Fool.com: Ups and Downs Plus Top News (QuickNews) October 14, 1999

Motley Fool QuickNews

Thursday 10/14/99

Closing Market Numbers

DJIA          10286.61  +54.45   (+0.53%) 
S&P 500        1283.42   -2.13   (-0.17%)
Nasdaq         2806.84   +5.57   (+0.20%)
Russell 2000    419.31   -0.01   (-0.00%)
30-Year Bond  97 11/32  -19/32  6.32 Yield

Today's Market Movers:

UPS

Direct PC marketer Gateway (NYSE: GTW) picked up $3 13/16 to $55 1/8 after introducing its Astro PC, a $799 all-in-one model similar in design to Apple Computer's (Nasdaq: AAPL) popular iMac.

Worldwide fiber optic network builder Global Crossing (Nasdaq: GBLX) gained $2 3/16 to $37 after Goldman Sachs started coverage of the company by placing it on its "recommend list" and setting a 12-month price target of $50 per share. Conveniently, Bloomberg News also reported that Goldman Sachs is arranging a $762 million loan to Global Crossing in connection with the firm's planned acquisition of Racal Electronics' phone network in the U.K.

Online mobile electronic devices provider iGo Corp. (Nasdaq: IGOC) jumped $2 1/16 to $14 1/16 in its first day of trading after selling 5 million shares in an initial public offering at a price of $12 per share.

Facilities-based communications services provider MGC Communications (Nasdaq: MGCX) rang up $2 3/16 to $31 after naming former Frontier Corp. (NYSE: FRO) President and COO Rolla Huff as its new president and CEO. Goldman Sachs raised its rating on the firm to "recommend list" from "market outperform."

DOWNS

Conglomerate Tyco International (NYSE: TYC) slid another $10 to $87 after dropping 6% yesterday on continued concerns of alleged accounting irregularities at the acquisition-happy company. In a conference call this morning, CEO Dennis Kozlowski unsuccessfully tried to put an end to the matter by calling the reported suspicions "false, unfounded, and malicious."

Traders took a bite out of Tastykake baked snacks maker Tasty Baking Co. (NYSE: TBC) today, sending the company's stock down $1 3/16 to $10 9/16 following a warning late yesterday that Q3 EPS will come in between $0.07 and $0.09, missing the Zacks mean estimate of $0.16.

Broadband Internet access systems designer Redback Networks Inc. (Nasdaq: RBAK) fell $5 11/16 to $129 3/8 after some 12 million shares held by insiders were reportedly freed from the lock-up related to the company's initial public offering in May.

Railroad and flow control products manufacturer ABC-NACO (Nasdaq: ABCR) was run over for a $3/4 loss to $11 after saying industrywide issues in the railway sector will lead to lower-than-expected sales and earnings throughout the remainder of the year.

Today's Top Stories:

Intel Says DSP the Key to 3G
By Brian Graney (TMF Panic)

Two days after reporting its Q3 earnings report, chipmaker Intel Corp. (Nasdaq: INTC) jumped back into the spotlight today by announcing that it will acquire wireless communications baseband chipsets supplier DSP Communications (NYSE: DSP).

Despite being the proud owner of a stock whose price has appreciated 21% so far this year, Intel is whipping out its wallet and paying $1.6 billion in cash for the company, or $36 per share. The sweet 28% premium to DSP's closing price of $28 per share last night may seem a little steep for a company with only $131 million in revenues and $31 million in operating profits last year. Then again, DSP's stock has been all over the place in the past few years, rising to as high as $31 7/8 this past June. Predictably, the company's shares jumped skyward this morning.

Unlike recent Intel acquisitions where the main aim has been to bulk up the firm's growing Network Products Division, DSP will instead be folded into Intel's Computing Enhancement Group, which used to be the old Semiconductor Products Group. This group focuses on the company's core logic PC chipsets, flash memories, and embedded microprocessors and is also the home to Intel's StrongARM line of processors. With DSP on board, Intel can take its design expertise in these areas and make a run at the exploding market for cellular communications technologies.

Traditionally, DSP's main business has revolved around providing Personal Digital Cellular (PDC) chipsets to Japanese digital cellphone makers and TDMA chipsets, which is the digital standard supported by a number of wireless carriers in the U.S. and South America. However, the company has been making great strides lately with its new CDMA chipsets, which began shipping last year.

In Q2, CDMA chipsets represented 19% of total sales, up from 1% in Q1, according to Warburg Dillon Read. Without a doubt, the growth prospects of the CDMA business and DSP's development program for emerging third generation (3G) wireless technologies are what attracted the chip giant to the company in the first place.

As with its acquisition of communications chipmaker Level One earlier this year, Intel is essentially spending a boatload of money for a heap of intellectual property and design expertise. Like Level One, DSP does not own any fabrication facilities, relying on independent foundries instead. That keeps the economic profile of the business as "light" as a feather, with net property and equipment representing a mere 4% sliver of total assets last year. So, judging the purchase price in terms of the tangible assets Intel will be receiving in return is an analytical waste of time.

In terms of the R&D know-how Intel is getting its hands on, the deal's value is pretty comparable to the price paid for Level One. At the end of last year, DSP had 230 employees, including 164 involved in R&D. Based on the $1.6 billion purchase price, Intel is paying about $9.7 million per engineer. On the other hand, Level One's 271 engineers fetched $8.1 million apiece based on the company's $2.2 billion price tag. Obviously, top-notch expertise in cutting-edge technologies doesn't come cheap, and Intel has proven this year that it is willing to pay up to get in on what it feels will be the dominant technologies in the not-too-distant future.

The financial details of the deal aside, perhaps the most intriguing aspect of today's news is what the combination of Intel and DSP will mean down the road for current market darling Qualcomm (Nasdaq: QCOM), which has established itself as the CDMA technology leader. Currently, DSP's products are really the only alternative to Qualcomm's CDMA chipsets. With the competition's breath now much stronger on its back, Qualcomm's shares slipped a tad this morning.

Qualcomm definitely has a large head start in the CDMA area, as DSP has only rounded up five CDMA customers so far. But as the global wireless industry transitions to 3G and embraces new technologies such as Wideband-CDMA, Intel's enormous financial resources could make the competition interesting. If they haven't already, technology investors should dial up this industry and pay close attention.


FOOL PLATE SPECIAL An Investment Opinion
VISX Keeps On Burnin'
By Dave Marino-Nachison (TMF Braden)

Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) continued its impressive earnings momentum with last night's announcement of third-quarter results that, at $0.36 per share, beat last year's mark of $0.22 and came in two pennies better than First Call's consensus expectation.

Revenues for Q3 were $79.7 million, up more than 120% from last year's $35.8 million figure. Key profitability measures were upbeat: Gross margins improved to 78.1% from 77.2%, while operating margins were 48.1%, up from 44.2% a year ago. VISX boosted its cash hoard by $36.6 million to $225.9 million during the quarter.

VISX watchers shouldn't just concentrate on the big numbers, though, but pore over the company's revenue breakdown of system sales and license, service, and other revenues. As explained in a September Foolish Duel over VISX's prospects, the company not only sells and leases its laser treatment systems to physicians, but collects incremental revenues from each procedure performed through its "VisionKey card" that must be used to operate the machines.

It's the per-procedure revenue VISX is counting on to drive high-margin growth in the future as more and more of the millions and millions of corrective-eyewear-sporting Americans decide to opt for their procedure. "Because VISX grows as a result of increased procedure volume at our customers' sites," said Chairman and CEO Mark Logan in a statement, "this model aligns our clinical and financial incentives with those of our customers and the consumer."

By this measure, Q3 growth was even more impressive. While system sales revenue rose 91.4% to $23.3 million, license, sales, and other revenue (which covers the per-procedure fees and other items) jumped 138.1% to $56.3 million. Also notable is that license, service, and other revenue accounted for a larger proportion of VISX's total topline than it did a year ago, reaching 70.7%. In 1998's Q3, it was 66%.

Considering that laser shipments actually constrain margins in the short term -- and VISX shipped 90 in Q3 -- the company's profitability upside looks borderline exponential. The company's market size is estimated at more than 150 million potential patients and VISX has only performed 1 million operations. There's definitely more room to grow.

Logan was given an opportunity to crow on CNBC's "Squawk Box" this morning, and he took it.

"We are going to grow very rapidly," he said. "It's been about 100% a year in terms of the procedure growth year-to-year. I think we can continue that for a while. Then the percents get a little ridiculous, in terms of the numbers, but we've got such a big market here. And a lot of people are just becoming aware."

With VISX's impressive momentum, execution, and leading market position, the future looks bright; so bright, investors might wanna wear shades. Preferably -- to VISX -- shades without corrective lenses.


More of Today's Best:

FOOL ON THE HILL An Investment Opinion
Farewell, Fool
By By Dale Wettlaufer (TMF Ralegh)
--Longtime readers may wish to know I have come to a fork in the road and that I intend to take it. The time has come for me to move on after a happy four-year relationship with The Motley Fool.
FULL STORY >>

Unisys Walloped on Slow Sales
By Richard McCaffery (TMF Gibson)
-- Shares of systems integration and hardware company Unisys (NYSE: UIS) got clobbered in trading -- falling around 35% -- as Q3 revenue growth came in unexpectedly slow. Sales at the Blue Bell, Pennsylvania integrator increased just 4% to $1.87 billion from $1.79 billion a year ago. Company officials attributed poor top line growth to currency issues as well as weakness in its network services and NT services lines, in part because technology spending is tight during the Y2K transition. Some analysts expected top line growth twice as high, so, look out below.
FULL STORY >>

BREAKFAST WITH THE FOOL
Apple Beats Lowered Expectations
By Richard McCaffery (TMF Gibson)
-- Strong sales of Apple's (Nasdaq: AAPL) colorful iMac computers and newly introduced iBook portables powered Apple to a better fiscal fourth quarter than expected after an earnings warning three weeks ago. The company that introduced the world to the personal computer two decades ago reported earnings (minus nonrecurring items) of $0.51 per diluted share on net income of $90 million, and sales of $1.3 billion. Analysts polled by First Call/Thomson expected earnings of $0.45. The company said the outlook for a strong fiscal first quarter, however, is very good.
FULL STORY >>

Black Box Just Beats Street
By Dave Marino-Nachison (TMF Braden)
-- Shares of private-label computer communications and networking products and services marketer Black Box Corp. (Nasdaq: BBOX) were up nearly 10% today following news of strong fiscal second-quarter results. Revenues for the quarter increased 49% to $117.9 million from $79.1 million last year. EPS was $0.62, well ahead of the $0.49 for the same period last year, and a penny better than First Call's seven-analyst consensus estimate. Free cash flow for the quarter was $7.9 million. There were some reasons for caution, however. Gross margins fell to 43.4% from 48.8% while operating margins also moved back slightly, slipping to 16.8% from 18.4%.
FULL STORY >>