"Servers with a Smile" is the title of today's Special Section covering Compaq, Digital and Netscape, which have reported strong earnings and rose today. Included will be a FoolWire on Netscape and a Fool Take on the servers and how software and hardware companies interact in the server market.
MF Merlin's Economic News today covers the Commerce Department's report on durable goods, manufacturers' shipments and orders for March 1996. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on the Evening News screen. In tonight's Fool on the Hill, MF Templar focuses on growth in the PC industry vs. the Digital World. Enjoy!
Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> shares plowed ahead $2 1/4 to $64 today, on the heels of a surprisingly strong earnings report. Revenues were up 35% from the last quarter, and up a remarkable 832% from the year-ago quarter. The company also unveiled a new part of its website called Netscape Destinations. Designed for business users, the site offers financial and general news and information. As Netscape turns more attention to the new "Intranet" market (internal networks using Internet technology), it sees this emerging market accounting for roughly three-quarters of its business.
Remedy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RMDY)") else Response.Write("(NASDAQ: RMDY)") end if %>, rocketed ahead $7 1/8 to $79 1/8 after reporting revenue up 104% from the year-ago quarter and net income up 183%. After debuting in an initial public offering (IPO) last March, the stock has nearly quadrupled in the past 52 weeks. As David Gardner explained in a Valentine's Day "Stocks to Fall in Love With" tribute, "Remedy Corp. develops and retails the Action Request System, 'help-desk software' used by corporations to pool and share (via network) solutions to typical problems that occur to employees or customers."
Applied Voice Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVTC)") else Response.Write("(NASDAQ: AVTC)") end if %> beat estimates handily today, with sales up 31% over the year-ago quarter. The company develops computer telephony equipment which automates call processing and helps people manage messages coming at them from both telephones and PCs. Investors were pleased with the results, and bid shares up 32.5%, up $3 1/4 to $13 1/4.
Instead of losing $0.02 per share, Digital Microwave Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DMIC)") else Response.Write("(NASDAQ: DMIC)") end if %> reported earnings of $0.02 today. This surprise from the maker of digital microwave radios sent shares up $2 5/8 to $11 1/8 and caused Oppenheimer to upgrade its rating for the company from "market performer" to "buy". New orders increased 15% over the year-ago quarter, due primarily to "the ongoing buildup of the wireless infrastructure", said President and CEO Charles D. Kissner.
QUICK TAKES: GLENAYRE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GEMS)") else Response.Write("(NASDAQ: GEMS)") end if %> just met its earnings estimates, but that was enough to send shares skyward, rising $7 7/8 to $45. This suggests that the Street had actually expected worse results from the wireless communications company. Sales increased 49% from the year-ago period, and income from operations increased 41%. . . Momentum-stock ACME ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACE)") else Response.Write("(NYSE: ACE)") end if %> continued its rise today, up $1 3/4 to $12 1/4, a day after reporting sales up slightly and earnings down . . . Medical technology company PROTOCOL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PCOL)") else Response.Write("(NASDAQ: PCOL)") end if %> was boosted $1 1/2 to $18 5/8 after beating estimates by $0.03 and reporting net income up 165% over the year-ago quarter. . . SEATTLE FILMWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FOTO)") else Response.Write("(NASDAQ: FOTO)") end if %> flashed $1 1/2 to $21 after announcing record earnings, with revenue and net income up over 40% from the year-ago period. Last week the company introduced FilmWorksNet, a service helping photographers develop personal web pages. . .Agricultural supplier and servicer AG Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AGSV)") else Response.Write("(NASDAQ: AGSV)") end if %> popped up $3/4 to $14 after reporting record revenues and net income, up over 30% from the year-ago quarter.
Proxima Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRXM)") else Response.Write("(NASDAQ: PRXM)") end if %> analysts found out today that they had not properly 'proximated the company's earnings. The maker of desktop projection products posted earnings per share (EPS) of $0.47, below last year's $0.56 and nine cents below expectations, enough to slash 25.5% off the share price, as it dropped $4 7/8 to $14 1/4. Executives foresee pressure on sales and earnings in the next few quarters, as the company develops new products and establishes "a strong position in the market for the second half of the year."
Zoltek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> shares suffered from a period of profit-taking today, as they dropped $10 to $75 3/4. The manufacturer of industrial materials is a thinly-traded issue, and therefore rather volatile. Prospects for a new Eastern European carbon-fiber plant as well as a recommendation in the Cabot Market Letter had helped push the shares up from the low 20s to the high 80s in the past few weeks.
Several connectivity concerns had a bad day today. Level One Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LEVL)") else Response.Write("(NASDAQ: LEVL)") end if %> met its analyst estimates of $0.24 EPS today, with record revenues up 108% and net income up 120% over the year-ago quarter, but investors must have hoped for more, as shares slumped $2 to $28 1/2. Worse off was Crosscomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XCOM)") else Response.Write("(NASDAQ: XCOM)") end if %>, which lost less than analysts had expected, but saw its shares plunge $1 1/4 to $11 anyway. Its revenues were 19% lower than in its year-ago period.
QUICK CUTS: Nuclear furnace manufacturer BTU INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BTUI)") else Response.Write("(NASDAQ: BTUI)") end if %> experienced a meltdown today, reporting $0.05 EPS instead of the expected $0.09. Unimpressed investors dropped shares $1 5/8 to $4 1/4. . . UNITED DENTAL CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UDCI)") else Response.Write("(NASDAQ: UDCI)") end if %> met its estimates, with managed dental benefits revenue up 43% over 1995's first quarter, but got drilled, down $2 7/8 to $39 1/8. . . EXPERT SOFTWARE (NASDAQL: XPRT) and power conversion company ZYTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZTEC)") else Response.Write("(NASDAQ: ZTEC)") end if %> both missed estimates by a penny and dropped $3/4 to $13 3/4 and $3 1/4 to $26 1/2, respectively. . . WRIGLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WWY)") else Response.Write("(NYSE: WWY)") end if %> announced earnings four cents below estimates and said that it was closing a California plant today, sending shares down $3 5/8 to $51 7/8. . . CD-manufacturer QUIXOTE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QUIX)") else Response.Write("(NASDAQ: QUIX)") end if %> reported disappointing losses and lost $1 to $6 1/2.
FOOL ON THE HILL:
Of Centaurs and Fecoliths
The resurgence in Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> and Digital Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> today brought about a renaissance in "technology-space" today. Herds of institutional investors, blissfully unaware that circa 1994 the "technology sector" became a quaint anachronism much like powdered wigs, bid up the prices of all stocks attached to the computer-complex with little regard for what was really happening. That was fine by most standards, simply because their regard for reality was not really apparent when they killed all of these stocks a month and a half ago either.
Come on. Digital Equipment and Compaq Computer both stand within a hair of where they were before they were mashed in huge down days after simply stating that "things are good, but not as good as last year." Certainly expectations take time to adjust and when growth rates creep down from 50% to 20%, a lot of people become afraid that the creeping will suddenly turn into a deluge and that red ink will flow. One common strand links today's positive news -- the Digital World. More specifically, the curious beast known as the "server", half computer code, half machine.
This modern day centaur stands proudly behind beneficent results at Compaq Computer and Digital Equipment today. Compaq, which holds about 30% of the server market, is the hands-down leader in the segment, with twice the market share of the nearest threat, International Business Machines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>. Digital Equipment is an up-and-comer -- a Digital Alpha server sits silently in the corner of Fool HQ, a recent arrival that will someday house our massive Web site.
Another champion of the day was Netscape. With its 35% revenue growth over last quarter along with 25% profit growth, this company is also about servers. Although servers only accounted for 27% of revenues in the quarter, I suspect they were responsible for a much higher percentage of the profit -- in spite of the fact that Netscape has had to come down to deal with Microsoft's free server package. Heck, the fact that the company increased market share in both servers and browsers in spite of the fact that Microsoft was giving away an alternative for free is pretty impressive -- shows you what brand name in "technology space" can really mean.
The server stands at the heart of today's rally, despite the overall interpretation by most market mavens that consumer personal computer sales were firming. As I never thought they were as bad as most implied, it does not take a lot to convince me that 15% to 20% growth for the year in this category is possible. Digital's declaration last evening that it can make this segment profitable, however, seems a little quixotic to me. When a consumer electronics machine like Sony talks about getting into PCs, I would start looking up the ladder, leaving the lower rungs behind like scraps for the wolves to fight over.
CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> has managed to grow revenues and earnings incredibly over the past few quarters, through good times and bad. The fact that CompUSA caters to the upscale enterprise market, with a careful eye on the sophisticated computer user looking to upgrade their existing system, seems to be a fact lost on many. Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> virtually bankrupted themselves giving away a free monitor with starter PCs. Last time I checked, Packard Bell was in a lot of trouble and needed a short-term loan for chip giant Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %>. What does this mean to me? The low-end, consumer personal computer will grow in revenues but profits are an entirely different issue. The earnings of server-weight enterprise systems companies like Compaq and Digital will be buttressed by the connectivity revolution, not any "resurgence" in PC demand -- especially considering that the slowdown was never as bad as anyone thought.
Let's look at that book-to-bill for a moment. For many, including SoundView analyst Rick Whittington, the last few days have signaled some kind of turnaround in the general direction of the capital goods market. . . errr. . . semiconductor market. The simple fact remains that DRAM prices are in the tank, though. The book-to-bill is likely to stay depressed over the next few months as backlogs are cleared and inventories are worked down. The short-term combination of light orders and heavy billings will mean the number will hang below 1.0 until June or July in my read -- which would be about the length of the 1980, 1984 and 1989 pullbacks in these markets. Don't get me wrong -- I think there is growth galore here. The problem is, it is a cyclical growth that leaves the weak stomachs heaving.
Although chip-makers like Texas Instruments are tough-minded enough to invest counter-cyclically, raising their capital expansion budget while the faint-of-heart all lower theirs collectively, the picture remains muddy and mixed for semiconductor and semiconductor equipment companies short term. As I think the book-to-bill will hang low for another two months, I also think that the robust book-to-bill for semiconductor equipment will trend down, with front-end systems like those sold by Applied Materials bearing the brunt of it all.
I would not look at these stocks as getting away from you any time soon, despite the $3 3/8 run to $42 1/4 you have seen in Applied or the $1 3/4 jump to $19 you got a gander at in Kulicke and Soffa. Certainly these stocks were beaten down too low -- but I think they are going to get hammered again when the book-to-bill for equipment softens and a few semiconductor manufacturers express a cautious word. I would keep my focus here on stocks with a lot of cash (for acquisitions), ridiculous valuations, products that increase output through automation or allow for the construction of sophisticated chip architectures. Names like Ultratech Stepper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UTEK)") else Response.Write("(NASDAQ: UTEK)") end if %>, up $2 1/4 to $27 1/4 today, KLA Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KLAC)") else Response.Write("(NASDAQ: KLAC)") end if %> rising $1 1/2 to $31 1/4 and PRI Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRIA)") else Response.Write("(NASDAQ: PRIA)") end if %>, rising $1 to $29 all come immediately to mind.
Investors are best off when in the midst of celebration they prepare for what can happen next. The above represents my best thinking on the subject, educated by looking at the historical record, as well as being informed by the experience of people like Carl Johnson and Ron Leckie out at Infrastructure (www.infras.com) on capital goods and capital equipment questions. Investors are best served when they think about what the news of the day really means and when they do not depend on the desiccated fecoliths market commentators love to quip on certain television stations or in certain dailies or journals. If you are online reading this, you understand that the true strength in the earnings we saw today comes from the Digital World and not the PC-centric domain. Adjust your expectations for what comes next accordingly and be prepared to take advantage on any ride down.
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Byline: Randy Befumo (MF Templar)