Thursday, March 14, 1996
MARKET CLOSE
INDEX:
I. Market News: Early Rally Tempered In Afternoon
II. Heroes: Barnes & Noble, Cytel, ACT Networks, Advance Multimedia
III. Goats: Active Voice, Kulicke & Soffa, Tower, Philip Morris
IV. Investment Perspective: Alex Brown New Media, Day 4
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5586.06 +17.34 (+0.31%)
S&P 500: 640.87 +2.32 (+0.36%)
NASDAQ: 1091.07 +2.43 (+0.22%)
After our recent weeks of volatile swings, the market's advances today seem only moderate. Economic data reported today seems to suggest that inflation is under control and that the economy is growing at a moderate pace. This news, less-positive than last week's remarkable unemployment numbers, gave the stock and bond markets a paradoxical boost. For a thorough look at today's interesting economic news, zip on over to MF Merlin's Economic Indicators area in the Evening News screen. Today Merlin tackles the Labor Department's report on the Producer Price Index (PPI) for February, new claims for unemployment insurance for the week ended March 9, ten-year high levels in consumer loan delinquencies, and Treasury Department doubts regarding the plausibility of last Friday's employment report.
Analysts are still discussing the implications of yesterday's announcement that the Liggett Group tobacco company is settling its portion of several major lawsuits. For MF Templar's take on the matter, check out our Special Section in the main screen listbox. Another Special Section there details Templar's ongoing experience at the Alex Brown New Media Conference, including his analysis and company reviews. And for those of you who just can't get enough of MF Templar's incisive analysis. . . hold on to your seats. . . a new series---Technophrenia---is coming!
Shares of the largest U.S. bookseller Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> were pressed up $2 7/8 to $32 3/8 today, as the company reported strong earnings. Excluding restructuring charges, earnings per share (EPS) for fiscal 1995 were up 30% over the previous year, to $1.05, and revenues were up 22% in the same period. Perhaps most impressive was the performance of the chain's "superstores", which saw revenues rise 42% year-over-year and which contributed 68% of total revenues, vs. 59% a year ago. Barnes & Noble is in the midst of a restructuring plan aimed at boosting profits by closing unprofitable smaller stores and focusing on Superstores and mall stores. Perhaps in sympathy, competitors Borders Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %> and Books-a-Million <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BAMM)") else Response.Write("(NASDAQ: BAMM)") end if %> were up $7/8 to $27 and $3/8 to $11 7/8, respectively.
Pharmaceutical concern Cytel Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYTL)") else Response.Write("(NASDAQ: CYTL)") end if %> popped up $1 1/4 to $8 when it announced very positive phase II trial results for an anti-Hepatitis-B treatment. The product, Theradigm(TM)-HBV, provoked an immune response in chronically-infected patients. Approximately 350 million people suffer from Hepatitis-B, which causes 2 million deaths per year.
ACT Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANET)") else Response.Write("(NASDAQ: ANET)") end if %> continued to rise today, up $2 1/4 to $24 1/2, after recently announcing an agreement to provide the Takachiho Koheki company of Japan with a custom version of its frame relay access device which will then be sold by Takachiho Koheki and its resellers. The deal's first order is valued at nearly $3 million. ACT shares have been hot recently, rising over the past year from $5 3/4 to today's high.
Advance Multimedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMM)") else Response.Write("(NYSE: AMM)") end if %> shares blasted up $2 7/8 to $19 3/8 after the company announced that Panasonic's multimedia notebook computers will be shipping with Advance's CD-ROM multimedia software, DiscoverWare, pre-loaded. DiscoverWare combines audio, video, and animation to train users in applications such as Windows95, Lotus 1-2-3, and WordPerfect by placing them in a simulated virtual TV studio and by leading them step-by-step through application features.
QUICK CUTS: Shares of medium-duty truck transmission-maker CAPCO AUTOMOTIVE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAB)") else Response.Write("(NYSE: CAB)") end if %> shares revved up $4 3/8 to $12 1/8 today after Eaton Corp. announced a bid to acquire Capco for $11 per share in cash. . . Recent IPO GENSYM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GNSM)") else Response.Write("(NASDAQ: GNSM)") end if %> hopped $1 3/4 to $16 1/2 on an initial rating of buy from Montgomery Securities. The brokerage e set a year-end target price of $23. . . Telecommunications equipment manufacturer SCIENTIFIC-ATLANTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFA)") else Response.Write("(NYSE: SFA)") end if %> was upgraded by Cowen from buy to strong buy, sending shares up $1 5/8 to $18 1/2. . . SPYGLASS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> advanced $1 1/8 to $27 1/8 in the wake of Microsoft's deal to provide America Online with its Spyglass-licensed Internet Explorer browser. . . Seismic instrument manufacturer INPUT/OUTPUT INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IO)") else Response.Write("(NYSE: IO)") end if %> reported record revenues up 123% for the quarter, and earnings up 76%. These were enough to shake the stock price up $4 3/8 to $32 5/8. . . AMERICAN EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> charged $2 1/4 to $47 1/4 after Warren Buffet revealed his desire to increase his stake in the company from 10.2% to 17%.
Computer telephony firm Active Voice <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACVC)") else Response.Write("(NASDAQ: ACVC)") end if %> announced yesterday that it expected this quarter's earnings to disappoint, sending shares down $5 1/4 to $13. The leading manufacturer of computer-telephone integration and computer-based voice systems blamed the shortfall on, "1) the loss of software kit sales to our largest OEM, Comdial, who recently announced an intent to acquire a competitor, 2) the product mix shift from our mid-sized offering, Replay Plus, to our low-end product, Replay, which was recently made more affordable to small enterprises, and 3) to a lesser extent, the challenges of selling and installing Computer Telephony Integrated products." The company maintains that these are temporary troubles, and still sees a rosy future. Only a month ago, the shares stood at $22.
Kulicke and Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KLIC)") else Response.Write("(NASDAQ: KLIC)") end if %> shares dropped $3 to $15 3/4 today, after the company warned that its March quarter and fiscal 1996 earnings are likely to disappoint. The semiconductor equipment maker blamed low growth estimates for the semiconductor industry, as well as uncertainty in Taiwan. Earnings for the March quarter are predicted to compare to year-ago numbers, while the rest of the year's quarters are expected to be "significantly" lower than in 1995.
Another semiconductor company also warned of low earnings. Tower Semiconductor Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TSEMF)") else Response.Write("(NASDAQ: TSEMF)") end if %> of Israel explained that it is experiencing lower-than-expected yields from a new wafer manufacturing process, and sees sales and earnings for the rest of 1996 and through 1997 being below estimates. In response, investors dropped the stock $3 to $13 1/2.
Tobacco and food giant Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> got smoked for $5 3/8 to $92 5/8 in the wake of the Liggett Group's settlement of several major lawsuits against the tobacco industry. It is widely believed that the move was a tactic designed by Bennet LeBow to pressure RJR Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> to spin off its tobacco business. Meanwhile, though, the uncertainty surrounding the industry is weakening some stock prices. RJR Nabisco was down $1 1/4 to $32 5/8, and UST (NSYE: UST) dropped $1 to $33 5/8. For much more on these unfolding developments, see MF Templar's perspective in his Special Section on the main screen listbox.
QUICK CUTS: BIG FLOWER PRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGF)") else Response.Write("(NYSE: BGF)") end if %> could not stem a loss of $4 7/8 to $10 7/8 today, after warning that due to the recently-weak advertising market, its third quarter earnings would be low. The company expects a loss of $0.13-$0.15 per share, compared with a gain of $0.05 per share a year ago. . . OFFICE DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %> shares crashed $2 3/4 to $20 1/2 after Sanford Bernstein cut its first quarter earnings estimate. The company's outperform rating was retained, however. . .PLANAR SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PLNR)") else Response.Write("(NASDAQ: PLNR)") end if %> dropped $2 to $10 5/8 on a downgrade from buy to outperform by Smith Barney analyst Peter Enderlin. . . Crop nutrient producer IMC GLOBAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGL)") else Response.Write("(NYSE: IGL)") end if %> saw its shares wilt $1 5/8 to $39 1/4 after it announced that it will reduce third quarter earnings by $0.75 per share due to merger and restructuring expenses. The recent merger was with Vigoro Corp., and the restructuring plan includes layoffs, a new decentralized structure, and estimated three-year savings of $120 million. Apparently investors will believe it when they see it.
INVESTMENT PERSPECTIVE:
The Alex Brown New Media Conf.--Part 3
"Branding" is the buzzword at this week's Alex Brown New Media conference. These relatively young companies are universally concerned about branding, regardless of whether they are peddling access, software, content aggregation, development & authoring tools or any other digital product. Nowhere is the concept of branding more pressing than in the software game category, populated by Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BROD)") else Response.Write("(NASDAQ: BROD)") end if %>, Softkey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKEY)") else Response.Write("(NASDAQ: SKEY)") end if %>, Maxis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MXIS)") else Response.Write("(NASDAQ: MXIS)") end if %>, Spectrum Holobyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SBYT)") else Response.Write("(NASDAQ: SBYT)") end if %> and GT Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GTIS)") else Response.Write("(NASDAQ: GTIS)") end if %>, just to name the companies whose presentations I attended.
It will be helpful to explain just what branding is before launching into a detailed discussion of how it affects the software industry. A brand is the most intangible asset that a company can have and yet it can be more significant than all the bricks, mortar, management and distribution muscle it can bring into play. You do not find a brand on the balance sheet with a quantified dollar value (although the IRS is trying to find a way to do this in order to tax them). At the same time, without a brand, many companies would not be able to do business in their usual way.
The most common illustration of the power of a brand is Coca-Cola---if their real estate was blown-up tomorrow by tooth decay extremists, the management could simply stroll across the street, get a $100 million loan and be back in business in a week. If you could take their brand from them, they would suddenly lose the ability to charge premium prices for carbonated water and syrup. Branding is so powerful that people could enjoy New Coke in blind taste tests but hate it once they saw that it was not their familiar soft drink. Coca-Cola's brand is so powerful that people call the very product "coke" even when another company makes it. It is the equivalent of buying some software and calling it a "microsoft".
Brands come into play in the software industry, especially among the CD-ROM ranks where there are literally thousands of titles competing for users' attention. Adjunct to brands is distribution, which amounts to getting the product out in the right stores at the right price to be bought by the right people---the ones whose checks don't bounce. Depending on the markets that software companies are targeting with their products, each of these companies emphasizes an alternate scheme to brand, differentiate and distribute their product. What surprised me the most was how different each management's strategy really was and how varied the method of execution could be in an industry that most investors tend to think of as a homogenous entity.
Software is broken into a number of categories in which companies compete to varying degrees depending on their business models. In the presentations I attended, the main categories discussed were entertainment, education, reference, lifestyle, and productivity with the last two clusters blending together. Entertainment consists of games---whether it is Doom II, King's Quest IV or Tetris, it is a product designed to amuse and entertain. The gaming segment is the most populated, with arcade-style action, puzzles, simulations, and role-playing being the dominant types. Education, sometimes called edutainment, focuses on teaching children basic skills and commands the highest prices, as it is a product parents are willing to pay dearly for when it comes to quality. Reference ranges from dictionaries to multimedia encyclopedias. Lifestyle and productivity products include calendar-makers, personal finance software, applications and the like.
The company betting the most on brand names is Broderbund. CFO Michael Shannahan believes that "brands create their own distribution" because of the high demand. Broderbund is a company that has focused completely on developing quality products that dominate its niches. Its revenues are pretty evenly split between entertainment (Myst), education (Carmen Sandiego) and productivity (3-D Home Architect). Many of its hottest titles were developed through its affiliated brands program whereby the company funds third-party developers to build a product around an existing brand, like Dr. Suess. Broderbund's products all carry a pretty high price point and the company does not have substantial distribution assets.
Softkey is Broderbund's anti-matter twin, the opposite in every way. The company bills itself as the premiere software vendor for consumers and has suddenly started preaching the religion of brands after years of exploiting the low-end of the software market. The product of a merger between Softkey, Wordstar and Spinakker a few years ago, Softkey used to pump out offerings at the $20-or-below price point and make its money in volume. Now that it has acquired the assets of the Learning Company and Minnesota Education Computing, its product mix has shifted dramatically.
It emphasizes that its products are number one in reference, entertainment and edutainment and that no one product accounts for more than 6% to 7% of revenues. It has a "powerful" distribution network that involves retail, international capabilities, mail order and online. Its management, much like its brands, has been acquired through acquisitions and it believes it has put together a solid team. Softkey, which according to many at the conference changes its presentation completely every time it presents, now says that after finally penetrating the educational market after three failed attempts, it has number-one products in reading and writing and number-two products in spelling and math.
Softkey believes that it can leverage the same code into products that have prices between $12.95 and $99, penetrating all levels of the distribution chain. Its example is its calendar software, which it sells as a product to make multiple calendars with a lot of graphics ($99), a Sports Illustrated Swimsuit Calendar ($50) and some less expensive iterations without an extensive graphics library. One "code-base" allows five "phasings" maximizing penetration. The company also says that two-thirds of its sales are now above the $29.95 price point with the really cheap $12.95 stuff only accounting for 12% of its sales. This was no doubt helped by the portfolio of products that it got with the Learning Company.
With the Learning Company brand name, Softkey can now launch education titles that sell. This is why it paid so dearly for the company and was willing to fight Broderbund tooth and nail for it. Without the Learning Company, Softkey really had no way to consistently demand higher price points. This is what a brand name does and this is what the people who thought the Learning Company was undervalued before its acquisition did not fully account for.
Maxis will show the value of the SIM- brand name when it launches SIMGolf later this year. Because of the acclaim that SIMCity has garnered, Maxis can penetrate the sports market for the first time with a quality product, and can potentially take over the category. Software companies with brand power have consistently shown that they can take the top spot even if they are last to market. Maxis also emphasized that it was purely an entertainment company and was leveraging the SIM franchise on multiple platforms like the Sony Playstation, Sega and the Internet and was improving its product differentiation, penetrating children's software, action and sports for the first time this year.
Spectrum Holobyte is a company that completely lacks a brand name and has retooled its business plan in order to start developing one. A few years back, before a series of bad product releases and delays, Civilization had earned its Microprose subsidiary a reputation for quality, but after many mishaps it has lost that. New CEO Steve Race believes that by focusing on only three game categories and three platforms, they can start to build back the brand name and get distribution. The path they are taking resembles Electronic Arts to a degree, in that they run multiple studios and emphasize multiple platforms, with the difference being the Electronic Arts fixation with sports games and cartridges making up the bulk of its business.
Lastly, GT Interactive is a company selling itself as an integrated studio that simply takes the brand names others develop and distributes them. Where GT believes it makes money is by bypassing the traditional network of developers and distributions and selling straight to the mass merchant and specialty channel. Using its own proprietary method of gaining point-of-sale information, GT keeps its big customers like Wal-Mart well-stocked with software, minimizing inventory costs and maximizing inventory turns. GT likens itself to the modern-day record labels. In the '50s, there were hundreds of labels and an equal number of distribution outlets. What happened in the '70s was a series of consolidations that left only ten or so big names that were promoting the artists. The drawback of this distribution-centric method is that they are left with no brand name---who the heck buys a cassette because Virgin put it out as opposed to Mercury? The power that Broderbund has and that Softkey alleges it has acquired is the ability to draw the consumer to their product because of the name. A GT and a Softkey would say that distribution, that is getting the product out there, everywhere, in everyone's face is either as important or more important, not relying on the brand to create the distribution.
I will spend more time with each of these companies as I write up my reports from this week based on my notes. Tomorrow's segment will wrap up my comments on the Alex Brown conference by focusing on why companies go to these things and what they hope to gain and will look at a few of the smaller outfits that presented today.
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Byline: Randy Befumo (MF Templar)