Jumpin Jack KLAC
Plus, the focus of AOL and AMZN
by Jeff Fischer

ALEXANDRIA, VA (July 28, 1998) -- Some days it's better to anticipate the morrow than to reflect on the present. As Dean Acheson said, "The best thing about the future is that it comes one day at a time."

For those fully invested in stocks and not planning to be net buyers over the coming years, today was a small step backward rather than forward. Surrendering to continued downward momentum, the S&P lost 1.5% and the Nasdaq plummeted 2%! (That's Wise-speak, meant to sell newspapers. Nasdaq has still gained 20% this year and 163% the past four years, not to mention the past ten-year performance... not to mention it, because I don't have it handy.)

The Fool declined 2.6% today, courtesy of the ever-volatile twosome -- AOL and Amazon.com. We can't complain about the month of July, though. The port is up 4.7% while the S&P has declined 0.33%. This follows an extremely strong June for the Fool, too (up 24%), so the question is, "Can we hold this month's gain?" Imagine a tightrope walker in a three-ring circus wobbling left and right above the crowd. Three days time (three small steps into the future) hold the answer for the month.

Today KLA-Tencor (Nasdaq: KLAC) announced fourth quarter results that topped estimates by a few pennies per share, sending the stock 6% higher. The company reported fourth quarter revenue of $253 million and net income of $23 million, or $0.26 per share before charges. Earnings per share were nearly double this amount one year ago, on slightly higher revenue.

For the past year, KLA earned $156 million on $1.2 billion in revenue, up from $151 million in net income and $1 billion in sales last year. Earnings per share were flat year-over-year, right around $1.76 per share. The stock trades at 16 times trailing earnings and 24 times 1999 estimates.

The company shared that new orders for the fourth quarter were lower than anticipated (earnings estimates were recently reduced for this past quarter), with weakness across the world. The company's margins declined as more lower-margin service revenue made up sales. KLA remains financially strong, with $723 million in cash and little debt, and at least it has remained highly profitable in this industry downturn. That doesn't mean a market-beating stock, though. We reviewed KLA yesterday.

America Online (NYSE: AOL) has declined 18% from its $140 high of last week, closing at $114 today. Based on likely subscriber, advertising, and commerce revenue, the shares are projected to be worth about $180 in the next two years. That doesn't matter to Wise investors right now, though -- as long as the market is declining, they want to sell. They'll aim to buy back later (after taxes, a handful of hair, three boxes of Tums, and a few extra years of aging).

Consider AOL's largest current commerce partners in the list below. On the left is the partner, the middle number represents the minimum amount being paid to AOL, and the final column is the duration of the contract. All of these deals were signed in 1997 or 1998. The money will be paid over the time of the contract.

AOL Minimum Length Partner in millions of contract Tel-Save $144 4 years Cendant 50 4 Barnes & Noble 40 4 Preview Travel 32 5 Intuit 30 3 800 Flowers 25 4 N2K 22 3 Kodak 21 3 Cybermeals 20 4 Software.net 20 3 Amazon.com 19 3 J-Fax 16 3 Realtor.com 14 3 Fragrance Counter 12 4 Videos Now 12 3 Amer. Greetings 9 4 Provident Amer. Ins. 8 1 Cyberian Outpost 5 1 Infonautics 4 3

Total guaranteed: $473 million

America Online is guaranteed at least $473 million from these partners, and that doesn't include revenue sharing, which is a factor in many of these deals. What I find most interesting about the list, though, is the lack of large names. Kodak, Barnes & Noble, Intuit, Cendant, and American Greetings are the only companies on the list that border on "blue chip" status (and calling Cendant that right now is sure to raise some eyebrows). The list is highly representative of the youth of the Internet. In the years ahead, I wouldn't be surprised to see Sears on it, or the Gap Inc., or heck, the Texas Board of Tourism.

AOL has tremendous opportunity to leverage its real estate and its community. Some of the companies on this list have been on AOL for years, but they only recently signed large deals in order to guarantee eyes -- they're willing to pay to be on the mainpage, or any high traffic page. AOL will make a mint charging real estate fees, through revenue sharing, and by sometimes charging a fee per transaction accomplished.

America Online built a successful community and was able to crush Prodigy and CompuServe because management realized that it should be a consumer company first, not a technology company. Technology is AOL's underlying strength and represents much of the company's expenses, but (like the machinery that makes Disney World work) the consumer only sees the elegantly simple facade -- the lively community and its easy interface. Amazon.com (Nasdaq: AMZN) understands this as well. Amazon's technology has revolutionized e-commerce, but the site is about the consumer experience, not the technology behind it.

Perhaps more than any company on the Internet, Amazon is focused on the customer experience first and foremost, which creates consumer loyalty. 63% of sales last quarter were repeat buyers, while at the same time the company experienced the largest absolute rise in new customers in one quarter -- gaining 900,000 new accounts to 3.1 million.

Going through Amazon's earnings from last week, the company was net cash flow positive to the tune of $1.1 million. While losing $21 million for the quarter, Amazon remained cash flow positive -- a better feat than Iomega has accomplished in the past two quarters. Amazon is able to do this because it essentially has no accounts receivable.

All sales revenue is paid almost immediately, while Amazon enjoys the luxury of a 45-day net payment schedule to suppliers. It holds low inventory, has cash flowing in the door before it even ships an order, and pays the supplier nearly seven weeks later. As the Lunchtime News wrote in an article called "WSJ Takes on Amazon" two weeks ago, Amazon has often achieved better cash flow than the number one and two booksellers in the country.

Today TMF Nico shares thoughts on the quickly changing Internet industry, called "Slippery When Online." And tonight the Fool on the Hill column in the Evening News discusses Starbucks (Nasdaq: SBUX).

Enjoy the evening! And as for tomorrow, per the opening of this column... actually, there's this quote to complement Acheson's:

"I never think of the future; it comes soon enough." -- Albert Einstein

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07/28/98 Close

Stock Change Bid ---------------- AMZN -6 9/16 118.94 AOL -3 114.38 T - 15/16 59.06 DJT --- 6.94 DD - 13/16 61.13 XON -1 3/4 69.69 INVX --- 13.50 IP -1 42.94 IOM + 1/16 5.56 KLAC +1 3/4 28.94 LU -2 1/8 92.25 SBUX + 1/16 46.25 COMS -1 1/16 24.88 TDFX + 1/2 15.50
Day Month Year History Annualized FOOL -2.61% 4.73% 49.45% 401.55% 49.98% S&P: -1.49% -0.33% 16.46% 146.54% 25.46% NASDAQ: -1.93% 0.06% 20.73% 163.25% 27.55% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 114.38 3045.25% 9/9/97 580 Amazon.com 19.11 118.94 522.36% 5/17/95 1960 Iomega Cor 1.28 5.56 334.43% 10/1/96 84 LucentTech 23.81 92.25 287.47% 8/12/96 130 AT&T 39.58 59.06 49.23% 4/30/97 -1170*Trump* 8.47 6.94 18.08% 2/20/98 200 Exxon 64.09 69.69 8.73% 2/20/98 215 DuPont 59.83 61.13 2.16% 2/20/98 270 Int'l Pape 47.69 42.94 -9.97% 7/2/98 235 Starbucks 55.91 46.25 -17.28% 8/24/95 130 KLA-Tencor 44.71 28.94 -35.28% 1/8/98 425 3Dfx 25.67 15.50 -39.61% 8/13/96 250 3Com Corp. 46.86 24.88 -46.92% 6/26/97 325 Innovex 27.71 13.50 -51.28% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 81206.25 $78624.38 9/9/97 580 Amazon.com 11084.24 68983.75 $57899.51 5/17/95 1960 Iomega Cor 2509.60 10902.50 $8392.90 10/1/96 84 LucentTech 1999.88 7749.00 $5749.12 8/12/96 130 AT&T 5145.11 7678.13 $2533.02 4/30/97 -1170*Trump* -9908.50 -8116.88 $1791.63 2/20/98 200 Exxon 12818.00 13937.50 $1119.50 2/20/98 215 DuPont 12864.25 13141.88 $277.63 2/20/98 270 Int'l Pape 12876.75 11593.13 -$1283.63 8/24/95 130 KLA-Tencor 5812.49 3761.88 -$2050.62 7/2/98 235 Starbucks 13138.63 10868.75 -$2269.88 1/8/98 425 3Dfx 10908.63 6587.50 -$4321.13 6/26/97 325 Innovex 9005.62 4387.50 -$4618.12 8/13/96 250 3Com Corp. 11715.99 6218.75 -$5497.24 CASH $11876.47 TOTAL $250776.09

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