CONFERENCE CALLS
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FOOL PLATE SPECIAL
Last evening online service providing stalwart AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> reported fourth quarter earnings of $0.19 EPS before a $0.05 EPS charge, three cents better than expectations. Despite the better-than-expected earnings, Big Blue Triangle was being mashed for $3 to $30 3/8 this morning due to some rather complicated comments by Chief Financial Officer (CFO) Len Leader in the conference call last night. The words subscribers, churn and retention occurring all in the same sentence was enough to cause heart palpitations on the part of many an institutional investor.
America Online talked about its costs for subscriber acquisition, saying it had been down to $45 in the most recent quarter from $50 to $55 last quarter. However, the company said it saw subscriber acquisition going up to $50 to $60 next year as they rolled out their new marketing campaign to promote the "new AOL." Subscriber acquisitions costs have long been the bugaboo of Wall Street. The way America Online counts them and the way die-hard permabears like Jeff Goverman at Cowen & Co. count them are light years apart, and although this Foolish reporter was actually going to ask America Online how it calculated its subscriber acquisition costs in the conference call, I unfortunately did not get into the queue fast enough.
America Online said that the last week in July was the best week they have had as far as churn is concerned, although it is still not where they want it. Part of the churn problem comes from fraudulent account activity, something America Online is attacking by spending more of its effort and money on the verification process. This should reduce churn and the manpower that is dedicated to terminating fraudulent accounts, but it will end up raising subscriber sign-on charges. There has also been some speculation that at its current 400,000 subscribers-per-quarter rate, it will not make the goal of 10.5 million subscribers the company has set for itself in the next fiscal year.
Always the America Online shill, I came away with more positives than negatives from the conference call. (Obviously, that is facetious... Templars are many things, but shills? Nah.) (1) Margins increased 5.4% as the company continues to leverage AOLNet to bring down overall costs. More than 50% of subscribers use AOLNet now. The company is looking for 85% by the end of this fiscal year, which could push up gross margins even more. (2) Advertising revenue increased more than 55% sequentially. Transaction revenue increased more than 35% sequentially. Advertising, transactions and merchandise were up more than 25% sequentially. All have significant momentum left in the October and December quarters -- ad sales hit their stride next quarter, most of the Intuit banks will be online by the end of the year and December is typically a great month for merchandise, or so people tell me. (3) That darn lawsuit only cost AOL $8 million to settle, way less than the $20+ million people were yapping about. (4) Retention is improving as AOL 3.0 and the $20/20 plan kick in. In the test data and in the first month of $20/20, lower-than-$20-a-month people upping their monthly fee are covering the heavy-users who are not getting charged yet.
It is interesting to see that the Street is chanting the mantra of "subscribers, subscribers, subscribers" at a time when raw subscriber growth has slowed. They used to be worried about profits. With $0.19 EPS this quarter and room to improve margins, $1.00 EPS next year on $1.5 to $2.0 billion looks like a slam dunk, which would be almost double the trailing numbers. Just repeat the last quarter four times and you have $0.76 EPS on $1.4 billion. With the diversified revenue streams coming in and retention improving, subscribers are becoming more valuable. Assume a subscriber stays with America Online for 24 months, with the current amortization period, at about $18.00 in revenues per month including merchandise on average, and you have $432 in lifetime subscriber revenues -- a number that covers even questionable Goverman's $200+ subscriber acquisition number. Assume subs are valued at that and you have a stock in the high $30s. Push that out a few months and you see a whole new world. I hope to get the conference call write-up and some more analysis up later today.
USA DETERGENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USAD)") else Response.Write("(NASDAQ: USAD)") end if %> shareholders cleaned up this morning, benefiting $3 1/4 to $32 1/4 from a J.P. Morgan upgrade from "long-term buy" to "buy."
Speculation that MCAFEE ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCAF)") else Response.Write("(NASDAQ: MCAF)") end if %> might acquire fellow software concern QUARTERDECK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QDEK)") else Response.Write("(NASDAQ: QDEK)") end if %> has pushed Quarterdeck shares up $1 3/4 to $9 1/2.
TARGET THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGET)") else Response.Write("(NASDAQ: TGET)") end if %> shares jumped $1 1/2 to $32 1/2 on news that the company has raised its stock buyback plans to 500,000 shares.
SOFTWARE SPECTRUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SSPE)") else Response.Write("(NASDAQ: SSPE)") end if %> lost less than it was expected to lose, only $0.06, and was rewarded with a $1 1/4 to $25 pop.
SYSTEM SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SSAX)") else Response.Write("(NASDAQ: SSAX)") end if %> tanked $3 7/16 to $8 7/8 after warning of disappointing upcoming earnings and receiving an Alex. Brown downgrade from "strong buy" to "buy."
Circuit board-maker BOCA RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCI)") else Response.Write("(NASDAQ: BOCI)") end if %> slumped $1 5/8 to $13 1/2, downgraded from "short-term buy" to "short-term market perform."
INTEGRATED PROCESS EQUIPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IPEC)") else Response.Write("(NASDAQ: IPEC)") end if %>, which earned $0.37 per share in the year-ago quarter, posted only $0.13 this year, a penny below estimates. It was punished with a $1 3/4 to $13 3/4 fall.
Shares have been discounted and are on sale at NORDSTROM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOBE)") else Response.Write("(NASDAQ: NOBE)") end if %> after the company severely disappointed analysts, posting $0.55 per share, compared to estimates of $0.70. Merrill Lynch downgraded the firm to "short-term neutral" and "long-term accumulate," and shares dropped $3 3/4 to $38.
MOVIE GALLERY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MOVI)") else Response.Write("(NASDAQ: MOVI)") end if %> shares experienced technical difficulties, retreating $1 3/8 to $16 3/4 after the company beat estimates, but posted earnings lower than year-ago levels.
Men's apparel concern NAUTICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAUT)") else Response.Write("(NASDAQ: NAUT)") end if %> shares shed $2 1/8 to $27 3/4 following a Smith Barney downgrade from "buy" to "outperform."
DASSAULT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DASTY)") else Response.Write("(NASDAQ: DASTY)") end if %> was cut from "outperform" to "neutral" by Morgan Stanley, and slipped $2 to $37 3/8 as a result.
Furniture and home furnishing concern RHODES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHD)") else Response.Write("(NYSE: RHD)") end if %> shares dropped $1 1/8 to $7 1/8 after the company announced that it's cutting back operations sharply and expects sales and earnings to fall in the upcoming quarter.
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Randy Befumo (MF Templar), a Fool
Selena Maranjian (MF Selena) another Fool
Prem Kumar (MF Prem) another
Fool