The Lunchtime News today featured a continued discussion of conference call access for the individual investor. This weekend we'll have Fool's Gold, featuring a Sector Snapshot on consumer software companies, Industry Updates, and the Weekend Research Center. These are great springboards for stock-picking, but remember to do your homework first before investing in anything!
MF Merlin's Economic News today discusses the Labor Department's report on Producer Price Indices and the Commerce Department's Advance Monthly Retail Sales Summary. 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 Madge Networks and its recent troubles. Enjoy!
CONFERENCE CALL REPLAYS
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MADGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %>
1-303-267-1036 (code: 111715)
CANANDAIGUA WINE COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WINEA)") else Response.Write("(NASDAQ: WINEA)") end if %>
1-800-593-1268 (password: 1234)
HEROES
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Gaming stocks were up almost across-the-board today, for a variety of reasons. <FONT COLOR="#000000" SIZE=3>MIRAGE RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIR)") else Response.Write("(NYSE: MIR)") end if %> was the recipient of a Donaldson, Lufkin & Jenrette upgrade from "market perform" to "outperform," and rose $3/8 to $23 5/8 accordingly. Also cashing in on the Street's apparent enthusiasm for gambling concerns were GRAND CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %>, up $1 7/8 to $25, and SHOWBOAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBO)") else Response.Write("(NYSE: SBO)") end if %>, which rose $1 3/8 to $24 on no apparent news. AZTAR CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AZR)") else Response.Write("(NYSE: AZR)") end if %> was unchanged even after reporting break-even results one penny shy of Wall Street estimates. Pour quoi, you ask? Well, continued takeover speculation might have helped, along with revenue growth that was ahead of expectations.
METROPOLITAN BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSEA)") else Response.Write("(NASDAQ: MSEA)") end if %> shares popped up $3 9/16 to $16 15/16 after the company agreed to be acquired by WASHINGTON FEDERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WFSL)") else Response.Write("(NASDAQ: WFSL)") end if %> in a deal currently valued at about $18 per share of Metropolitan common stock. The merger is intended as a tax-free reorganization under the IRS code, meaning that Metropolitan shareholders will not recognize a gain or a loss in connection with their receipt of Washington Federal stock. The deal has been approved by the board of directors of both companies, and is awaiting approval from Metropolitan shareholders. Shareholders affected by this merger should check the press release for the arcane formula used to determine the number of shares they will receive in the exchange. With the news of the deal, Washington Federal stock rose $1 1/16 to $21 1/8.
VIDEOSERVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSVR)") else Response.Write("(NASDAQ: VSVR)") end if %> surged $3 7/8 to $31 1/2 today after it reported better-than-expected earnings after the market close yesterday and after Oppenheimer & Co. raised its estimates for the company. On revenues of $11.3 million, a 65% increase over the year-ago period, Videoserver reported net income of $0.17 per share, above First Call consensus estimates of $0.15. The company had reported net income of $0.08 per share in the corresponding quarter of 1995. Videoserver said that its strong results were a result of "growing demand" for multimedia conferencing capabilities as a result of "broadening applications, new capabilities at the desktop, and the continuing extension of conferencing to traditional networks." Videoserver's results were also helped by the launch of an integrated audio and data conferencing product in May that delivers real-time transmission over regular analog telephone lines.
QUICK TAKES: SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %> beamed up $1 3/16 to $10 today after announcing that as a result of a restructuring of operations that included the loss of 55 jobs, it would realize $6.0 million in annual savings... RUSSELL CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RML)") else Response.Write("(NYSE: RML)") end if %> was upgraded by Morgan Stanley from "neutral" to "outperform," and rose $2 1/4 to $31 3/8... UNITED HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> rebounded $2 1/8 to $33 1/8 today after forecasting lower-than-expected earnings yesterday and getting clobbered for more than $13... MDT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDTC)") else Response.Write("(NASDAQ: MDTC)") end if %> surged $1 to $5 5/16 after Sweden Getinge increased its takeover offer to $5 1/2 a share from $4 1/2 a share... PREMIERE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PTEK)") else Response.Write("(NASDAQ: PTEK)") end if %> canceled a proposed secondary offering today, boosting the shares $2 3/4 to $21 1/4 as investors began to worry less about management selling out their shares... EAGLE HARDWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EAGL)") else Response.Write("(NASDAQ: EAGL)") end if %> was the beneficiary of an Alex. Brown upgrade from "neutral" to "buy" today, sending shares up $1 1/2 to $17... Alex. Brown also helped out retailer GADZOOKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GADZ)") else Response.Write("(NASDAQ: GADZ)") end if %> $3 1/4 to $29 today by raising its rating on the stock from "buy" to "strong buy."
GOATS
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Many companies must be wishing this earnings season would just finish already, so they can put it well behind them. Client/server software concern CARNEGIE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CGIX)") else Response.Write("(NASDAQ: CGIX)") end if %> tanked $2 1/2 to $5 3/4 today after reporting second quarter earnings a dime below consensus expectations of $0.12 EPS. ANALOGY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANLG)") else Response.Write("(NASDAQ: ANLG)") end if %> substantially disappointed consensus estimates of $0.02 EPS today, reporting a quarterly loss of $0.09 EPS. The data processing firm gave up $7/8 to $4 5/8 in heavy trading. XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %> posted earnings of $0.41 per share, two pennies shy of estimates, and sank $3 1/8 to $27 7/8.
High-quality color printing concern ELECTRONICS FOR IMAGING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EFII)") else Response.Write("(NASDAQ: EFII)") end if %> beat earnings estimates of $0.49 by two cents, posting a record $0.51 per share on a 54% sales increase. Nevertheless, it was downgraded by Prudential from "buy" to "hold" and plunged $7 1/2 to $57 1/2. President and Chief Executive Officer (CEO) Dan Avida registered his delight with the company's success and leadership in the short-run color printing market and noted that the company's Fiery controller was selected by IBM, "increasing EFI's presence in the corporate arena."
QUICK CUTS: The reality of the semiconductor equipment industry has finally caught up with HELIX TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HELX)") else Response.Write("(NASDAQ: HELX)") end if %>. Shares dropped $3 7/8 to $29 this morning when the company stated that it was "cautious" about its near-term business conditions... Tool and die manufacturer GIDDINGS & LEWIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GIDL)") else Response.Write("(NASDAQ: GIDL)") end if %> was crushed for $2 9/16 to $11 15/16 today when the firm stated that net earnings would be 25% to 30% below current consensus estimates. Lower bookings and a major deterioration in the integrated auto segment accounted for the disappointment... NOVADIGM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NVDM)") else Response.Write("(NASDAQ: NVDM)") end if %> simulated an exploding star today, warning of lower-than-expected revenue and earnings and dimming by $1 to $9... APPLIED DIGITAL ACCESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADAX)") else Response.Write("(NASDAQ: ADAX)") end if %> dipped $1 7/8 to $7 7/8 after a Hambrecht & Quist downgrade from "buy" to "hold", based on revenue uncertainty and acquisition-related performance risks... PEDIATRIX MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PEDX)") else Response.Write("(NASDAQ: PEDX)") end if %> was off $3 3/4 to $34 on no apparent news other than continued jitters about the healthcare industry.
An Investment Opinion by MF Templar
FOOL ON THE HILL: The Incredible Shrinking Madge
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MADGE NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %><B> </B>reported a loss of twelve cents per share late yesterday, much lower than the $0.20-some EPS estimates that the three major analysts who follow the company in the United States had placed on the shares. The stock tumbled $2 1/8 to $10 3/4 in heavy trading of more than two million shares -- a pretty sizable chunk of the nine million share float, even if you back out the fact that the Nasdaq double-counts volume. These grim results pushed shares of the networker to an annual low as the last of the momentum investors and some of the more recent value converts to the stock decided to cut their losses.
Looking at the numbers, there was a lot of confusing data. Gross margins for the quarter were 48.4%, well below the first quarter's 56.6% even if you back out the $2 million or so writedown they took for bad inventory. There are a lot of factors apparently involved in the fall in gross margins. First, the company did $20 million less in revenues this quarter than they did last quarter. When your quarterly revenue decreases by 15% you suddenly have a lot fewer units to spread your fixed costs over. The company also saw lower average selling prices due to a product mix shift, which weighed on gross margins because it apparently focused on lower-margin products. Finally, the company took an extra $2 million-some reserve for bad inventory to ensure that they had enough protection in case any of their inventory became outdated.
Some of these factors appear to be permanent and some of them are clearly limited to this quarter. The gross margin would have been around 50% without the inventory reserve, something I think the company took opportunistically, given the fact that the quarter was going to be a disaster anyway. It is a fairly common practice to load all of the bad news you ever could conceivably have into one quarter if you can. The mix shift and the lower revenues appear to be here to stay, at least for the near term. With so much of Madge's business concentrated in Europe, which is set to go on vacation for three months starting now, you really cannot build too much quarterly revenue acceleration into your model in good conscience. A tepid 5% increase would put Madge at $118 million, which might notch up the gross margin to 50.5%.
The complicating factor to my gross margin forecast is the odd mix of direct and indirect sales that Madge has moved to. As longtime readers will recall, the reason Madge got itself into this jam was because it tried to move the Lannett business it recently acquired to a direct sales model from an indirect sales model. Direct sales are when the company has its own salesforce and they try to sell directly to retailers and end-users. Indirect sales are when they sell to distributors, normally value-added resellers (VARs), who then go and sell to retailers and end-users. Madge suddenly found out that when it told its VARs it was going to go to a direct model, its VARs got real uninterested in selling Madge products. Madge's solution has been to convert its direct sales force into VAR support, maintaining the indirect channel but supporting it more than many companies do. Indirect sales costs, however, go into gross margins, not sales and marketing.
This is weird because the sales and marketing expenses were up quite a bit. Like 58.8% year-over-year and 14.4% quarter-over-quarter. This is consistent with the picture Madge gave after they first announced the shortfall, saying that they had continued to ramp up operating costs aggressively, even as the VARs stopped selling. The gain was higher than that from the fourth quarter to the first quarter but appeared to be pretty consistent. The increase in research and development costs of 9.3% also appeared to be consistent as well. It was general and administrative that was really shocking -- up 39.2% quarter over quarter to $8.081 million. However, this included a $1.5 million write-down for bad debt, another apparently opportunistic charge. If you back this out, the increase was only 13.4%.
In the conference call today (the synopsis of which is soon to be up in the Fool Wire area as well as in the list box to the right of The Evening News) Madge said that they would keep costs flat into next quarter. I have taken the liberty of taking the $1.5 million debt writedown out of the general and administrative expenses to build my model. Assuming sales and marketing of $37.9 million, research and development of $16.7 million and general and administrative of $6.6 million gives Madge a total of $61.1 million in operating costs for the next quarter.
If there is any upside to this situation it is the next factor -- taxes. When a company loses money in a quarter, they get tax-loss carryforwards that allow them to shelter future income from taxes. Madge got $2.03 million of these this quarter, which is a tax rate of about 24.7%. Interest income in the quarter with cash balances starting at $76 million was $0.71 million. With cash balances starting at $46 million this quarter, I am assuming $0.4 million in interest income for the entire quarter. All of this leads me to a $1.6 million loss in the next quarter, or about 3.7 cents per share.
This is actually quite a bit lower than the $0.03 EPS profit the analyst at Oppenheimer put out today, but the simple fact is that the twenty cents-plus EPS estimates this quarter were dead wrong. The reason for this is that Madge does not give analysts any guidance -- analysts make their own assumptions on revenue growth. Also, because of its cost structure, Madge is very volume-sensitive. An 11% revenue increase to $125 million in revenues would elicit a two-cent profit, all other things being equal. This caveat aside, it appears to me that investors are being set-up again by over-optimistic analysts who are creating a climate for disappointment at the next quarterly earnings report -- not cool. At this point in Madge's cycle, I think that conservative estimates are required in order to give the company a chance to make them. Today's slaughter had as much to do with the ridiculous estimates being put out by the sell-side as with the fact that Madge has already reported a loss.
Quibbling over quarterly numbers aside, the real test for those analyzing the company is to try and figure out whether their cost structure has changed permanently or if they can achieve those 54% margins ever again. If the company is permanently hit on the gross margins because of the change in the sales channel, they should be able to reduce costs in the sales and market expense side. I understand that a lot of what has been spent has been spent, but if they need to commit to one model -- whatever it is -- and go forward with it, they should opt for minimizing expenses and decreasing the hit on gross margins. In my model I balance this next year by assuming average gross margins of 52% and flat sales and marketing in the first and second quarter, with a drop over a 6% in the third and fourth quarter. This, with a small leveling of the research and development costs, should allow the company to make $0.77 EPS next year -- well below the $1.00 analysts are talking about. Ironically, it would appear that the real buying opportunity is only going to come when the analysts finally abandon the stock, as they are currently not doing it any favors.
ANOTHER FOOLISH THING: Fool Weekend Chats!
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What makes The Motley Fool different? A lot of things, of course. Among them is our interactivity, permitting exchanges between Fools from all walks of life. One of the best ways to take advantage of this is to try out our chat rooms. With a new screen in place that allows easy access to all 9 chat rooms, The Motley Fool invites you to stop by and discuss investing, Foolishness, and well, even the weather, with fellow Fools. Scheduled chats for the weekend are listed below, but the rooms are always open so drop in anytime.
Friday:
10 pm ET: MF Cubster discusses the past market week.
Saturday:
7 pm ET: Join MF Energy to talk about the earnings news in the oil and gas industries.
11 pm ET: MF HiTech discusses high technology, bio-technology and medical industry stocks.
Sunday:
7 pm ET: MF Runkle hosts "Foolishness on a Budget: How to invest when you only have a *little* bit of money."
8 pm ET: MF Master discusses the upcoming market week.
9 pm ET: The "Friends of the Rainforest" Chat. Can't get enough Rasta Pasta? Stop by the chat to discuss the recipe. (They also discuss the company and the stock.)
10 pm ET: Join MF Edible for Foolish Digestion as we cook up investment trivia and spice it up with talk about food stocks and equities you can sink your teeth into.
Transmitted: 7/12/96