“Not every order begins with a purchase. Some begin with a decision.”
One phrase appears repeatedly throughout the engineering and technology sectors. “The company has secured several important design wins”. It sounds encouraging and markets often react positively. Management teams highlight the announcements, and investors often add another point to the investment case, but relatively few investors pause to ask an obvious question.
What exactly has the company won?
Winning Without Selling
A design win isn’t normally a purchase order. No money necessarily changes hands. Instead, a customer has decided that a particular company’s technology will be incorporated into a future product or platform. In other words, the supplier has earned a place in the customer’s design. This is a small but crucial difference.
Once a component becomes part of a sophisticated defence system, medical instrument or aerospace platform, replacing it can become expensive, time-consuming and technically risky. This means that the supplier is no longer simply selling a product but has become a key part of a customer’s engineering solution.
The Long Road to Revenue
Unfortunately for many, this is where patience becomes critical. A design win rarely produces immediate earnings. Instead, it often follows a sequence that can last many years. First comes research and development, the technical evaluation, qualification testing, prototype production, deployment, ongoing maintenance, and eventually replacement or system upgrades.
Revenue will therefore arrive gradually over many years from the initial design win. This explains why companies such as Concurrent Technologies (LSE:CNC) often refer not simply to current orders but to the estimated lifetime value of design wins. Management is attempting to describe the commercial opportunity created by today’s engineering decisions.
As a result, “Lifetime Programme Values” are therefore estimates of future potential revenue rather than contracted sales. They assume, amongst other things, that production proceeds broadly as expected, that programmes aren’t cancelled, and that future budgets remain supportive. These might be justified assumptions, but assumptions they remain.
I therefore try to avoid treating design-win announcements as though they’re signed contracts and instead view them as evidence that future demand has become more probable. Note, that’s probable, not certain.
With that said, design wins are still important indicators of a company’s future potential beyond next year’s revenue. They’re a good indicator of competitive position. When a customer chooses one supplier over another after extensive technical evaluation, they’re expressing confidence in that supplier’s engineering capability, reliability, and long-term support. These qualities are difficult to measure from financial statements alone but are no less important than the resulting pounds and pence that they generate.
Repeated design wins suggest that a business is strengthening its competitive position, even before the accounting numbers fully reflect that success.
A Competitive Moat Built One Decision at a Time
This is particularly true with aerospace and defence companies.
Once equipment has been qualified for military or aviation use, replacing it is rarely straightforward. Alternatives have to be certified, tested, and even if selected, replacement programmes run a lengthy gauntlet of opportunities for problems. As a result, customers in these sectors tend to favour continuity unless there is a compelling reason to change. This creates a relatively sticky forward pipeline of revenue, protected by the challenges associated with switching. As such, every successful design win slightly deepens the competitive moat.
Concurrent Technologies
Concurrent Technologies recently announced several significant design wins alongside an estimated lifetime value of approximately £129 million. I discusseed the wider investment case for Concurrent Technologies recently, but the headline figure naturally attracted attention, but the more interesting point to me was what the repeated wins tell us about the underlying business. In short, they suggest that customers are continuing to select Concurrent’s technology for demanding applications where reliability matters more than price.
Whether every win ultimately generates the anticipated revenue is important, but my primary observation was that the engineering reputation that produced those opportunities may prove even more valuable than any individual contract.
This is why I find the accumulation of design wins so interesting. One win might develop differently from management’s expectations. A succession of wins, however, beings to tell us something about a company’s position in its customers engineering programmes. The signal isn’t purely revenue based, but it’s definitely a sign that the business continue to be “chosen” by the market.
Looking Beyond The Headlines
Every investor loves hearing that a company they’ve invested in has generated “record profits”. They welcome growing dividends and celebrate expanding order books. Whilst these are all laudable indicators of a strong investment, they’re all backward-looking, and as my friend Peter Higgins has pointed out many times, it’s the future that will drive returns.
Design wins are one such future indicator. They offer a glimpse of future competitive strength before it becomes visible in reported earnings.
The main challenge is that we must always remember what they are, and most important, what they aren’t. They aren’t revenue, cash flow or a guaranteed contract, but they are evidence that a company is earning the trust of demanding customers. Repeated over time, they can tell us something about the competitive position long before that advantage becomes fully visible in the accounts.
None of this removes the ned to think about valuation. A company can still possess an excellent forward pipeline and still mak a poor investment if too much of that future success is already reflected in the share price. Design wins help me to assess the quality and direction of a business. They don’t tell me what I should be willing to pay for it.
For long-term investors, that may be worth more than the next quarter’s results.
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Twin Petes Investing Podcast
The latest episode of the Twin Petes Investing Podcast is now available. Peter Higgins and I discuss our latest investment ideas and look ahead to the Twin Petes Live Portfolio Clinic at Investor Summit on 18th September.
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