You have to hand it to the editors at Forbes for their creative lists. This week, they released their "Top-Earning Fictional Characters" for 2003 list. The top grosser was Mickey Mouse (and friends), who took in $5.8 billion. Next was Winnie the Pooh. He and the rest of the characters in 100 Acre Wood raked in $5.6 billion. Frodo Baggins from Lord of the Rings ($2.9 billion), Harry Potter ($2.8 billion), and Nemo from Finding Nemo ($2 billion) rounded out the top five.

So, forget about buying lottery tickets. Start working on the concept for the next SpongeBob SquarePants ($1.5 billion).

Have a great weekend, everybody. Let's hope the Sox and Cards give us a great Series!

In today's Motley Fool Take:

Google Looks Gorgeous

By

Rick Aristotle Munarriz (TMF Edible)



Last week I wondered about the logic behind a gutsy market call by American Technology Research advising investors to buy Yahoo!(Nasdaq: YHOO) and dump Google(Nasdaq: GOOG). With both companies set to report quarterly earnings in October -- and each one happily suckling the mother's milk of paid search -- it didn't make sense to project a divergence.

If Yahoo! was going to put up a strong effort -- and it did -- Google was only going to be even better a week later.

That's exactly what happened. If you thought Yahoo! posting an 84% spike in third-quarter revenues was sweet, then you're probably stoked to see Google growing the top line during its first quarter as a public company by 105%. Profits nearly doubled for Yahoo! last week? They more than doubled for Google.

Through the first nine months of the year, Google has produced earnings of $0.73 a share on nearly $2.2 billion in revenue. Consider the $349 million in free cash flow that the company has generated through those three quarters and, let's be honest, it's not exactly easy to justify the company's $40 billion market cap.

However, the fact that the stock has risen by more than 50% since going public is more a testament to brand endearment than rational valuation. That may sound like a flimsy way to justify a stock's buoyant share price -- and you would be right -- but short sellers nursing headaches can feel the pain.

As an investor, it's not just a matter of getting it right on valuation. You have to nail it on market sentiment too. Until Google flashes signs of fragility or mortality -- and its stance on not providing financial guidance is bound to trigger wide analyst targets to the point where it may be difficult to please everyone every three months -- it would be a tough call to tell investors to jettison the shares.

What if Microsoft(Nasdaq: MSFT) comes back strong in search? What if the company uses its nearly $2 billion in cash on iffy acquisitions? What if insiders start cashing out at these tempting prices in a few months?

Yet you also have other questions that can propel Google higher. What if Microsoft doesn't come back strong in search? What if the company uses its IPO money to scoop up smaller rivals like Ask Jeeves(Nasdaq: ASKJ) and FindWhat.com(Nasdaq: FWHT) that would be accretive to earnings? What kind of effect would the shares have if Google gets added to popular stock indexes?

Questions beg for answers. The fact that Google is a search specialist playing it coy when it comes to looking ahead is ironically intriguing. For now, all we have is a snapshot -- and that's a pretty picture.

Longtime Fool contributor Rick Aristotle Munarriz is a happy Google user. However, he does not own shares in any of the companies mentioned in this story.

Discussion Board of the Day: Amazon

Has Amazon matured? Have its shares become overpriced, or do you think greater returns are yet to come? All this and more in the Amazon discussion board. Only on Fool.com.

Amazon's Broken Heart

By

Rick Aristotle Munarriz (TMF Edible)

Is the leading online retailer catching a cold just before the critical holiday shopping season? Amazon(Nasdaq: AMZN) announced third-quarter results and a near-term outlook that fell short of Wall Street's expectations last night.

While earnings more than tripled to $0.13 a share and net sales came in at a robust $1.46 billion showing, the market was hoping for a little more. When Amazon initiated its glimpse into 2005 by pegging the top line to come in between $7.4 billion and $8.15 billion, the market was hoping for a lot more.

Like eBay's(Nasdaq: EBAY) report a day earlier, the strength in sales was masked by booming business overseas. Amazon's North American sales clocked in just 15% higher than last year's September quarter and that may not be the high-octane Amazon that many investors have come to know and love.

This doesn't mean that Amazon is bringing on the heartbreak. The stock has soared by 158% since being singled out in our Motley Fool Stock Advisor newsletter two years ago and no one is suggesting that gravity will wipe out those meaty gains. In fact, the same Amazon that some pundits figured would be left for dead when the dot-com bubble burst is actually operating as efficiently as ever. Over the past four quarters, the company has produced free cash flow of $420 million, a 76% improvement over this time last year.

However, Amazon has commanded a market premium due to its stellar growth in the past and that seems to be slowing. It is looking for net sales next year to grow by as little as 7% -- yes, 7% -- to as much as 22%. Is an Amazon that may potentially grow the top line in the single-digits really worth a share price that is three times net sales? You can scoop up offline favorites like Wal-Mart(NYSE: WMT) and Target(NYSE: TGT) for less than their trailing revenues.

That is why the upcoming holiday season is so important to Amazon. If the company is going to take a hit in growing operating profits stateside like it did this past quarter for the sake of expanding its consumer-friendly shipping policies, it better be able to offset that with some heartier sales growth. Santa or Grinch, let's hope that Amazon's heart over the holidays is not three sizes too small.

Longtime Fool contributor Rick Munarriz has been an Amazon customer since the 1990s, but he does not own shares in any of the companies mentioned in this story.

Quote of Note

"I take it that what all men are really after is some form or perhaps only some formula of peace." -- Joseph Conrad

Microsoft's Unearned Revenue

By

Bill Mann (TMF Otter)

You can get descriptions of Microsoft's(Nasdaq: MSFT) earnings most anywhere. Some will focus on the right things, some won't. In short, Microsoft had a great quarter, but says that its next quarter will be a little soft, and it predicts a strong 2005.

Wonderful. I note with some amusement that many writers are inserting "excluding stock-based compensation costs" in every sentence regarding earnings. That's all well and good, but my bemusement comes in two forms. First, I find it truly astounding that journalists generally do not bother to report the impact of stock options on company earnings for the companies that depend so deeply on them, which is a great disservice. Second, it's an expense, and a recurring one! Why back it out? Because it's not cash-based? That's extraordinarily silly.

It's just another example of the need to be extremely careful with corporate press releases, and more important, reports based on those press releases. Journalists by and large don't have time to go through financials, or even think about what they're being told. They've got a slot to fill, and so if the company says "net of x," why darn it, that's what they're going to report. This is not a global statement -- for example, I think that TheWall Street Journal's Theo Francis has done an astoundingly good job covering the ongoing scandal at Marsh McLennan(NYSE: MMC). It's just a friendly reminder that you should always think for yourself.

To Microsoft's infinite credit, its vice president for investor relations, Curt Anderson, said that it's not going to be pulling out these compensation costs anymore, since the true reflection of the business includes the cost. I wish the folks at Intel(Nasdaq: INTC), Cisco(Nasdaq: CSCO), Qualcomm(Nasdaq: QCOM), and on down the line would pay attention to this. "Break out non-cash compensation? Why? It's integral to our business."

But like I said, you can read about how the company did elsewhere. I thought I'd describe one component of the report that seems to be generating some confusion -- unearned revenue -- and describe what it is and why it's an important indicator of business condition.

For the quarter, one of the things that Microsoft reported was a decrease to $7.78 billion of unearned revenue, down from $8.18 billion last quarter, a decrease of $340 million. It's a funny term -- it sounds kind of like some folks just showed up in Redmond with bags of money and said, "Here, keep this."

In actuality, unearned revenue is an outcome of the "matching principle" in accrual accounting. It happens most often with companies that have subscription or service-contract models. Under the matching principle, revenues can only be taken when the expense to provide them has been matched. So if you, customer X, sign up and pay for an annual subscription for something, even though the company has the money in hand, it doesn't "count" until it provides the service. So in a quarter, the company can only count as revenue the amount that you paid for three months of the service -- the remaining nine go into a separate account to be earned later. That's "unearned revenue." When Microsoft's model morphed from straight software to more of a service-based business, the percentage of its sales that were product-based declined, and conversely the amount people paid it for services it had not yet provided skyrocketed.

That's why people look carefully at the unearned revenue number -- it's a good sign of how much long-term business the company has taken in over the quarter. Note that unearned revenue and Microsoft's next quarter revenue and earnings guidance are all down. Do you think that this is a coincidence? It most certainly is not.

Bill Mann holds none of the companies mentioned in this article. Please view his profile for a current list of his holdings. But before you do, let us regale you with the siren song of a great newsletter product: Philip Durell's Inside Value. We're not just talking paint and rock companies -- Philip unearths some extraordinarily dynamic businesses each month. A free trial costs $10. Aw, heck, we'll even give you the free trial for nothing!

Is PeopleSoft Stronger?

By

Tim Beyers

It's not over.

An impressive earnings report and a memo from new CEO Dave Duffield suggest that business software maker PeopleSoft (Nasdaq: PSFT) is not about to sell to rival Oracle (Nasdaq: ORCL) anytime soon.

The third-quarter financials were the attention-getter, though. After a trial in which the database king has tried to paint PeopleSoft as fading fast, PeopleSoft reported higher sales, net income, and margins. Revenue was $699 million, up 12% from the same quarter a year ago. Earnings improved from a loss last year to $24 million, or $0.06 per diluted share, and from $11 million, or $0.03 per diluted share, in the prior quarter. Operating margins widened to 5% from 2.2% in the previous quarter.

Unfortunately, all this good news obscures two really important pieces of information critical to judging PeopleSoft: the cost of expensing stock options, and the company's contracts that require refunding billions to customers if there is a takeover.

First, let's touch on the options. According to PeopleSoft's second-quarter 10-Q filing with the Securities and Exchange Commission, the net cost of stock options-based compensation was $25 million for the quarter and $54 million for the first six months of the year. It only seems reasonable, then, that PeopleSoft had roughly $30 million in stock-based compensation expense this quarter. But let's be conservative and say it was $20 million. Even then, net income would have been cut by 85% to $4 million and a penny per diluted share.

Moreover, options expense makes PeopleSoft's structural free cash flow, otherwise known as owner earnings, look downright anemic. Take a look:

Metric Six months ended June 2004 Nine months ended September 2004
GAAP net income $35 million $59 million
Net stock options expense $54 million $74 million*
Net depreciation and amortization $112 million $168 million
Capital expenditures $89 million $143 million
Structural free cash flow $4 million $10 million
Cash flow margin 0.3% 0.5%
*Estimate based on PeopleSoft's SEC filings

Think that's unfair? You shouldn't, because options expensing is coming whether you like it or not. Heck, PeopleSoft's owners even voted for it earlier this year.

Now let's tackle the second, and arguably more insidious, piece of the puzzle: PeopleSoft's poison pill rebate. The program says customers who license PeopleSoft software would be entitled to two to five times their investment if the company were acquired by Oracle. Oracle says the program would add $2 billion in liability to its bid and is seeking to remove it and PeopleSoft's other anti-takeover provisions in court.

Interestingly, PeopleSoft extended the program earlier this month, just as it was announcing it would exceed license revenue targets. Some good detective work by zoningfool on our Oracle discussion board found that management extended the program to "achieve successful results for the quarter ended September 30, 2004."

No wonder PeopleSoft's sales were way up. Customers are signing on the dotted line with the prospect of getting not only good software, but also a huge wad of bills if there is an acquisition. How on earth could anyone be surprised by PeopleSoft's results given that sweet deal? Only an ostrich could fail to see that coming.

So let's face it, folks, any talk of PeopleSoft suddenly being stronger than originally expected is either misguided drivel or intentional overhyping. Don't fall for it.

For related Foolishness:

  • I still think OracleSoft would make for a great combination.
  • Oracle CEO Larry Ellison's testimony in the latest courtroom battle between his company and PeopleSoft was nothing more than a stock striptease.
  • Despite popular belief, PeopleSoft's firing of Craig Conway hasn't changed all that much in its relations with Oracle.

Fool contributor Tim Beyers owns shares of Oracle. You can view his Fool profile and other stock holdings here.

More on Fool.com Today

Just as important as the stocks you own is how you manage them, Whitney Tilson says in Focus Investing.... Even the best companies can stumble. Diversification is your safety net, Chuck Saletta says in When Crystal Balls Break.... Getting up and running in online stock trading is easier than you may think, Selena Maranjian says in You Can Trade Online.... Companies that change the world can change your portfolio, David Forrest says in Believing in the Impossible.... In 5 Companies I Wish Were Public, Tim Beyers pines after a few great businesses that have yet to take the stock market plunge.

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