<THE EVENING NEWS>
Tuesday, June 29, 1999
MARKET CLOSE
DJIA           10815.35  +160.20   (+1.50%)
S&P 500         1351.45   +20.10   (+1.51%)
Nasdaq          2642.11   +39.67   (+1.52%)
Russell 2000     454.08    +5.47   (+1.22%)
30-Year Bond   88 29/32   +15/32  6.06 Yield

HEROES

Internet venture capital company CMGI (Nasdaq: CMGI) climbed $12 5/8 to $110 5/16 after taking an 83% stake in PC maker Compaq's (NYSE: CPQ) popular AltaVista Web search service. CMGI will give Compaq common and preferred stock, plus a three-year note that will total $2.3 billion and a more than a 16% stake in the company. Compaq's shares advanced $1 1/16 to $23 3/8. Also getting a boost from the news was Web advertising firm DoubleClick (Nasdaq: DCLK). Shares of the company, up $6 1/16 to $85 3/16 today, have been hurt in recent sessions on worries that it would lose AltaVista, its biggest client, if the CMGI/Compaq deal went through. CMGI said today it would honor DoubleClick's three-year contract with AltaVista, inked in January. The deal might also eventually have implications for portal operator Lycos (Nasdaq: LCOS), which moved up $2 7/16 to $94 15/16 today. CMGI, Lycos' biggest shareholder, earlier this year led a campaign that successfully killed the potential acquisition of Lycos by USA Networks (Nasdaq: USAI). CMGI, likely looking for a means to aggregate its online media properties, now has its fingers in two of the leading entry points to the Web and has proven willing to snap them.

An investor in CustomTracks (Nasdaq: CUST) who had been around long enough could have made a pretty penny off the company's shares without ever quite knowing what the company did. Security-systems-company-turned- customized-music-CD-seller-turned- secure-electronic-transmissions-technologies-developer CustomTracks finally gave investors an idea of what's in store last night, announcing after the market's close that it won Commerce Department approval for its ZixIt digital signature and encryption technology. The recent Foolish Double plans to use the technology in ZixMail, a secure e-mail messaging system, and ZixCharge, an Internet transaction processing system. The shares appreciated $4 9/16 to $54 1/8 today; more information is expected following U.S. patent filings, set to be made tomorrow. Considering that CustomTracks' shares have more than quadrupled since the business' newest, and current, direction was announced -- despite a paucity of concrete news -- investors would do well to listen carefully in the coming days and try to match the company's explanations to their own expectations.

QUICK TAKES: Computer products and e-commerce technologies provider pcOrder.com (Nasdaq: PCOR) bagged gains of $6 3/8 to $37 7/8 after announcing a joint alliance with Compaq to provide the PC company's resellers and customers with e-commerce services. Financial terms of the deal weren't disclosed... Computer maker Sequent Computer Systems (Nasdaq: SQNT) rose $3 9/16 to $17 9/16 following reports in The Wall Street Journal that the company may soon be acquired by IBM (NYSE: IBM). For more on the news, head back to this morning's Breakfast With the Fool... Information technology investor Safeguard Scientifics (NYSE: SFE), which announced a 75% stake in telecommunications network testing equipment company SOTAS, plugged in $4 to $64 13/16.

Internet networking equipment company Juniper Networks (Nasdaq: JNPR), which took a breather yesterday after being Friday's hot IPO, got its second wind today and raced ahead $16 3/8 to $115 1/2... Online mortgage company E-Loan Inc. (Nasdaq: EELN) raced ahead $23 to $37 in its first day of trading. The company sold 3.5 million shares for $14 each. Internet banking services company nFront (Nasdaq: NFNT) also moved up $3 1/2 to $13 1/2 in its first trading session after selling 3.9 million shares for $10 each... Finnish mobile phone company Nokia's (NYSE: NOK) American depositary receipts dialed up gains of $3 1/16 to $88 3/8 as the company announced its 640 mobile phone, expected to launch in Q3.

Equipment rental company United Rentals (NYSE: URI), recently dissed by Rental Service Corp. (NYSE: RSV), moved up $2 1/8 to $29 3/16 after announcing an agreement to sell $100 million of preferred stock, convertible into 3.3 shares of company common stock for $30 per share, to Apollo Management... ZDNet (NYSE: ZDZ), the tracking stock for the Internet-related businesses of information technology media and marketing company Ziff-Davis (NYSE: ZD), tracked up $1 9/16 to $23 3/16 after debuting its prototype broadband-optimized website... Drug maker Warner-Lambert (NYSE: WLA) improved $4 3/8 to $67 1/8 following reports that a new developmental drug, untested on humans, has stalled the spread of cancerous growths in lab mice.

Tucker, Georgia-based bank holding company Merit Holding Corp. (Nasdaq: MRET) merited a rise of $3 1/2 to $22 3/4 after inking a merger agreement to be bought by Synovus Financial (NYSE: SNV) in a stock swap valuing Merit at a 26% premium to Monday's close. The companies first announced their intentions in March... International telecommunications and Internet services company Worldport Communications (Nasdaq: WRDP), crushed for a loss of $4 27/32 yesterday after saying it's under review by a Nasdaq panel and may be delisted, recovered $11/16 to $4 3/16... Carbohydrate-based chemicals company Penford Corp. (Nasdaq: PENX) bubbled up $1 11/16 to $14 after reporting fiscal Q3 earnings from continuing operations of $0.22. Last year, the company turned in a $0.33 figure.

Online brokerage National Discount Brokers (NYSE: NDB), which Deutsche Banc Alex Brown started with a "strong buy" rating, jumped $9 1/4 to $45 1/4 today... Online information and news network About.com (Nasdaq: BOUT) battled its way up $4 11/16 to $44 1/16 following reports in Dan Dorfman's JagNotes.com column that CBS Corp. (NYSE: CBS) and USA Networks may be considering takeovers... Radio frequency integrated circuits company RF Micro Devices (Nasdaq: RFMD), an April Foolish Double, snared $4 1/8 to end at $67 7/8 on news that it now offers a monolithic integrated circuit specifically designed for direct conversion to baseband QPSK receivers.

Applied Micro Circuits (Nasdaq: AMCC), which makes semiconductors used in communications networks, advanced $8 3/8 to $77 7/8 as Salomon Smith Barney reiterated a "strong buy" rating on the stock, setting a $100 per share 12-month price target. Broadband communications integrated circuits maker Broadcom Corp. (Nasdaq: BRCM), recipient of a reiterated "outperform" rating, rose $8 1/2 to $126 1/2 after its 12-month target price was upped to $150 form $89... Internet investment banking and brokerage firm Wit Capital (Nasdaq: WITC) gained $4 7/16 to $31 1/2. Both Bear, Stearns & Co. and Thomas Weisel Partners started coverage of the company with a "buy" rating. Bear, Stearns also set a 12-month share price target of $51.

GOATS

Seagate Technology (NYSE: SEG) was beat up for a $2 3/8 loss to $27 1/4 after warning that weaker than anticipated demand and worse than expected price deterioration for its disk drives will result in fiscal Q4 EPS between $0.32 and $0.37, below its previous expectation of $0.45. Drive revenues will likely fall 6% sequentially and the "extremely aggressive pricing environment" in the desktop segment will probably wallop Seagate's Q1 results as well. The warning follows similar admonitions from drive rivals Western Digital (NYSE: WDC), Quantum (Nasdaq: QNTM), and Maxtor (Nasdaq: MXTR), who are all hurting as PC prices head south with no end in sight. With a gross profit margin last quarter of 24%, Seagate is tops in the drive industry in terms of profitability. However, being the most profitable firm in a commodity business is a bit like being the world's largest Chihuahua -- you may get the respect of other Chihuahuas, but you'll never be able to run with the big dogs of the world.

Newspaper advertising inserts company Big Flower Holdings (NYSE: BGF) wilted $3 15/16 to $31 9/16 after agreeing to a $1.9 billion recapitalization plan involving investment companies Thomas H. Lee Co. and Evercore Capital Partners. Under the plan, each publicly held share of the company will be converted into $30 in cash and 0.21 of a share of payment-in-kind (PIK) preferred stock with a liquidation value of $25 per share. While the PIK portion of the deal is ostensibly worth $5.25 per common share ($25 times 0.21), investors aren't buying it. PIKs are highly speculative debt-like instruments, considering they pay interest not in dollars but in the form of additional PIKs. Judging by today's drop, investors believe the fractional PIK interests are worth less than the $5 1/2 per share needed to close the price gap between the cash portion of the plan and Big Flower's closing price of $35 1/2 per share yesterday.

QUICK CUTS: Enhanced directory assistance call centers operator Metro One Telecommunications (Nasdaq: MTON) dropped $2 5/8 to $12 5/8 after forecasting Q1 EPS of $0.01, missing the First Call mean estimate by $0.10. The company said it increased its staffing and infrastructure spending in anticipation of increased call volume from a major customer group, which never materialized... Winemaking and processing services firm Golden State Vintners (Nasdaq: VINT) was crushed $1 to $5 7/8 after saying pricing and volume softness has hurt its bulk wine sales and will lead to fiscal Q4 earnings below analysts' estimates. Full-year fiscal 1999 EPS is now seen between $0.70 and $0.75, short of the First Call mean estimate of $0.99... Vodafone Group (NYSE: VOD) slipped $6 7/8 to $198 and AirTouch (NYSE: ATI) slid $3 1/4 to $107 3/4 on the final day of trading before the two telecommunications firms start trading as one entity, Vodafone AirTouch PLC.

Shares of teeth-whitening technologies developer BriteSmile (AMEX: BWT) lost more of their bite today, falling $1 1/16 to $8 1/2 after declining 18% yesterday on worries about the company's ability to turn a profit and the safety of its treatment... Mahwah, New Jersey-based bank holding company Hudson United Bancorp (NYSE: HU) lost $3 3/16 to $31 3/4 after agreeing to buy Philadelphia-based JeffBanks (Nasdaq: JEFF) and Southern Jersey Bancorp (OTC BB: SOJB) for a combined $425 million in stock... Payroll processor Paychex (Nasdaq: PAYX) slipped $7/16 to $31 5/8 despite reporting fiscal Q4 EPS of $0.15, up from $0.11 a year ago and in line with the First Call mean estimate. When asked about the drop on CNBC, CEO Tom Golisano reportedly said, "My primary responsibility is to run the company. It's up to others to determine the stock price." That's telling 'em, Tom!

Cigarette and packaged food company Philip Morris (NYSE: MO) was burned $7/8 to $40 1/8 after saying this year will be a "transition year" for its international and domestic tobacco units. The company is now shooting for full-year 1999 EPS of $3.30, less than the First Call mean estimate of $3.32... Metalworking tools supplier JLK Direct Distribution (NYSE: JLK) was trimmed $5/8 to $9 3/16 after saying softness in the North American market will lead to fiscal Q4 EPS between $0.20 and $0.22, $0.06 shy of the First Call mean estimate.... Fiber optic network operator Qwest Communications (Nasdaq: QWST) fell $1 7/16 to $32 7/8 as acquisition target Frontier Corp. (NYSE: FRO) warned that its Q2 and full-year earnings will miss analysts' estimates. Fellow suitor Global Crossing (Nasdaq: GBLX) also lost $2 1/16 to $42 1/2.

FOOL ON THE HILL
An Investment Opinion
by Warren Gump

Scoring Fair Isaac & Co.

A profitable way to invest in many industries is through the "support" business -- those that help facilitate the main business at hand. The best example of this situation is probably air travel, where it seems like people have made more money from firms like Sabre Group Holdings (NYSE: TSG), the operator of a major computer reservation system, and OAG, the Official Airline Guide, than airlines themselves. While the banking business has been quite profitable on its own, businesses that support it can also find lucrative niches. Fair Isaac & Co. (NYSE: FIC), the developer of credit scoring and other products for the financial services industry, has found just that kind of sweet spot.

Fair Isaac was a pioneer in the creation of credit scoring technologies, which are now commonplace in the granting and maintenance of consumer credit like credit cards and lines of credit. You may not know it, but every time you apply for a credit card, you are most likely "graded" by a computer scoring system. This system combines data you provide on the application as well as information gleaned from your credit report. A higher score will be awarded to those who pay obligations on time, hold steady jobs, and maintain balances below their credit limits. Developing the exact scoring methodology (i.e., how many points to deduct for a late payment) and software to implement it is a major part of Fair Isaac's business.

You don't need to apply for a credit for Fair Isaac to earn revenue, since the company also sells screening and monitoring products. You think it's a mystery as to why you get one of those "preapproved" offers of credit in the mail? Your receipt of that mailing is not a haphazard risk being taken by the mailing financial institution. You were selected because you met the criteria the bank was searching for when it scanned its own or publicly available credit databases. Fair Isaac sells algorithms and software that help these institutions mine through that data to find the best candidates for these offers. The company also sells products to monitor accounts and avoid overexposure to various credit risks.

In addition to credit products, the company has a rapidly growing business called DynaMark, which provides database management and data processing service to direct marketers. So far this fiscal year, revenues for the division are up 42%, on top of the 65% increase in 1998. While most of its sales come from the financial services sector, it also targets catalog merchandisers and fundraisers. The division's external sales represented 20% of Fair Isaac's revenues in 1998.

Given the deluge of credit offers you have likely received, you could imagine that Fair Isaac has been fairly successful over the past few years. Between 1993 and 1998, the company saw its revenue increase at a compound annual rate of 30% and earnings per share grow at an annualized 35%. With such strong performance, you can imagine that the stock was an excellent performance. From 1993 to 1996, that was the case. The company was awarded an increasing valuation based on the prospects for excellent returns. Since that time, however, the stock has been sluggish. In fact, the current stock price of $35 � is off about 30% from its mid-1996 high.

Part of the problem affecting Fair Isaac's stock was a slowdown in earnings growth because of ambitious company forecasts. While the company's revenue was growing faster than 20% in late 1997, it had budgeted expenses based on even more dramatic growth, resulting in a slight earnings decline for that quarter. One of the primary culprits of the higher expenses was a dramatic boost in research and development (R&D) spending as the company focused on bringing more new products to market. While disruptive to short term results, the company was trying to develop a product portfolio for the future.

As 1998 progressed, Fair Isaac regained some favor on Wall Street as earnings growth rebounded strongly later in the year. The stock, in fact, rebounded as high as $54 9/16 this past January, despite warnings from management that 1999 would be tough because of Y2K fears, continuing bank consolidation, and sales growth being dependent on the introduction of new products. Earnings for the quarter ending in December 1998 increased a whopping 75% from the prior year's slightly depressed number, but management still cautioned about the outlook for 1999. Some investors started shying away from the stock.

The stock went through a massive correction in early March after the company announced a reorganization in order to expand its presence beyond financial services into healthcare, telecommunications, and eBusiness. Although the company had already started to target the healthcare and telecommunications, this new structure is expected to help increase penetration in those markets. The primary products to be offered in these areas are related to receivables management and direct marketing.

The new eBusiness division is more amorphous, with a mission to "provide unique decision control solutions for new players in the Web world." The stock market reaction to this announcement, a 25% drop over two days, was most likely not caused by these new initiatives themselves. Instead, it was a reaction to the warning that although 1999 results wouldn't be impacted by these moves, the company might see some downward pressure on margins in 2000, depending on the pace of investment -- particularly in eBusiness.

One of the reasons I have been interested historically in Fair Isaac is its "light" business model. The company had gross margins last year of 65% and net operating margins of 16%. Increased R&D spending accounted for the three percentage point drop in operating margin from the prior year. Despite this drop in margins, the company is still generating lots of cash. Over the past three years, cash from operations has exceeded net income by 25%-70% and has also exceeded capital expenditures. Given those statistics, it probably isn't too surprising that the company has cash and marketable securities of about $4.50 per share and no debt.

Where will Fair Isaac stock go from here? The earnings outlook over the next 18 months is not as clearly defined as those for many other companies. Results could be hampered by sales slowdowns related to Y2K and increased research and development expenditures on new products. The company will also likely see sales and marketing expenses increase as new markets are aggressively pursued. While near-term prospects aren't crystal clear, you are able to pick up shares for the company for only 17x earnings estimates for the year ending in September.

It's unusual to be able to find a company with such an entrenched position in our information economy, a solid history of earnings growth, and a clean balance sheet at such a low valuation. Granting subjective bonus points for my belief that management has a fairly high likelihood of being successful in some of its new ventures over the next couple of years, I score Fair Isaac quite highly as an investment vehicle worth following closely.

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