What Will Meredith Do When People Stop Reading Magazines?
Hyperbole. Pardon me. Meredith (NYSE:MDP) is doing quite well, thanks. The death of the publishing and local TV markets may be slightly exaggerated.
The purchase of G+J Consumer Magazines (primarily Parents, Family Circle and Fitness) from Gruner+Jahr appears to have gone very well. After three fiscal years (June 30 cycle) of fairly flat revenue in the $1.1 billion to $1.2 billion range and modest increases in net income, Meredith is on the move.
For the first six months of Meredith's fiscal, ending December 31, revenue rose to $620 million from $420 million. Income from operations rose to $107 million from $92 million. Broadcasting was weak during the period. Broadcasting operating profit fell from $46.4 million to $39.1 million. Political advertising revenue fall-off seemed to account for most of this.
Magazine publishing is where the company showed its mettle. Even without the G+J titles revenue for the six months ending December 31 would have risen 9% due to ad strength and interactive media revenue. With the new titles, advertising revenue in publishing division rose 58% and circulation revenue rose 60%.
Meredith took on $350 million in debt to buy the new magazines, and it has paid off handily for investors. Since hitting a low of $44.51 a little less than a year ago, the company's market capitalization has gone up almost $550 million and the stock now sits at $56. So, the capital for the acquisition was well spent.
Meredith now has to get organic growth from the magazines. Broadcasting will not help much, at least until another cycle of political ads comes around. But, local stations are going to remain under pressure as the networks lose audience.
The fairly modest rise in Meredith stock shows that they have done a good job plugging in the new publications. Further gains will almost certainly depend on whether the total magazine ad revenue and online initiatives can continue to grow or whether Meredith will go back to the flat top-line profile it had for three years or continue to show substantial improvements in advertising and circulation.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine which was on the Adweek 10 Hottest Magazine list in two separate years. He has also been president of Switchboard.com, which at the time was the 10th most visited site on the internet according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.
LookSmart, A Bridge Too Far
LookSmart (NASD:LOOK), the search engine company, has made a big move this year from $2.75 to $5.50. It's hard to figure out why.
LookSmart's revenue has dropped every year for the past three years, and its quarterly numbers for 2005 didn't move much. The first quaret revenue was slightly above $12 million and Q4 05 was just below $10 million. The company showed an operating loss in excess of $4 million in each quarter of the year.
LookSmart guided to a meager 3% to 5% sequential growth for Q1 06.
LookSmart is no longer just in search per se. They have 181 search sites in 18 vertical categories. In addition, they supply tools that, in their words, are a "comprehensive and customizable set of syndicated solutions for publishers to grow their advertiser relationships and audience". In essence, the company offers tools, their AdCenter and Furl.net products, that allow other internet publishers to get better results from search and targeted advertising.
LookSmart has $51 million is cash and equivalents, so they have some time to see if their "tools" model will work. But, the company has two huge hurdles. First, search is dominated by Yahoo! (NASD:YHOO), Google (NASD:GOOG), and MSN. Barry Diller just might get into the game in a big way with Ask.com, but even that will be very tough.
The same holds true of the online ad tools business. Google offers tools and MSN is moving into this game. A number of the online advertising resellers like 24/7 Real Media (NASD:TFSM) offer them. It's very hard to see how this is a winning game for a small player they does not have a sharply differentiated product. And, I mean very sharply differentiated.
The run-up in the LookSmart stock does not seem justified. They may show something in 2006 to prove they have a viable business, but it has not happened yet.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine which was on the Adweek 10 Hottest Magazines in two separate years. He has also been president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the board of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
JDS Uniphase Gets Ahead, Of Itself
JDS Uniphase (NASD:JDSU) provides optical products for the telecom, cable and network equipment manufacturers. It's started to become a very good business, and recent positive announcements from companies like Level 3 (NASD:LVLT) have only served to fuel the fire.
The company had an impressive quarter-over-previous-quarter ramp in calendar 2005 (the company is on a mid-year to mid-year fiscal). The top-line went from $166 million in Q1 to $171 million in Q2 to $258 million in Q3 and $313 million in the year's final quarter.
The company did say it expected sales in the current quarter to be flat at $304 to $321 million as compared to the immediately previous quarter.
As Forbes (www.forbes.com) pointed out recently the increased commitment to fiber by the likes of Verizon (NYSE:VZ)is likely to accelerate the trends that have helped Uniphase grow.
After a lot of analyst upgrades late last year, the last two ratings on the stock according to Yahoo!Finance (finance.yahoo.com) where a downgrade to Hold by Needham and an initiation at CIBC at Sector Perform. Neither was exactly a ringing endorsement for the stock at current levels, so there is obviously concern about whether the rising tide in fiber will lift all ships.
The stock has made a huge move up over the last year from $1.32 to $4.25, which is where it trades now. With a $7 billion market cap, the company trades at about eight times sales and Yahoo!Finance shows a forward PE of almost 85.
For a company that expects a flat quarter and that still has a way to go before it can demonstrate that it can show a record of profits, the current stock price seems far too high.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com, which was the 10th most visited site on the web at that time, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.
SigmaTel's Bad News
SigmaTel (NASD:SGTL), the Texas-based fabless semiconductor company, revised guidance down yesterday, with a vengeance. The company had revenue of $324 million last year and an operating profit of $56.3 million. It made money in every quarter except one.
The company has already been downgraded by four brokerages since October. The only piece of good news the company has had lately is that it prevailed in a patent dispute against Actions Semiconductor.
Sigmatel is now saying that Q1 will have a top line in a range of $30 million to $35 million. It's previous forecast was $52 to $60 million, so the miss is massive. A back-of-the-envelope calculation would say that, based on past expenses, the company could loss over $40 million in the quarter. As of December 31, the company had cash and cash equivalents of about $120 million, so let's hope that they don't keep this up for any long period of time.
If the stock drops sharply, and it will, the reasons for the miss could benefit shareholders as the company moves into the latter part of the year. The transition from the company's 3500 series chips to the 3600 series went more slowly than expected. The company expects those orders to show up in Q2. The company also said that the availability of a hardware and firmware solution for public casings customers had created order delays. SigmaTel claims this has been addressed by management. So, there could be some net positives in Q2 and beyond.
On the distressing side of the ledger, NAND flash prices have declined sharply. The company was unclear about how this would be resolved, or when.
SigmaTel is in some attractive and growing businesses. The company provides semiconductors for PCs, the huge portable audio business, digital TV, and television set-top boxes. These businesses are likely to grow rapidly, so the issue will be whether SigmaTel can get a reasonable share.
The stock has come down from $38 to $10 so far this year, so it is already out of the running in any popularity contests. The stock dropped closer to $9 after hours.
Because SigmaTel is at the center of some hot markets, if management's assessment that most of the company's products will be resolved in Q2, at a $375 million market cap with a fair amount of cash on hand, the stock could be getting cheap.
Let's hope cheap does not get expensive for investors.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine, which was on the Adweek Ten Hottest Magazines list in two separate years. He was also the president of Switchboard.com when the company was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of Edgar Online and TheStreet.com. He does not own securities in companies he writes about.
RedEnvelope's Near Term
Online retailer RedEnvelope (NASD:REDE) had a hard day at the office recently. Make that a hard month. The company lost its CEO. JPM securities downgraded the stock when it missed its fiscal Q3 numbers (ending January 1, 2006) and issued disappointing guidance.
But, not all the news was bad. The company added 586,000 customers over the year with that number now totaling 2.8 million. The company ended the quarter with about $29 million in cash and no debt. Revenue is expected to grow 7% to 10% next year (hardly burning down the barn but better than shrinking), and the company has a new CEO, COO, and head of marketing, all of whom seem to have good backgrounds. The incentives given to the CEO and COO seem to be ones that should keep them motivated to beat the guidance given by previous management.
RedEnvelope's business of online gift giving should be one that continues to grow as more people shop on the internet. The brand is well-known and seems to be respected. At least the customer growth would indicate satisfaction with the service.
The company trades at just under $10 about midway between its 52 week high/low of $7.06 and $13.25. RedEnvelope has a market cap of $90 million. Back out the cash, and the company trades at about 60% of annual sales.
If one or two things go right at RedEnvelope, the gift could be a pleasant surprise.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was president of Switchboard.com when it was the 10th most visited site on the web, according to MediaMetrix. He as been on the board of TheStreet.com and Edgar Online. He does no own securities in companies he writes about.
Not The Knot
The Knot (NASD:KNOT) provides services to the wedding market, mostly online. The stock has run like a scalded dog from last summer's low of under $6 to $18 recently.
The company now trades for over eight times sales.
A look at 2005 revenue by quarter does not reveal much that could be viewed as spectacular. Revenue in Q1 was $11.9 million, Q2 was $13.6 million, Q3 was $13.3 million and Q4 was $12.8 million. According to the Motley Fool (www.fool.com), The Knot earned $.06 a share in the December quarter which 50% better than what Wall Street expected.
A look at the company 10-K shows that The Knot is being sued by a company called WeddingChapel.com. The issue is a patent violation claim. The amount being sought could be as high as $13 million.
Another issue that investors should consider is that if the publishing empire Conde Nast, which dominates the wedding magazine business, even decides to build a large online business in this market, things could get tough over at The Knot.
This is a good business with a clever approach to a large market--getting married. But, the stock is too high now, given the risks.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about.
Will The Interpublic Drama Ever End?
Interpublic (NYSE:IPG), one of the world's largest advertising and public relations conglomerates, just can't seem to wake up from its multi-year nightmare. Within the last few weeks, the company posted a loss and restated earlier quarter, lost its chief accounting officer, cut offices at one of its largest divisions, sued one of its former star executives, and had S&P cut the ratings on its bonds, which are already in junk territory.
The company seems to go through senior managers so fast that you can't tell the players without a scorecard.
Revenue for Q4 05, recently reported, was $1.9 billion, slightly down from a year earlier. The full-year was flat at $6.3 billion. Full-year operating loss was $104 million. The company closed the year with $2.2 billion in cash and marketable securities, but also had $2.2 billion in debt. Maybe they should just use the cash to pay it off. To complicate matters, the company offered $525 million in convertible preferred stock and got a waiver on a revolving line of credit. Most of that sounds worrisome.
I always find it helpful to look at a company's website. If they cannot be clear about what business they are in, it's usually a bad sign. To get through the Interpublic website, I needed a map, a flashlight, and a two-week supply of food and water. And, this is a company in the marketing and public relations business.
Interpublic's CFO recently said that the company had exited 29 non-strategic or unprofitable businesses in 2005. One would think that would mean 2006 would be a banner year, with all off that ballast thrown over the side.
But, looking at the company roster of divisions, what is core and what is not? There must be fifty units that make up Interpublic. Is the Frank About Women marketing consultancy which helps companies pitch women strategic? I would hope one of the larger advertising divisions like Campbell-Ewald or Foote Cone could do that. They are huge ad agencies with multinational clients. How about Graphic Orb, which provides print design and production services? Is that one core? My favorite division is OneSeven, an "elite force of account, strategic and creative people with an average of 20 years of experience in the advertising industry." I guess the people at the larger ad agencies Interpublic owns can't do that.
No wonder no one wants to own the stock and it has fallen from $16 two years ago to under $10 today. The company's market capitalization is about 70% of its annual revenue.
Interpublic needs to sell a lot more of its businesses. Operating a company with this many arms and controlling financials and management for all of them is just too hard, which is what got the company into trouble in the first place.
Cut back. Own a few really big, first-tier ad agencies and operate a business that management and investors can understand.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine which made the AdWeek 10 Hottest Magazines list twice. He was also president of Switchboard which was the 10th most visited website in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online.
Can Microsoft Be All Things To All People?
Bill Gates, Steve Ballmer and I went to college together, so I have the advantage of having watched Microsoft (NASD:MSFT) for a long time. Gates didn't graduate, so maybe the BA and MBA are overrated.
Microsoft's stock has traded in a fairly narrow range since early 2003, and that is not news to anyone. The reason why is the subject of endless debate.
In a nutshell, Microsoft's problem is that too many businesses have become "strategic" to them, and too few are merely "tactical". Business school professors would argue that strategic is core to the company's overall mission and tactical activities merely play a supporting role for the main engine of a company's growth.
Microsoft has divided its corporate structure into seven units. This is changing and some are combined or reorganized, but it is illustrative to look at them as they have been set up and ask how much each contributes to the overall Microsoft pot.
Microsoft's 10-Q defines the seven units as Client (Windows XP Professional and Home), Server and Tools (Windows server and Microsoft SQL server), Information Worker (Microsoft Office, Visio, Live Meeting and OneNote), Business Solutions (enterprise resource planning, customer relationship management software and Microsoft Partnership Program), MSN (e-mail, instant messaging, MapPoint, portal and search), Mobile and Embedded Devices (Windows Mobile and Windows Embedded OS), and Home and Entertainment (XBox and platforms for interactive TV). Within each unit, a segment of the business may dominate its revenue contribution. Microsoft Office generates 85% of the Information Unit top line.
The Client, Server and Information units are really, when put together, Microsoft's core old line business of licensing software for PCs, servers and related devices. Client has a 77% operating margin in the quarter that ended December 31. Server was at 34% and Information at 73%. These business do not grow fast, about 10% year-over-previous-year. But, they are what Microsoft has been for years, the dominate provider of PC and server operating systems and related products.
Jack Welsh once told me something that he said to almost everyone. If GE (NYSE:GE) has a unit that was not No.1 or No. 2 in global share for its industry, he wanted no part of it. Welsh violated his own rule from time-to-time, but his commitment to it is what lead to the tremendous growth of GE while he was CEO.
One has to ask what Microsoft is doing in the portal business, the IPTV (internet TV)
business, the game console business, and the cell phone business. The company has an explanation for each. MSN and search are strategic because they drive contact information and behavior information on tens of millions of people. This in turn is useful in building functions into the company software and identifying customers. Does the company really need to compete with Google (NASD:GOOG) and Yahoo! (NASD:YHOO) in the portal and search space? Is it essential? MSN revenue grew 17% in the most recent quarter, but margin dropped 33%. It's competitors clearly did much better.
Microsoft wants to get more deeply into the online music business and customized business management solutions for productivity. Microsoft wants its software to be the standard for high-definition DVDs.
In the meantime, the new version of the OS flagship, called Vista, will be released late. Investors weren't happy. Maybe the company is stretched, even with its size and resources.
Microsoft has a multitude of problems. The flat stock price makes it harder to get and keep employees. Antitrust bodies around the world are looking for ways to milk a few hundred million in penalties for real or perceived monopoly practices out of Redmond. The search engine companies are pushing to stay ahead in their core "strategic" business, which really are strategic. Companies like Sony (NYSE:SNE) are desperate to rule the video game market.
Microsoft may have to do a bit of retrenching. The most radical form of this is breaking the company up, an oft-mentioned remedy which seems very unlikely. But, the idea of trying to dominate ten or fifteen industries that have solid, capable competitors is almost certainly impractical.
The sooner the management at Microsoft comes around to this, the better.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site on the web, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
RedHat, Nice Business, Expensive Stock
RedHat (NASD:RHAT) announced earnings today for the fiscal fourth quarter and full year 2006 which ended February 28. Quarterly revenue came in at almost $78 million, up 37% from the same quarter last year. For the year, revenue was $278 million, up 42%. Operating income growth was even more impressive, rising 116% for the year to $58 million. The company forecast that it would do about $83 million in the current quarter, which, according to Reuters (www.reuters.com) was a bit of a disappointment.
RedHat licenses and supports open source software, particularly Linux. This includes operating systems, middleware and management solutions.
Linux is in its prime. It is the logical alternative to Microsoft (NASD:MSFT) products, and, due to the large community that contributes to Linux without charging for core development work, Linux is, in most cases, less expensive to deploy than Microsoft solutions.
RedHat has had an astonishing run this year, from just over $10 to $31. After hours today, it traded slightly below $28. This still gives the company a price-to-sales ratio of over 20 times. Microsoft's price-to-sales number is 6.8x.
When Microsoft was in its real growth spurts, the company was putting up revenue increases like RedHat is now, but on much, much bigger numbers. From 1996 to 1997, revenue at the software giant grew from $8.8 billion to $11.4 billion. Operating income grew from $3.1 billion to $5.1 billion. Investors tend to forget how formidable the Microsoft machine was.
RedHat has a strong business and open source software is likely to continue to grow as an alternative to Microsoft. But, until the company can show growth off of much bigger numbers, the multiples are too high.
Douglas A. McIntyre was the Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com which was the 10th most visited website on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and has served on the boards of Edgar Online and TheStreet.com. He does not own securities in companies he writes about.
United Online, Frankenstein Lives
United Online (NASD:UNTD) is a remarkably consistent business. In each quarter in 2005, the company had approximately $105 million in revenue. Gross profit each quarter was around $104 million. Operating income each quarter was about $21 million.
United Online was put together from the body parts of internet access providers Juno and Net Zero in 2001. In 2004, the company bought Classmates Online. I am not sure how that part fits even after going through the 10-K. The core of the company's business is its five million paid accounts.
The company offers its customer tiers of service, most between $9.95 and $14.95. The customers get internet access, e-mail, and additional goodies like free voice over IP. The company also has a photosharing business, but there are so many good ones offering free service that it is hard to understand why anyone would use this.
United Online is a very small business in a market with giant competitors. This would include the likes of Verizon (NYSE:VZ), Quest (NYSE:Q), Comcast (NASD:CMCSA), and AT&T (NYES:T), to name a few. In other words, any phone company or cable provider in the country, not to mention WiFi providers. United Online navigates this competitive landscape by offering dial-up service while most of the competition is broadband.
The company has $244 million in cash and short term investments, up about 5% from 2004, so there is no concern here that the business cannot provide for itself.
This is not a standalone business. Period. At $12.65, the company is in the middle of a narrow trading range and has a market capitalization of $800 million. But, someone should tell the board to hire an investment bank.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was the president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
IDT, A Good Talk, Spoiled
IDT (NYSE:IDT) was on of the grandfathers of VOIP (voice over IP) with its Net2Phone operations, which is just brought in-house with a merger. But, the company let a bunch of bullies like Vonage and Skype beat it up and take its lunch money. It is hard to understand why the company would let such a spectacular opportunity go, but they did.
The company has retail and wholesale telecommunications services, its VOIP operations and a home entertainment division. Try as they might, the cannot get the pieces to make money together. In the six months ending January 31, 2006, the retail business made $3.5 million on revenue of $732 million. The entertainment line made $882,000 on revenue of $96.5 million. Everything else showed red ink.
The company is now a hodgepodge of telco, entertainment, VOIP and an IDT Capital arm. The company operates at about a $2.5 billion annual revenue run rate and operating losses each quarter run in the $25 to $60 million range.
So, what are we to make of IDT? It has a market cap of a little over $1 billion and trades at the bottom end of its $11 to $15 range. The two year chart is pretty much straight down.
If ever a company needed a rationale for being in business, IDT is it. Maybe their best bet is to sell everything but Net2Phone and make a run at Vonage. It would be better than trying to operate five or six business that don't seem to be going anywhere.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
Level 3 Raises Guidance
Level 3, which was given a positive write-up here recently, raised first quarter and full year guidance today. Q1 operating income before depreciation and amortization was raised from a range of $105 to $125 million to a $140 to $150.
The forecast for the full-year was raised from a operating income before D&A of $550 to $600 million to a new range of $600 to $650.
The stock, which was below $3.50 five trading days ago closed at $5.18 today.
Douglas A. McIntyre does not own securities in the companies he writes about.
Has Apple Had Its Run?
Even with the first quarter pull-back in Apple's (NASD:AAPL) stock, the company carries a rich price tag. The company has a market capitalization that is 3.1 times revenue. Dell (DELL) is at 1.3 times and Hewlett-Packard (NYSE:HPQ) at 1.1. Now, as Babe Ruth said when he was asked why he made more than the President of the United States, his answer was that he had a better year.
Can Apple keep it up and get back to $86? I doubt it. Since the company announced its fiscal first quarter results on January 18, a lot has happened. Success breeds competition, and in 2006, Apple will have plenty, particularly for its iPod and iTune products.
Nokia (NYSE:NOK) has announced that it is working on a cellphone that plays 50 hours of music on a single charge using a new chip from NEC (NASD:NIPNY). MTV and Microsoft (NASD:MSFT) are opening the new Urge music store. Amazon (NASD:AMZN) has announced a new music download service. AOL has launched new video and audio initiatives that offer a great deal of content for free, which could take business from paid services like Apple's. And, of course, Sony (NYSE:SNE) knows that if they cannot take a large piece of the portable audio and video markets, you can put a fork in them.
This does not even take into account the scores of competing products and services from companies as diverse as RealNetworks (NASD:RNWK)Rhapsody and SlingMedia which makes a product that allows you to take your home TV signal with you anywhere in the world.
Apple cut prices on some products in Q1 05 including the iPod Nano. No company wants to cut prices on popular products, so one has to wonder what pressure may have caused them to employ this tactic.
It is hard to fault what Apple has done so far. The quarter ending December 31, 2005 was a record all the way around. Revenue rose to $5.75 billion from $3.49 billion a year earlier. Net profit rose to $565 million from $295 million in fiscal Q1 04. iPod sales were up 207% over the same period the year before and iMac sales rose 20%. The company now sits on over $8 billion in cash and short term investments.
But, iPod growth has to slow, both because many people who want one now have one, and because competing products coming to market will take some share. There are now over 40 million iPods in the marketplace, and that is a lot.
Needham & Co. analyst Charles Wolf recently said he believes the Mac's share of total market could rise to 9%. IDC (www.idc.com) says that there were 206.8 million PCs sold worldwide in 2005. There were 4.7 million Macs sold. That's 2.28% of the market. The glow from the iPod is only going to do so much to get people to leave their PCs behind. With Acer and Lenovo pushing into the U.S. market to join juggernauts like Dell and HP, and the perceived interoperability advantages of the PC platform, the fight for share is going to be a bloody one.
Apple will continue to do very well. Will it enjoy the kind of growth it since 2003? Even Babe Ruth's run ended at some point.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard which, at the time, was the 10th most visited site on the internet. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and has, in the past, served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
What If Bezos Is Right?
Amazon (NASD:AMZN) is often ridiculed for its lack of financial transparency by the media and analysts. Barron's (www.barrons.com) seems to take the company to task at least every other issue for something being wrong or misleading on its balance sheet. At least four brokerages have downgraded the stock in Q4 05 or early this year.
The company's growth has stayed respectable. Revenues for 2005 were almost $8.5 billion up from $6.9 million the year before. Net profit was flat. According to Value Line (www.valueline.com), Amazon had 55 million active customer accounts at the end of 2005, up almost 20% from a year ago. Looking ahead, Amazon guided for revenue between $9.85 billion and $10.45 billion. Not sexy, but $10 billion is $10 billion.
The phase "reinventing our business" usually comes from CEOs who have run out of ways to make their core business work. Generally, when you hear it from a company, it's not a good sign.
Jeff Bezos, the founder and CEO of Amazon hasn't mentioned reinvention as far as I can tell, but he may be quietly going about a partial overhaul of how Amazon makes money anyway.
In the last two months, Amazon has said it is working on a movie download service according to the New York Times (www.nytimes.com). One would think that Blockbuster (NYSE:BBI) or Netflix (NASD:NFLX) would be doing that, but not Amazon. They are also in talks with Vivendi Universal (NYSE:V) about a music download service with an Amazon portable device.
Amazon also opened a business (Amazon S3) that allows software engineers to get cheap, scalable, low-latency storage at very competitive prices. One might have expected this from Akamai (NASD:AKAM), but not Amazon.
And, to top it off, Fidelity is opening a premium store at Amazon to sell financial services.
I would be very reluctant to count Bezos out, even if he is secretive. With 55 million active customers and some visionary business plans, not every initiative has to work for Amazon to be in some new, solid, high-margin businesses that it was not in just last quarter.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com, which at the time was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive officer of FutureSource, LLC and On2 Technologies, Inc., and in the past been on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
Sirius and Stern: A Canary In The Coal Mine
Sirius Satellite (NASD:SIRI) clearly made a huge gamble by taking on Howard Stern. Could a company with well over a hundred channels come close to betting the company on one channel, one that is only live a few hours a day? Subscriptions have risen and Sirius recently passed the four million mark. But, the stock market has dragged the shares from close to $8 in late 2005 to $5 now.
Granted, there are other issues that investors have with satellite radio. Sirius had a mere $242 million in revenue in 2005 against costs that drove an operating loss of $829 million. The company's market capitalization at $7.1 billion is 29 times trailing twelve months sales. Almost no company can boast that multiple.
The issue with Stern adds up to whether the throngs who have signed on to hear him will renew when the time comes. For a lot of people, that will be a year from now. Fundamentally, Sirius has 184 channels, but the ones carrying National Public Radio and Broadway's best musicals are probably not getting a lot of play.
So, Sirius casts its lot with Stern. In many ways it is a traditional media gamble. The gamble that puts a lot of money in the pockets of Rush Limbaugh, Stern and Don Imus. The gamble that a star can carry a network.
Sirius needs to increase its revenue by a factor of 4x to 5x to breakeven at its current cost rate. Since some expenses will probably rise as revenue does, that breakeven number is probably higher.
Year-end subscriptions for Sirius were 3.3 million, so they have gotten to 4 million in a matter of three months. But, the Stern listeners from regular radio have almost certainly already made their move to Sirius.
The scary question is, how many of them will stay?
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has, in the past, served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
A Rough Start For Traffic.com
Traffic.com (NASD:TRFC) had its IPO in January and hit $13.30. The company raised almost $75 million. The stock recently dropped below $9 and now trades around $9.50. That's a pretty big drop in a short time.
The company describes its business as syndicating real-time traffic data from the largest cities in the U.S. so that it can be run by local TV and radio stations. Traffic.com keeps part of the advertising time and sells it, making money from the proceeds. The company currently focuses on 35 large metropolitan areas.
In mid-July 2005, the company began to sell advertising at its website and distribute its data to wireless devices. These applications certainly seem more sexy that the radio syndication business.
The company is something of a technology marvel. It collects over 25 million traffic flow records a day. This data is converted into digital format for distribution to the company's customers.
It is difficult to fault the company's distribution network. Traffic.com has 48 TV stations as customers. The company website had over 900,000 unique visitors in February 2006 which was a 67% increase over the same figure for September 2005.
The company's competitors tend to be large radio networks like Westwood One (NYSE:ONE) and Clear Channel (NYSE:CCU).
The company seems to have a simple problem. It can't seem to make money. Revenue for 2005 was $43.3 million. The number was barely up from $42.4 million in 2004. Gross margin actually dropped. The company had a 2005 loss from operations of $37.5 million. This included $18.5 million for legal settlements, but even backing that out, the bottom line was worse than in 2004.
Looking at Q4 2005 numbers, Traffic.com had revenue of $11.2 million, down from $11.4 million in Q4 2004. Gross margin feel apart, dropping from $3.5 million in Q4 04 to $2.2 million in Q4 05. The loss from operation also got much worse.
With a market capitalization of $184 million, I would not want to have to be the one making the case for buying this stock, even while it is near its lows. It has a lot of distribution, but would need to have a huge run-up in revenue to make a dime.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com, the 10th most visited website on the internet according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and in the past has been on the boards of TheStreet.com and Edgar Online.
Has Intel Finally Dropped Far Enough?
The short interest in Intel (NASD:INTC) rose 18.7 million shares between February 15 and March 15 to 71.9 million shares. That's a big move in the short interest for a large cap stock. Intel has also lost $54 billion in market cap since the summer of 2005. According to Forbes (www.forbes.com), there are only 48 companies in the US that even have a market cap above $54 billion.
Since conventional wisdom in the business press is that improvements in the products of Advanced Micro Devices( NYSE:AMD) is the primary cause of Intel's troubles, it is not surprising that that stock is up from about $14 a year ago to $36 now, adding over $10 billion to its market cap.
Caris & Co. analyst Rick Whittington recently noticed a build up in inventories for the aging Intel Prescott x86 chips, but saw no such inventory issues at AMD. He sees this as a sign that customers are moving to the AMD product.
AMD announced with much jubilation in early March that it now supplies half the chips to China PC giant Levono Group. Reuters pointed out at the time that AMD's share in China had risen from 5% in 2001 to 18% in 2004, much of it at Intel's expense.
The question becomes whether or not to bet against Intel at $19, a price it has not seen since the fall of 2004?
Intel recently announced their new chips with "Core" technology. These chips should have improved performance while using less power. Intel also announced new WiFi chips and PCI cards. If WiFi does not rule the world of broadband now, it certainly is gaining on that goal. In-Stat (www.in-stat.com) sees mobile chips growing from 140 million annual chipsets in 2005 to 420 million in 2009. Intel also announced its new "Santa Rosa" chip features which allows devices to boot up more quickly.
Granted, Intel has been a financial disappointment. Intel revised revenue guidance downward for the quarter ending March 31. At the time, RBC Capital Markets analyst Apijit Walia told Forbes "future quarter growth estimates may get lowered further".
With Intel's stock falling, it is easy to forget its still substantial advantages over virtually all of its competitors. Intel did $38.8 billion in revenue in 2005. Operating income was over $12 billion. Perhaps most impressive, R&D spending was $5.1 billion according to Morningstar (www.morningstar.com). Intel's top line has risen 74% between 2002 and 2005. Hardly a dog.
Intel now trades at a PE of 14 against the S&P 500 average of 22. Looking at the same numbers supplied by Morningstar for AMD, their PE stands at 90.3. AMD's R&D budget is $1.1 billion and its operating income was $232 million in 2005.
According to Intel, 150 million people will begin using wireless devices this year. Intel's Core Duo processor and new WiMax technology position the company very well for the latter part of this calendar year and into 2007, as demand in these sections of computing rises. Is Intel likely to have to weather a slump over the next few months? Yes. It is likely that they deserve their current stock price based on metrics like PE and the improving outlook for mobile and wireless computing.
I don't think so.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and in the past was on the boards of TheStreet.com and Edgar Online.
Value Line Could Have Been Morningstar.
As a matter of fact, Value Line (NASD:VALU) was Morningstar (NASD:MORN). Founded in 1931 by Arnold Bernhard, Value Line was one of the premier investment research firms in the country, selling the Value Line Investment Survey and spin-offs to everyone from high-end individual investors to mutual funds and institutions. The flagship product still covers 1,700 stocks every week.
In Value Line's fiscal third quarter, which ended January 31, the company had revenues of $21 million, little changed from a year earlier. For the nine month period, revenues were $63.5 million, little changed from a year earlier. For fiscal Q3 net income rose to $6.7 million for $4.7 million, but for the nine months the change was more modest rising to $17.7 million from $16.4 million last year.
Breaking down the top line, $12 million came from Value Line publications in Q3. Investment management fees for funds that Value Line manages were $8.2 million. Neither line-item moved much from the year before. License fees were small, and rounded out the revenue.
Over the years, Value Line has expanded it services to include mutual fund surveys, options and convertibles data, and a number of institutional products. Corporate and pension funds use Value Line Asset Management and the company earns fees from managing over $3 billion dollars, according to their 10K.
The company has a market cap of $360 million.
Let's turn to Morningstar for the purposes of a contrast. The company is much younger, and later to the investment advisory business, having been founded in 1984. Like Value Line, the company also markets stock, fund and exchange traded fund advisory services for individuals, investment advisors, and institutions.
For the year 2005, Morningstar did $227 million, up from $180 million in 2004. Year-over-year growth of its premium memberships and advisor workstations has been impressive. The company also has an investment consulting business and acts as a registered investment advisor for institutions.
Morningstar has a market capitalization of $1.7 billion and since its IPO less than a year ago the stock has gone from just over $18 to $42. Value Line's stock hit $43 earlier this year and now trades at $36.
This is a great case study of the first guy in the market getting his lunch eaten by an aggressive newcomer. In 2001, Morningstar was losing money on revenue of $91 million, about what the Value Line annual revenue run rate is now. But, Value Line's multi-decade head start did not do it much good. Morningstar had operating income of over $46 million in 2005, and there is strong evidence that the number will keep growing.
Value Line's revenues in 2001 were over $98 million, and they have not managed to get back to that number since then.
When Arnold Bernhard died, his daughter, Jean Buttner, took over as CEO. She has done little to distinguish herself. Certainly, she has taken a company with the clear lead in an important segment of the investment market and let the world pass Value Line by.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World where Value Line was a regular advertiser. He has also been the president of Switchboard.com which was the 10th most visited website in the world at the time, according to MediaMetrix. He has been chief executive of On2 Technologies, Inc. and FutureSource, LLC. In the past, he as served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
Dow Jones, Driving Into The Future Looking In The Rear View Mirror
When the Peter Kann, the former Dow Jones (NYSE:DJ) chief executive and his wife, the Wall Street Journal publisher Karen Elliot House, announced at the turn of the year that they would be leaving, investors breathed a sigh of relief. The company had not prospered on their watch. But the stock, which traded above $50 in early 2004, still has trouble moving above $40 on any given day.
Earnings per share in Q4 05 were up slightly, but this was due to a one-time event. Revenue for the quarter rose 10% to $482 million, but the acquisition of MarketWatch accounted for a significant portion of this improvement. And, a number of investors feel that Dow Jones overpaid for the property. The forecast for Q1 06 was not inspiring.
Looking at figures by business segment, publishing revenue was slightly better than flat. Most of this is from The Wall Street Journal. Electronic publishing was up 33%, but, again, the MarketWatch purchase fueled much of the increase. The company noted in the report that it had taken on $439 million in debt to buy MarketWatch.
One of the noteworthy issues in the earnings report was that subscriptions to WSJ.com rose very slowly from 712,000 at the end of 2004 to 768,000 at the end of 2005, and average monthly unique visitors to Dow Jones Online actually fell. Not a good sign.
Since the earnings announcement, the new management has gone through the obligatory restructuring and eliminated a few jobs. It also settled a legacy dispute with Market Data and Cantor Fitzgerald to the tune of $202 million. The company said it would take on more debt to finance the payment.
Dow Jones has clearly been caught in the sunset of the newspaper industry, which is no sin in and of itself. The real disappointment is that the company's move to capitalize on the internet and electronic deliver has been so poorly executed. One only has to look at what companies with no real financial journalism backgrounds like Microsoft (NASD:MSFT), Google (NASD:GOOG), and Yahoo! (NASD:YHOO) have done to build huge audiences in the investment and personal finance business.
Dow Jones has probably missed the opportunity. It may not be able to recover from its late and tepid attempts to reach its audience on the web. If it is not too late, it will be soon, and one hopes new management stops shuffling divisions and starts to get its head in the game.
Douglas A. McIntyre is former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. In the past, he has served on the boards of TheStreet.com and Edgar Online.
Should Martha Stewart Be Unpopular?
Shares of Martha Stewart Living Omnivision (NYSE:MSO) have been at the dog track for quite some time. The share price has marched relentlessly down over the last six months, with the share price being cut more than 50%.
If you strip away all the emotion surrounding the company, the operating business shows some trends that would lead a dispassionate observer to believe that there is life in the old girl yet.
Revenue for Q4 or was $84.5 million, up 40% from a year earlier. The company had operating income of over $2.5 million. It is not a great margin, but compared to a big loss a year earlier, it looks pretty good. Full year income rose over 12% to $209 million. Accounts receivable rose sharply year-over-year but payables did not. This could be another sign that the business is recovering.
The company's VP Finance forecast that revenue could go as high as $280 million in 2006. Operating income before depreciation, amortization and non-cash compensation is expected to be as high as $12 million. Still not a great margin, but the company expects to be free-cash-flow positive this year.
The company mentioned several other positive signs, one of which is that Q1 2006 advertising pages are trending up 70%.
TheStreet.com (www.thestreet.com) has commented that Martha Stewart's business is too dependent on their deal with Sears/KMart (NASD:SHLD). That may be so. But a 50% drops in stock price on improving numbers and a relatively strong outlook for the current year does not seem justified.
One further note. MSO should look at cutting its general and administrative costs. At nearly $17 million in Q4 2005, against the $84 million in revenue, these expenses are too high. Lose some weight and add another $5 million to the bottom line.
Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has also been chief executive of FutureSource, LLC and On2 Technologies, Inc. In the past, he has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.
Worldspace, Will The Last One To Leave Please Turn Out The Lights
Worldspace (NASD:WRSP) is viewed by its fans at the Sirius (NASD:SIRI) or XM (NASD:XMSR) of countries like India. The company claims it satellite radio footprint reaches two-thirds of the globe. USB analyst Lucas Binder put a "buy" recommendation on the stock recently, indicating that the company's 48% price decline in the last week was not justified since the company is adding subscribers.
Unfortunately, there is no way to get around the fact that things at Worldspace look really bad. At the end of the year, the company had 115,000 subscribers. Sirius has four million and still loses a lot of money. In Q4 2005, Worldspace only had $4.4 million in revenue. Loss from operations for the period was almost $63 million. If you back out $15 million for stock-based compensation and $17 million for depreciation and amortization, it is not quite as bad.
The company raised $221 million in an IPO in August 2005. The company traded at $26 early on, but has dropped to $6.25, and has hardly had an "up" trading day along the way. The current market cap at $235 million is barely more than the company raised.
Even with non-cash expenses backed out, the cost to run Worldspace based on Q4 number is about $140 million per annum.
That means revenues have to grow 35x to cover costs.
I don't think so.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has, in the past, been on the boards of TheStreet.com and Edgar Online.
Level 3 Gets An Upgrade
Level 3 (NASD:LVLT) which was covered here a few weeks ago, was upgraded two levels at Bear Stearns this morning, all the way to outperform. Analyst Steven Randall said that the consolidation in the industry was "improving the operating environment" and that he liked the management and M&A strategy. He added that the were no liquidity issues on the horizon for Level 3.
Pretty much what we said here awhile back.
Douglas McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He does not own securities in companies he writes about.
Since our last post on Novell (NASD:NOVL), the company has been upgraded by Soleil from Sell to Hold. It has also signed significant contracts with Webster Bank (NYSE:WBS) and the Defense Ministry in Finland.
The launch of the companies new line of desktop and server Linux products on March 20 should accelerate its efforts to be an alternative to the Microsoft OS in large businesses like Webster.
Douglas A. McIntyre
Is There Something Wrong With Expedia?
Expedia (NASD:EXPE) had pretty good year last year. Revenue came in at over $2.1 billion, up from $1.84 billion the year before. Net income rose to $229 million from $163 million in 2004. The year end cash balance was $297 million. The company is the largest player in the online travel market and has presences in Europe and Asia. Expedia also have a footprint in corporate travel business.
Expedia has a significant relationship with Microsoft (NASD:MSFT) to provide travel services of MSN visitors.
So, how does a company that bills itself as the No.1 brand in the online travel market, with 25 million travelers per month as customers, get knocked to the bottom of its trading range? The primary argument is that the company will have to spend heavily to keep its lead over Priceline and other online travel services. Forbes (www.forbes.com) has gone so far as to say that due to this problem, the shares of Expedia will be "range-bound" this year. After a disappointing fourth quarter, the sentiment at Forbes seems to be shared by the great majority of the institutions that cover the stock.
With the travel industry experiencing heavy traffic volume, the majority may be wrong on this one. AMR (NYSE:AMR) is trading at the high end of its 52 week price range. So is Starwood Hotels & Resorts (NYSE:HOT). Ditto, Marriott (NYSE:MAR). Sometimes this means the online travel people do not have as much prime inventory because the airlines and hotels keep it to themselves, but a rising tide does lift all ships. Increased demand for travel is going to help and not hurt Expedia. It is likely to continue to get its very large share of bookings.
So, there's something wrong with this picture. The Street has become too pessimistic about Expedia. The fact that the company is investing in expanding its lead may weigh short-term, but the uptick in travel and Expedia's commanding market leadership make it the "most likely to succeed" in this category.
Douglas A. McIntyre is former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive officer of FutureSource, LLC and On2 Technologies, Inc.
Does anyone remember Gannett NYSE:GCI)? The recent buyout and anticipated break-up of Knight-Ridder has keep its larger counterpart out of the news. Its stock has done poorly lately along with the balance of the public companies in the newspaper business.
Gannett has some important advantages over other companies in this industry, its size and the ownership of USA Today being the most obvious. But, scratch the surface, and one of the things you find is that Gannett is one of the largest players in the internet content business. Gannett's online revenue grew 56% in 2005 on top of 60% in 2004. Gannett's internet audience for its combined online properties was 21 million unique visitors in December 2005, which is almost 14% of the entire internet audience according to Nielsen/NetRatings. Gannett also owns large pieces of the online sites CareerBuilder and Classified Ventures.
For 2005, total revenue for Gannett grew just over 4% to $7.6 billion. Net income dropped 5.5% to $1.244 billion. The newspaper and television station businesses just aren't what they used to be in large part because of the internet.
Gannett has the opportunity, content, and capital to build its online operations and enjoy some of the valuation benefits of being viewed as an internet powerhouse. Whether management will pursue this is still an open question. But, putting capital into a business that grows 50% to 60% a year seems like a prudent investment. And, maybe a path to saying goodbye to the low stock price.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has also been chief executive of FutureSource LLC and On2 Technologies, Inc. He does not own securities in the companies he writes about.
Oracle And Rodney Dangerfield.
Shares of Oracle (NASD:ORCL) dropped at the open today, based on the premise that their results for their fiscal third quarter just weren't good enough. As far as I can tell, they slightly beat the $.18 a share consensus, but that wasn't enough.
According to Reuters (www.reuters.com), the company expect Q4 fiscal earnings to be between $.26 and $.28 a share and revenue to rise between 10% and 14% from the year earlier quarter.
The division of opinion on Oracle typically turns on whether investors think that the company made wise use of its capital in buying PeopleSoft, Siebel, and some smaller recent acquisitions. The jury may be out on this for some time, but, in general, the financial performance of the company, and the breadth of its products and services reminds me a great deal of Microsoft (NASD:MSFT) and Intel (NADS:INTC), two other big techs with stock prices stuck in the mud.
The history of business is littered with large companies like GM (NYSE:GM) that squandered the advantages of their size. But, things don't look like they are headed that direction at Oracle.
Oracle did well in Europe, home of its nemesis, SAP. New license revenue in Europe grew 100% year-over-year. It's a good sign that you do that well in your competitor's backyard.
Sales of database software somewhat lagged what the Street wanted to see, but the strength in Europe and other lines of business still added up to a 42% increase in profits for the quarter.
A sign of big companies falling apart is when they are stop hitting on most cylinders. The opposite seems to be happening at Oracle.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com and chief executive of On2 Technologies, Inc. and FutureSource LLC. He does not own securities in any of the companies he writes about.
NetRatings, Can It Get Back To $20?
At the end of 2004, NetRatings (NASD:NTRT) was trading above $20. Now, it trades around $13 and the volume is very low for a stock traded on the Nasdaq National Market.
The company's Nielsen/NetRatings service for measuring audiences and traffic to internet websites is the gold standard brand for this kind of research. All you have to do is look at the press pick-up the company gets. Whether the subject is eHarmony.com, Google, or MSN, the NetRatings measurements are part of the story. It is the kind of public relations most companies can only dream of.
Given this market advantage, revenue growth has been fairly slow for NetRatings, which is one of the primary concerns underlying the weak stock price. Revenues for 2005 were only $68 million, up 15% from 2004. In Q4 05, the company showed an EBITDA profit of under $1 million. The company guided for revenue as high as $78 million in 200 with a modest EBITDA profit. The company expects a small GAAP lose.
NetRatings claims to have 1,600 clients worldwide.
ACNielsen's parent, VNU, owns 62% of NetRatings, but VNU is in play and has been in recent talks with private equity firms about a change in ownership at VNU. NetRatings relies on the VNU relationship, so the markets are understandably nervous about whether VNU's future course could affect NetRatings. The company also has competitors like comScore Networks.
NetRatings revenue and gross margins have improved nicely over the last few years, but the core to this business is that importance of the web and large websites is growing so quickly, both in the U.S. and abroad. The demand for the services that NetRatings offers should accelerate over the next several years, and with the gross margin improvement that appears to be linked to revenue growth, both the top line and profits should actually begin to improve at a quicker pace.
NetRatings appears to have a bright future, the uncertainty about VNU notwithstanding.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix, and the chief executive of both On2 Technologies, Inc., and FutureSource, LLC. He does not own stock in any of the companies he writes about.
Gateway, Time To Cut Costs
Gateway (NYSE:GTW) is actually in better shape now than it has been in a couple of years. Leaving aside the departure of its CEO and recent downward revision in earnings for Q4 05, the company has shown a pulse with an increase in PC sales in the fourth quarter to 1,359,000 units and retail PC revenue up 32% over the previous quarter and 31% over the same period last year. Professional sales, sales to businesses, slumped. Cash and cash equivalents were $586 million.
Clearly, Gateway is going to have to improve the way it markets to businesses. The margins for selling at retail are brutal, and that is not likely to change.
But, the most important issue at Gateway is still expenses. In 2005, the company was a breakeven operation on almost $3.9 billion in revenue. PC unit sales were up 27% over 2004, so the lack of a profit is especially troubling. The company had a gross profit of $339 million for 2005. That's all it has to work with against its costs. And, the PC market is not likely to grow like a weed over the next couple of years. Of course, Gateway has plenty of competition in bigger companies with better balance sheets like Dell (NASD:DELL) and HP (NYSE:HPQ).
Taking another 10% out of the cost base, combined with even modest growth, turns Gateway into a reasonably good investment prospect, which it is not today. This is going to be especially hard given the huge amount of expense reduction that has already been done. But, it's necessary if this stock is going to see $6 or $7 again.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix, and chief executive of On2 Technologies, Inc. and FutureSource LLC. He does not own stock in any of the companies he writes about.
According to CNET (www.cnet.com), Cray (NASD:CRAY) will today announce "a multi-year strategy to merge four differen supercomputering technologies into a single, versatile machine." The first phase of the project will be done in 2007.
It looks like Cray is aggressively taking its fate into its own hands by building a platform that will make it easier to get share from IBM and HP.
Symantec Is Better Off Than Its Share Price
Symantec (NASD:SYMC) and McAfee (NYSE:MFE) are the kings of the PC antivirus market. Neither can get a break in the stock market now, particularly in light of the "Microsoft rule". The rule says that anytime Microsoft enters a market, the stocks of the existing companies in that market get trashed. The new Windows Live OneCare (http://www.windowsonecare.com/) claims to deliver you a "smooth, hassle-free package" to protect your computer around the clock.
But, Microsoft has done OK entering some markets, and, in others, it has been a disaster. The jury will be out on this for a long, long time.
The only big defender of Symantec that I have been able to find is Rick Summer of Morningstar (www.morningstar.com). In early November 2005, at least six Wall Street firms downgraded the stock. One, WR Hambrecht, has since upgraded it.
Summer of Morningstar believes that the Norton brand and opportunities to move into the storage software business should carry the company forward nicely. But, I think the reasons that things look good for Symantec go beyond that.
For starters, a lot of software and PC companies still have a very edgy relationship with Microsoft. Windows is important to them, but Microsoft has done so much damage to its competitors and the issues of antitrust are still fresh enough that having alternatives can be a very comforting thing. I would not rule out antitrust issues arising in the virus protection market depending on how Microsoft prices and distributes its new product.
Second, and perhaps more important, the security threats to computers and information storage systems are going to get worse, and not better, over the next few years. This is an expanding market.
Both IDC (www.idc.com) and Gartner (www.gartner.com), the large IT research companies, tend to rank the Symantec products ahead of their competition. The Microsoft product is still in "beta" and it probable that it will not be a large force in the market for now.
McAfee, Symantec, and Internet Security Systems (NASD:ISSX), the lead public company players in the field, all trade for about four time 12 month trailing sales. But, McAfee and Internet Security Systems are much smaller than Symantec, which has a revenue run rate of close to $4 billion. McAfee's revenue is at less than $1 billion and ISS is at $330 million.
Given the very broad distribution of this type of software and the huge demand for security on PCs and networks, the market share leader should have a fairly significant premium built into its share price.
With Symantec, that is not the case.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix, and chief executive of On2 Technologies, Inc.
Cray, The Grand Old Man Of Supercomputing.
Cray, Inc (NASD:CRAY) announced yesterday that it was examining revenue issues from 2004 that might affect 2% or so of revenue and losses from operations. The market reacted badly and Cray dropped as low as $1.63. The stock has traded as high as $2.75 during the last year..
That was the bad news, but it seems there was some pretty good news buried a little further into the announcement. Preliminary Q4 05 revenues were $65 million and full year top line was $201 million. Q4 04 revenues were a little over $39 million and the full year came in at $149 million. Adjusted for EBITDA and stock-based compensation calculations, the company was at roughly a breakeven for the last quarter of 2005.
The preliminary results also indicated a significant improvement in gross margins and cash and cash equivalents, which rose to $46 million. The company has a $160 million market cap.
The outlook for 2006, particularly the second half, seemed quite good. Operating income for that period should be breakeven and EBITDA should be positive.
Cray is the grandfather of the supercomputer business, having started in the business in 1972. The engineering and scientific communities of major universities and governments still look to Cray for supercomputer expertise. The company has had some impressive recent customer wins with the U.S. military and scientific institutions and corporations in Korea, India and the UK.
These are likely to get better at Cray, and the disappointment over the restatement may offer a value to investors looking at the company, especially with the stock trading at well below one time annual sales.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com and chief executive of On2 Technologies, Inc.
Can Novell Get Its Act Together?
Take a look at Novell (NASD:NOVL). Down from almost $10 to $7.30 in about a month. And, a nice slug of analyst downgrades. Novell has a market cap of a little over $2.8 billion, and $1.7 billion in cash and short-term investments. Novell has some debt, but not much compared to assets. So, net of cash, it's under a $4 stock.
Perhaps it deserves to be this low. The quarter ending January 31, revenues dropped slightly to $275 million and the business did little more than breakeven. The forecast for the current quarter is really no better.
But, Linux could save the day here. At least enough to get the stock back to a respectable number, and by that I mean $10 or $12.
Linux has been underestimated by the investment community, at least until lately. The rise of Linux software champion Red Hat (NASD:RHAT) from $10 to $30 this year gives it a price-to-sales ration of 19. IBM (NYSE:IBM) and Sun Micro (NASD:SUNW) are embracing Linux like a long-lost brother. IBM now claims to have over 12,000 Linux customer engagements (http://www-1.ibm.com/linux/). IDC predicts that revenue from Linux desktop, server and packaged software will exceed $35 billion by 2008.
Sales from Novell's Open Platform Solutions, which includes its Linux initiatives, rose 4x in the first fiscal quarter of 2006 to $54 million. This is a good early indication that their Linux initiatives are on the right track.
Is there execution risk here? Yes, management needs to prove that it can turn over its customer base to a Linux product set and get new business from competitors. The relatively low costs of Linux, its large developer community, and the view of Linux as an alternative to Microsoft all work in Novell's favor. So, it's blocking and tackling time.
Most of the bad news about Novell seems built into the stock price. Very little of the potential success of the new business model is. That makes it worth another look.
Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine. He was also the president of Switchboard when it was the 10th most visited website in the world and was chief executive of On2 Technologies, Inc. He does not own securities in this company.
SOLD Sells Off
Shares in online real estate marketing company Housevalues (NASD:SOLD) plunged on recent guidance. SOLD works with close to 16,000 real estate brokers and mortgage agents as well as consumers who are selling their homes. There are aspects of this business that are very competitive, and there are several good companies providing services on the internet in this industry. The company does have four significant web properties that handle various parts of the home marketing process.
Anyone who reads the daily paper knows that home sales are slowing as real estate prices rise at the same time interest rates do. But, houses are still changing hands at close to a historically fast pace.
Housevalues says that its Q1 06 will be about $26 million on the top line and that for the year revenue will probably not be above $115,000,000. Adjusted EBITDA for 2006 is pegged at $18 million to $20 million.
So, housing sales are slowing and competition for real estate services on line is growing. But, so are the percent of people and agents who use the internet at some stage of buying a home, and this is likely to continue.
SOLD sells at a market cap of $215 million. Take away its cash and cash equivalents and this drops to $130 million. And, this is for a business that could do $115 million in revenue and have $20 million in adjusted EBITDA this year.
Maybe these shares have fallen too far.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchbaord.com, the 10th most visited website in the world at the time, according to MediaMetrix, and the chief executive of On2 Technologies, Inc.
Primedia, Internet Content Play?
Most people assumed that when Primedia (NYSE:PRM) sold its About.com (www.about.com) operations to the New York Times Company (NYSE:NYT), it exited the internet content game. Think again.
The company has a lot of debt, and it has been a painful play for most of investors. After hitting $4.75 last spring, it has settled just south of $2 for the last few months. Q4 05 revenues rose slightly from a year earlier to $252.3 million. EBITDA dropped slightly to $50 million. Debt service eats all of that up, plus some. The debt does not really start to mature until 2010.
The company's build out of its automotive.com and equine.com platforms is an impressive start to gaining a significant share of the online dollars in those categories. The company's apartmentguide.com business is showing impressive traffic growth. Expanding further into the real estate arena, the company has moved into online rentals (www.rentclick.com) and new homes (www.newhomeguide.com).
It is probably safe to assume that Primedia's print businesses that mirror these internet sites can supply most of the content without burdening the online business with significant extra costs. If so, Primedia may well have found an engine for growth, which it has not done successfully in print.
Keep an eye on the internet businesses at Primedia. They may be the smartest thing the company has done in a long time.
MTC Technologies, Doing Business With The Government
MTC Technologies (NASD:MTCT) reported a 27% increase in Q4 05 revenue and a 36% increase in full year revenue for 2005. EBTIDA for the year rose 40% and cash from operationg was excellent. Guidance for Q1 06 income was choppy, but that seems to be attributed to cost for options and amortization. It also appears that the top-line growth for the business may slow in calendar 2006.
But, I like this business long-term. The company provides systems integration, IT and program management for the Department of Defense and intelligence agencies. They work on weapons systems and national security.
According to ZDNetGovernment (government.zdnet.com), IT providers will be bidding on $200 billion in contracts this year. Some of the most critical technology upgrades are at the center of MTC's business. Due to the priorities set on military spending and national security, the prospects for this business should be very good.
Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine and former Predident of Switchboad.com and chief executive of On2 Technologies, Inc.
In Defense Of Yahoo!
Fortune (www.fortune.com) recently did an article saying that Yahoo! (NASD:YHOO) was being overlooked as a company with an excellent future. They praised Yahoo's moves into social networking with the purchase of properties like photosharing site Flickr. "Friends helping friends", Fortune called it. The article went further to praise MyYahoo! as one of the best targeted content plays on the internet.
The story is interesting, but it only looks at the surface of why Yahoo! should do well in the next year or two.
The Financial Times pointed our last week that people searching on the web only do devote about 5% of their time to actually searching. The rest of the time is spent looking at the items that the search returns. This means that text keywords (in search areas like the ones Yahoo!, Microsoft, and Ask.com have) only get limited exposure to web users.
In essence, this leaves internet users spending most of their time on pages with content, pages which usually run display advertising. The problem with display advertising is that the targeting of it has been relatively crude, and, consequently, the response rates tend to be fairly poor compared to keyword search text ads which match the topic of the search.
Yahoo! delivers hundreds of millions of pages with display advertising, but with ads for video-on-demand service MovieBeam running at Yahoo! Finance, all cannot be right in the advertising targeting world.
Fortune is correct that one of Yahoo's great strengths is its massive library of content, both content it has licensed from other sources and content it has created on its own.
But, the content, by itself, it not the key to the future for Yahoo!. It is the ability to put the right marketing message with the content, and drive the price that Yahoo! can charge for that advertising higher.
Really sophisticated advertising targeting on the internet is still in its infancy. Small companies like Revenue Science have been advancing the ability to target ads by behavior. Microsoft has made the point that it can use its huge database of individual activity on the internet to better target ads. AC Nielsen and Yahoo! have been working on this kind of targeting for some time.
The Holy Grail for display advertiser is sophisticated software and measurement tools that will allow this form of advertising to have the kind of relevance that text ads do on search results pages. Companies like TACODA (www.tacoda.com)have been getting promising results in real-world online campaigns using behavior as the primary metric for ad placement.
If we could look inside the labs at Yahoo!, you can be assured that we would see the best software engineers at the company are working to perfect this kind of targeting for display ads. Yahoo! has as much of this real estate as anyone on the web. They have the real estate, and now they are building the houses.
Yahoo! has a price-to-sales market cap of 8.1. It doesn't belong that low. Google is at 16.2. Ebay at 11.7. Even Microsoft is at 6.8.
It's time for another look at Yahoo!. It is about to monetize its advertising base in a way people have only started to imagine.
Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine, and former president of Switchboard.com which at the time was the 10th most visited website in the world, according to MediaMetrix. He does not own securities in the companies mentioned here.
Affymetrix, So Misunderstood
Wow, have these shares been punished. Affymetrix (NASD:AFFX) where just shy of $60 last July, and now a day above $30 is about all the stock can do. But, there are a bunch of missing links here. The stock is almost certainly too low.
A lackluster Q4 05 and concerns that the company's new Mapping 500k Array Set chip may not be getting adopted as fast as planned have shaved almost $2 billion off the company's market cap.
But, take a step back. This company virtually owns the business of the development, manufacture and service of systems for genetic analysis used in the life sciences and in clinical diagnostics. This business gets more important to the drug and medical community everyday.
The relationships between genes and health are going to be a larger and larger part of the phamacuetical, medical reasearch and health industries. Affymetrix is increasing the genetic data on its "arrays" over time. In addition, the number of "arrays" on their wafers is expanding.
Complex medical conditions like asthma, hypertension, and coronary artery disease may well have a basis in genetics. Unlocking the secrets of the causes of diseases as diverse as arthritis and schizophenia may depend on the kind of products that companies like Affymetrix supplies. The research into new drugs also makes this kind of technology extremely valuable as time passes. Being able to determine drug efficiency and interaction can be greatly enhanced by the kinds of products Affymetrix produces.
The company has made some impressive announcements that appear to be excellent beachheads for new revenue. Their deal with Iconix to accelerate the drug development process by looking at the toxicological and pharmacological properties of drugs and drug research could turn into a very large business. The use of Affymetrix technology to test transplant organs for rejection without the use of biopsies should have tremendous value to the medical community and hospitals. The use of Affymetrix microarrays to test for pathogens like anthrax would seem to have broad appeal in areas like national security.
Affymetrix is also getting past the prime period of execution risk for its 500K Array Set. Will there still be adoption issues? Probably, but the majority of new product downside would appear to be behind them. I do not know if this is true for their competitors like Illunina (NASD: ILMN), who still have their next chip product introductions ahead of them.
If "personalize medicine" has a future, Affymetrix will be at the center of it. I am looking past the weak Q4 and assuming that this company could be at a $500 million dollar run rate late in calendar 2006, if things go well.
Affymetrix trades at 5.5 times sales. Illumina, which has much less share in the industry, trades at 14.2 time sales. Affymetrix's discount to a rational multiple is far too low.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also President of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has also been chief executive of On2 Technologies, Inc. He does not own the securities mentioned here.
Apollo Group (Part II) Change the Name And The Game
One of the issues that analyst coverage of Apollo (NASD:APOL) consistently overlooks is the recent elimination of the so-called "50/50 rule", which no longer hampers institutions that offer more than 50 percent of college courses online by having their share of student aid reduced. Bricks and mortar are expensive. Apollo now has a clear field to increase the higher margin online portion of their business. It's a big deal.
And, a suggestion to the new management at Apollo. No one knows what Apollo is. The University of Phoenix is one of the most well-known brands in higher education. Change the company's name and get some real equity out of your name.
Now That Everyone Has Downgraded Safenet...
Safenet (NASD:SFNT) runs a business that sits at one of the important crossroads of the digital industry. The company provide encryption technologies for communications, IP, and digital identities. They play in both the hardware and software segments of these businesses. And, they do it across an important spectrum of customers including work to protect government secrets.
The company has a staff of over 300 encryption engineers, which has to make it one of the larger pools of this kind of talent in the tech industry. Because this group builds solution for chips, and in hardware and software, Safenet is more of a "one stop shop" for encryption technology than most companies.
But, Wall Street has a beef with the company. After Safenet announced its Q4 2005 and full-year numbers, Stifel Nicolas, Kaufman Bros., and Wedbush Morgan downgraded the stock. As might be expected, the price per share got hammered from about $32 down to $24 on heavy volume.
Maybe investors should take an second look here. Revenue and EPS grew at an impressive rate for both the year and the quarter. If the company hits the high end of its guidance for 2006, revenue will grow another 18% year-over-year. And, this is a company that has signature customers like the Department of Defense, Tally Solutions (India's largest accounting software vendor), Digital River (NADS:DRIV), and Applied Micro Circuits (NASD:AMCC).
The company has also made a series of strategic acquisitions to improve its footprint and share in the encryption part of the tech world.
The stock trades at 2.3 times trailing twelve-month revenue. And, the stock is down 37% from its 52-week high.
A couple large customer wins and a good quarter, and this stock could trade right back in the high 30s.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has also been chief executive of On2 Technologies, Inc. He does not own securities in the company covered here.
RealNetworks Needs To Get Sold
The intraday high for RealNetworks (NASD:RNWK) over the last two years is $9.08. A lot has gone right for Real during the last few months, but the stock has not broken out.
What's the problem. Due to the settlement of Real's antitrust suit against Microsoft, the company had $780 million in cash at the end of 2005. And, the Microsoft litigation costs had gone away. The market cap for the entire company is less than $1.4 billion. Adjusting for all this cash, the market is putting an enterprise value of less than $4 on RealNetworks.
Arguably, the company just had its best year ever. Revenues rose to $325 million from $267 million in 2004. Online subscriptions to Real's music and other products rose to 2.25 million. In the first quarter of 04, they were 975,000.
The RealNetwork's forecast for next year was not awe-inspiring, but called for reasonable growth and solid margins.
The problem seems to be that the markets cannot accept RealNetworks as a standalone company. Perhaps they see too many risks from online music competitors like Apple (NASD: AAPL) or from multimedia player companies like Microsoft (NASD: MSFT). Although they settled with Microsoft, the drive to get the Windows Media Player to be the dominant multimedia player in the world is not going to end.
There has been a debate for many years about who has the most media player downloads on PCs, phones, set-tops, and other devices. A lot of players get downloaded or shipped with PCs and then never get used, so the debate also moves to "players in use". Apple says it has 250 million downloads of its Quicktime player. Kevin Foreman, who runs one of the divisions at Real, says that they have 400 million downloads based on unique e-mails addresses from the users. These numbers may be fairly good approximations.
Leave it at this. Only a very small number of companies have this kind of media player distribution. Being on hundreds of millions of PCs has a value. It is not unlike owning a cable or TV network. It is a delivery platform with few competitors. The fact that Real and Microsoft also have the best digital rights management to protect content from theft improves the value of Real's "network" even more.
Real has also made inroads to the cellphone and cable markets, cutting deals with Cingular and Cox. As of a year ago, the company claimed to have 70 operators in 40 countries using the Real Universal Mobile platform.
But, the market feels that RealNetorks is just too small. It's in the stock price. Having the distribution is not enough. You need the content, the eyeballs and the marketing muscle.
Real needs to turn to TimeWarner (NYSE:TWX) or Yahoo! (NASD: YHOO) and get itself a parent that can leverage the technology and distribution. Could this happen at a 40% premium to the current price. Based on the sales of some other public software companies in the last year, it's possible. Is Real's stock likely to get to $12 on its own anytime soon. I doubt it.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetix. In addition, he has been chief executive of On2 Technologies, Inc. He does not own securities in the company in this article.
Apollo Group, Much Maligned.
The Apollo Group (NASD:APOL) must feel that it has hit the perfect storm. The company lowered its second quarter earnings forecast. Enrollment was shy of forecasts for 2005. And the company CEO, Todd Nelson, resigned in early January.
On top of all this, the New York Times ran an article about Apollo in last Sunday's edition.
So, the stock is near its 52-week low, and it does not belong there.
Let's look at the facts. If there was something material involving the CEO's resignation, we would know it by now. A similar business, Education Management (NASD:EDMC) was just bought by Goldman Sachs and Providence Equity Partners. According to analyst Kristan Rowland at Morningstar, the price was 17x trailing one-year EBIT. If you apply that to Apollo, the stock should be over $70, not below $50 where it is now.
Another important issue is who replaced Nelson. Brian Mueller, the new president, has been at Apollo for years and has been running the successful University of Phoenix flagship division.
Apollo is a company that has more than doubled its annual revenues since 2002. Operating income has nearly tripled during the same period. Trailing twelve month cash from operations is nearly $650 million.
The online education market is going to continue growing. Post high school education is also going to continue to grow, rapidly, as the workforce continues to retrain itself for new and better ecomomic opportunities. As Apollo points out, 80% of people getting a higher education degree work full-time now. And, the University of Phoenix brand is widely known and highly regarded among people seeking training for a career improvement.
Apollo is on its way to $3 billion in annual revenue, and I can see it at that run rate at the end of 2006. The growth is there. A couple of stumbles. Yes. But, nothing more.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard when it was the 10th most visited website in the world, according to MediaMetrix. He has also been chief executive of On2 Technologies, Inc. He does not own securities in this company.
What iVillage Tells Us About CNET
The Universal/NBC/GE mega-company bought iVillage (NASD:IVIL) for $600 million a few days ago. In 2005, iVillage has revenues of $91 million, and net income of $8.7 million. In January, the iVillage Network had 14.5 million unique visitors, so it is a fairly large set of websites, but not anywhere near the top 25.
I would make the argument that the iVillage visitors, who are mostly women, are a fairly average group of web users. The content of the sites would not seem to draw anyone unique, beyond the high concentration of females over 18 years of age. They do have some good health properties, and I would expect they get a slightly higher cost-per-thousand that the rest of the sites because the audience is more targeted. It would not, however, be as targeted, or as valuable as visitors to sites like MarketWatch (www.marketwatch.com).
Based on all of this, I would say the iVillage board got a very good price for the company.
This should indicated that some of the larger and more targeted web properties might be undervalued now. Take a look at CNET (NASD:CNET). The company did $353 million last year. Operating profits before depreciation, amortization, and asset impairment went from 23% in Q4 2004 to 30% in Q4 2005. Operating income calculated on the same basis hit $32.3 million in Q4, up 57% year-over-year. Not bad.
Perhaps an even better sign of the strength of the company is that in Q4 their network of internet sites had an average of 116 million unique visitors a month and average daily page views of over 103 million. Its photosharing site, Webshots (www.webshots.com) has 330 million photo uploads.
Next year, the company says they will do about $400 million in revenue. I think they are playing possum.
The kind of audience that CNET has tends to be highly targeted towards management, tech types and online gamers. This is the kind of distinct audience you want to have if you own web properties.
CNET has a market cap under $2 billion. If the online ad market and software download business grows has it has the last year, I could see CNET doing $425 million to $450 million. I would also not rule out more acquisitions which allow them to take over related business, keep revenue and cut overhead costs.
With the stock just above $13, it has a lot of room to surprise on the upside.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has also been chief executive of On2 Technologies, Inc. He holds no position in the securities of this company.
Level 3, A Day In The Sun?
Level 3 (NASD: LVLT) is a cheap stock. At $3.40, the company has a tiny market cap for an operation its size. Securities analyst are actually looking for its revenues to shrink slightly in the 2007 fiscal year. Consensus estimates are that Level 3 will lose $1.01 in 2006 and $.88 in 2007. So, why isn't it just an outright dog?
Level 3 has a couple of things going for it. The company has a 23,000 mile broadband fiber optic network. No other company has anything quite like it. This network can be used for VOIP, broadband transport, colocation and the company's own managed modum system. A number of the world's largest ISPs, content providers, systems integrators, and the RBOCs use the Level 3 network.
The company has good customers, a great network and a large market share. But investors think the company is in a race that some think it cannot win. Long term debt was over $6 billion at the end of the 2005, but by renegotiating it, the company has pushed the due date for a fair amount of this out to 2010. The company has over $800 million in cash and investment according to analyst estimates.
The acquisition of WilTel should add to the company's competitive advantages in providing bandwidth to the largest telcos and internet companies in the U.S. and abroad. We have to assume some integration risk, but this is a business that Level 3 knows well.
The reasons Level 3 can win the race against the due dates on its debt, is that, after years of sharp declines in what companies can charge for bandwidth, it appears that the era of overcapacity may be ending. Level 3 management has said that bandwidth costs, which were dropping at 40% in 2004, are dropping at closer to 20% now.
But, this could get much, much better for companies like Level 3. The emergence of VOIP and the amount of data, files, audio and video that is being sent over the internet is beginning to suck up the bandwidth capacity. According to the Bandwidth Price Revolution by Phil Harvey, 2005 is the year for the turnaround because bankruptcy will have weeded out a number of competitors and demand for bandwidth will begin to equal supply. According to WebMetro, the demand for bandwidth is being lead by the consumer demand for broadband. And, all the communicating and downloading that is a by-product.
One other very interesting note in all of this is the recent comments by telcos and cable companies that they want to start charging large portals like Google (NASD: GOOG) and Yahoo! (NASD: YHOO) for bandwidth use because these companies are distributing larger and larger files, especially audio and video. When there is talk of raising prices and a fight is about to break out between those who provide the highway for internet traffic and those who provide the traffic, it is a sure thing that someone has figured out that the cost of raw bandwidth is heading up. Soon.
Is Level 3 a risk? Yes. But, with the largest providers of broadband saying they have to charge someone for all this new traffic and charge a toll to keep the speed of downloads where they are today, I like Level 3's chances of beginning to actually raise prices soon.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was one of the ten most visits sites in the world, according to MediaMetrix. He has also been chief executive of On2 Technologies, Inc. He does not own any of the securities mentioned here.