The Motley Fool, 7/30/97: The Evening News

SAVILLE SYSTEMS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAVLY)") else Response.Write("(Nasdaq: SAVLY)") end if %> gained $7 3/4 to $64 1/2 after the telecom billing software company reported a better than 100% increase in Q2 revenues of $25.5 million and EPS of $0.23, which was up 100% year-over-year and $0.05 per share better than estimates. License fee revenues were up 50%, service revenues were up 22%, and EPS was up 22%, all sequentially. The last two weeks have been a mixed bag for telecom billing software companies, which are seen as way to benefit from the convergence of one-stop telecom-data-entertainment shopping and the rise of billing complexity brought about by quality of service (QoS) features in the wide area network cloud. While BILLING INFORMATION CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %> successfully ran the earnings gauntlet last week, CSG SYSTEMS IINTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSGS)") else Response.Write("(Nasdaq: CSGS)") end if %> was squashed yesterday after warning about a product delay, though its numbers looked very strong. LHS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> is down only marginally after reporting earnings last week.

Cosmetics company and LBO baby REVLON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: REV)") else Response.Write("(NYSE: REV)") end if %> rose $3 7/8 to $54 1/8 on reporting what looks like a good quarter. The company's press release mentions EPS of $0.18 before extraordinary charges, but fails to back out extraordinary gains from the sale of subsidiary stock, the settlement of claims, and one-time, non-recurring international tax benefits. Given what one can see objectively on the earnings release, though, a normalized earnings figure of $0.12 looks closer to the operating earnings number. Looking at a slightly more upscale brand, but one that is more in touch with younger consumers with brands such as MAC and Bobbi Brown, ESTEE LAUDER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EL)") else Response.Write("(NYSE: EL)") end if %> is sporting an multiple of 26 times its enterprise value to 1998's EPS estimate. The same ratio for Revlon, which carries a good deal of its capitalization in debt, is about 30 times. Analysts estimate that Estee Lauder's yearly growth rate over the next five years will be three percentage points higher than Revlon's growth rate.

YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> jumped another $6 3/8 to $54 5/8 after re-crafting an online commerce agreement with Visa International. Instead of going with a joint venture agreement, Visa will take a stake of approximately 1.5% in Yahoo! for which Yahoo will take a $21 million one-time charge this quarter. From an outsider's perspective, what looks nice about this deal is that Yahoo! will be able to book all of the earnings from this deal going forward, rather than booking the net effect of a 55% interest in the joint venture under the old structure. Visa gains a heck of a lot of exposure on Yahoo!, potentially adding new customers and strengthening its brand recognition.

CITICORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> gained $4 11/16 to $135 1/4, BANC ONE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> rose $3 3/16 to $56 1/2, and consumer lender HOUSEHOLD INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HI)") else Response.Write("(NYSE: HI)") end if %> gained $4 7/16 to $124 15/16 as a bullish bond market doesn't necessarily mean better margins for these companies, but it does have a bearing on the volume of business that these companies do (lower rates bring more loan growth) as well as the valuations investors put on them. A strong housing market is particularly good news for banks in the credit card business, as more new homes mean more consumer credit use. For companies like Household and Banc One (with its huge FirstUSA credit card operation), fee income associated with new loan originations and loan securitizations is the best way to boost the bottom line when net interest income falls because of more conservative credit loss reserve provisions.

QUICK TAKES: AMERICAN VANGUARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGD)") else Response.Write("(Nasdaq: AMGD)") end if %> rose $2 5/8 to $10 1/4 after the specialty and agricultural chemicals company reported a 61% rise in second quarter revenues and EPS of $0.27... Computer output and document management services company VESTCOM INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VESC)") else Response.Write("(Nasdaq: VESC)") end if %> sprang out of the IPO box today, gaining $3 1/4 from its offering price to close at $16 1/4... VERSANT OBJECT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VSNT)") else Response.Write("(Nasdaq: VSNT)") end if %> sprinted $1 5/8 higher to $9 7/8 before reporting Q2 EPS of $0.02 after the bell... Chemical, pharmaceutical, and biotech research services and software company TRIPOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRPS)") else Response.Write("(Nasdaq: TRPS)") end if %> was lifted $2 1/8 to $14 5/8 after announcing a multi-million dollar contract to develop drug research software for PFIZER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>... Anti-virus and utilities software company SYMANTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> rose $1 13/16 to $23 3/16 on reporting Q1 revenues of $135 million and EPS of $0.32, beating estimates by about 7%.

Technical help call centers company SYKES ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYKE)") else Response.Write("(Nasdaq: SYKE)") end if %> jumped $3 5/16 to $25 9/16 on reporting Q2 EPS of $0.13, in line with estimates... WORLD FUEL SERVICES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: INT)") else Response.Write("(NYSE: INT)") end if %> was pumped up $1 7/16 to $21 9/16 after the aviation fueling company reported Q1 EPS of $0.46, beating estimates of $0.45, resulting from better brokerage operations, lower credit charge-offs and bad debt reserve provisions, and an overall better business... Integrated steel producer BETHLEHEM STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %> gained $1 to $10 7/8 on reporting Q2 EPS of $0.32, beating estimates of $0.23... PHP HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> picked up $1 7/16 to $17 11/16 after signing a deal with the District of Columbia under which a PHP subsidiary will become the default Medicaid contractor for the city... POLICY MANAGEMENT SYSTEMS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMS)") else Response.Write("(NYSE: PMS)") end if %> added $3 7/8 to $55 1/4 after the financial services software and information systems company reported Q2 revenues of $164.8 million and EPS of $0.59, beating estimates of $0.56... Wendy's franchisee DAVCO RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DVC)") else Response.Write("(AMEX: DVC)") end if %> gained $1 7/16 to $13 7/8 after cooking up Q3 EPS of $0.42, searing the single estimate of $0.32.

SEACHANGE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEAC)") else Response.Write("(Nasdaq: SEAC)") end if %> plunged $8 5/8 to $19 1/4 after the maker of software systems for storage and distribution of video for the TV and telecom markets reported Q2 revenues of $21.8 million, up 55% over last year, and EPS of $0.18, in line with estimates. Both Morgan Stanley and Alex. Brown lowered their ratings on the company because of Seachange's guidance that it will step up R&D expenses in coming quarters. R&D spending growth outpaced revenue growth by 4.8 percentage points this quarter. A willingness to invest in future growth now rather than taking the short-term benefits of a higher stock price borne of higher profit margins shows a good deal of maturity. Despite being a young software concern in what looks like an awfully hot niche in the recently revived cable industry, a current multiple of 27 on its run-rate EPS of $0.72 and 3 times revenues with an operating margin of 17% doesn't look all that pricey for this company.

Semiconductor and flat panel display wafer processing equipment manufacturer LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %> eased $2 15/16 to $53 1/16 after reporting Q4 revenues of $263 million and EPS (before a charge) of $0.09, which beat estimates. The company says it's past the trough of the cycle, but investors are worrying that there might not be much room for upward revisions in forward EPS estimates. Merger partner chemical mechanical planarization systems maker ONTRAK SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONTK)") else Response.Write("(Nasdaq: ONTK)") end if %> also fell, losing $2 3/4 to $44. In contrast, companies appearing at the Robertson Stephens annual semiconductor conference were making gains today, with Lam competitor APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> picking up $2 1/4 to $90 3/4, and PRI AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> gaining $2 5/8 to $50 3/8.

QUICK CUTS: Rebuilt engine and natural gas engine manufacturer BONDED MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BMTR)") else Response.Write("(Nasdaq: BMTR)") end if %> lost $2 7/8 to $7 5/8 after the company said record Q2 revenues will be accompanied by higher expense levels that will result in EPS of $0.08 to $0.10, below estimates of $0.20... ACT NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANET)") else Response.Write("(Nasdaq: ANET)") end if %> slipped $2 5/16 to $11 11/16 after reporting Q4 EPS of $0.01, 94% below estimates... BRINKER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EAT)") else Response.Write("(NYSE: EAT)") end if %> fell $1 1/8 to $16 3/16 after the Chili's restaurant operator reported Q4 EPS of $0.29, better than estimates. Possibly casting a cloud over the earnings report is the recent resignation of the company's CFO.

Dataquest and IDC issued another round of PC sales data on Monday, focusing this time on the second calendar quarter between April 1 and June 30 of this year. With much of the strength in PC-related companies in the last two weeks linked to these reports, it is no surprise that the shares of many of these companies paused to digest this information on Monday. After a few evenings of scrupulous analysis, the Grand Bawanahs of the equity markets have deemed the information "good" and are now running the shares of PC-related companies up the flagpole again. What is there in the data that the Street is seeing and, more importantly, what is there in the data that Fools should be paying attention to?

Dataquest (a unit of the Gartner Group) is an international information technology (IT) consulting organization whose primary business is gathering data and selling reports based on that data to customers. Because part of its business model requires it give away some of the data for free via press releases in order to whet the appetites of potential buyers for their reports, a culture of breathless expectations has sprung up around its quarterly release of worldwide and North American PC vendor unit shipment data. International Data Corp. (IDC) is a competing company that issues the same data, although because the methodology of the two groups is different, the data is never exactly the same. Because Dataquest was kind enough to post its press release on its website in its press release archive, we will focus on that data.

According to Dataquest, worldwide PC sales grew 17% in the second quarter with U.S. PC sales leaping 21.9% over the same period. The pace accelerated from the 15.4% growth reported in the first quarter. Dataquest is predicting that the PC market overall will enjoy 19% growth for calendar 1997, meaning that the growth rate should continue to accelerate throughout the year. Although not explicitly stated, Dataquest analyst Tom McCall's assumptions about accelerating growth are probably driven by a strong product cycle from Intel, including the recently released Pentium MMX and the soon-to-be released Pentium II. Initial indications are that demand for these new central-processing units (CPUs) is quite high and is resulting in higher-than-expected inventories of plain-vanilla Pentium chips at Intel, causing reports to leak on Sunday that Intel would take price cuts of up to 50% on some Pentium chips.

         Preliminary Worldwide PC Vendor
 Unit Shipment Estimates for Second Quarter 1997
              (Thousands of Units)

                     Q2/96             Q2/97     Q2/96-
             Q2/96   Market    Q2/97   Market    Q2/97
Company    Shipmts  Share(%) Shipmts Share(%) Growth(%)
Compaq       1,555     9.6     2,208    11.7      42.0
IBM          1,390     8.6     1,668     8.8      20.0
HP             661     4.1     1,047     5.5      58.4
Dell           627     3.9     1,012     5.3      61.4
Pack Bell/NEC  948     5.9       932     4.9      -1.7
Others      10,990    68.0    12,057    63.7       9.7
Total       16,171   100.0    18,924   100.0      17.0

(Source: Dataquest, June 1997)

Digging deeper in the worldwide PC sales data, some interesting patterns emerge. Although many expected Dell to take the number three spot this quarter, a better-than-expected quarter from Hewlett-Packard driven by notebook computers sold directly to corporations allowed the recent Dow addition to squeeze out 35,000 more units. The two companies ended up neck in neck in terms of market share and year-over-year unit growth. Number two ranked IBM was barely able to keep up with the market's pace, but apparently the company was still better equipped to execute than second or third tier PC manufacturers. With Packard Bell clearly wounded even after the recent acquisition of the company by Japan-based NEC, the gains in market share seem to have been concentrated in the top four competitors.

In the second quarter of 1996, the current top four names accounted for 26.2% of PC sales. In the second quarter of 1997, this market share increased 5.1 percentage points to 31.3%. Although about 1.0% came at the expense of Packard Bell's flagging performance, the companies squeezed an addition 4.1% out of the "Others," mainly indirect retailers that lack large manufacturing plants or sufficient working capital to compete with fast-growing direct and hybrid manufacturers. As readers will recall, the PC market is divided into three camps -- those that sell direct to the customer, those that sell through stores to the customer (indirect), and those that try to straddle the fence and do it both ways. The gains in share in the quarter seem to be concentrated in the direct players (Dell) or the hybrid players (Hewlett-Packard, Compaq) rather than the pure indirect retailers (Packard Bell). Even though IBM did manage to gain market share, its overall rate of growth barely kept pace with the industry, possibly because it is hard to grow sales when the market gets hot if you are using the indirect channel.

With 31.3% of all PCs sold by the top four names, what can investors reasonably expect over the next few years? Some are reminded of the situation among hard drive manufacturers in 1989. At that time, 59 companies made hard drives, with the top 4 holding market share below the 30% range. In 1996, only 12 companies made hard drives, with Seagate, Quantum, Western Digital and IBM accounting for a whopping 78% of this output. Should consolidation of this level occur in the PC industry, the companies that are going to benefit will be those that already have substantial market share and are increasing that market share. Although it probably will never get to the extreme of the hard drive industry, it is instructive to recall that the majority of sales for a number of high-ticket consumer items from cars to televisions are concentrated disproportionately in the three to five top tier players.

With Dataquest forecasting 151.6 million units by 2001, assuming the top four companies can split 60% of this share among them, that will be 22.74 million units apiece. Given that Compaq is tops right now with an annualized rate of 8.8 million units, that would give it 23.5% annualized unit growth even if it just hit the average. Is 60% a reasonable concentration for the top four players four years out? Judging by the even faster concentration that has occurred in networking, operating systems, applications, and central-processing units, it hardly seems unreasonable. Those who say the low barriers to entry make concentrations like this impossible in the PC business should keep in mind that the economies of scale being acheived now by the larger manufacturers cannot be duplicated by new entrants into the business, meaning they would have to be able to stomach losses until they got volume up high enough to compete profitably. In a sense, the sub-10% operating margins function as a moat that keeps new competition from entering the PC manufacturing business. Investors interested in PC companies should probably continue to concentrate on the top names in the industry, perhaps also glancing at Gateway 2000 and Micron Electronics as potential acquisitions to bolster the top four.

CYRIX CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %> and
NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %>
Regarding merger
(800) 642-1687 (code: 534426) -- replay through 8/1

TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>
(800) 475-6701 (#348218) -- replay

PAPA JOHN'S PIZZA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PZZA)") else Response.Write("(Nasdaq: PZZA)") end if %>
(800) 642-1687 (ask for Papa John's Int'l conference call) -- replay

GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>
(402) 220-2251 -- replay through 7/31

ACCEPTANCE INSURANCE COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIF)") else Response.Write("(NYSE: AIF)") end if %>
(800) 633-8284 (code: 2931450) -- replay through 7/31

OLSTEN CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %>
(800) 475-6701 (code: 348684) -- replay through 7/31
(320) 365-3844 (code: 348684) -- replay for international callers

LERNOUT & HAUSPIE SPEECH PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %>
1-800-677-4611 (passcode: 11345) -- replay through 8/1 @ 7:00 p.m. EDT
(402) 220-2168 (passcode: 11345) -- replay number for international callers

07/31/97 (Thursday)
PERFORMANCE TECHNOLOGIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTIX)") else Response.Write("(Nasdaq: PTIX)") end if %>
(800) 360-6077 -- 10:00 am EDT

07/31/97 (Thursday)
HA-LO INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HALO)") else Response.Write("(Nasdaq: HALO)") end if %>
1-800-275-2442 -- replay available through 8/1 @ 10:00 am EDT

NAT'L SEMI - CYRIX (Merger) Call
ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> Call
PRIME MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMSI)") else Response.Write("(Nasdaq: PMSI)") end if %> Call

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