Friday, July 23, 1999
DJIA 10926.48 -42.74 (-0.39%) S&P 500 1358.71 -2.26 (-0.17%) Nasdaq 2682.53 -1.91 (-0.07%) Russell 2000 448.56 -2.93 (-0.65%) 30-Year Bond 89 24/32 -10/32 5.99 Yield

An Investment Opinion
by Matt Richey

Putting the Dollar in Dot.com

Sun Microsystems (Nasdaq: SUNW) reported strong earnings after the bell last night, turning in fourth quarter profits of $0.48 per diluted share, up 30% from a year ago and two cents ahead of estimates. The company's aggressive "dot in dot.com" marketing campaign has made Sun a mindshare leader in high-end hardware and services offerings for Internet development and connectivity. The company now bills itself as a "pure play Internet computing company." Such a description may not be too far-fetched, considering that Sun equipment is now used by 15 of the top 20 Internet Service Providers (ISPs) and runs 80% of Internet backbone traffic, according to Goldman Sachs research.

During Q4, revenues grew faster than expected, rising 22% over what was a strong year-ago quarter. Product revenues grew by a healthy 20%, but the real action was in the enterprise service arena, which experienced a 38% jump in revenues. Sun's e-commerce services are booming as companies scramble to get "dot.comed." More than half of the quarter's new hires were in services, and the overall workforce expanded by 13% for the year.

For Sun, fiscal 1999 was a record year by a number of metrics, and management was "very pleased" with both business growth and operational efficiency. Revenues reached an all-time high of $11.7 billion, up 20% from the prior year and once again paced by 38% growth in enterprise services. For the past five years, Sun has grown its revenues at a compound annual rate of 20%. Management attributes much of that growth to gains in market share, especially against primary competitors IBM and Hewlett-Packard.

Moving down the income statement, SG&A expenses were held in check, rising only 14%. Spending for research and development (R&D) increased 14% as well, to $1.3 billion, or 11% of revenues. All R&D spending is now focused on "products and disruptive technologies for this new Internet age." Sun chairman and CEO Scott McNealy opined that "effectiveness on the return for our R&D dollar is second to none." Even as Sun invests aggressively in its future, today's bottom-line is in great shape. Excluding acquisition-related charges, fiscal year diluted earnings per share increased 23% to $1.42. Net margins were up to 9.9%, having increased steadily over the past decade from only 3.4% in 1989.

The income statement's strong results are confirmed on the balance sheet. CFO Michael Lehman rightly noted that there are "improvements in just about every balance sheet metric you can point to." Most noteworthy was the 11% decline in year-over-year inventory levels. Days in inventory declined from 30.1 to 20.9, leading to a 22% improvement in the cash conversion cycle (number of days for cash to move through a complete product cycle), which now stands at 44.5 days. Net cash (cash minus total debt) now stands at $2.2 billion -- an increase of $1.1 billion in the past year. In fact, the increase in net cash actually surpasses annual reported net income of $1.03 billion.

Even with an increasingly cash-rich balance sheet, during Q4 the company enacted a shelf-registration for up to $4 billion in debt or other securities due to the expanding array of investment opportunities within the industry. CFO Lehman stated, "There's no question that the business of e-commerce and service providers continues to expand, and that bodes well for us." The shift to e-business is clearly playing into Sun's core strengths of industrial-grade computing and the services to put it in place. Accelerating revenues, rising profit margins, and an improving balance sheet make Sun Microsystems an interesting prospect at 40x fiscal 2000 earnings estimates of $1.67 per share, according to First Call.


Swedish telecommunications equipment company Ericsson (Nasdaq: ERICY) dialed up a gain of $3 3/16 to $30 13/16 this morning despite saying second-quarter net income fell more than 32% from year-ago levels. "Despite a stronger second half," said company brass in a statement, "we expect income before tax including restructuring charges to be lower than in 1998.... For year 2000, although difficult to predict... Ericsson anticipates an income before taxes better than in 1998."

Supermarket giant Safeway (NYSE: SWY), which agreed to buy Randall's Food Markets for about $1.8 billion in stock, cash, and assumed debt, bagged a gain of $2 3/8 to $53 1/8 this morning. The combined companies expect to have 1999 pro forma revenues of about $30 billion. Safeway sees the deal as neutral to earnings for 12 months and accretive thereafter.

White Cap Industries
(Nasdaq: WHCP), which sells tools and materials to professional contractors, jumped $3 5/8 to $15 1/8 after agreeing to be bought by an affiliate of Los Angeles-based merchant banking firm Leonard Green & Partners. The $16.50 per share cash buyout price represents a 43% premium to yesterday's close.

Digital subscriber line (DSL) technologies marketer, and developer Copper Mountain Networks (Nasdaq: CMTN) shone $14 1/8 to $104 5/8 after the company reported Q2 EPS of $0.09, up from a loss of $0.21 per share last year and beating First Call's four-analyst consensus break-even estimate. "Total revenues and net income for the current quarter exceeded our expectations as the pace of DSL deployments by our customers accelerated rapidly in Q2," said CEO Rick Gilbert, "and we see strong demand for our products continuing through Q3."

Senior housing services company CareMatrix Corp. (Nasdaq: CMDC) checked in $1 1/4 to $11 following the announcement that the company's board voted to consider strategic alternatives possibly involving a leveraged recapitalization. CareMatrix hired director Donald Amaral as a consultant to help with the process.

Medical, personal accident, credit life, and disability and special risk reinsurance company ESG RE (Nasdaq: ESREF) moved up $1 to $15 1/2 after Vontobel U.S. Value Fund manager Ed Walczak told Business Week's "Inside Wall Street" column the shares are ''driven down to ridiculous levels." Also getting small boost from coverage in the column were communications equipment company Andrew Corp. (Nasdaq: ANDW), up $1 1/16 to $21 15/16, and biotech Aronex Pharmaceuticals (Nasdaq: ARNX), up $3/4 to $5 1/2.

Asset management and mutual fund company Pilgrim Capital Corp. (NYSE: PFX) advanced $3 9/16 to $33 1/2 this morning after ReliaStar Financial Corp. (NYSE: RLR) agreed to buy the company in a stock, cash, and assumed debt deal worth about $258 million. The merger agreement calls for the exchange of $12.50 in cash and half a share of ReliaStar stock for each Pilgrim share, in total about a 21% premium to yesterday's close.

Industrial process software and services company Unigraphics Solutions (NYSE: UGS), which reported a $700,000 order from Dunlop Aviation and said test results of its iMAN product data management software on Sun Microsystems' (Nasdaq: SUNW) Enterprise 10000 server were upbeat, added $2 3/4 to $69 15/16 this morning.

Earnings Movers

Digi International (Nasdaq: DGII) up $1 to $12 9/16; fiscal Q3 EPS: $0.15 vs. $0.45 last year; estimate: $0.10

Forte Software (Nasdaq: FRTE) up $15/16 to $12 13/16; fiscal Q1 EPS: loss of $0.02 vs. loss of $0.12 last year; estimate: loss of $0.04

Gateway (NYSE: GTW) up $8 to $70 7/8; Q2 EPS: $0.56 vs. $0.38 last year; estimate: $0.55

General Instrument (NYSE: GIC) up $2 1/4 to $44 3/16; Q2 EPS: $0.24 (before gain) vs. $0.19 last year; estimate: $0.22

Halliburton (NYSE: HAL) up $15/16 to $44 15/16; Q2 EPS: $0.19 vs. $0.55 last year; estimate: $0.17

Rainforest Cafe (Nasdaq: RAIN) up $3/16 to $5 15/16; Q2 EPS: $0.16 vs. $0.18 last year; estimate: $0.16

Starbucks (Nasdaq: SBUX) up $1 9/16 to $25 1/2; fiscal Q3 EPS: $0.13 (before charges) vs. $0.11 last year; estimate: $0.13

Zoran Corp. (Nasdaq: ZRAN) up $1 1/2 to $25 1/8; Q2 EPS: $0.10 vs. loss of $0.10 last year; estimate: $0.05


Look out below! Laser ophthalmology systems developer Sunrise Technologies International (Nasdaq: SNRS) blew up this morning, tumbling $10 1/2, or 70%, to $4 1/2 after an FDA advisory panel voted against recommending approval of the company's LTK correction system for farsightedness "at this time." Sunrise said it will continue to seek approval for the system despite the setback.

Online sports information provider SportsLine USA (Nasdaq: SPLN) was sacked for a $6 1/2 loss to $32 1/2 after reporting a net loss of $0.55 per share for the second quarter, in line with the loss of $0.56 per share expected by analysts surveyed by First Call. Average daily page views increased 58% year-over-year and 24% sequentially to 8.4 million, but that didn't keep Deutsche Banc Alex. Brown from cutting its rating on the company to "buy" from "strong buy."

Hard disk drive supplier Quantum Corp. (Nasdaq: QNTM) was quashed $3 1/4 to $23 5/8 after reporting fiscal Q1 EPS of $0.05, up from last year's $0.02 but a nickel shy of the First Call mean estimate. That estimate had been whittled down from $0.31 last month following a warning from the company that "extremely aggressive" disk drive price declines were hurting profits.

Electronic hardware and software design firm Mentor Graphics Corp. (Nasdaq: MENT) sank $3 1/8 to $9 1/2 after saying the consolidation of its two distinct alternate selling channels into a single channel has hurt sales and will lead to Q2 EPS of about $0.09, excluding charges. Analysts had been expecting the company to earn $0.14, according to First Call.

Voice, video, and data network integration and gateway products maker ACT Networks (Nasdaq: ANET) dropped $1 5/16 to $14 7/16 after posting a fiscal Q4 loss of $0.30 per share (including charges), missing the Zacks mean earnings estimate of $0.06 per share. Net sales slipped 3% from a year ago to $13.2 million. The company said expected orders from two of its larger customers did not pan out due to timing issues.

Video and film editing, finishing, and special effects products maker Avid Technology (Nasdaq: AVID) slumped $3 3/16 to $12 15/16 after turning in Q2 EPS of $0.10 (excluding acquisition-related amortization), down from last year's $0.37 and shy of the Zacks mean estimate of $0.24. The company blamed a difficult industry environment and an adverse sales mix of lower-margin products for the shortfall.

Automated assembly, test, and package systems maker DT Industries (Nasdaq: DTII) slid $2 7/8 to $6 after saying cost overruns and delayed orders by several customers will result in fiscal Q4 EPS between $0.10 and $0.13 (before an $0.83 restructuring charge), which will be in line with analysts' estimates. However, the company said it is only "cautiously optimistic" about future orders due to the unpredictability of a business upswing.

SRAM, DRAM, and Flash memory products maker Alliance Semiconductor (Nasdaq: ALSC) was knocked down $1 5/8 to $7 15/16 after reporting a fiscal Q1 operating loss of $700,000, or about $0.02 per share, as the company was unable to boost revenues late in the quarter due to an availability delay for some of its products. However, Alliance said it expects to see sequential growth in revenues and operating income during the current quarter.

Customer relationship management software developer Clarify (Nasdaq: CLFY) fell $3 5/8 to $37 3/4 after posting Q2 EPS of $0.14, up from $0.05 a year ago and a penny ahead of the Zacks mean estimate. However, First Union Capital Markets cut its rating on the firm to "outperform" from "buy."

Biotech biggie Biogen (Nasdaq: BGEN) slipped $2 11/16 to $69 15/16 following an ABN Amro downgrade to "outperform" from "buy."


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