America Online is attempting a sea change from being a computer-services company to being a full-fledged media company. MF Templar takes a look at this in the Fool in the Hill, and we've got a Special Section coming up on it, as well. We've also got some new conference call reports for you -- on TRO Learning and Countrywide Credit Industries.
MF Merlin's Economic News today discusses the significance of today's report on retail sales for May and speculates on the meaning of the recent upturn in new claims for state unemployment insurance. 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. Enjoy!
Fool Portfolio holding MEDICIS PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDRX)") else Response.Write("(NASDAQ: MDRX)") end if %> exploded $13 1/4 to $45 1/2 after Robertson Stephens analyst Donald Ellis initiated coverage of the dermatological concern with a "buy" rating. Ellis forecasts annual revenue growth of 25% and EPS growth of 30-35%, while estimating that the company would earn $1.18 per share in fiscal year 1996 and $1.53 per share in 1997. The magnitude of today's move could be explained by the fact that Robertson Stephens is the first major brokerage house to initiate coverage on Medicis.
WESTELL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> announced today that its ADSL modems will be used by the Canadian division of UUNET TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UUNT)") else Response.Write("(NASDAQ: UUNT)") end if %> in an ADSL trial involving 400 corporate customers in Toronto. Although ADSL modems are involved in test-trials in a number of locations worldwide, this announcement is significant because it is the first time that such a trial is being conducted by an Internet Service Provider. If used on a wide scale, ADSL modems with speeds in excess of 1.5 MB/sec downstream could provide much-needed high-speed access to the Internet. Westell stock closed up $5 7/8 to $55 3/8.
Merrill Lynch today raised its intermediate-term rating on DSP COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %> to "accumulate" from "neutral" while maintaining its "long-term accumulate" rating. DSP is a digital signal processing chip maker valued at more than 12 times trailing sales. The stock climbed $6 7/8 to $40.
One day after it completed a secondary offering priced at $32.75 per share, CITRIX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTXS)") else Response.Write("(NASDAQ: CTXS)") end if %> saw its stock rise $2 3/4 to $36 1/2. The offering raised more than $60 million in working capital for the company, which is involved in the production of "multi-user application server products" for use in Windows systems.
QUICK TAKES: FARMERS & MECHANICS BANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FMCT)") else Response.Write("(NASDAQ: FMCT)") end if %> closed up $9 7/8 to $30 1/8 after it agreed to be acquired by Citizens Financial Group for $53.2 million, or $32 per share... CARIBINER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CWC)") else Response.Write("(NYSE: CWC)") end if %> rose $2 1/2 to $35 1/2 after it announced that it had acquired European-based Spectrum Communications... KCS ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCS)") else Response.Write("(NYSE: KCS)") end if %> closed up $1 3/4 to $27 5/8 after it announced that it had recently completed building two additional oil wells in Texas... AST RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASTA)") else Response.Write("(NASDAQ: ASTA)") end if %> popped up $1 to $8 1/4, recovering a little after recently reporting losses.
METRA BIOSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTRA)") else Response.Write("(NASDAQ: MTRA)") end if %> imploded $4 to $7 after the company forecast profits and earnings for the fourth quarter that were below expectations. The developer of biochemical bone diagnostic tests said it now expects revenues around $1.5 million for the first quarter instead of the $2.5 million analysts had expected. Metra blamed large pharmaceutical companies for not pushing its products enough in their medical education programs. Cowen & Co. downgraded the company from "strong buy" to "buy", but apparently a lot of investors interpreted "buy" as "sell", as shares were slashed by over a third.
CALIFORNIA AMPLIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CAMP)") else Response.Write("(NASDAQ: CAMP)") end if %> was de-amplified for $7 3/8 to $26 after missing consensus estimates of $0.14 EPS by a penny yesterday in a very unforgiving market. Also punished for underperformance was telecommunications company COMDIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMDL)") else Response.Write("(NASDAQ: CMDL)") end if %>, which lost $ to $ after the company forecast an operating loss for its June quarter, negatively impacted by an unexpected sales decline. The company is mulling over whether or not it will throw in a one-time charge as well in the already-unspectacular quarter.
Storage-tech concern QUANTUM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QNTM)") else Response.Write("(NASDAQ: QNTM)") end if %> continued to slide today after several downgrades following yesterday's bad news. Losing $2 3/8 to $16 1/8, Quantum's reliance on Apple and Compaq as customers is probably not helping it all that much these days. Bear Stearns, Hambrecht & Quist and Gruntal & Co. were among those downgrading, and Hambrecht predicted that Quantum will not start improving until the December quarter, which is traditionally strong.
QUICK CUTS: MACROMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MACR)") else Response.Write("(NASDAQ: MACR)") end if %> continued to slide on worries about earnings, dropping $3 1/4 to $29 3/4. Merrill Lynch sees a 25% chance that the company will have a $1 to $3 million shortfall in this quarter... Semiconductor concern MICRION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MICN)") else Response.Write("(NASDAQ: MICN)") end if %> slid $6 to $20 3/4 today on no apparent news, after a larger drop yesterday... C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %> continues to slump $3 to $35 7/8 over growing concerns that the company will lose market share to new competitors... REPUBLIC ENVIRONMENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> said it didn't know why shares pulled back $4 5/8 to $34 3/4 after a recent run-up... MADGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %> tumbled $4 3/8 to $23 1/2 on anxiety about its second quarter.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
America Online's Inflection Point
There are two schools of thinking with regards to America Online. The first one is a dingy little schoolhouse closed by the county due to lack of funding. We will call this the Computer Services Academy. The windows are broken and the playground is in complete disrepair. If you ask neighbors about the school, they will tug on your sleeve and whisper in your ear, "Michael Murphy went to school there... so did David Readerman".
The Computer Services Academy trained a generation of technologically-savvy financial analysts who have a tendency to lose the forest for the trees. These are the guys who go to break-out sessions at investment conferences and corner vice presidents of Investment Relations, pummeling them with questions about what configuration a Winsock needs in order to use the newest features on America Online. These guys see America Online as a Computer Services company, pure and simple, where people pay for access to recreational features and services.
This techno-elite is very Web-savvy and sees America Online and the Web as essentially the same service. They get really antsy when they notice that one is free and the other costs money and they issue predictions about the coming commoditization of access that will destroy the premium currently placed on America Online subscribers. They measure demand for America Online by unscientific pools of general chat usage, postulating that the lack of an O.J. trial makes estimating America Online's revenue growth more tricky in the coming months.
The second school of America Online is a sprawling university campus, a university known for rich and witty research. Some of the attendees here include names like Meeker, Eskenazi and Parekh. This place is called Media U. and this is where the Fools come to hang out as well. Many of the people here are decidedly non-technical -- in fact, they believe that technology should be invisible, asking you quizzically when you last had to set the Winsock on a television. These are the historians, not the technologists -- they are more likely to reference the growth and development of the television broadcast networks than to dwell on Winsocks.
There has been a lot of talk out of Media U. using words like advertising, merchandise, transactions and brand. The gang from Computer Services has been snickering into their collars as they cruise around the Web. While the Media U. fellows favor words like transition, the Computer Services folks just have to say "commodization" to each other and they double over in guffaws. Lately, as America Online has slid back from its mid-May peak of $70-ish, people have been paying a lot more attention to the Computer Services gang.
The one thing Media U. is starting to worry about is the "inflection point". What if America Online's transition to a diversified media company is not smooth, but in fact produces a bump in the revenue and earnings growth? This is why the subscriber growth numbers have been so powerfully important -- although I must say that no one worried about CBS's subscriber growth in the early days. The inflection point is of major concern for some of the Media U. students because they have to call the stock exactly or else risk losing some degree of professional stature for a time. Although this concern varies in degree from individual to individual, no one wants to lose money so everyone is watching it closely.
The irony here is that if there is an inflection point, the Computer Services gang will take it as the ultimate confirmation of their position and cheer for a quarter or two -- missing out on what will be probably the fastest growth story for a new "network" ever told. In some numbers I crunch in a Special Section on America Online, I see somewhere between $100 and $200 million in ad revenues for America Online over the next twelve months. This means that anywhere from 10% to 20% of America Online's revenues over the next few quarter could come from advertising *alone*.
Does this catch any fallout from member revenues with the move to the 20/20 pricing plan? Even if my own personal thesis that elasticity of demand will make usage actually grow after the price cut turns out to be wrong, the push toward advertising, transaction and merchandise revenues should catch any short term blips in usage. In the end, it all depends on what metrics people start to use to measure America Online and whether they switch from raw subscribers to discounted cash flows. Suffice to say, it's gonna be an interesting year on the campuses of Computer Services Academy and Media U.