THE MARKET MIDDAY
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Virus Hits Network Associates
An earnings-warning virus crushed Network Associates (Nasdaq: NETA), the enterprise network security and management software company. The stock fell $6 3/16 to $15 3/4 this morning, after plunging $7 1/2 yesterday. After yesterday's market close, the company warned that Q1 earnings would be $0.30-$0.32 per share prior to non-cash amortization charges, compared to expectations of $0.48. Revenue is expected to fall between $245-$250 million, about 10% below expectations. In addition to the earnings news, the company announced a resolution to an accounting dispute regarding write-offs associated with acquisitions.
Network Associates started off the year at $66 1/4. The stock started to fall in January on concerns about an industry-wide SEC investigation into charge-offs associated with in-process research and development. Companies have been trying to maximize these "one-time" write-offs (which are summarily ignored by Wall Street analysts) so that they won't have to have an ongoing earnings hit in the form of goodwill. Acquisitive companies, such as Network Associates, were expected to be hardest hit by this investigation.
After waiting three long months, with the stock continuing to drop on increasing uncertainty in the investor community about the significance of these charges, the company finally announced a resolution to these issues yesterday afternoon. Total amortization for 1999 is now expected to be about $58 million, $36 million higher than previously expected. Assuming no tax benefits, that works out to total annual amortization of about $0.39 per share. While steeper than expected, this charge shouldn't have rattled investors too much since it is non-cash and has no impact on the company's underlying fundamentals. Under normal situations, the stock might have actually increased with the elimination of uncertainty surrounding the issue. The earnings warning that accompanied this resolution, however, injected more uncertainty about a much more substantial issue.
Beyond just warning that Q1 was going to fall significantly short of expectations, the company stated that it was not prepared to give guidance for the remainder of the year because of the unpredictable marketplace. If the company can't project what's going to happen, then investors certainly can't. Their default reaction is to (a) extrapolate current trends, generally assuming further deterioration in the business and (b) sell the stock. The company gave a litany of reasons for the shortfall, including a slower enterprise software business, the impacts of Y2K, an upgraded software suite, and a longer sales cycle. While these reasons may explain poor business trends, investors are likely going to stay away from the stock until more clarity about the company's future is available.
Internet service provider FlashNet Communications (Nasdaq: FLAS) streaked $3 5/8 higher to $44 3/8 after signing a co-branding alliance with Web portal Lycos (Nasdaq: LCOS) that will enable FlashNet customers to create a customized online start page using a template developed by the two companies.
Internet software developer Spyglass Inc. (Nasdaq: SPYG) sneaked ahead $6 to $14 7/8 after signing a three-year $20 million licensing deal with software giant Microsoft (Nasdaq: MSFT). Spyglass will help develop and deploy products for Internet device manufacturers using Microsoft's Windows CE operating system.
Web content integrator and aggregator InfoSpace.com (Nasdaq: INSP) gained $25 1/16 to $114 11/16 after setting a two-for-one stock split payable on May 4.
Cosmetics and beauty products company Revlon (NYSE: REV) strutted $2 13/16 higher to $22 13/16 after saying it has hired Goldman Sachs and Lazard Freres to advise it on "strategic alternatives," including the possible sale of one or more of its business units.
Pharmaceutical contract research organization (CRO) Covance (NYSE: CVD) climbed $1 1/4 to $23 1/16 after signing an agreement to produce biotech firm Centocor's (Nasdaq: CNTO) Retavase "clot-busting" drug for the U.S. and Canadian markets. Bear Stearns raised its rating on the firm to "buy" from "attractive" this morning, following Covance's comments late yesterday that it is "extremely comfortable" with analysts' Q1 EPS estimates of $0.22.
Discount variety retailer Dollar Tree Stores (NYSE: DLTR) grew $1 29/32 to $36 21/32 after saying its Q1 same-store sales rose 5.4% compared to a year ago. Total sales rose 26% in the period to $221.1 million.
Managed care software developer Health Risk Management (Nasdaq: HRMI) rose $1 1/4 to $9 after pre-announcing fiscal Q3 basic earnings of $0.22 per share, up from $0.01 per share a year ago, on a 203% year-on-year increase in gross revenues to $51.5 million.
Seagram (NYSE: VO) gained $3 3/4 to $58 11/16 on expectations that the media and spirits giant's Universal Music Group will form a joint venture with the BMG music unit of Germany's Bertelsmann to promote and sell music over the Internet. For more details on the expected deal, see this morning's Breakfast With the Fool.
Copper, aluminum, and fiber optic cable and wire maker General Cable (NYSE: GCN) strung together a $2 gain to $11 1/2 after saying it has agreed to acquire the worldwide power cable and business cable systems assets of Britain's BICC PLC for about $440 million in cash. General Cable expects the deal will add to its earnings starting this year.
Generic drug maker Watson Pharmaceuticals (NYSE: WPI) rose $4 1/8 to $46 5/16 on news that it will be added to the Standard & Poor's 500 Index after the close of trading Friday, replacing Aeroquip-Vickers (NYSE: ANV), which is being acquired by Eaton Corp. (NYSE: ETN). Univision Communications (NYSE: UVN), which will take Watson's place in the S&P MidCap 400 Index, advanced $3 1/4 to $54 3/16.
Transportation logistics management company Ryder System (NYSE: R) slowed $1/4 to $23 3/4 after the company said it expects Q1 EPS of between $0.30 to $0.35, missing First Call's $0.42 estimate. The company blamed high costs in its shipment-management business, reduced international demand -- especially in Brazil and the UK -- and Year 2000 remediation costs that have turned out to be higher than expected.
Next generation Internet video company FVC.COM (Nasdaq: FVCX) was clubbed for a $10 11/32 loss to $7 1/32 after it said last night that Q1 losses are expected to be between $0.20 and $0.22 per share, missing First Call's $0.03 profit estimate. The company blamed, among other things, a significant decline in business from Bay Networks, now a part of Nortel Networks (NYSE: NT), which has been FVC.COM's largest customer over the last several years.
Internet portal Lycos (NYSE: LCOS) lost $8 13/16 to $100 this morning after picking up $17 7/8 yesterday, reportedly on rumors that USA Networks (Nasdaq: USAI) will sweeten its offer for Lycos in an attempt to assuage renegade shareholder CMGI (Nasdaq: CMGI).
Enterprise modeling and simulation technologies company Engineering Animation (Nasdaq: EAII) dropped $22, or 55%, to $17 15/16 after it said an anticipated 15% revenue shortfall is seen dragging Q1 EPS below Wall Street's $0.26 consensus estimate. "We simply did not execute as well as expected," said CEO Matthew Rizai. "In particular, we failed to close several significant deals that were essential for achieving our quarterly goals."
Telecom billing and customer service software provider Saville Systems PLC (Nasdaq: SAVLY) cooled $4 7/16 to $5 5/8 after it expects Q1 EPS to be between $0.05 and $0.09 when it reports earnings around April 27. License sales were hurt by a lengthening of the sales cycle due and marketing issues related to UNIX customers going into production later in the quarter than expected. Service revenue, meanwhile, was hurt by the license sales slowdown.
Manufacturing, planning, and financial software systems developer Symix Systems (Nasdaq: SYMX) fell $2 5/8 to $7 3/8 after saying it expects fiscal Q3 EPS of between $0.09 and $0.11. Last year's figure was $0.09, and Wall Street was looking for a $0.13 profit. Service revenue growth was strong -- about 50% year-over-year -- but license sales are expected to be flat.
Interactive entertainment software developer Acclaim Entertainment (Nasdaq: AKLM) was beaten down $1 3/16 to $7 3/4 after reporting fiscal Q2 EPS of $0.21, flat with market projections. Among the company's projected launches for the balance of the fiscal year are sequels to last year's hit All-Star Baseball and WWF War Zone games -- several of the company's "franchises" will be extended this year.
Video teleconferencing equipment maker PictureTel Corp. (Nasdaq: PCTL) dimmed $1 5/8 to $4 15/16 after it said it expects to report a Q1 loss of $0.68 per share, well off First Call's $0.09 loss estimate. PictureTel said it suspended distribution of its SwiftSite II compact videoconferencing system until "software issues" are worked out; the company won't record revenue from the product until the improved version of the software begins shipping.
Business-to-business communications company Check Point Software Technologies (Nasdaq: CHKP) slid $3 3/8 to $26 3/4 after ING Barings Furman Selz downgraded the stock to "hold" from "buy" on worries about Q1 EPS. The brokerage cut its Q1 estimate to $0.38 per share from $0.44, the market's mean projection.
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David Marino-Nachison (TMF Braden), a new Fool