<THE EVENING NEWS>
Wednesday, February 10, 1999
DJIA 9177.31 +44.28 (+0.48%) S&P 500 1223.55 +7.41 (+0.61%) Nasdaq 2309.50 -1.29 (-0.06%) Russell 2000 397.96 -5.17 (-1.28%) 30-Year Bond 98 9/32 -29/32 5.37 Yield
Life sciences company Monsanto Co. (NYSE: MTC) gained $2 1/4 to $47 3/8 on news that its new anti-arthritis drug Celebrex is selling rapidly, generating 83,000 prescriptions in only its third week on the market. In comparison, Warner-Lambert's (NYSE: WLA) popular Lipitor cholesterol-lowering drug, itself a fast seller right out of the starting blocks, logged "only" 14,000 prescriptions during its third week, according to a report by health data tracker NDC Health Information Services. While the quick pace is definitely good news for Monsanto, the behind-the-scenes winner in this pharmacological version of the 100-meter dash may very well be Pfizer (NYSE: PFE). Since Pfizer is co-marketing both Celebrex and Lipitor, a fast start for both drugs translates into an equally quick expansion of the "Alliance Revenue" line of Pfizer's income statement in coming quarters. Pfizer also picked up $1 1/2 to $126 1/2 today.
Internet advertising firm DoubleClick (Nasdaq: DCLK) gained $5 to $79 3/4 after reportedly telling analysts and investors at a Goldman Sachs investing conference today that it delivered 5.3 billion online ads in Q4 and that it forecasts that number to hit 20 billion by Q4 of this year and a whopping 80 billion by Q4 of fiscal 2000. "We feel confident in 1999 and 2000 that we can keep up this pace," said DoubleClick CFO Jeffrey Epstein according to Reuters. That breaks down to 39% compounded quarterly ad placement growth this year, followed by 41% compounded quarterly growth next year. Those heady growth rates will put pressure on other online ad shops, such as NetGravity (Nasdaq: NETG) and 24/7 Media (Nasdaq: TFSM), to keep up. NetGravity dropped $1/16 to $20 3/4, while 24/7 lost $1/2 to $29 3/4 today.
QUICK TAKES: Investment and insurance holding company Rushmore Financial Group (Nasdaq: RFGI) rocked $9 1/2 higher to $11 3/4 after announcing it will offer real-time market information and a fast order entry system for day traders through its RushTrade.com division... Call center automation systems designer InterVoice (Nasdaq: INTV) gained $9/16 to $12 3/4 after receiving a $5.8 million order for its interactive voice response systems from a new customer, which it categorized as a "major provider of local and long distance telecommunication services"... Musculoskeletal and orthopedic medical products maker Biomet Inc. (Nasdaq: BMET) picked up $1 11/16 to $34 following upgrades from Bear Stearns and BancBoston Robertson Stephens today.
Outsourced pharmaceutical manufacturing services firm ChiRex Inc. (Nasdaq: CHRX) advanced $1 3/4 to $21 5/8 after reporting Q4 EPS of $0.34 (before charges) vs. $0.03 last year, beating the Zacks mean estimate of $0.29... Transportation logistics management company Ryder System (NYSE: R) motored ahead $1 3/4 to $26 1/16 after receiving an upgrade to "strong buy" from "neutral" from Morgan Stanley Dean Witter. The brokerage's price target is $35 per share... Discount shoe retailer Payless ShoeSource (NYSE: PSS) skipped $4 higher to $53 1/4 after saying stronger-than-expected sales in December and January will result in Q4 EPS between $0.35 and $0.40, topping the First Call mean estimate of $0.28.
Telecommunications embedded processors maker RadiSys Corp. (Nasdaq: RSYS) moved up $1 5/8 to $30 3/8 after agreeing to buy IBM's (NYSE: IBM) communications coprocessor adapter hardware and software development unit for about $22.8 million in cash... Combination casino-hotel operator Mirage Resorts (NYSE: MIR) rolled $1 3/16 higher to $15 1/2 after Donaldson, Lufkin & Jenrette raised its rating to "top pick" from "market perform"... Electronic transaction services provider Concord EFS (Nasdaq: CEFT) bounced back $4 7/16 to $29 15/16 after tumbling 21.5% in trading yesterday. Analysts reportedly chalked up yesterday's dive to concerns that the company may disappoint investors when it issues its Q4 earnings report, which is scheduled for Friday. Such pessimism dissipated a bit today, however.
British-based pay TV broadcasting firm British Sky Broadcasting Group (NYSE: BSY) rose $5 3/8 to $47 1/8 after announcing it will supply content from its Sky Sports website and other sources to online services conglomerate America Online (NYSE: AOL). In return, AOL will market the company's SkyDigital service to its users... Financial services holding company Equitable Cos. (NYSE: EQ) moved up $5 7/16 to $64 9/16 thanks to a Morgan Stanley Dean Witter upgrade to "outperform" from "neutral"... Aircraft ground support and fueling services provider Hudson General Corp. (AMEX: HGC) rose $5 1/2 to $68 after receiving a $67 per share cash buyout bid from a subsidiary of German airline Lufthansa.
Cigna Corp. (NYSE: CI) up $3 5/16 to $76 7/8; Q4 EPS: $1.04 (before gain) vs. $0.81 last year; estimate: $1.00
General Instrument Corp. (NYSE: GIC) up $1 7/8 to $33 1/2; Q4 EPS: $0.26 vs. $0.10 last year (excluding charges); estimate: $0.23
Network Solutions (Nasdaq: NSOL) up $5 7/8 to $153 7/8; Q4 EPS: $0.22 vs. $0.11 last year; estimate: $0.20
Shared Medical Systems (NYSE: SMS) up $7 5/16 to $50 5/16; Q4 EPS: $0.69 vs. $0.67 last year; estimate: $0.67
SOFTWORKS (Nasdaq: SWRX) up $1 3/32 to $8 15/16; Q4 EPS: $0.20 vs. $0.07 last year; estimate: $0.16
Unigraphics Solutions (NYSE: UGS) up $1 1/4 to $19 15/16; Q4 EPS: $0.28 vs. $0.26 last year; estimate: $0.22
Maryland-based biotechnology firm EntreMed (Nasdaq: ENMD) was crushed for an $11 5/8 loss to $12 7/8 after drug and personal care products maker Bristol-Myers Squibb (NYSE: BMY) said late yesterday it won't develop EntreMed's Angiostatin protein, a developmental cancer treatment. The decision by the world's largest cancer drug company to back away from Angiostatin is a major blow for EntreMed, which now is faced with the task of finding another partner. Covance (NYSE: CVD), which has an agreement to develop Endostatin, another EntreMed cancer fighter, was reportedly mentioned by EntreMed as a potential future manufacturer for Angiostatin. But if Bristol-Myers' reasoning for giving Angiostatin some time alone holds true -- the company apparently wasn't happy with preliminary trial results -- the search for a replacement could be difficult. Bristol-Myers retained the option to reclaim development and marketing rights for Angiostatin "once clinical proof of principal has been demonstrated."
Investors should probably be forgiven for taking out some frustration on Shop At Home (Nasdaq: SATH) today, as the direct retailer lost $6 7/16 to $13 9/16 following its announcement of the Internet strategy it teased investors with late last month. Oh, there was a strategy all right, including plans for a website selling collectibles with Oracle (Nasdaq: ORCL) and iXL Inc. But clearly that didn't live up to expectations when the market's buzzing about deals involving Lycos (Nasdaq: LCOS), USA Networks (Nasdaq: USAI), and Ticketmaster Online-Citysearch (Nasdaq: TMCS). Shop At Home also announced a move to the Nasdaq National Market System from the exchange's SmallCap Market, effective today, and reported fiscal Q2 losses of $0.02 per share, a penny better than market projections but down from last year's nickel per share profit.
QUICK CUTS: All three heads of the multimedia hydra now known as USA/Lycos Interactive Networks lost ground today. Ticketmaster Online-Citysearch (Nasdaq: TMCS) moved back $5 1/8 to $37 1/8, while web portal Lycos (Nasdaq: LCOS) stumbled $7 to $87 1/4 as both stocks extended yesterday's losses. Cable TV networks operator USA Networks (Nasdaq: USAI), which picked up $3 11/16 yesterday, forfeited $2 3/8 of that today to finish at $39 1/4. The Fool's Warren Gump logged on to this one in today's Lunchtime News... Millennium bug exterminator Keane Inc. (AMEX: KEA) was squashed for a $3 1/4 loss to $27 following reports that the company overstated Q3 backlog by $81 million because of a spreadsheet error.
Nutritional science firm Natural Alternatives International (Nasdaq: NAII) flaked off $1 1/2 to $5 1/2 after CEO Mark Le Doux said second-half EPS may fall below year-ago levels as capital expenditures and administrative costs rise in accordance with growth efforts... Propane grill cylinder exchange company Blue Rhino Corp. (Nasdaq: RINO) was gored for $2 7/8 to $11 5/8 after saying last night it will adjust Q1 earnings down to a loss of $0.01 per share from the previously reported $0.05 after figuring in charges related to the acquisition of certain assets from Bison Valve... Outerwear maker Columbia Sportswear (Nasdaq: COLM) cooled $3 1/4 to $12 1/2 after it said warmer winter weather is leading it to expect that domestic fall sales in 1999 will be flat with 1998 levels.
TV station owner Sinclair Broadcast Group (Nasdaq: SBGI) sank $3 1/4 to $13 1/2 after the company said CEO-designate Barry Baker is leaving the company to pursue other opportunities. Q4 losses at Sinclair were $0.14 per share, down again from last year's penny loss and missing First Call's anticipated $0.06 profit... Aluminum producer Century Aluminum Co. (Nasdaq: CENX) rusted $1 1/4 to $7 5/8 after Chairman Craig Davis said 1999 holds "little promise of earnings improvement" with aluminum prices at or near five-year lows... Non-contact manufacturing sensors and systems maker CyberOptics Corp. (Nasdaq: CYBE) blurred $2 1/8 to $14 after the company said Q1 results will come in below last year's $0.28 mark. CyberOptics' largest sensor customer reported an order slowdown over the balance of the first quarter seen extending into Q2.
Automated animal feeding and watering systems maker CTB International Corp. (Nasdaq: CTBC) lost $7/8 to $6 7/8 after it said it expects the devaluation of Brazilian currency to have an unspecified negative impact on Q1 earnings... Enterprise software developer Peregrine Systems (Nasdaq: PRGN), which agreed to buy privately held transportation fleet management software developer Prototype Inc. for $21.3 million in stock and cash, lost $5 15/16 to $48 11/16 today... Industrial fluid handling devices maker Robbins & Myers (NYSE: RBN) leaked $2 5/8 to $19 3/4 after the company said this morning it expects fiscal Q2 earnings to come in as much as 30% below Wall Street's $0.39 consensus estimate because of a plant closing charge.
Data network company Equant (NYSE: ENT) dropped $5 9/16 to $73 1/2 following news that company shareholders raised the number of shares they will sell in a secondary offering to 42 million from 35 million... E-business software company Segue Software (Nasdaq: SEGU) moved back $4 15/16 to $11 on last night's news of Q4 losses of $0.19 per share, well off Wall Street's $0.05 per share profit estimate. The company this morning announced a deal to provide Netscape Communications (Nasdaq: NSCP) with server software tools... Hydraulic systems maker Commercial Intertech Corp. (NYSE: TEC) steamed off $1 to $13 1/4 after the company said fiscal Q1 EPS is seen coming in between $0.11 and $0.15 per share, missing Wall Street's $0.23 consensus projection.
Chicago Title (NYSE: CTZ) down $3 3/8 to $37 3/16; Q4 EPS $1.20 vs. $0.70 last year; estimate: $1.19
MedPartners (NYSE: MDM) down $5/16 to $6; Q4 EPS $0.06 vs. loss of $0.01 last year; estimate: profit of $0.07
NOVA Corp. (NYSE: NIS) down $2 3/4 to $27 1/2; Q4 EPS $0.21 (before charges) vs. $0.19 last year; estimate: $0.21
Omega Protein (NYSE: OME) down $2 3/4 to $6 1/8; fiscal Q1 EPS $0.18 vs. $0.27 last year; estimate: $0.20
Policy Management Systems (NYSE: PMS) down $11 9/16 to $38 1/4; Q4 EPS $0.51 vs. $0.43 last year; estimate: $0.51
Provident Cos. (NYSE: PVT) down $4 5/8 to $34 1/2; Q4 EPS $0.60 vs. $0.52 last year; estimate: $0.62
RehabCare Group (NYSE: RHB) down $15/16 to $18 1/2; Q4 EPS $0.46 (before gain) vs. $0.38 last year; estimate: $0.43
Unum Corp. (NYSE: UNM) down $7 9/16 to $48 1/4; Q4 EPS $0.71 vs. $0.64 last year; estimate: $0.73
Verio Inc. (Nasdaq: VRIO) down $2 3/8 to $28; Q4 EPS loss of $1.02 vs. loss of $1.03 last year; estimate: loss of $1.08
$1 for 90 cents. Sounds Great
Online business models have been under attack for a while. Every card-carrying curmudgeon has felt compelled to mock the major e-commerce players for sporting apparently lofty stock market valuations while still bleeding losses. Sure, they say, the revenue growth is impressive; Amazon (Nasdaq: AMZN) will soon be booking a billion bucks a year in sales. Yet, it's easy to grow revenue if you're selling stuff below cost. Then comes the yack-yack dismissive line, "Oh, but I guess they plan to make it up on volume," as if this old saw is such a hands-down truism that it sums up all the thinking one needs to do on the subject. I'm not exaggerating, either. As the "venerable" British weekly The Economist put it recently, "Amazon could yet become a $10 billion business with the profits of a corner shop."
Maybe so. But while the Web is still in a state of flux regarding which business models will ultimately work best, it is worth highlighting the fact that even supposedly freakish models aren't as ugly or bizarre as commentators seem to think. In fact, they're downright old-fashion if you get beyond the Web-worthy bells and whistles. Let's consider The Economist's ultimate putdown of the future of e-commerce: "Is it too implausible to imagine Dollar.com -- a company that sells dollar bills for 90 cents and makes money from advertising?"
Actually, no. Neither is that a necessarily stupid idea. In fact, that pretty much describes The Economist's own business model. Another way of saying you want to sell dollar bills at a discount, of course, is to say that you want to offer an attractive product to customers for less than it costs you to produce. And that's what most content providers do today. Subscriptions for magazines and newspapers typically cover just a fraction of the cost of paying writers, editors, and other personnel; maintaining office facilities; buying paper and ink; and distributing the product. Advertising pays for the vast majority of these expenses. No ads, no profits, no business. Period.
Indeed, many local newsweeklies made the rational business decision long ago that they can make more money giving their product away. That's because ad rates are based on circulation ("eyeballs" in Webspeak), and a free product usually attracts a larger circulation. The same is generally true of the television networks. Think about it. Everyday, your television carries hours upon hours of entertainment and news content -- for free. Sure, there's cable, which many of us can't live without. But over a quarter of American viewers watch good old free TV. These viewers have made an implicit deal with the networks and their local affiliates: Give us something worth watching, and we'll more or less let you assault us with advertising for 14 minutes every hour. Radio works with the same business model.
The Fool offers some for-pay items, like our excellent Industry Focus, which highlights 20 leading industries and 20 top investment ideas. But we've generally embraced this old-fashioned advertising-supported business model. And if you're reading this, so have you. In fact, you just sat through my ad for the Industry Focus. Now, back to the exciting conclusion to today's Fool on the Hill...
All of this would seem pretty elementary except that the Web has a way of confounding our perceptions even as it ought to be sharpening them. Trading the proverbial $1 for a customer's 90 cents -- or, maybe nothing but some required ad viewing -- may prove just as powerful with the Web as it has with other entertainment technologies.
Consider the offer made on Monday by Free PC, a California startup led by the venture capital firm Idealab. As the name suggests, Free PC will give away personal computers, beginning with 10,000 Compaq (NYSE: CPQ) Presarios with a 333MHz processor, 32MB of RAM, a 33.6kpm modem, Windows 98, CD-ROM and floppy drives, a 15-inch monitor, and a 4-gigabyte hard drive. Idealab's ultimate goal, assuming all goes as planned, is to give away millions of PCs. Interested? Go to www.free-pc.com and register by answering a list of questions. If you meet certain demographically attractive requirements, then you'll qualify. The main catch is that you must agree to be bombarded with ads (apparently for at least two years) every time you've got your PC on, whether you're online or not. About 2 gigabytes of the PC's hard drive will be reserved for storing ads (which will be updated each time you go online) and certain data gathered by Idealab.
The company's business model is based on the notion that your eyeballs are worth more than the $600 price of the PC. It's actually just a savvy twist on the patented concept launched long ago by Idealab's business partner Cybergold (www.cybergold.com). This California company works up deals in which advertisers pay consumers for reading their ads. More recently, Cybergold has attained a business-method patent for the concept of a product that would store a consumer's demographic info (income, hobbies, and so on) and allow consumers to be compensated for giving this data to advertisers. This, too, sounds novel, but it's really little different than getting paid to answer a marketing survey.
Still, these developments suggest the obvious: Soap operas are designed to sell soap. If you can get customers to either sit through your ads or divulge information about themselves, then giving away financial commentary, entertainment programming, or even cash may make plenty of sense. The real value in this nexus may be your customer's time and personalized data. The Free PC initiative, however, reveals precisely how far e-commerce may go along these lines. It may end up being smart to give away merchandise (books, PCs, you name it) at or even below cost if you can make up the difference and salvage some profits on the ad front.
In light of Free PC, then, the move by online auction firm Onsale (Nasdaq: ONSL) that left The Economist in a tizzy may actually prove relatively conservative. In mid-January, Onsale (www.onsale.com) launched atCost, an e-commerce site that allows consumers and small businesses to buy any of some 35,000 PC-related items at wholesale prices. Customers also pay a fixed premium of $10 or less per item plus the costs of shipping, handling, and credit-card processing. As the company's press release reads, "This shift is reminiscent of the changes online brokerage firms brought to the securities industry with low- and fixed-price charges per transaction."
Of course, Onsale will supplement this modest markup with high-margin ad revenues. As company CEO Jerry Kaplan has said, the goal is to generate gross margins from atCost in the 7% to 9% range. While that's below Onsale's overall gross margin target of 9.7%, it could really help the bottom line since "the company expects only an incremental increase in related operating expenses" from this initiative since Onsale's already got the basic infrastructure in place. Assuming an efficient enough distribution operation, of course, it's not hard to imagine a world where e-commerce in general operates on even more of a magazine or newspaper model. Consumers may be asked to cover just a tad of an etailer's expenses, with profits coming all from advertising. In that world, volume -- or better said, eyeballs -- will mean everything.
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