Ups and Downs Plus Top News (QuickNews) October 11, 1999

Motley Fool QuickNews

Monday 10/11/99

Closing Market Numbers

DJIA        10648.18    -1.58    (-0.01%) 
S&P 500      1335.21    -0.81    (-0.06%)
Nasdaq       2915.96   +29.39    (+1.02%)
Russell 2000  430.19    +2.48    (+0.58%)
30-Year Bond      99     unch  6.20 Yield

Today's Market Movers:


Enterprise application integration specialist New Era of Networks (Nasdaq: NEON) lit it up for a $5 5/16 gain to $27 1/2 after saying its Q3 loss will be in line with the loss of $0.18 per share expected by analysts. Revenues, which will not include any royalty revenue from its joint-marketing channel with IBM (NYSE: IBM), will rise 15% sequentially and 70% year-on-year to the $30 million to $32 million range.

Supply chain and e-business management software provider i2 Technologies (Nasdaq: ITWO) gained $3 to $51 15/16 after unveiling its TradeMatrix "intelligent business portal" and announcing licensing deals with Alliant Foods and Caterpillar (NYSE: CAT). Late yesterday, the company reported Q3 EPS of $0.12 (excluding charges), up from $0.03 a year ago and ahead of the Zacks mean estimate of $0.10. Prudential Securities and BancBoston Robertson Stephens raised their ratings on the firm today.

Personalized e-business applications developer BroadVision (Nasdaq: BVSN) gained $10 13/16 to $182 13/16 after discount retailer Wal-Mart (NYSE: WMT) said it will use the company's applications for the relaunch of its website and its Sam's Club e-commerce initiatives.

Mobile device management and synchronization products developer Puma Technology (Nasdaq; PUMA) clawed $13 1/2 higher to $35 1/8 after saying it will launch a free Internet-based service in the first quarter of 2000 that will allow anyone with online access to keep PC applications, mobile devices, and Web-based content synchronized from one central Internet address.

Gigabyte Ethernet switches maker Extreme Networks (Nasdaq: EXTR) raced $4 7/8 higher to $76 1/4 after saying its fiscal Q1 EPS will be between $0.07 and $0.08, topping its internal expectations and the First Call mean estimate of $0.05.


Portal company Yahoo! (Nasdaq: YHOO) fell $10 3/4 to $181 3/8 after the lock-up period related to stock issued in connection with the company's acquisition of GeoCities earlier this year expired, allowing certain insiders to sell their shares as they please.

Polymer and specialty products manufacturer CK Witco Corp. (NYSE: CNW) melted $4 11/16 to $9 13/16 after saying increased costs and weakness in several of its business areas will lead to Q3 EPS between $0.16 and $0.18 and Q4 EPS between $0.06 and $0.08, excluding charges. The company was expected to earn $0.28 in Q3 and $0.18 in Q4, according to analysts surveyed by First Call.

Industrial automation and plant efficiency software maker Datastream Systems (Nasdaq: DSTM) sank $3 7/8 to $8 15/16 after the firm said its failure to close several Asian and European sales in the quarter will lead to cash earnings between $0.10 and $0.12 per share, short of the $0.13 to $0.17 that the company said analysts had been anticipating.

Employee and executive benefits insurer Clark/Bardes Holdings (Nasdaq: CLKB) slid $3 9/16 to $14 1/8 after saying the delay of some revenues until the fourth quarter will result in third quarter EPS between $0.08 and $0.10, shy of the First Call mean estimate of $0.15. However, the company said its fourth quarter results should top estimates and added that it is on track to hit expectations for the full year.

Workers' compensation and small business insurer Mutual Risk Management (NYSE: MM) slumped $1 to $10 5/8 after Legg Mason analyst Hugo Warns cut his rating on the company to "outperform" from "buy."

Today's Top Stories:

FOOL PLATE SPECIAL An Investment Opinion
Ask Jeeves Answers Microsoft's Questions
By Dave Marino-Nachison (TMF Braden)

OK, we'll admit it: Ask Jeeves' (Nasdaq: ASKJ) online question-and-answer service has been the butt of a few jokes around here at Fool HQ.

Can you blame us? After all, the website's very interface is begging for mockery, asking users to type in a question -- in plain and simple English -- and wait for it to come up with links that will, hopefully, point toward an answer.

So as Fools, you'll forgive us if we sometimes get a little punchy from too many late nights on the message boards and take a break to ask Jeeves "Where are my pants?" (some interesting suggestions) or "Qui�n es mas guapo, Lorenzo Lamas o Ricardo Montalban?" (not much help there).

Alas, the question "When will your company turn a profit?" is gently parried.

But by focusing our energies on Ask Jeeves' consumer search engine, there's a chance we're overlooking the one aspect of the company's business that could distinguish it significantly more than a cartoon of a butler ever would.

Today's news involving an expanded deal with software giant Microsoft (Nasdaq: MSFT) not only sent Ask Jeeves' shares up more than 30% but drew attention to a small but growing piece of the company's revenue pie: its corporate question answering service. Microsoft is ramping up the integration of Ask Jeeves' interface on its Personal Online Support page -- terms of the deal weren't disclosed -- which the company said gets more than 250,000 questions daily.

For reference purposes, Ask Jeeves as a whole answered an average of just over a million questions daily in Q2, the vast majority of them by the consumer site. The corporate unit, though, counts per-answer fees among its revenue streams, while the consumer area is supported by advertising and partner fees.

Trying to analyze the impact of the corporate answering service on Ask Jeeves' results is difficult given its very brief operating history.

What we do know is this: For the second quarter ended June 30 -- the first period in which the two divisions ran as separate business units -- the corporate operation accounted for 30% of revenues (the consumer site makes up the rest), up from 6% in Q1.

Ask Jeeves didn't turn a gross profit in Q1 but did nearly 16% in Q2. It doesn't appear that the corporate division was responsible for that, however. Customization and installation of the corporate service requires more work and time -- as much as five months -- as it requires considerable specialization and interaction with the customer. Ask Jeeves outsources much of that work but has been extra-cautious because of quality control concerns. That may in part explain why the corporate division couldn't manage a gross profit in Q2.

Still, the corporate service operates on a contract basis (usually one year), so there is the potential for a more regular revenue stream. The flip side of this is that for many companies it might not make sense to use the Ask Jeeves offering as it's most valuable for large companies with broad, complex web sites, such as BellSouth (NYSE: BLS), Compaq (NYSE: CPQ), Dell (Nasdaq: DELL), and Office Depot (NYSE: ODP) -- all users of Ask Jeeves. That could constrain the market opportunity considerably.

Nevertheless, that such well-known and respected companies are on board with Ask Jeeves speaks well to the potential and acceptance of the company's interface and should provide it with the support to collect additional customers. It also suggests that Ask Jeeves is actively looking for ways to find new ways to leverage its technology and pick up new revenues. The corporate service is clearly a work in progress, but the progress shown since the division launched about a year ago is encouraging.

Ask Jeeves, as an investment, is still by most measures a highly speculative place to put one's money. But for those who are interested in this and other new and quickly changing companies -- and who plan on actually doing their research before sending a ticker symbol to their online brokerages -- it pays to read 10-Ks and other sources of corporate information carefully.

In the case of Ask Jeeves, to evaluate the company purely based on its consumer-focused publicity might end up doing both it and your account balance a pretty gross disservice.

Darkness Falls at Knight/Trimark
By Brian Graney (TMF Panic)

Market maker Knight/Trimark Group (Nasdaq: NITE) woke up to a bad hangover today, shedding about 12% of its share price after warning that its third quarter earnings per share will come in lower than expected at $0.17 to $0.19.

The company's shares have lost traction recently as observers took turns speculating how lower trading volumes in the company's bread-and-butter markets during the summer months would impact the firm's earnings picture. Wall Street analysts had ratcheted down expectations, but they obviously didn't go far enough. The First Call mean EPS estimate before the warning was $0.30, down from $0.37 in mid-September and $0.42 in mid-August but still suggesting a heady 130% year-over-year growth rate.

With the new guidance in hand, Knight/Trimark is set to report year-over-year earnings growth between 31% and 46% and revenue growth of 49% in what was by all accounts an absolutely crummy quarter for e-brokers and market makers alike. Those growth rates appear pretty lame when stacked up against the triple-digit advances the company sported in the first two quarters of the year. Then again, any mature business in its right mind would kill for that kind of "weak" growth in today's earnings growth rate-obsessed investing environment.

The problem, of course, is that Knight/Trimark is anything but a mature business. The rampant growth of the online brokerage industry coupled with an unabating investor enthusiasm for stocks have driven demand for the company's trade executing services through the roof. The stock price naturally followed suit, until the trading slowdown this summer took some of the wind out of the company's billowing sails.

Valuing a company in hypergrowth is not the easiest thing in the world to do. In the end, many investors end up falling on one side or the other of the "too rosy" or "too pessimistic" expectations divide. Individual investors shouldn't beat themselves up too much about their failings in this area -- many professionally paid analysts whose job is to figure these things out can't do it either. Knight/Trimark offers a stellar example of this phenomenon: Sell-side analysts covering the stock were basing their opinions on a single-shot valuation approach that more often than not relied on the all-too-common bedfellows of earnings multiples and expected growth rates.

Relating the price-to-earnings ratio to expected growth rates (or PEG analysis) has its benefits, but it loses a good deal of its utility when used to value a company like Knight/Trimark, where the main EPS growth variable is anything but known even one quarter down the road. Stressing the company's "unique position in the eBrokerage industry" and using that unquantifiable attribute to justify that the share price should trade at a 50% to 100% premium to the multiple of the entire U.S. stock market -- as one sell sider did recently -- just ain't gonna cut it.

Eventually, the issue of valuation goes back to projecting future cash flows. With this in mind, investors interested in trying to figure the appropriate value to place on a company like this should focus on the main value drivers and how the overall business model lends itself to improved value creation over time. When the company's earnings report comes out and the situation can be more thoroughly analyzed, investors should spend their time thinking about how Knight/Trimark can leverage its low-cost, large-scale position in the market making business to higher returns over time, rather than pondering whether the company can hit a certain analyst's often shaky short-term assumptions.

More of Today's Best:

Boeing Lights Up Sea Launch
By Richard McCaffery (TMF Gibson)
-- Aerospace and defense giant Boeing (NYSE: BA) started commercial operation of its long-awaited Sea Launch services company with the October 9 launch of a DirecTV satellite. The Sea Launch rocket successfully lofted the spacecraft into orbit after liftoff from its floating platform near the equator. Sea Launch, a rocket that's carried on a gigantic ship, takes advantage of the fact that it's cheaper to launch many satellites from the equator because the spacecraft burns less fuel getting into final orbit. Fuel plays a major role in how much a satellite weighs, which in turn affects its cost, capability, and life expectancy.

FOOL ON THE HILL An Investment Opinion
Visor Steals the Show at Internet World
By Yi-Hsin Chang (TMF Puck)
-- Last Thursday, I spent a couple of hours at Fall Internet World '99 at the Javits Convention Center here in Manhattan. The exhibition was huge. I don't pretend that I saw everything at the show -- far from it. But I did learn about some very interesting Internet businesses, including several that were downright exciting. The most exciting and, I dare say, the most popular booth was that of Handspring. A large crowd gathered around to see demonstrations of the young company's new Visor handheld organizer.

PeopleSoft to Buy Vantive
By Dave Marino-Nachison (TMF Braden)
-- New PeopleSoft (Nasdaq: PSFT) CEO Craig Conway, who moved up to the top spot at the enterprise software maker late last month after founder David Duffield stepped aside, may have had to contend with the lukewarm reception new heads sometimes get when companies in trouble try to right themselves with inside, rather than outside, help. Conway moved quickly to attempt to generate excitement, today announcing plans to buy front-office automation software developer Vantive Corp. (Nasdaq: VNTV). Each share of Vantive will be swapped for 0.825 shares of PeopleSoft. Based on PeopleSoft's $17.25 per share close of Friday, the $433 million deal values Vantive at about $14.23 per share, a 59% premium.

Global Crossing Wraps Up Racal Telecom Buy
By Richard McCaffery (TMF Gibson)
-- Internet and telecommunications provider Global Crossing (Nasdaq: GBLX) has reached an agreement to acquire the telecommunications business of Racal Electronics for $1.65 billion in cash and debt. Global Crossing, which completed its multibillion dollar acquisition of Frontier Corp. in late September, outbid telephone and data services company Energis Plc. to claim a valuable portion of Racal, the London-based defense electronics company, according to news reports. Racal operates a 7,300 kilometer fiber optic network in the United Kingdom that will expand Global Crossing's network solidly into Europe. It gives Global strategically located fiber connections to every major city in the U.K., which is the fourth largest and fastest growing international telecommunications market.