THE MARKET MIDDAY
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Diamond Still in the Rough
Though the morning saw panic buying of Internet-related tech stocks following more positive earnings news and a general market boost from IBM (NYSE: IBM), Diamond Multimedia (Nasdaq: DIMD) found itself still in the rough, down $1 3/4 to $5, after yet another disappointing quarter. Previously known mainly as an underperforming maker of brand name graphics accelerator cards -- including Stealth, Viper and Monster boards, fueled by 3Dfx (Nasdaq: TDFX) chips-- and Supra modems for PCs, Diamond has now become something of an underperforming play on music distributed over the Internet thanks to its Rio digital audio appliance. Q1 results, though, didn't sound so sweet.
Revenue declined 23% to $144 million as net income dipped to just $1.3 million or $0.04 per share versus $7.9 million or $0.22 a share a year ago. Analysts had been looking for $0.14 per share. Gross margins declined from 22.4% to 20.8% while operating expenses ran the other way, up to 19.4% from 16.4%. That ugliness was caused mainly by falling gross margins in its multimedia division. However, Diamond said new product areas such as RioPort, Communications (the company sells HomeFree, a home networking product), and professional graphics were profitable and now account for 40% of revenues.
Diamond is still adjusting to last November's restructuring, which led to some $37 million in forfeited Q4 revenue due to pricing changes and product returns. Notorious for having up to three months of inventory in the retail channel and a poor feel for actual sell-through, Diamond was continually caught flat-footed as quick product cycles forced price reductions. The goal now is to cut back on inventories, focus on fewer product architectures, and promote newer product areas.
The company appears to be making some progress. CEO William Schroeder noted that expense levels dropped 10% sequentially and that channel inventory is now down to six weeks, better but still high. He added that the new product divisions "all experienced gross margin percentages for the quarter substantially above the overall corporate margin percentage." The company also exited the quarter with $44.4 million in cash ($1.17 per share) and shareholder equity (including $25 million in intangible assets) of about $148 million. At $5, the stock trades at about 1.27 times book value.
Diamond caused a major music industry ruckus in November when it began selling the Rio, a portable digital device using flash memory to store and play music downloaded from the Internet. Rio works with the popular MP3 format, which allows near CD quality sound. The Recording Industry Association of America had filed a lawsuit to try to stop Diamond from shipping the product due to fears it would encourage bootlegging of copyrighted music by college students, who are gaga for MP3. The lawsuit didn't fly. Diamond has recently introduced a more powerful 64MB version of the Rio retailing for $249, but competitors have also entered the field. Creative Labs, for example, will soon bring out the competitively priced Nomad, a similar device, in both 32MB and 64MB versions.
But Diamond has also moved to create a Web presence called Rioport.com to distribute digital music. Though IBM and others are battling to set the digital music standard, half a million songs are already available on the Web in the MP3 format. Whether Diamond can capitalize long-term on this growing niche is anyone's guess, but investors looking for a beaten down Internet-related speculation might want to take a closer look.
Computing products and services giant IBM (NYSE: IBM) jumped $22 13/16 to $194 11/16 after reporting Q1 EPS of $1.55 late yesterday, up from $1.05 a year ago and $0.14 ahead of the First Call mean estimate. The better-than-expected results were due mostly to a 17% increase in hardware sales to $8.6 billion and 19% growth in services revenues, which rose to $7.6 billion.
TV and Web content provider CNET (Nasdaq: CNET) gained $22 1/4 to $142 after reporting Q1 pro forma earnings of $0.09 per share (excluding goodwill amortization and gains) compared to a loss of $0.19 per share last year, beating analysts' estimates of $0.03 per share. The company also said it will split its stock two-for-one on May 28.
Web site registrar Network Solutions (Nasdaq: NSOL) moved up $1 to $93 after posting Q1 EPS of $0.14 compared to $0.06 a year ago, topping the Zacks mean estimate of $0.12. The company said it registered 922,000 new Internet domain names during the quarter, up 171% year-over-year and 49% sequentially.
Online software retailer Beyond.com (Nasdaq: BYND) advanced $7 3/16 to $34 5/16 after posting a pro forma Q1 loss of $0.66 per share, which was not quite as bad as the loss of $0.74 per share expected by analysts surveyed by First Call. The company also said it has won a three-year, $6.1 million contract to provide Microsoft software upgrades and updates for the U.S. Patent and Trademark Office. Donaldson, Lufkin & Jenrette raised its rating on the firm to "buy" from "market perform."
Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) rose $5 7/8 to $39 7/8 after saying it has returned to profitability six months ahead of schedule with fiscal Q2 earnings of $0.08 per share, topping analysts' expectations of a loss of a penny per share for the quarter. Both BancBoston Robertson Stephens and Merrill Lynch raised their ratings on the firm today.
Medical products and services provider Baxter International (NYSE: BAX) picked up $4 7/8 to $66 3/16 after posting Q1 EPS of $0.61 (excluding charges) versus $0.58 a year ago, matching the First Call mean estimate. CEO Harry Kraemer told Reuters that he is "very comfortable" with the Street's EPS estimates of $2.85 for fiscal 1999 and $3.21 for fiscal 2000.
ZDNet (NYSE: ZDZ), the tracking stock for the Internet-related businesses of information technology media and marketing company Ziff-Davis (NYSE: ZD), gained $5 1/2 to $40 1/4 after Donaldson, Lufkin & Jenrette started coverage of the company with a "buy" rating and a 12-month price target of $70 per share. Parent Ziff-Davis rose $13/16 to $17 3/16. DLJ was an underwriter for ZDNet's initial public offering last month.
Business diagramming and technical drawing software maker Visio Corp. (Nasdaq: VSIO) added $4 7/8 to $27 5/8 after reporting fiscal Q2 EPS of $0.34 versus $0.27 (excluding charges) a year ago, topping the Zacks mean estimate of $0.32.
Discount broker Charles Schwab (NYSE: SCH) traded up $5 11/16 to $123 11/16 after setting a two-for-one stock split payable on July 1 assuming shareholder approval.
Telecommunications and network access products maker Tellabs (Nasdaq: TLAB) tacked on $6 3/8 to $108 15/16 after setting a two-for-one stock split. The company also announced a new company-wide objective of tripling annual revenues to $6 billion by 2003.
CDW Computer Centers (Nasdaq: CDWC) up $15 to $87 1/2; Q1 EPS: $0.90 vs. $0.68 last year; estimate: $0.85
Exodus Communications (Nasdaq: EXDS) up $13 1/4 to $97 1/4; Q1 EPS: loss of $1.09 vs. loss of $0.96 last year; estimate: loss of $1.14
i2 Technologies (Nasdaq: ITWO) up $4 3/16 to $31 7/8; Q1 EPS: $0.05 (excluding charges) vs. $0.05 last year; estimate: $0.05
ISS Group (Nasdaq: ISSX) up $9 13/16 to $64 1/16; Q1 EPS: $0.05 (fully-taxed) vs. loss of $0.19 last year; estimate: $0.02
Mail-Well (NYSE: MWL) up $1 7/16 to $14 5/8; Q1 EPS: $0.28 vs. $0.20 last year; estimate: $0.26
MedImmune (Nasdaq: MEDI) up $3 9/16 to $54 1/2; Q1 EPS: $0.45 vs. $0.21 (untaxed) last year; estimate: $0.34
Net.B@nk (Nasdaq: NTBK) up $16 1/8 to $163 5/8; Q1 EPS: $0.09 vs. loss of $0.02 last year; estimate: $0.09
PepsiCo (NYSE: PEP) up $1 3/4 to $40 11/16; Q1 EPS: $0.25 (excluding charges) vs. $0.24 last year; estimate: $0.25
Providian Financial (NYSE: PVN) up $8 to $127 1/2; Q1 EPS: $0.78 vs. $0.39 last year; estimate: $0.72
Ultratech Stepper (Nasdaq: UTEK) up $2 3/16 to $17; Q1 EPS: loss of $0.12 vs. earnings of $0.02 last year; estimate: loss of $0.15 (one analyst)
Hilton Hotels Corp. (NYSE: HLT) booked a loss of $9/16 to $16 1/4 this morning. The company said Q1 EPS was $0.16, better than last year's $0.14 mark but flat with projections. The company also said it acquired the 563-suite Pointe Hilton Resort at Squaw Peak in Phoenix, which it had managed since 1991, for approximately $94 million. "Conditions remain particularly difficult in Hawaii," according to Hilton, but "the market outlook and advance bookings... point to improvement in 2000."
Lattice Semiconductor (Nasdaq: LSCC) dumped $12 to $46 1/2 after agreeing to buy Advanced Micro Devices' (NYSE: AMD) Vantis logic-chip division for $500 million in cash. The deal, expected to close before the end of Lattice's fiscal second quarter ending in September, will initially be dilutive to Lattice's earnings per share but will become accretive in calendar 2000. AMD advanced $3/16 to $17 this morning.
Telecom Italia (NYSE: TI) lost $6 to $104 after agreeing to an $82 billion mega-merger of equals with Deutsche Telekom (NYSE: DT) that will create the world's second-largest telecommunications company after Japan's Nippon Telephone & Telegraph Corp. (NYSE: NTT). For more on the news, head back to today's Breakfast With the Fool.
Enterprise application integration software company New Era of Networks (Nasdaq: NEON), a February Foolish Double, gave up $5 5/8 to $45 7/8 despite turning in Q1 EPS of $0.11, up from $0.03 last year and a penny above estimates. The company also agreed to buy privately held SLI International AG for $22 million in cash and stock plus the potential for $3 million in future considerations.
Wireless communications and application-specific integrated circuit (ASIC) maker Mitel Corp. (NYSE: MLT) lost $1 1/2 to $5 7/8 after announcing that it expects to report Q4 EPS of $0.13 before charges, down from $0.23 last year. The company cited lower earnings in semiconductors because of poor markets in the Asia-Pacific region among the culprits.
Swedish mobile communications technologies firm Ericsson (Nasdaq: ERICY) lost $1 5/16 to $24 3/4 this morning. The company said Q1 net income fell to 905 million kronor from 1.806 billion kronor a year ago and said full-year 1999 earnings will be below last year's levels despite an expected "stronger second half."
Consumer products maker Sara Lee Corp. (NYSE: SLE) fell $2 15/16 to $22 15/16 after the company said it expects to report full-year fiscal 1999 EPS between $0.03 and $0.05 below Wall Street's current $1.25 estimate in large part because of a product recall at one of the company's packaged meat plants. Sara Lee reported fiscal Q3 EPS of $0.26, in line with estimates and $0.03 better than a year ago.
Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADAC) put away $6 9/32 to $6 9/32 after it said it expects Q2 revenues to be between 2% and 8% lower than Q1's $94.3 million, leading to "a significant decline" in EPS. Among the reasons cited by Adac for the shortfall were delays in recognizing revenue under a recently adopted revenue recognition policy and a weakening of market demand, particularly in nuclear medicine. Adac expects Q3 and Q4 revenues to disappoint as well.
Wireless handsets wholesaler and retailer CellStar Corp. (Nasdaq: CLST) dimmed $5/8 to $8 7/16 after the company said last night that President and COO Richard Gozia and CFO Evelyn Miller resigned to pursue other interests.
Thermal imaging and broadcast camera systems company FLIR Systems (Nasdaq: FLIR) floated down $3 7/8 to $12 1/4 after announcing that the company expects to report a Q1 loss of as much as $0.18 per share. Five analysts surveyed by First Call were looking for a $0.03 per share profit. CEO Ken Stringer said the shortfall is primarily attributable to reduced orders from government customers.
Bell Atlantic (NYSE: BEL) down $1 5/8 to $56 7/8; Q1 EPS $0.73 (before charges) vs. $0.66 last year; estimate: $0.73
Black & Decker (NYSE: BDK) down $4 1/4 to $54 1/4; Q1 EPS $0.44 vs. $0.29 last year; estimate: $0.35
Drug Emporium (Nasdaq: DEMP) down $2 to $7 7/16; fiscal Q4 EPS $0.04 vs. $0.05 last year; no estimate
Hypercom Corp. (NYSE: HYC) down $15/16 to $5 13/16; fiscal Q3 EPS loss of $0.11 vs. gain of $0.11 last year; estimate: loss of $0.08
Xerox (NYSE: XRX) down $2 3/4 to $57 3/8; Q1 EPS $0.48 vs. $0.42 last year; estimate: $0.48
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