America Online dropped sharply today, after canceling a presentation and being downgraded. The Lunchtime News took a preliminary look at the situation, and more in-depth coverage will be offered in a Special Section appearing tonight.
MF Merlin's Economic News today offers an analysis of the Bureau of the Census/HUD's April report on housing unit completions. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar focuses on America Online. Enjoy!
COMPUTER LEARNING CENTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLCX)") else Response.Write("(NASDAQ: CLCX)") end if %> shot out the lights this morning, reporting $0.27 earnings per share (EPS) versus $0.13 EPS last year. The regional computer-education corporation, based in the Northern Virginia area, tends to be overshadowed by its nationwide competitors and might still trade at a discount to fair value. Shares rocketed ahead $5 1/4 to $23 1/4 -- an all-time high, and twice what the shares have traded at in the past year.
High performance graphics company NUMBER NINE VISUAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NINE)") else Response.Write("(NASDAQ: NINE)") end if %> announced an original equipment manufacturer (OEM) deal with DELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>, to make its 2-D, 3-D and video performance technology available in Dell's Dimension and OptiPlex business lines. This news sent shares up $1 5/8 to $10 5/8. Number Nine graphics accelerators in use in Dell PCs have earned top scores in computer magazine benchmark tests. Number Nine also resolved a dispute with a supplier today, and will take a related $2 million charge in the second quarter.
Shares of athletic- and leisure-wear concern THE FINISH LINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FINL)") else Response.Write("(NASDAQ: FINL)") end if %> raced ahead $3 to $27 3/4 on the heels of a strong sales report for the first quarter. Net sales were up 37% from the year-ago quarter, with comparable stores net sales up 13%. The company noted that its sales have always been highly variable, and may not necessarily continue rising. Nevertheless, investors appeared bullish today.
Farewell to Penny-stockdom for MILTOPE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MILT)") else Response.Write("(NASDAQ: MILT)") end if %>. The company's shares posted an eye-popping 187% return today, rising $4 9/16 to $7 after the computer, printer and peripheral company was awarded a five-year, $80 million contract from the U.S. Army to produce "SPORTs". SPORT stands for Soldiers' Portable On-system Repair Tools, a product which will aid in the diagnosis and repair of weapons systems. Miltope is known for making products which can operate in difficult environmental conditions.
QUICK TAKES: Thinly-traded photovoltaic equipment company SPIRE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPIR)") else Response.Write("(NASDAQ: SPIR)") end if %> leapt $1 3/4 to $6 3/4 following its annual meeting, presumably on increased awareness of the firm... MIDISOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIDI)") else Response.Write("(NASDAQ: MIDI)") end if %> shares soared $3 5/8 to $8 1/8 after announcing that their Sound Bar software would provide access to AT&T's WorldNet... ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORTL)") else Response.Write("(NASDAQ: ORTL)") end if %> rose $3 to $25 1/4 this morning -- the only news we could find to explain this was a deal to supply fiber-optic equipment to Lockheed Martin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMT)") else Response.Write("(NYSE: LMT)") end if %>... DIANA CORP.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> management came out swinging today, fending off attacks from a shorting-oriented newsletter and Asensio & Co.'s questions about the quasi-networker's value. Shares rose $8 1/2 to $87 1/2 after management called comments about its Sattel Communications unit "inaccurate"... She starts wars, she splits stock. Hair product manufacturer HELEN OF TROY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HELE)") else Response.Write("(NASDAQ: HELE)") end if %> rose $2 1/2 to $29 1/2 this morning after announcing a two-for-one split. The company also emphasized that 1997 should be "another record year"... WACKENHUT CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHC)") else Response.Write("(NYSE: WHC)") end if %> shares surged $6 1/2 to $44 3/4 after the company was selected by the state of Virginia to build and run a 1,000-bed privatized prison.
OPTA FOOD INGREDIENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OPTS)") else Response.Write("(NASDAQ: OPTS)") end if %>, which develops proprietary food ingredients, slumped $4 to $12 1/2 after it told the Street that it will more than likely miss analyst's estimates for both the second quarter and the full year. The company blamed delays in product ramp-ups, new production facility expenses, and new product launch costs, but pointed out that revenues for this quarter and the rest of 1996 should still be well above 1995 levels. Some of the company's food products replace fat, provide fiber, and enhance textures.
PINNACLE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PCLE)") else Response.Write("(NASDAQ: PCLE)") end if %> announced today that it acquired the Video Director software line from privately-held GOLD DISK INC. for $4.5 million in cash. The expense will be drawn from research and development (R&D), and concern about the effect of this on the company's bottom line profits is most likely what sent shares down $7 1/4 to $17 3/4. Pinnacle plans to combine Video Driector with it's own video manipulation technology to create inexpensive video manipulation products for home video enthusiasts.
Semiconductor equipment company LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %> dropped $3 1/4 to $34 after it forecast earnings 4% to 5% below the First Call consensus estimate of $1.34 EPS for the fourth quarter. It said the first and second quarters might also be weak, citing excess inventory due to a slowdown in the semiconductor equipment industry's growth rate. Yesterday Merrill Lynch started coverage of Lam with "intermediate-term neutral" and "long-term buy" ratings.
Smith Barney recommended investors sell shares of CEPHALON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CEPH)") else Response.Write("(NASDAQ: CEPH)") end if %> and CHIRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHIR)") else Response.Write("(NASDAQ: CHIR)") end if %> today, and shares dropped $3 11/16 to $23 and $5 7/8 to $97 7/8, respectively. At issue is the companies' Myotrophin drug, which is meant to treat Lou Gehrig's disease and which Smith Barney feels might not win ready approval from the Food and Drug Administration (FDA). "While there is always a slight chance that Myotrophin could be recommended for treatment, we believe that the risk/reward ratio is extremely unfavorable," said analysts, adding that they expect a placebo trial to be recommended instead.
SYQUEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYQT)") else Response.Write("(NASDAQ: SYQT)") end if %> shares were gutted today, careening down $4 49/64 to $8 7/8 after Nasdaq announced that the storage drive company was out of compliance with rules. Nasdaq requires that listed companies have $1 million in net tangible assets, and SyQuest has apparently fallen short. The company must have its plan to cross the $1 million mark cleared by Nasdaq. Net tangible assets are a company's total assets, less liabilities and intangibles such as goodwill, patents, trademarks, and par value of preferred stock.
QUICK CUTS: MF Boring's mused in his portfolio report last night that investors viewed the 4.9 million share secondary offering for PRIME MEDICAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PMSI)") else Response.Write("(NASDAQ: PMSI)") end if %> as favorable. However, shares slumped $2 7/16 to $17 15/16 this morning after small institutions and individual investors found out the details... Has LA-Z-BOY CHAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LZB)") else Response.Write("(NYSE: LZB)") end if %> nodded off? Merrill Lynch might think so, as it downgraded the company from "intermediate-term accumulate" to "intermediate-term neutral", as shares reclined $2 3/8 to $29 7/8... Well, perhaps being interviewed by Mark Haines on CNBC's Squawk Box does not always guarantee multi-point rises, however engaging the questions might be. SPECTRAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPTR)") else Response.Write("(NASDAQ: SPTR)") end if %> dropped $4 1/4 to $23 3/4 after the interview this morning... Remember a price cut on their desktop projectors in March, poor comparisons, and missed estimates in their April fourth quarter? Now PROXIMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRXM)") else Response.Write("(NASDAQ: PRXM)") end if %> is letting people know that it expects a first quarter loss, losing $1 7/8 to $14 1/8... Presstek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> shares were hard-pressed today, falling $25 to $109 after the Cabot Market Letter reported that the SEC has subpoenaed records from the printing technology company.
An Investment Opinion by Randy Befumo (MF Templar)
FOOL ON THE HILL
Ask The Right Questions
INVESTORS ARE ASKING A LOT OF QUESTIONS about AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> today. What does slowing subscriber growth mean? What are the implications of the high rate of churn revealed last quarter? How badly could revenue and earnings momentum slow as a result of the company's focus on operations this quarter? Are all those optimistic assumptions about subscriber retention built on a foundation of sand or stone? Will access on America Online become commoditized, reducing subscriber valuations to that of the Web? And ultimately... why is the stock down so much today?
A NUMBER OF INSTITUTIONAL INVESTORS, sell-side analysts and newsletter writers are becoming more bearish on America Online. Montgomery Securities, increasingly anxious about the ease of access to the Internet, cut the company to "neutral" today. An ever-bearish analyst at Cowen & Co. dropped his estimate for subscriber acquisition in the June quarter from 750,000 to 400,000, maintaining his "neutral" reading. Michael Murphy's comments last week predicting a commoditization of America Online's service and a whopping charge for deferred subscriber acquisition costs looming in the future summed up the negative side of the argument.
THE PROBLEM TO THIS FOOL APPEARS TO BE that investors are not asking the right questions and are becoming very disturbed with the obvious answers they are getting. There are a few simple, straightforward facts that both bulls and bears alike have to accept.
FACT: AMERICA ONLINE'S SUBSCRIBER ACQUISITION will become seasonal as the company's business model matures. The peak Christmas season will become the real time of subscriber additions going forward as the installed base of PC users becomes saturated, generating less-sustainable momentum over the entire year. This is a simple function of the fact that most people buy personal computers during the Christmas season. Expect a big blip in the March 31st quarter, followed by smaller gains throughout the rest of the year. If you are looking for a huge, gravy momentum train of subscriber acquisition that never ends... stop now. It ain't here. As the subscriber acquisition rates of cable systems, television networks and radio stations slowed to a more moderate pace years ago, so shall America Online.
FACT: AMERICA ONLINE'S USAGE REVENUES are going to trend down over the next 12 to 36 months as the company continues to push cost savings out to the consumer. I personally believe that the final cut in usage costs will put all subscribers on a simple, all-you-can-eat flat fee that is being pioneered by the Web. America Online will one day soon be as cheap as the Web, potentially moving some of its content out there in the same manner that CompuServe's "Red Dog" strategy has apparently embraced.
FOR FOOLS, HOWEVER, IT IS THE QUESTIONS that are not being asked right now that are most compelling. Who has pondered how America Online can better leverage and maintain its existing subscriber base to generate new sources of revenue rather than mindlessly adding new customers? Has anyone been talking about whether or not America Online can ramp up advertising, transaction and merchandise revenues faster than it will be forced to drop usage revenues? This will determine whether America Online has a future as a media company or is simply going to fulfill bearish predictions and become a provider of commoditized access.
MICHAEL MURPHY'S BEARISH ARGUMENT holds as a core presupposition that America Online's business model is based on subscriber fees. Commoditization of the service can only happen if America Online is forced to compete on price alone, with no other source of revenue. The successful build-out of AOLNet in conjunction with the sourcing agreements with AT&T and PacBell have allowed America Online to significantly reduce network and subscriber acquisition costs in the future, but they need those precious "other revenues" in order to graduate to being a full-fledged media company and prove the bears wrong.
THE "GIVE IT AWAY FOR FREE" CONTENT MODEL is bankrupt. The companies that will survive and prosper in the brave, new world of online communications are going to be the ones with viable business models. When Murphy compares America Online to an Internet access company, he is essentially suggesting they have the same business model based off of subscriber revenues. This is only true, however, if the Internet access companies have the same capabilities as America Online to generate other revenues. If the Internet access companies cannot build significant advertising into their service and generate revenues from all transactions done by subscribers, the comparison fails.
NETWORK TELEVISION AND BROADCAST RADIO needed to cultivate significant advertising revenues in order to support their business models. To have access to the same pool of money, an online content company needs to acheive a critical mass of readers that puts it on par with similar markets already available on television, radio and cable. In order to get this critical mass, it needs to produce quality shows and allow the user the simplest method of connectivity possible. America Online's approach has been to build its network and the critical mass of viewers through usage fees, shifting to advertising, merchandise and transaction revenues as opportunities presented themselves. The opportunities are beginning to make themselves apparent.
FOR THOSE WHO ARE WONDERING IF "OTHER REVENUES" are coming, take a quick look at the new Quotes & Portfolios screen, paying careful attention to that new advertising spot in the upper right hand corner. How much do you think PCFN has paid for that button? If you take a minute and reflect, you will realize you have been seeing little advertising buttons in all of the recent forms that have been coming out of America Online. Taking a cue from the Fool, of all places, America Online is aggressively building advertising into its pages. Although I have not seen a rate card out of America Online, these spaces are not cheap -- just a listing in the What's Hot area costs $5000 a pop. And the planned Banking Center and a planned buy-and-sell-oriented Mutual Fund Center will also give America Online a hand in the financial transaction arena. The irony here is that America Online's perceived weakness, the proprietary operating system, actually enhances online security in a nice point-and-click interface.
COMPUSERVE'S MOVE TO THE WEB IS DEFENSIVE, not offensive. The company is trying to regain lost momentum and actually manages to improve their clunky interface by gong to the Web. The Microsoft deal yesterday also did not hold many surprises -- CompuServe has a virtually identical bundling deal with Microsoft on Windows95 and they will use Internet Explorer as well as the recently announced (but never tested) Normandy platform to build their Web site. All of these moves are clearly compatible with their Red-Dog strategy, but say a lot more about CompuServe's relative position in the industry than any need to move to the Web because of its growth. WOW!, CompuServe's new service, is purely a proprietary, Windows95-only interface that is not moving to the Web anytime soon. With two-thirds of subscribers to the e-mail version of the Evening News having America Online accounts and this number remaining stable over the past six months, it is my first-hand opinion that the shift to the Web by America Online subscribers is dramatically overdone.
THIS IS NOT TO SAY AMERICA ONLINE HAS NO RISKS... because it does. In an industry changing this fast, any leader is constantly at risk from a smaller, more nimble and more intelligent rival. America Online proved this in 1994 when it graduated from joke to threat in the once-dominant CompuServe's mind. The first risk is this transition to a full-fledged media company that I have been dwelling on -- can America Online do this? The fact that many investors seem preoccupied with other, more inane companies suggests to me that a lot of the hard work that needs to be done to answer this question has not been done by the investment community.
THIS IS NOT JUST THE INVESTMENT COMMUNITY'S FAULT, unfortunately. In my opinion, America Online itself has suffered from a bit of communication breakdown of late with shareholders. Is America Online a content company, an access company, a media company, a network company, a subscriber-based company, a technology company, or none of the above? Moves within America Online are confusing at best and counter-productive at worst. The Greenhouse, founded to take advantage of outside info-preneurs, has become bogged down with pre-registration requirements that almost ensure that their two biggest successes -- the Motley Fool and Heckler's Online -- probably never would have gotten off the ground. America Online itself is unclear whether it is going to allow other companies to create brands or if it is going to create its own brands to compete head-to-head with its partners.
AMERICA ONLINE'S PRIOR CONTENT STRATEGY is nearing bankruptcy. Dozens upon dozens of areas in multiple channels do not encourage subscriber retention, they create subscriber confusion. More and more voices fighting for less and less promo time means that most new partners are doomed unless they can effectively generate offline publicity. America Online has no strategy to help build the brands of its information providers, instead relying on them to build their own brands. Unless they happen to have a book out in bookstores and a heck of a lot of free air time, however, I am not sure how they can build their businesses.
AMERICA ONLINE'S CONTENT TEAM needs to take a cue from network television and cable television on this front. At any one time, a network has a portfolio of 20 to 40 shows that it promotes the heck out of, putting all of its marketing muscle behind them. If the shows are hits, they go on. If the shows are duds, they are put on waiver and pulled if the ratings do not improve. America Online needs to cull the overall content on its service into a manageable portfolio of brands or it will become a de facto competitor to the Web. America Online needs to take this quarter's opportunity to put the operations side of the house in order to put a freeze on all new content areas, put any that do not add value to the service on waiver, and focus development efforts on transaction and merchandise based offerings.
THE AMERICA ONLINE OF THE FUTURE will not look anything like the service you are using today. First and foremost, you will be using WAOL 3.0 or higher, which introduces a friendlier interface with a lot of whiz-bang gizmos -- including the ability to use multiple fonts, italics, bold and hypertext in e-mail. In fact, there are even rumors that a spell-checker is in the works, meaning this Fool will never need a word processor again. Even more exciting is what I see as the opportunity that America Online has on the advertising front. The Fool currently pulls in less than 50% of its revenues from usage on America Online, generating the majority of its bucks through advertising and merchandise. This means that if America Online follows the Fool's lead, there is a lot of opportunity to build those "other revenues" to a significant majority of total revenues.