can take advantage of days like these to start or build positions.

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Tickers in this Article: WIND, GOOG, MOT, QCOM, TXN, VZ, VOD, MSFT, INTC

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