Thursday, July 9, 1998
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An Investment Opinion
by Louis Corrigan

Yahoo! Mocks the "Neigh"-Sayers

Call them Yahoos if you like, but investors in Jonathan Swift's favorite Internet portal site are thumbing their noses today at those "neigh"-saying Wall Street Houyhnhnms who keep looking for the Internet stocks to go the way of Holland's tulips. Shares of Yahoo! (Nasdaq: YHOO) shot up $10 to $196 3/16 by midday after trading as high as $204 earlier in the session following last night's stellar earnings report. Second quarter revenue was $41.2 million, up 192% over the year-ago period and 36% above the first quarter's $30.2 million. Excluding $44.1 million in one-time charges related to the acquisition of Viaweb Inc., the company delivered $8.1 million in net income, or $0.15 a share. That crushed the $0.09 per share consensus estimate as well as the supposed "whisper number" of $0.12. It also beat first quarter profits of $4.3 million, or $0.08 a share, which was itself double analyst estimates.

Adding fuel to Yahoo's rocket ride was the announcement that the stock would split two-for-one, with the split to be reflected in trading on August 3. While splits are irrelevant from an economic perspective, like Viagra, they tend to get investors excited. More significantly, Yahoo! said it had finalized a private sale of 1.36 million shares to Softbank Holdings, the U.S. subsidiary of Japan's Softbank Corp., which will now own 31% of Yahoo!'s stock. The transaction was set at a market price of $183 and so will add $250 million to the Internet leader's $147 million cash hoard for new partnerships and acquisitions.

On balance, though, Yahoo's quarterly report was remarkable for being nearly unremarkable. Average page views per day (a key measurement of website traffic) increased to 115 million in June, up 21% from the 95 million figure hit in March, which was up 46% from the 65 million seen in December 1997. Growth in registered users was more robust, rising to 18 million from 12 million in March. While these aren't paying customers, they do represent a group more likely to stick with Yahoo! since they're likely to personalize their experience of the portal's services. By comparison, America Online (NYSE: AOL) has over 12 million paying subscribers, with the actual user base much higher. Other metrics showed more incremental gains, with Yahoo! still the number one website for office users, with 54.1% using the portal versus 49% in the first quarter. And it's still number two for home users, just a percentage point behind AOL at 44.4%, up from 43% in the first quarter. In other words, business as usual.

What is remarkable is how clearly Yahoo!'s numbers exhibit the absolute beauty of its business model. While revenues rose 36% from the first quarter to $11 million, fully half of that amount dropped down to operating profits, which increased 151% to $9.2 million from $3.7 million in the first quarter. Yahoo! doesn't have to involve itself in the more capital intensive part of the Internet, stuff like laying, servicing, or leasing cable or a telecommunications backbone. It mainly just aggregates content and sells ads. Given that operating margins jumped from 12.1% to 22.3% in just one quarter, it's easy to see how increased ad spending and higher ad rates should provide Yahoo! with monster operating leverage in the future. Gross margins of 88.5% suggest just how high that upside can be. Critics that talk about Yahoo!'s valuation without talking about its business model are really just horsing around for the cameras.


The usual (Internet) suspects moved up on the back of Yahoo!'s earnings report. Excite (Nasdaq: XCIT) added $3 3/16 to $94 9/16; Lycos Inc. (Nasdaq: LCOS) gained $4 3/16 to $81 11/16; Amazon.com (Nasdaq: AMZN) rose $5 7/16 to $112 9/16; Netscape Communications (Nasdaq: NSCP) picked up $1 1/2 to $38 9/16; America Online (NYSE: AOL) climbed $2 1/4 to $113; DoubleClick (Nasdaq: DCLK) gained $3 3/4 to $59 7/8; and NetGravity (Nasdaq: NETG) advanced $2 13/16 to $24 13/16.

With PC inventories at resellers such as Vanstar (NYSE: VST) and Pomeroy Computer (Nasdaq: PMRY) down to 4-6 weeks, PC original equipment manufacturers continued to move up today. Compaq Computer (NYSE: CPQ) rose $1 13/16 to $31 5/8, Gateway (NYSE: GTW) continued its impressive drive this week, gaining another $4 3/8 to $64 1/8, and IBM (NYSE: IBM) was up $3 to $118. Dell Computer (Nasdaq: DELL) cracked the century mark this morning, gaining $4 7/16 to $100 13/16.

General Electric
(NYSE: GE) brought good things to shareholders' lives today by gaining $2 1/2 to $95 13/16 after reporting second quarter earnings of $2.45 billion, or $0.74 a share, up from last year's $0.65 per share and meeting analysts' mean estimate. Revenues jumped 14% from a year ago to $25.1 billion.

Federal Express parent FDX Corp. (NYSE: FDX) took off for a $2 1/4 gain to $63 3/8 after delivering fourth quarter earnings of $1.14 a share (before charges) compared with $0.91 last year.

Hambrecht & Quist (NYSE: HQ) gained $1 15/16 to $37 7/8 as Germany's largest bank, Deutsche Bank AG, is reportedly considering acquiring a U.S. investment bank in the wake of the departure of Frank Quattrone and part of his gang from DMG Technology Group. Having been the lead underwriter for such clients as Amazon.com (Nasdaq: AMZN), DMG's West Coast presence has been diminished with the departure of Quattrone, and some people think that Deutsche Bank is considering getting back into the game with H&Q as their substitute striker.

American Eagle Outfitters (Nasdaq: AEOS) rose $4 1/4 to $47 3/8 after the casual apparel retailer announced that comparable-store June sales were up 26.4% from the year-ago period.

Women's apparel retailer AnnTaylor Stores (NYSE: ANN) gained $1 7/8 to $23 3/16 after announcing a 9% increase in June same-store sales.

Apartment owner and operator Merry Land & Investment Co. (NYSE: MRY) picked up $5/8 to $23 5/8 on news that it has agreed to be acquired by Equity Residential Properties Trust (NYSE: EQR) for $2.2 billion in stock and debt. Merry Land shareholders will receive 0.53 Equity Residential shares for each Merry Land share. Equity Residential, the nation's largest apartment real estate investment trust (REIT), will also assume about $656 million in debt and about $370 million of preferred stock. Equity Residential lost $1 5/8 to $45 1/16.

Fred Meyer Inc. (NYSE: FMY) gained $1 1/4 to $47 3/4 after Standard & Poor's announced that the company will replace Echlin Inc. (NYSE: ECH) in the S&P 500 Index after the bell today. Echlin is being acquired by Dana Corp. (NYSE: DCN).

Rehabilitation and employee services provider NovaCare Inc. (NYSE: NOV) added $1 9/16 to $12 13/16 after announcing it has hired Salomon Smith Barney and Wasserstein Perella & Co. to "explore strategic alternatives, including a spin-off of one or more of its businesses." The company said the opportunities available from operating its various businesses separately may outweigh the benefits of synergy as a single company.

Biotechnology company Cerus Corp. (Nasdaq: CERS) jumped $1 11/16 to $17 5/8 after announcing that Baxter Healthcare, a unit of Baxter International (NYSE: BAX), will buy up to $14.5 million of Cerus preferred stock. In addition, Baxter will provide a minimum of $60 million over the next several years to fund cooperative development of pathogen inactivation systems for platelets and red blood cells used for transfusion.

PC and computer products direct marketer PC Connection (Nasdaq: PCCC) advanced another $1 1/4 to $19 1/4 in the wake of reporting a 43.5% year-over-year increase in net sales in fiscal Q2 to $174.3 million.

American Materials & Technologies (Nasdaq: AMTK) surged $2 to $5 after announcing it has agreed to be acquired by Cytec Industries (NYSE: CYT) in an all-stock transaction that values American Materials at $6 per share -- double its price at yesterday's close. The deal comprises about $31 million in stock and assumption of around $7 million in debt.

Healthcare management company WellPoint Health Networks (NYSE: WLP) rose $2 15/16 to $72 9/16 on news it will buy Cerulean Companies, the parent of Blue Cross & Blue Shield of Georgia, for around $500 million. WellPoint also announced plans to buy back an additional 8 million shares.


Advanced Micro Devices (NYSE: AMD) fell $2 5/8 to $15 1/2 after reporting a fiscal Q2 loss of $0.45 per share compared to earnings of $0.07 per share a year ago. The Street had been expecting a loss of $0.20 per share. The company blamed the loss on slumping worldwide demand for chips and price pressures on flash memory products. On the bright side, the firm said it shipped 2.7 million K6 processors in the quarter, or 35% more than it had forecasted.

Chemicals and life sciences company DuPont (NYSE: DD) was dumped $6 9/16 to $70 9/16 after saying its fiscal Q2 earnings will come in 10% to 15% below the $0.99 per share earned a year ago, missing the Street estimate of $1.01 per share. The company said half of the shortfall is due to the effects of adverse weather, Asian currency translations, and weak demand in the market for crop protection products in June. The rest is due to lower oil prices, lagging demand in the textile industry, and the strike at General Motors (NYSE: GM).

Retailer J.C. Penney Co. (NYSE: JCP) slid $5 15/16 to $65 1/2 after reporting a 2.1% decrease in same-store sales in June compared to the same month a year ago. Moreover, the company said fiscal Q2 earnings will come in below the $0.38 per share earned last year, missing the Street estimate of $0.49 per share for the quarter.

Retailer Kmart Corp. (NYSE: KM) fell $1 3/16 to $18 1/2 after reporting a 1.5% rise in same-store sales in June compared to the same month a year ago. However, the results were "below plan," according to chairman and president Floyd Hall, due to adverse weather and soft Father's Day sales.

Anti-impotency products maker Vivus Inc. (Nasdaq: VVUS) lost $1 3/16 to $8 after announcing it is looking for "a major pharmaceutical partner" to market its Muse treatment in the U.S. in response to strong competition from Pfizer's (NYSE: PFE) Viagra drug. In an interview with Reuters, the firm's CEO said Viagra has hurt Vivus's sales "fairly drastically," as Muse prescriptions have fallen from 15,000 a week to 5,000 a week since Viagra's launch in March.

Pharmaceutical company Alza Corp. (NYSE: AZA) fell $2 1/2 to $42 1/4 after saying it will more than triple its U.S. sales force to 360 from 100 in order to increase the exposure of its urology and oncology products to physicians. The move will result in a "modest dilution" of the firm's fiscal 1998 EPS, which the Street had expected to come in at $1.42.

Medical device maker Cardima Inc. (Nasdaq: CRDM) gave back $1 27/32 to $7 1/8 after more than tripling yesterday on news that the FDA approved its Vueport guiding catheter for viewing the coronary venous system.

Photronics Inc. (Nasdaq: PLAB), which makes photomasks used in the production of semiconductors, slipped $4 3/4 to $17 1/8 after saying fiscal Q3 EPS could be 25% to 35% below the First Call mean estimate of $0.33 due to the worldwide chip slowdown, corporate restructuring, and a "change in direction" regarding new products. The company said the problems could impact fiscal Q4 results as well.

Boating products retailer West Marine (Nasdaq: WMAR) sank $4 3/16 to $12 3/8 after saying it expects its fiscal Q2 EPS to come in between $0.47 and $0.52, falling short of the IBES mean estimate of $0.73 for the period. The company also announced that CEO Crawford Cole quit and will be replaced by West Marine chairman and founder Randy Repass.

Powerwave Technologies (Nasdaq: PWAV), which makes power amplifiers for the wireless communications market, slid $2 3/16 to $16 5/16 after reporting fiscal Q2 EPS of $0.11 versus $0.20 a year ago, which was in line with the First Call mean estimate. The company said some South Korean customers postponed, rescheduled, and cancelled orders during the period.

Printed circuit board (PCB) and backplane assemblies maker Hadco Corp. (Nasdaq: HDCO) dropped $1 1/8 to $21 after saying it expects a fiscal Q3 loss of between $0.45 and $0.50 per share due to the general electronics industry slowdown, customer product and inventory adjustments, and the Asian financial crisis. The Street had been expecting earnings of $0.10 per share in the period.


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