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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Imagine AOL, Anywhere
With shares of America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> up 4800% in the last five years, 274% in the last year, and 107% this year, non-shareowners might assume AOL is just one of those great stocks they've already missed out on. Yet it's actually becoming easier to believe that AOL may be just an infant due to become the Michael Jordan of a new league of media giants that will completely redefine the current boundaries.
AOL's shares were up $4 1/16 to $92 1/16 at midday after the online service reported better-than-expected earnings after the close yesterday. Revenues rose 54% from the year-ago period to $694 million, as sales from monthly online service fees jumped a robust 51% year over year and 19% from the December quarter. Those gains came on continued strong subscriber growth, as AOL added 944,000 new North American members and 1.15 million worldwide. AOL's total subscriber base topped 12 million on April 12, with CompuServe serving another 2.2 million members. Those numbers are impressive given fear that the new price hike for unlimited access might begin to dent customer retention rates. Membership growth was so healthy that the company pulled back on its marketing.
Marketing expenses amounted to $84.2 million (12.1% of revenues), or 9% less than a year ago when these costs ran to 20.6% of sales. Marketing expenses have now declined in actual dollars for several quarters. Crucial "advertising, commerce and other" revenues also rose a surprising 72% to $118 million, or 8% ahead of the December numbers. Meanwhile, the ad backlog increased $107 million to $427 million, as some large deals closed earlier than planned. On a fully taxed basis, and after backing out $44.8 million in one-time charges, net income was $39 million, or $0.16 per share, four cents ahead of the consensus estimate. Adjusted pre-tax income, a key metric, jumped to $63.4 million, or 9.1% of revenues, versus a year-earlier loss of $4.7 million.
AOL has become a booming business as costly marketing expenses decline and high-margin ad revenues pour in. The specific subcategory of "advertising and commerce revenues" jumped to about $75 million from $52 million in the December quarter and just $24 million a year ago. CFO Len Leader said ad revenues are rising at more than twice the 20% sequential growth rate seen by the major Internet search engine and directory companies. Also, this money isn't just coming from corporate ad budgets, but from broader marketing budgets that include spending on such things as direct marketing, catalogs, and brochures.
AOL is also working to expand its reach. Since 30% of aol.com visitors are non-AOL subscribers, the company sees an opportunity to beef up its Internet site to create a major portal a la Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>. The re-launch is scheduled for this summer. Yesterday's long-rumored acquisition of NetChannel, a Web-enhanced TV company that will help AOL compete against or complement Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> WebTV further confirms the scope of AOL's ambition: to suck up a healthy chunk of the massive ad/commerce dollars currently going to all other media and communications companies. Imagining what AOL Anywhere, driven by high-margin ad revenues, will really look like five years from now, the stock begins to look more interesting, even at 100 times the unrevised June '99 estimates.
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> popped up $4 3/4 to $53 9/16 after the automaker confirmed it will merge with Germany's Daimler-Benz A.G. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %> in a stock swap valued at around $39 billion. Under the deal, each Chrysler share will be converted into 0.547 of a share of the new company, giving the shareholders of the U.S. company a 43% stake in the new venture. The combined company is expected to yield cost savings of $1.4 billion in the first year and $3 billion in annual savings thereafter. Daimler-Benz rose $5 15/16 to $114 1/2.
Recoton Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCOT)") else Response.Write("(Nasdaq: RCOT)") end if %>, maker of Jensen and MacAudio stereo speakers and components, gained $2 3/4 to $28 3/8 after reporting Q1 EPS of $0.30 versus $0.05 a year ago, beating the First Call mean estimate of $0.12. Net sales rose 51% to $144.7 million in the quarter. The company's CEO added that Recoton is "at the beginning of an exciting growth track."
Physician practice management firm MedPartners Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> climbed $9/16 to $10 9/16 after reporting a Q1 loss of $0.04 per share (before charges) versus profits of $0.24 per share a year ago, which was in line with the First Call mean estimate. The company expects fiscal 1998 operating earnings to come in around $0.20 to $0.25 per share, while fiscal 1999 earnings are seen at $0.70 per share. MedPartners also appointed James Dickerson, former CFO at Aetna/U.S. Healthcare, as its new CFO.
Upscale retailer Saks Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %> rose $7/8 to $23 1/8 after reporting a 17.7% year-over-year increase in April same-store sales. For the first quarter, same-store sales climbed 5% from the same period a year ago. Same-store sales at Talbots Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %> rose 28.8% in April, sending shares of the retailer up $3 7/8 to $23 5/16.
Computer technology education company Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> advanced $1 9/16 to $15 after regulators in Illinois allowed the company to resume marketing and enrollment activities at its Schaumberg campus. The company has agreed to "certain measures and procedures" to operate within the letter of Illinois' education laws, the firm said. Yesterday, the Department of Education said it would audit the company to determine its eligibility for federally funded student loans.
Sunglasses retailer Sunglass Hut International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %> shined $1 7/32 to $11 13/32 after announcing an 11.4% increase in April same-store sales compared to a year ago. The company's president and CEO added that he was "optimistic about our initiatives to maximize spring and summer sales." Gruntal & Co. upgraded the company to "strong buy" from "buy."
Document storage and management products maker Anacomp Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANCO)") else Response.Write("(Nasdaq: ANCO)") end if %> was lifted $1 1/2 to $18 1/8 after reporting a Q2 loss of $1.14 per share versus a loss of $1.98 per share (including charges) a year ago. The company also said it will buy First Data Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %> data storage unit for $150 million in cash.
Envirotest Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENR)") else Response.Write("(NYSE: ENR)") end if %> rose $1 1/4 to $12 after the provider of vehicle inspection services said it has hired CS First Boston to explore "strategic alternatives."
Contract electronics manufacturer Jabil Circuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JBL)") else Response.Write("(NYSE: JBL)") end if %> gained $2 1/8 to $41 15/16 after BT Alex. Brown upgraded the company to "strong buy" from "buy."
Flat-rolled steel products maker Olympic Steel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZEUS)") else Response.Write("(Nasdaq: ZEUS)") end if %> rolled $3/4 higher to $14 3/4 after being upgraded by Bear Stearns to "attractive" from "neutral."
Biotechnology company EntreMed <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENMD)") else Response.Write("(Nasdaq: ENMD)") end if %> gained another $1 11/16 to $32 11/16 after Nobel Laureate James Watson, who with Francis Crick discovered the double helix molecular structure of DNA, submitted a letter to the editor to The New York Times claiming that he was misquoted in the front page article that popped up EntreMed's stock Monday. Watson was quoted as saying, "Judah is going to cure cancer in two years" in reference to the discoverer of the two EntreMed drugs that have been shown to eradicate cancer in mice. Watson said he told the article's author that endostatin should be in clinical trials by the end of this year, and that "we would know about one year after that whether they were effective." Check out our Stock Talk interview with EntreMed CEO John Holaday.
Earnings Movers
InVision Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVN)") else Response.Write("(Nasdaq: INVN)") end if %> up $1 1/4 to $10; Q1 EPS: $0.18 vs. $0.06 last year; Estimate: $0.16
Nortek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NTK)") else Response.Write("(NYSE: NTK)") end if %> up $1 1/2 to $32 1/2; Q1 pro forma EPS: $0.13 (continuing operations) vs. $0.06 loss last year; Estimate: $0.04 loss
Smallworldwide PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SWLDY)") else Response.Write("(Nasdaq: SWLDY)") end if %> up $1 3/8 to $29 1/2; Q3 EPS: $0.24 vs. $0.09 last year; Estimate: $0.23
TMP Worldwide <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMPW)") else Response.Write("(Nasdaq: TMPW)") end if %> up $1 9/16 to $30 3/16; Q1 EPS: $0.09 vs. $0.06 last year; Estimate: $0.07
Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %>, which rose yesterday amid rumors that Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> may make a bid for the company, fell back $5 1/4 to $72 3/4 this morning as the rumors appear to have been unfounded.
Metals and industrial services company Philip Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHV)") else Response.Write("(NYSE: PHV)") end if %> sank $1 1/4 to $6 1/4 after announcing the resignations of chairman Howard Beck, CFO Marvin Boughton, chief operating officer Philip Fracassi, and executive vice president Robert Chiste. As a result, the company's board has restructured top management by appointing a new chairman, a new president and CEO, and an executive vice chairman, and by eliminating the position of COO. The company will be seeking a new CFO.
First Alliance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FACO)") else Response.Write("(Nasdaq: FACO)") end if %> tumbled $1 7/16 to $13 1/4 after the American Association of Retired Persons (AARP) filed a motion charging the sub-par mortgage lender of deceptive and predatory lending practices targeted at older homeowners. The motion joins others in a suit seeking as much as $50 million in restitution. The company issued a statement "vigorously" denying any wrongdoing.
Computer software company Baan Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> dropped $1 11/16 to $41 13/16 on reports that it will issue a statement next week on the new accounting principles it will be adopting. Problems arose during the first quarter because the company was not allowed to include lease contracts as part of its sales. The company blamed lower-than-expected Q1 earnings on the deferral of about $43 million in revenues.
Comsat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQ)") else Response.Write("(NYSE: CQ)") end if %> slid $1 15/16 to $38 5/8 after the House of Representatives passed legislation to end the company's 35-year monopoly as the only U.S. gateway to two international satellite systems. If passed by the Senate and approved by the President, the bill would allow competitors to bypass Comsat and enable customers to renegotiate their contracts starting in 2000.
Italian footwear maker Fila Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> slipped another $1 to $19 1/2 after reporting late Tuesday a first quarter loss of $0.33 per share compared with a profit of $1.22 a year ago. Analysts had expected breakeven results.
Information security solutions company MEMCO Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEMCF)") else Response.Write("(Nasdaq: MEMCF)") end if %> tanked $5 to $23 5/8 after announcing it will acquire AbirNet Ltd., a provider of network intrusion detection and usage monitoring software, and Network Information Technology Inc., a provider of server security software, for a total of about $43.7 million in stock and $11.3 million in cash. MEMCO also reported first quarter earnings of $ 0.13 per share, beating the analysts' mean estimate of $0.11.
Earnings Movers
Credit Management Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMSS)") else Response.Write("(Nasdaq: CMSS)") end if %> down $1 3/4 to $6 1/4; Q1 EPS: loss of $0.18 vs. loss of $0.03; Estimate: loss of $0.10
ESG Re Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESREF)") else Response.Write("(Nasdaq: ESREF)") end if %> down $2 to $23 5/8; Q1 EPS: $0.23 vs. $2.50 last year; Estimate: $0.31
Information Management Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMAA)") else Response.Write("(Nasdaq: IMAA)") end if %> down $2 3/16 to $11 5/8; Q1 EPS: $0.07 (before charges -- loss of $0.75 after charges) vs. loss of $0.09; Estimate: $0.05
1-800 CONTACTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAC)") else Response.Write("(Nasdaq: CTAC)") end if %> down $1 1/2 to $18 3/8; Q1 EPS: $0.08 (before charges) vs, $0.03; Estimate: $0.08
Signature Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OWN)") else Response.Write("(NYSE: OWN)") end if %> down $1 3/16 to $17 13/16; Q1 EPS: $0.20 vs. $0.14 (before charges) last year; Estimate: $0.19
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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