<THE EVENING NEWS>
Wednesday, April 14, 1999
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HEROES

The recovery of disk drive maker Seagate Technology (NYSE: SEG), in the red a year ago, appears to be taking shape nicely in light of last night's fiscal third quarter earnings report. Shares of Seagate gathered in $1 9/16 to $28 3/16 today in brisk trading after the company reported EPS of $0.49 before restructuring charges, well ahead of last year's $0.10 loss (the second of two consecutive unprofitable quarters) and Wall Street's $0.46 consensus estimate as high-end sales were particularly strong. And even though the outlook for Q4 isn't overwhelmingly ebullient -- President Steve Luzco said in an interview with Reuters after the earnings release that the company is assuming Q4 EPS will be flat with last year's $0.11 figure, short of First Call's $0.53 projection -- the explanation should please investors. The company is changing the way it recognizes North American revenues by not recording sales until merchandise is sold by distributors. This more conservative practice will lower Q4 distribution revenue but will give investors a better picture of the demand for Seagate's products.

Hoping investors would cheer a move to focus its future efforts on a white-hot industry despite softness in recent months, communications and electronic products maker Harris Corp. (NYSE: HRS) said it will spin off its office products division, Lanier Worldwide, to shareholders. The broad restructuring will probably involve the sale of its power semiconductor business and a more-than-halving of its employee base after the spin-off, sale, and job cuts are figured in. Several prospective buyers have already inquired about the $300 million semiconductor division, according to the company. Harris shares picked up $5 5/8 to $33 5/8 today on news that it will restructure into a company with six divisions, each focused on a different communications market -- the company currently traffics in the wireless, broadcast, government systems, and network support markets. These divisions have made up about 60% of the company's revenue so far this year despite Harris' reporting late last month that weakness in South America, China, and other international markets is hurting its communications business and dragging on fiscal Q3 EPS. The Lanier spin-off is expected by the end of summer.

QUICK TAKES: Oracle Corp. (Nasdaq: ORCL), the world's leading provider of database software and number-two independent software firm, rose $1/2 to $24 1/8 after boosting a stock buyback program by 85 million shares to 93 million... E-commerce intermediary Priceline.com (Nasdaq: PCLN) was bid up $11 5/8 to $93 1/8 on news of a five-year marketing agreement with Bank One's (NYSE: ONE) FirstUSA unit>, a leading Visa card issuer, worth as much as $200 million in revenue for Priceline.com over the length of the pact... Aircraft maker Boeing Corp. (NYSE: BA) rose $3 3/8 to $38 in advance of its Q1 earnings report, expected tomorrow. Wall Street's consensus estimate is $0.17 per share.

Shares of wireless communications and semiconductor maker Motorola (NYSE: MOT) jumped $3/16 to $83 1/8 this morning after the company announced better-than-expected Q1 results. Head back to today's Lunchtime News for a closer look... Telecommunications equipment maker Lucent Technologies (NYSE: LU) won $2 7/16 to $59 3/8 after it said it expects to report fiscal Q2 EPS "in line with or exceeding" analysts' mean forecast of $0.15, cooling recent worries about revenue growth... Heavy equipment manufacturer Caterpillar (NYSE: CAT) rolled up $5 15/16 to $60 11/16 following optimistic comments about the company's outlook by executives at its annual meeting today and a reiterated "buy" rating from Salomon Smith Barney.

Natural gas company Connecticut Energy (NYSE: CNE), which said it "has recently conducted preliminary discussions concerning a possible strategic transaction," improved $2 3/8 to $28 5/16 today... Equipment lease financing company First Sierra Financial (Nasdaq: FSFH) climbed $1 to $19 3/4 after it announced plans to launch a business-to-business Internet bank that will be operational by the end of Q4 1999... Enterprise network security products developer Pilot Network Services (Nasdaq: PILT) rose $1 3/8 to $18 after it said it will provide secure e-commerce services to General Electric (NYSE: GE).

Casino operator Circus Circus Enterprises (NYSE: CIR), upgraded to "buy" from "market performer" today by BancBoston Robertson Stephens, cashed in on a gain of $2 1/8 to $20 13/16. The brokerage set a 12-month share price target of $27... South American industrial and financial services holding company Quinenco SA's (NYSE: LQ) American Depositary Receipts won $15/16 to $10 on reports that it will sell its 50% interest in its O'Higgins Central Hispano joint venture with Spain's Banco Central Hispano to its partner for $600 million... Business communications solutions company AVT Corp. (Nasdaq: AVTC), which said it bought closely held MediaTel Corp. for $48 million in stock, moved ahead $1 to $24.

Mortgage real estate investment trust IndyMac Mortgage Holdings (NYSE: NDE) swung up $2 1/16 to $13 7/8 after announcing that it is changing its emphasis in the home improvement lending business from transactions with specialty loan brokers and dealers to loans originated via the Internet at LoanWorks.com and LoanWorks' other direct lending channels... Wireline and wireless network synchronizing products maker Datum Inc. (Nasdaq: DATM) recorded gains of $1 3/8 to $8 5/16 after agreeing to buy Digital Delivery Inc., a provider of secure information and product distribution software, for an undisclosed sum... Eyecare company Bausch & Lomb (NYSE: BOL) cleared up $2 1/16 to $74 3/16 after Merrill Lynch boosted its near-term rating on the stock to "buy" from "accumulate."

Earnings Movers


E-Tek Dynamics (Nasdaq: ETEK) up $6 to $49 1/2; fiscal Q3 EPS $0.14 vs. $0.06 last year; estimate: $0.11

Fleet Financial (NYSE: FLT) up $3/8 to $43 7/16; Q1 EPS $0.72 vs. $0.53 last year; estimate: $0.69

Hertz (NYSE: HRZ) up $1 13/16 to $60 1/2; Q1 EPS $0.45 vs. $0.33 last year; estimate: $0.39

Johnson Controls (NYSE: JCI) up $2 1/4 to $69 5/8; fiscal Q2 EPS $0.70 vs. $0.56 last year; estimate: $0.69

J.P. Morgan (NYSE: JPM) up $3 9/16 to $132 7/8; Q1 EPS $3.01 vs. $1.80 last year; estimate: $1.73

KLA-Tencor Corp. (Nasdaq: KLAC) up $3 5/16 to $49; fiscal Q3 EPS $0.22 vs. $0.33 last year; estimate: $0.14

Pope & Talbot (NYSE: POP) up $2 to $8 1/2; Q1 EPS loss of $0.17 vs. loss of $0.47 last year; estimate: loss of $0.17

GOATS

GO Network portal partner Infoseek Corp. (Nasdaq: SEEK) found itself trading $19 1/8 lower at $60 3/8 today after posting a pro forma fiscal Q2 loss of $0.39 per share (excluding charges), which was not quite as bad as the loss of $0.41 per share forecasted by analysts. Revenues were up more than 100% year-over-year to $29.6 million, but down 2% from last quarter. That slight negative was enough to prompt a downgrade to "buy" from "strong buy" from BT Alex. Brown and a Salomon Smith Barney fiscal 1999 revenue estimate revision to $135 million from $146 million. Despite the sales decline, Infoseek appears to executing well in its core aim of attracting more eyeballs to the GO website, which saw average daily page views climb to 45 million in March from 33 million in December as its registered user base expanded to 12 million from 8 million during the period. However, converting those eyeballs into an ever-increasing stream of revenue dollars is the firm's bigger, if not now more distant, goal.

Bank back office accounting and branch management software maker CFI ProServices (Nasdaq: PROI) slid $4 7/16 to $13 9/16 after reporting Q1 EPS of $0.16, down from last year's $0.19 and short of the First Call mean estimate of $0.21. While quarterly revenues rose 5% to $20.1 million, net income slipped more than 20% to $799,000. The company chalked up the drop to an isolated revenue timing problem as two "major" software orders were deferred by customers, resulting in a 14% slide in software revenues. On the bright side, service and support revenues rose 30% during the period thanks mainly to growth in the firm's online home banking and bill payment business, which saw sales double in the period. Not surprisingly, positive buzz about the future market for that division's products was largely responsible for the 50% rise in the firm's share price yesterday amid a wave of Internet banking hoopla.

QUICK CUTS: Chipmaker Intel Corp. (Nasdaq: INTC) slipped $3 1/2 to $57 despite reporting Q1 EPS of $0.57 late yesterday, topping analysts' estimates by $0.02. However, investors may have been rattled by a larger-than-expected sequential drop in revenues, which slid 7% to $7.1 billion. For more details, see this morning's Breakfast With the Fool and last night's Drip Port report... Digital wireless communications network operator Sprint PCS (NYSE: PCS) dropped $8 to $47 1/2 after Morgan Stanley Dean Witter lowered its opinion of the company to "neutral" from "strong buy"... Business Internet services provider PSINet Inc. (Nasdaq: PSIX) slid $4 5/8 to $59 after announcing plans to sell 6 million common shares and 7 million convertible preferred shares in two concurrent offerings.

Several of yesterday's Internet banking big winners gave back part of their gains this morning, perhaps as traders sought to overcome their hangovers from Tuesday's share price party. Florida Banks (Nasdaq: FLBK) lost $14 1/4 to $17, Net.B@nk (Nasdaq: NTBK) retreated $63 1/32 to $172, TeleBanc Financial (Nasdaq: TBFC) dropped $50 3/8 to $90 1/8, and Atlantic Bank (Nasdaq: ATLB) returned $12 to $29 1/8... Solid waste and recycling services company KTI Inc. (Nasdaq: KTIE) was kicked $1 11/16 lower to $7 7/8 after waste collection firm Casella Waste Systems (Nasdaq: CWST) said it will call off its proposed merger with the company if "certain breaches by KTI of its representations" in the merger agreement are not ironed out in the next 30 days. Casella gained $3 1/16 to $23 9/16... Biomedical company Biomatrix (NYSE: BXM) slumped $9 11/16 to $80 5/16 following a Prudential Securities downgrade to "accumulate" from "strong buy."

Oilfield services company Baker Hughes (NYSE: BHI) fell $1 1/4 to $23 3/16 after the company reportedly hinted at a conference yesterday that it may have to continue cutting back its staff this year if its oil and gas exploration clients maintain their current posture of reducing projects in the face of low oil and gas prices and an ongoing supply glut. Rival Halliburton (NYSE: HAL) slid $1 3/4 to $35 and Schlumberger (NYSE: SLB) lost $1 9/16 to $56 9/16... Elsewhere in the oil patch, contract offshore driller Rowan Companies (NYSE: RDC) dropped $1 1/8 to $11 15/16 after reporting a Q1 loss of $0.12 per share, which was worse than the First Call mean estimate of a loss of $0.06 per share... Electric power provider Peco Energy (NYSE: PE) was zapped for a $2 5/8 loss to $44 9/16 following a Morgan Stanley Dean Witter downgrade to "neutral" from "outperform"... Advanced Communications Group (NYSE: ADG) shed $1 3/4 to $8 15/16 after PaineWebber downgraded the competitive local exchange carrier to "neutral" from "buy." Fellow CLEC Intermedia Communications (Nasdaq: ICIX) tumbled $5 3/8 to $32 7/8 following a downgrade to "maintain" from "accumulate" from A.G. Edwards.

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Delia's iTurf Kicks Grass

I'm not a teen, but I watch them on TV. And at the local multiplex. Lately I've been jonesing for new episodes of Dawson's Creek, despite the fact that the denizens of Creekside have been awash in troubles this year. You know, there's Andie's ongoing crack-up, her brother Jack's torturous coming out of the closet, and Dawson's general angst about Joey leaving him. What happened to the good old days when Pacey could indulge his Mrs. Robinson fantasies? Yet by comparison, the lack of a new Party of Five lately has been almost a relief. What was Julia thinking putting up with the abusive Ned for so long? After a while, I just about wanted to hit her, too.

Of course, during these post-sweeps doldrums, I've caught up on some of the latest teen flicks. For starters, there's She's All That (two thumbs up, a terrific Pygmalion riff on the classic teen plot), 10 Things I Hate About You (shrew Julia Stiles was great, the film so-so), and Cruel Intentions (Selma Blair's gooey kiss with Sarah Michelle was a turn-on, but this Dangerous Liaisons remake lacked the appeal of the classic teen storyline). Of course, my dance card is still full, with Claire in The Mod Squad, Katie in Go, and Drew in Never Been Kissed yet to be seen.

Clearly, I'm still working through some issues about my high school years. Or something. Of course, if all this sounds foreign to you, then you're probably clueless about why iTurf (Nasdaq: TURF), a new e-commerce issue with about $4 million in FY98 revenue, could possibly be valued at a billion dollars.

Spun off last week from catalog queen Delia's (Nasdaq: DLIA)-- or dELiA*s as the company cutely prefers -- iTurf was initially priced at $10 - $12. Last Tuesday, the underwriters boosted the range to $16 - $18. The stock finally priced at $22 a share on Friday and quickly soared, today touching an all-time high of $66 before closing down $4 1/8 to $58 1/2. Great expectations had pushed Delia's to an all-time high of $40 last week before the now predictable sell-off. However, investors' exuberant embrace of iTurf actually had Delia's running back up in recent days before closing down $5 1/2 to $30 7/8 today.

The story here is pretty simple. In pure numbers, the teen market is huge and getting huger. According to the U.S. Census Bureau, the number of 10-to-19 year olds reached a fifteen-year low of 35.2 million in 1992, but it's been expanding ever since. This segment of the population will reach 40 million by 2000 and will continue growing at twice the rate of the overall population through 2010. Also, what's often called "Generation Y" includes folks in the 10-to-24-year age bracket. This group will increase in number from 56.2 million in 1998 to 63.1 million in 2010. This is the Baby Boomers' baby boom, and it's creating a wave of teenploitation films and TV shows that's changing the entertainment industry.

Better yet, Gen Y has a lot of money to spend, thanks to the surging economy. Delia's puts the figure at $275 billion annually. Various studies put spending by the core teen population at between $90 billion and $120 billion in 1997. What's more, this is a population that increasingly is growing up on the Internet. They're wired, savvy, and loaded.

Happily, Delia's and iTurf target exactly this market. Delia's catalog serves females ages 10 to 24, selling Delia's own trendy clothes plus hot brands like Quiksilver (NYSE: ZQK), Vans (Nasdaq: VANS), and Paris Blues. Working with a mailing list of over 5.4 million potential customers, more than 1.6 million of which had actually bought something recently, the company expected to mail out about 55 million catalogs last year, up from 13 million in 1996. Thanks to acquisitions, Delia's also operates TSI Soccer stores selling sports apparel plus Screeem! stores selling unisex apparel. About 40% of total teen spending goes to apparel and sporting goods, including sports-related apparel.

Better yet, Delia's picked up the gURL.com website, a smart and humorous content site for girls (eh, grrrrls) developed by three New York University grad students as part of their masters thesis and all about grrrl power. Delia's built up this site a bit and linked it to the company's online apparel store and to sites for its physical store concepts (like tsisoccer.com). Thanks to cross-promotions with the popular Delia's catalog, page views have increased from just 800,000 per month in February of 1998 to around 35 million a month just one year later.

Unfortunately, Delia's encountered some rough going last year as it spent its IPO money to broaden its reach to boys and to store-based retailing while its more fashion-forward clothes ran into the juggernaut that is Gap (NYSE: GPS) basics. The stock plunged as low as $4 1/8. Running out of financing, management got the bright idea to package its websites (including its e-commerce business) into a separate company since its sites had in fact proven popular with exactly that group of free-spending teen girls that is hard to reach. Voila, iTurf.

The basic numbers look like this. iTurf did $4.01 million in sales in FY98, generating net income of $0.46 million, or about $0.04 per share based on 12.5 million shares outstanding. Given preliminary Q4 results and pro forma numbers for the first nine months of FY98, Delia's itself did about $172 million in revenue and $0.31 a share in profits. As of October, the company had just $3.5 million in cash and book value minus intangible assets of $34.8 million.

Delia's offered the public 4.2 million class A shares of iTurf, maintaining control of the company through 12.5 million class B shares. So excluding other potential common share equivalents (a possible over-allotment of 630,000 shares, 1.42 million shares issuable based on options that exercise at $9.36 per share, and 2.63 million shares for an employee incentive plan), there are now 16.7 million shares of iTurf, giving the firm a market cap of $977 million. Its cash is roughly equal to book value at around $75 million. Meanwhile, Delia's has about 14.35 million fully diluted shares now valued at $443 million. In other words, with more than 40 times iTurf's revenue and ten times its total profits, Delia's is trading for substantially less than half what investors are paying for iTurf.

Frankly, I love Delia's clothes. I hope that if I were a teen girl, I would feel cool enough to wear them. This generation's role models (check out the stars of the above TV shows and films) at least look like they're clad in Delia's wear. I'm sure the world would be a better, more interesting place if Delia's fashion sense ruled. And I like iTurf's online sites. Cool. Cool enough to actually attract customers. But do these companies' valuations make any sense? Not exactly.

With Delia's carrying a trailing net profit margin around 2.7% in a high-risk part of the apparel market, figure it's worth 1 times sales, or $172 million divided by 14.7 million shares, or $11.70 per share. That's about 20 times the estimate of $0.60 per share for the fiscal year ending next January. Actual rather than pro forma EPS for FY98 should be about $0.40, so that's 30 times trailing earnings. Add in at least $10 million which Delia's pocketed from the IPO (iTurf is using this amount of money -- and 60% of funds raised from any exercise of the over-allotment -- to buy Delia's stock), and the adjusted tangible book value goes to around $44.8 million. So my target value is about 3.8 times book.

But then we must figure in the value of Delia's roughly 75% stake in iTurf. Three-quarters of $977 million is $733 million. As I noted last week with Ziff-Davis (NYSE: ZD) and ZDNet (NYSE: ZDZ), you need to discount such majority holdings by at least 40%, owing in part to what the supply/demand effects of trying to actually sell that stock would be. So $733 million times 0.6 equals $440 million. Add in our $172 million target value for Delia's proper, and we can guesstimate that Delia's stock is worth roughly $612 million. Divide that by 14.35 million shares, and we get a fair value of $42.65.

Either Delia's core business is worth less than I'm giving it credit for, or Delia's stock is discounting an iTurf price of about $45. Of course, if Delia's core business is worth more than $11 1/2 (and a year ago, investors valued it at twice that amount), then iTurf shares could soon be eating grass rather than kicking it. Then again, iTurf investors haven't yet had a chance to see Delia's complete full-year results, so it's hard to draw firm conclusions.

Those results are expected to be released tomorrow and coincide with a conference call. However, yesterday's announcement regarding the death of director Sidney Kahn, father of CEO Stephen Kahn, might alter that plan. (Our condolences.)

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