The bond market was looking for an excuse to rally today and it caused the New York Stock Exchange to hit upside trading limits only a few hours after bumping against downside limits just a few hours before. The first time this has ever happened, it is ironic that it was inspired by a better-than-expected demand for 5-year notes at a government auction. With bonds down 110 basis points in the last five days, needless to say it has been an exciting week and it is only half over.
Well, America Online reported its earnings today, and beat estimates, but the stock dropped sharply today. We have a Special Section on the earnings release, including a conference call report. Stay tuned for more earnings reports due out in the rest of the week. MF Merlin's Economic News today covers the Conference Board's report on the composite indexes of coincident and lagging economic indicators for March. 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 America Online and its developments du jour. Enjoy!
Westell Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> got short-term traders in a tizzy today when it announced a 2-for-1 stock split, effective June 7th. Shares of the asynchronous digital subscriber line (ADSL) and high-bit-rate digital subscriber line (HDSL) provider leapt $8 3/8 to $71 3/4, powered by prospects for its new type of telephone lines. These lines would allow significant increase in bandwidth for data transmission while reserving some space on the same telephone line for actual calls. Amati Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMTX)") else Response.Write("(NASDAQ: AMTX)") end if %> popped up $2 7/8 to $22 5/8 in sympathy.
US Robotics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> pulled ahead $10 1/2 to $177 1/4 after it announced that AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> had chosen the provider of connectivity equipment to supply it with modems for its corporate and consumer online services. US Robotics would supply AT&T with its Total Control hubs in a multibillion dollar, multiyear arrangement worth as much as $45 to $60 million by itself and potentially increasing US Robotics's already 55% market share in this niche to upwards of 60%. Many still look upon US Robotics as simply a modem company, blithely unaware that it is making equipment for the actual infrastructure of the Internet and intranets.
Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> finally proved today that it was more than an ex-food distributor, announcing a contract with an Internet access company to provide networking equipment. Surging $17 1/4 to $66 after this confirmation, Diana will supply equipment to Sattel Communications and Concentric Network Corp. in a "far reaching" memorandum of understanding. Many have been skeptical of Diana in its quest to reinvent itself as a connectivity company from its previous incarnation as a wholesale distributor of meat, seafood and produce.
C-Cube Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %> shot up $7 1/4 to $52 1/4 after it came out with two separate original equipment manufacturer (OEM) announcements. Tee-Comm, TV/Com and DiviCom will all use C-Cube Motion Picture Experts Group 2 (MPEG-2) codexs (coder/decoder pairs of chips) for their digital set-top boxes and digital broadcast satellite systems. The deals strengthen the notion that C-Cube is the dominant supply of chips that are crucial for digital video, only a few weeks after an announcement from IBM that it was making three MPEG-1 codexes shook the stock.
QUICK TAKES: HYDE ATHLETIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HYDEA)") else Response.Write("(NASDAQ: HYDEA)") end if %> rose $1 1/8 to $4 7/8 after it reported earnings of $0.12 EPS versus $0.10 EPS a year ago and made some upbeat comments on the second half. . . MICOM COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MICM)") else Response.Write("(NASDAQ: MICM)") end if %> rose $2 5/8 to $13 3/8 based on rumors that it might be the target of an acquisition-minded competitor. . . TELEBIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TBIT)") else Response.Write("(NASDAQ: TBIT)") end if %> was also up on ADSL fever today, rising $1 5/16 to $10 1/8 on the perception that it might get some patents on its technology.
Omnicare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCR)") else Response.Write("(NYSE: OCR)") end if %> proved itself omni-vulnerable today, falling $4 3/8 to $50 on news that the government is investigating its Home Pharmacy Services division. Yesterday the company explained that the government has not revealed the nature of the investigation, but that the home of Home Pharmacy's general manager was searched, and that Omnicare is cooperating fully with authorities. Last month, Omnicare, which provides pharmacy and consulting services for nursing homes and other long-term facilities, reported earnings up 45% and sales up 29% from the year-ago quarter.
Iomega competitor Syquest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYQT)") else Response.Write("(NASDAQ: SYQT)") end if %> disappointed investors today, actually losing more in the last quarter than it lost. The storage technology company was expected to lose between one and two dollars per share, but posted a stunning loss of $4.49 per share, compared with earnings of $0.31 in the year-ago quarter. Syquest explained that it is in the midst of a major restructuring process and it named several new top executives. But despite this, and adding insult to injury, the company was slapped with a class action lawsuit today, alleging that the company misrepresented its financial situation and growth, driving share prices up nearly to $20 in the summer of 1995, permitting insiders to sell 325,000 shares before negative revelations sent the shares tumbling. On today's developments, shares dropped $3/4 to $4 7/8.
QUICK CUTS: Carbon fiber-maker ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %>, which posted increased earnings yesterday, succumbed to apparent profit-taking today, falling $10 5/8 to $80. Pauli & Co. analyst Chris Pauli explained that results were fine, but not amazing, and that the share price had gotten "a little ahead of itself.". . Text-searching and retrieval software provider EXCALIBUR TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXCA)") else Response.Write("(NASDAQ: EXCA)") end if %> was whacked for $7 to $19 after pre-announcing a first quarter loss on only 10% greater revenues. . . Recent initial public offering (IPO) WILMAR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WLMR)") else Response.Write("(NASDAQ: WLMR)") end if %> dropped $2 to $23 3/4 after it reported $0.10 EPS versus $0.07 EPS last year. Wilmar markets and distributes repair and maintenance products to the housing industry.
FOOL ON THE HILL:
Uncertainty = Death
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> reported earnings this morning. To see the way the stock reacted, you would have thought they missed their numbers. Nothing could have been further from the truth, though. In spite of beating consensus estimates by $0.01 EPS on $0.015 EPS of charges and more shares than expected, America Online belly-flopped down $7 1/4 to $62 3/4.
What was the reaction amongst the investors? Well, as there are more than a few in Fool HQ, between that and the message board I can get a pretty good feel for what is going on. You would think that investors would be decrying their devastating loss, leaping out the window to their untimely deaths below. Not a chance. In fact, checking into the America Online folder here online, you'll just find a lot of confusion as to why the stock was down. These Fools are not alone, as more than a few are scratching their heads at Fool Global HQ, trying to figure out how yet again what could have been easily anticipated is causing a tremendous market move.
Scouring the wires for hints of why America Online is down is a pretty futile effort. Except for some reductionist quips from harried floor traders about the company not beating estimates by *enough*, suspicion falls on the newly-announced $20-for-20 hours pricing scheme. With much-publicized numbers of out the New York Times that two-thirds of America Online's usage came from one-third of its customer base, there is a lot of fear that the pricing system will devastate revenues. Recently this point was underscored quite intelligently by Robert Seidman, who extrapolated from this figure the suggestion that any price cut would cause revenues to collapse in on themselves.
Let's dismiss the first suggestion that America Online crashed because it did not beat estimates by enough. Sometimes I really wonder if the media will actually print anything said by someone on the trading floor, as long as they have the title analyst appended to their name. America Online did quite fine last quarter when it only met estimates and only beat their numbers by a penny the quarter before. No one in their right mind was expecting a major estimate-beating performance, given the fact that America Online's quite capable Investor Relations team gives pretty good guidance to the analysts who follow the stock. I will note that despite today's drop, the stock is actually still up a few percentage points for the week, suggesting that a number of so-called investors piled in the stock and related options in the past few days to "play" on earnings.
As for comments in the conference call that America Online would focus on operations next quarter and growth in the September quarter, more power to them. Len Leader was very careful to say that the higher-than-expected margins this quarter should be taken as an offset to the emphasis on operations next quarter instead of growth and people should keep their expectations, net-net, basically the same. This raised the specter of uncertainty, however, which short-term means death for a stock. If people become a little less-certain, even if it is purely psychological and not based on fundamentals, they will react short-term. I say, let them. It is part of what makes the market and creates value that knowledgeable investors can take advantage of.
The $20-for-20 hours plan is a stickier wicket. There are a number of issues here. First and foremost, there is incredible user demand for such a pricing scheme. In fact, there is incredible user demand for an entirely free service supported by advertising -- something that is not even close, but definitely is one of the possible futures after America Online succeeds in building its brand. America Online absolutely had to deliver this cut in its pricing structure to its members. With more than 50% of traffic on the 100,000-modem AOLNet, the amount it is saving over using SprintNet and TymNet can pay for most of this, protecting their margins.
Many were not even to the point of worrying about margins, more concerned over overall service revenues dropping as a result of the rate cut. America Online just cut prices 66%, many reacted immediately. That has to be bad. Looking into the numbers some more reveals less-negative signs. Robert Seidman showed us last week that if the average America Online customer spends somewhere north of $18 a month for their service and two out of three only pay $10, then the third guy is paying $34 for 18 hours. He suggested that any price cut would cause this to be lowered.
Taking the suggestion by Seidman and others to heart, many got worried today. Now the last guy is only gonna have to pay $20, most people were thinking, the total from three customers will go to $40 and average revenues per subscriber will plunge to $16. Uh-oh. This is not necessarily the case, however. $20 is still lower than cable bills and basic phone rates. If many subscribers perceive $20 as a value, they will probably just start paying the $20 base rate -- even if they don't use the hours. If people start buying more hours than they use, then there are no costs incurred. Moving to a subscriber model like this makes revenues much more predictable and gives America Online even more ability to plan ahead for the future. And even if the guy using 18 hours only pays $20, if the other two bump up to $20 the average revenues per subscriber *rise* even after the price cut.
The last fact to consider in this mix is the increasingly high-margin revenues America Online derives from "other revenues". America Online brought in $312.3 million in revenues, an increase of 24% from last quarter and more than triple what it made a year ago. About 9% of these revenues came from "other" sources, 60% of which is advertising, merchandise and transaction costs. All of these bring more to the bottom line and increase if people are online more. If everyone agrees that America Online needs to generate more of its revenues from this avenue, getting people to come online more makes a lot of sense. Basically, it is my opinion that America Online has finessed this price cut quite well and might actually come out ahead of the curve.
In the end, America Online dropped because everyone who bought this week sold and there was some concern over what might happen in the coming months. But seriously, $20- for-20 hours was no surprise to anyone who has been watching user demand for such a value pricing scheme grow. It was easily anticipated, much like the AT&T event that sent online stocks reeling in February. A focus on operations next quarter was another easy one to guess. There are not too many companies that can grow consistently at 24% a quarter without taking some time to get the core business working again. At a stone's throw from 6 million members, the America Online community continues to dwarf the Web, particularly if you take e-mail-only people out of the mix, and America Online remains the online brand with serious prominence and household recognition.
Do you have what it takes to be a Fool? Is your investing outlook sufficiently Foolish?
Well. . . take The Fool Quiz! The Fool Quiz is a new primer by Jeff Robinson (MF Swagman) and is chock full of entertaining questions and situations where you have to make an investment decision. And no, you don't have to order the teacher's guide separately! The detailed answers are included. Learn all about investing from the stories of Wenceslas Widgets and Mercutio's Church Doors. Make sure you know when to buy, when to short, and when to sell. Find out what CANSLIM and the PEG and the PPP really are. A masterful Foolish overview, and as interactive as printed paper can get! The Fool Quiz is available for $12 (plus $2.50 s&h) in FoolMart or by e-mailing [email protected].