We've moved through the heart of earnings season now, and several of our Rule Breakers have reported in the past few days. Here's a short summary of the results, along with a year-to-date price check (just for fun). But first, a word from our  portfolio update department, also known as Out Goes the Bad Air, In Comes the Good Air. Or something like that.

As promised last week, we sold all our Celera Genomics (NYSE: CRA) shares. With the $20,563 proceeds and the newly deposited $25,000 for the last two quarters, we bought S&P 500 Depositary Receipts, affectionately known as Spiders (AMEX: SPY). The Port said good-bye to Celera on April 24, and our order was filled in two parts, 100 shares at $16.64 and 1160 shares at $16.30. We bought 410 Spiders at $110.10. We did note this morning's Wall Street Journal with some chagrin, wherein Celera's ex-President J. Craig Venter said:

"My plan from the beginning, once the human genome was sequenced, was to have a scientific nest egg built so I could go back to research and not be absolutely dependent on public funding. Running a company was a necessary evil." 

Evil? Wish he'd told us -- though a few Fool community members suspected this and have been proven correct. Venter may think he has a nice retirement of research and sailing ahead, but now it's going to be clouded with lawyer appointments.

On to happier things!

Amazing Amazon
Amazon.com (Nasdaq: AMZN) beat analyst estimates, posting an operating profit of $2 million on revenue of $847 million. The world's largest online bookstore also upped its second-quarter and full-year guidance, and, in a show of pricing power, lowered book prices again.

Fool Community member howardroark has an excellent review of the quarter here. To quote a small part of his post: "Maybe the biggest high-level takeaway from this report, from my perspective, is that Amazon's core business model is now profitable on a non-seasonal basis despite that it is charging, on average and including shipping, less than traditional brick-and-mortar stores. Yay for e-tail economics."

Year-to-date: Up 53%. (S&P 500 YTD: Down 6%.)

AOL's whale of a loss
AOL Time Warner (NYSE: AOL) posted a first-quarter loss of $54.2 billion, a new U.S. corporate record. Lest you think the company is now bankrupt, however, realize that that total includes a $54 billion non-cash write off to reflect the deflated value of Time Warner since the acquisition.

If you put any credence in pro forma numbers, AOL actually earned $0.18 a share -- a bit ahead of expectations. Read more about it here, and check out David Gardner's (TMF DavidG) call to take heart.

Year-to-date: Down 40%.

Starbucks perks up
Coffee king Starbucks (Nasdaq: SBUX) earned $0.11 a share in the second quarter, excluding one-time charges. That was a 37% increase from the same period last year. The company also perked up the full-year forecast a bit to $0.53-$0.54 a share.

Year-to-date: Up 20%.

Pharma ways
Amgen (Nasdaq: AMGN) earned $341 million, or $0.32 a share, as expected. That represents a 14% increase from last year's first quarter. Our biotech giant also pushed up revenue guidance a few notches, predicting full-year growth of about 20%. Meanwhile, Millennium Pharmaceuticals (Nasdaq: MLNM) lost $0.22 a share in the first quarter, excluding acquisition-related charges, but we don't expect profitability until 2004 or 2005.


Amgen: Down 4%.
Millennium: Down 25%.

While hitting the high points for these stocks, I'll now take a closer look at the first quarter for a personal favorite.

eBay on track
eBay's (Nasdaq: EBAY) earnings release was largely overshadowed by reports the online auctioneer was considering an acquisition of PayPal (Nasdaq: PYPL). No comments from either company, but folks on our eBay discussion board provided some great analysis of the benefits and disadvantages of such a deal.

There were no huge surprises as far as the first-quarter earnings report was concerned, though. The company brought in revenue of $245 million, which is a 12% increase over the prior quarter and a 59% year-over-year increase. Earnings per share came in at $0.18, well above last year's figure of $0.08. Meg Whitman and crew also raised guidance for the full year to a profit of $0.73-$0.75 a share.

One thing I always look for in eBay's 10-Qs and 10-Ks is what's happening with third-party advertising. The company consistently and firmly downplays that revenue stream, probably so the Street won't get its hopes up about how much that area might add to the bottom line in the future. To quote from the 10-K: "We continue to view our business as primarily transaction driven and we expect third-party advertising revenues in future periods to decrease as a percentage of total net revenues, and possibly in absolute dollars."

I view eBay's business as primarily transaction driven (i.e., auctions) also. However, for as long as I've owned this stock, I've been confident that eventually -- and it may still be a few more years -- advertising will be a great source of revenue for the company. Yes, the online ad market has been in the dumps for a long time now... and, yes, eBay's management has been smart so far by placing almost zero emphasis on ad dollars. By setting the bar low, it has been able to ride out the advertising crunch unscathed. But I believe the online ad market will prove to be cyclical (just like its offline brethren), and it will rebound in the future.

Additionally, advertisers covet eBay's user base. For example, if you're a media buyer for a home improvement chain, you'd love to serve up your ad to users typing "garden tools" into the search box. Of course, eBay has to walk a fine line here -- it can't take away business from the sellers who support it by paying the listing and success fees. But the potential dollars almost demand that management find the line and stick to it.

eBay's third-party ad revenue increased 540% both from 1999 to 2000 and from 2000 to 2001, when it totaled $83.9 million. For the recently ended first quarter, it pulled in $19 million from advertising, a 62% increase over the prior year period. To put things in perspective, consider that the $19 million is only 8% of total online revenue for the quarter. However, that's 8% more revenue than just a year or so ago, and hopefully we'll see that number slowly (if perhaps not steadily) increase.

One other item of note: It was nice to see the cash flow statement included with the earnings release. It's something eBay has been doing for three quarters now and something we believe every company should imitate. With that information, we don't have to wait until the 10-Q is released, for example, to calculate free cash flow: $81 million, compared to $27 million a year ago.

Cash flow is increasing nicely. Cost of net revenue is decreasing, and gross profit is increasing. Operating expenses are decreasing as income continues to grow. All of this shows that the promise of the business model's scalability is being fulfilled, as it costs less and less to add more and more users. In summary, the stock price may continue to bob like a cork in the ocean, but eBay's business is still firing on all cylinders.

Year-to-date: Down 22%

Have a great week! Updated portfolio returns below.

Rex Moore spends many nights pondering the road not taken. He owns shares of eBay, and all of his holdings may be viewed online when the Internet is working. The Fool's disclosure policy was voted the official disclosure policy of the village of Grosse Tete, Louisiana.

Rule Breaker Portfolio Returns as of 4/29/02 Market Close:

             RB      S&P   S&P 500
             Port    500    DA*    Nasdaq
Week       -6.39%**  -3.85% --     -5.78%
Month      -7.36%**  -7.16% --    -10.21%
Year*     -16.24%**  -3.98% --    -15.05%
 since 8/4/94 24.21% 11.51% 13.44% 11.37%           

*Dividends added.

**Please keep in mind that these figures will be distorted for the RB Port once a quarter when we deposit $12,500 in new cash. See next note! 

***Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added shows up as returns.