Back in the Roaring 1980s, Carl Icahn was known as a prototypical corporate raider as he went hostile on a myriad of old-world companies such as B. F. Goodrich and American Can.
Now, in his early 70s, Icahn hasn't slowed down much. Funny enough, these days he's targeting tech companies, like BEA, Motorola (NYSE: MOT) and, of course, Yahoo! (NASDAQ: YHOO). Hmmmm... maybe these companies have become bloated and mature -- just like the laggards of the 1980s?
Perhaps so. After all, Icahn's strategy is to agitate for change, such as for cost cutting, share buybacks and higher dividends.
As for his pursuit of Yahoo (which involves a proxy fight), it's certainly a gutsy play. Simply put, there's no guarantee that Microsoft (NASDAQ: MSFT) will come to the table again. So far, the company is doing a good job in showing disinterest.
Nuance Communications (NASDAQ: NUAN), a business devoted to speech recognition technologies and document solutions, reported Q2 earnings earlier this week. Those of you who own this stock know that the company oftentimes puts forth a complicated earnings release, full of GAAP and non-GAAP stats. This is due, in part, to the company's acquisition strategy (not long ago, I wrote about Nuance's purchase of eScription). So, on a GAAP basis, don't expect much. Net loss per diluted share expanded to $0.13 versus a net loss per diluted share of $0.01 in last year's second fiscal quarter (there was a significant non-cash-stock-based compensation charge included in the current quarter). Top-line revenue did well on a GAAP basis, however, rising 54%. Again, though, this growth was due to acquisitions.
On a non-GAAP basis, things look much brighter. Revenues rose 63%, and net income per diluted share increased 50% to $0.18. According to Reuters, this figure matched analyst expectations (I would have liked to have seen Nuance beat expectations, but it is what it is). Of course, Nuance stimulates a classic bull-bear discussion in terms of when GAAP profitability becomes more of an issue than non-GAAP success. As a Nuance shareholder, I definitely would like to see GAAP profits on a consistent basis, but I am well aware that management intends to gamble on acquisitions as a method for creating shareholder value, and for now, I am willing to be patient and watch how the company proceeds.
Nuance could be considered a risky, speculative stock in many ways, but I think it has a good chance of doing well over time with its technologies. You'd probably sleep better with competitors Microsoft (NASDAQ: MSFT) and IBM (NYSE: IBM) in your portfolio, but since I own it from around $9 per share, I'm willing to wait and see how the share price moves from this point forward (admittedly, I was considering booking profits recently, but decided against such action). Anyone thinking of getting in now might want to perform a lot of due diligence and wait for the proverbial pullback.
Disclosure: I own shares in Nuance Communications; positions can change at any time.
Recently I posted a Serious Money metrics story that included Microsoft Corp. (NASDAQ: MSFT) and Yahoo Inc. (NASDAQ: YHOO) comparisons along with six other stocks. Until now I have not felt very strongly about the merits of Microsoft's offer to acquire Yahoo! and merge assets and features.
I was leaning toward the price is too high camp, but now, after Microsoft has withdrawn the offer and I have looked at the current state of affairs of both companies, I think it did the right thing and may have avoided a nightmare.
To bring Yahoo! into the fold, Microsoft would have had to find enough cost savings by eliminating overlapping departments or it would have had to hope it could double Yahoo's earnings. If not, the acquisition would unduly weigh down the mother ship, because Microsoft's P/E Ratio of 17.08 is half that of Yahoo!'s 34.25.
When you look at the ROE,Microsoft (NASDAQ: MSFT) -- with its 45.28% -- has a four times greater return than that of Yahoo Inc. (NASDAQ: YHOO)'s 10.96%. Yahoo looks like another drag.
Electronic Arts (NASDAQ: ERTS) issued Q4 and full-year numbers on Tuesday. The competitor of Activision (NASDAQ: ATVI), THQ (NASDAQ: THQI) and Take-Two Interactive (NASDAQ: TTWO) reported adjusted fourth-quarter revenues of $919 million, which was good for a 50% increase. Earnings per diluted share were $0.09 on an adjusted basis, also representing a 50% jump. For the full year, adjusted revenues jumped 30% to $4 billion and earnings per diluted share rose 36% to $1.06. Not too bad.
EA, according to Briefing.com, also beat Wall Street's expectations by quite a bit. EA was forecast to only break-even on a non-GAAP basis, so the difference was a nice $0.09. In terms of operational cash flow, EA increased the metric by 33% during the fourth quarter, but for the full year, operational cash flow decreased 15%. Ah, such is life, I guess. Nevertheless, EA produced 27 titles that sold over a million units this year -- three more than in the previous year. Fifteen of its titles sold over 2 million units -- five more than the last fiscal period. Titles such as Army of Two and Rock Band, as well as various sports franchises, drove the results.
Things sound pretty good, don't they? EA is definitely a major force on the Sony (NYSE: SNE) PlayStation, Microsoft (NASDAQ: MSFT) Xbox 360 and Nintendo (OTC: NTDOY) Wii platforms. But EA has had some challenges during this console cycle, and there is the perception that it needs a major merger to combat the threat posed by the Activision and Vivendi Games transaction. And let's not forget that Activision is on fire all on its own. That's what the whole attempted takeover of Take-Two is all about.
Looks like Microsoft Corp. (NASDAQ: MSFT) will be working with longtime nemesis Research in Motion Ltd. (NASDAQ: RIMM) to bring its Windows Live services to the BlackBerry mobile platform. Windows Mobile, the smartphone operating system made by Microsoft that is a direct competitor to RIM's BlackBerry smartphone operating system, is already integrated with Microsoft's Live services, naturally.
While RIM figured out long ago that instant access to secure email in a small, portable device was the key to its fortune, Microsoft took years to discover that same fact, and now provides a similar solution on its Windows Mobile platform. But providing access to Windows Live to the biggest competitor it has in the smartphone arena can mean only one thing: Microsoft is trying to fend off Apple Inc.'s (NASDAQ: AAPL) iPhone.
At the same time, Microsoft wants to get as many customers using its Windows Live services on those mobile phones as possible. The iPhone reportedly will shortly work with Microsoft's Exchange corporate email servers to allow the same "push email" functionality that put the BlackBerry on the map. That is, instant, real-time email wherever you are. Those with Microsoft's Hotmail email service will also enjoy real-time "push" email with this new partnership. But make no mistake -- RIM and Microsoft will need to do more to fend up the upstart competitor, Apple. If a new iPhone is announced this summer as expected, both RIM and Microsoft will see even more turbulence in the mobile markets.
Apple Inc. (NASDAQ: AAPL) was the big winner among only four that had appreciated. The following indicates commonly used metrics for tracking and comparing stocks.
Reviewing the stocks in order of lowest to highest P/E ratio (TTM):
It is interesting to note that only two of the eight have a below market P/E ratio, while only two are average. On the other hand, four are double the average and beyond, which leads me to believe the overall market consensus is that it is still very early in the game for these stocks and their futures are yet to be determined. The P/E ratios of the four are also the most volatile as are the stock prices.
Microsoft Corp. (NASDAQ: MSFT) will soon further into the world of online video as it has introduced software that will allow customers to watch online videos and chat about them in real-time. Called Messenger TV, the new service will combine Microsoft's Windows Live instant messaging program with an integrated video player. Windows Live Messenger, though, still is not the world's largest instant messaging platform. That honor belongs to AIM, one of AOL's more successful products ever.
Microsoft's goal in introducing the new instant messaging program with integrated video is to get its customers talking about the videos they are watching, as well as allowing them to watch and share clips from such companies as MTV, Sony BMG and EMI Group, some of the largest music companies on the planet.
Is this yet another attempt by Microsoft to try and "catch the wave" of online video usage? If that is its thought, it's already missed the boat. Google, Inc. (NASDAQ: GOOG)'s YouTube is where online video is already at, so this new Messenger TV product needs to offer something new and compelling. Microsoft will be rolling out this new service in Europe first, though, as there are 95 million users of Windows Live on that continent already -- the lion's share of the company's total base of 240 million customers.
After Microsoft Corp. (NASDAQ: MSFT) walked away from a $40+ billion dollar deal with Yahoo, Inc. (NASDAQ: YHOO) this past week, competitor Google, Inc. (NASDAQ: GOOG) was very, very relieved. After all, a combined Micro-Hoo would have been a significant competitor (in a best-case scenario) to Google. To help dissuade both parties to make a deal, Google ran a two-week test on Yahoo! to supply the competitor with its own advertising system. The test went well.
Now that Yahoo! has proved that is could one day dump its search technology and outsource that piece of its business to Google, Google executives are looking for that exact scenario. They believe it will help prevent another attempt by Microsoft to purchase Yahoo! in the future. They are probably right -- if Google were to become one of Yahoo!'s largest partners, there would be issues with Microsoft buying Yahoo! now or in the future, from a regulatory perspective.
Google co-founder Sergey Brin said that "We have been talking to Yahoo and we are very excited to be working with them ... we share a lot of values with them" in his remarks at yesterday's annual Google shareholder's meeting at Google's Mountain View, Ca. headquarters. Brian added that a potential deal with Yahoo! was "not about scuttling (the deal)." Hogwash -- I say that was exactly why the Google-Yahoo! test was performed. Look for a Yahoo!-Google search advertising partnership in the very near future, folks.
No matter how you slice it, whether you look at GAAP or non-GAAP statistics, Activision, Inc. (NASDAQ: ATVI) kicked it during the quarter. And I mean really kicked it.
Net sales for Q4 set off at warp factor 11, rising 93% to $602.5 million. Earnings per diluted share on a reported basis came in at $0.14, reversing a year-ago loss of $0.05 per share. For the full fiscal year, Activision grew revenues by 92% -- again, sales growth in the 90's! -- to $2.9 billion. Earnings per diluted share were $1.10 in 2008 versus a measly $0.28 in 2007. Take that, Electronic Arts Inc. (NASDAQ: ERTS) and THQ Inc. (NASDAQ: THQI)! Activision is truly taking advantage of consoles from Microsoft Corporation (NASDAQ: MSFT), Sony Corporation (NYSE: SNE), and Nintendo Co. Ltd. (OTC: NTDOY). Titles such as Call of Duty 4, Guitar Hero, and Transformers drove the results -- like I always say, it's always about the quality of the slate. On an adjusted basis, earnings beat expectations by a whopping $0.12, according to Briefing.com.
I bet EA is really wishing its deal went through for Take-Two Interactive Software, Inc. (NASDAQ: TTWO) right about now! I believe Activision will continue to do well the rest of the year, and I love its fundamentals, but what about the stock? As of this writing, it's up about 3%. If you are looking to trade Activision, I'd probably wait until all the earnings excitement is over and be patient for pullbacks as the market may perceive that everything is priced in at the moment now that the news is out.
Disclosure: I own shares in Activision; positions can change at any time.
THQ's (NASDAQ: THQI) Q4 results were not good at all. Revenues were up over 8% to $187 million, but the software publisher lost an adjusted $0.37 per diluted share from continuing operations. Last year at this time, THQ generated positive adjusted net income of $0.13 per diluted share from continuing operations. The full fiscal year was no better -- revenues were basically flat at $1 billion. The company lost an adjusted $0.23 per diluted share from continuing operations during the year compared to an adjusted profit of $1.20 per diluted share from continuing operations in 2007.
This publisher is no Activision (NASDAQ: ATVI) or Electronic Arts (NASDAQ: ERTS) right now. Its slate is performing poorly, and the company's stock is likewise in the dumps. But what about the future? A few years back, THQ wasn't a bad investment decision. I have a feeling that THQ will rebound as the current console cycle continues its forward path, especially when further price cuts in hardware make their way to market.
THQ, however, needs to get its slate back on track, and to really go after the Sony (NYSE: SNE) PlayStation 3 and Microsoft (NASDAQ: MSFT) Xbox 360 players. It seems to be doing OK with the Nintendo (OTC: NTDOY) Wii platform in terms of revenue mix. Perhaps the deal struck with DreamWorks Animation (NYSE: DWA) for a video game based on the animation company's 2010 feature MasterMind will help.
Nevertheless, there is nothing exciting in the earnings release, nothing that makes me think that THQ is out of the dark woods yet. Again, though, I would expect the publisher's stock to rebound in the future. Question is, how patient will investors be?
Disclosure: I own shares in Activision; positions can change at any time.
MOST NOTEWORTHY: Google, Boyd Gaming and Microsoft were today's noteworthy initiations:
Kaufman Bros. believes Google (NASDAQ: GOOG) has "only begun to scratch the surface" of its local market opportunity. Shares were assumed with a Buy rating and $680 target.
Banc of America believes Boyd Gaming (NYSE: BYD) will face financing challenges with its Echelon resort, and initiated shares with a Sell rating and $14 target.
Lehman reinstated Microsoft (NASDAQ: MSFT) with an Equal Weight rating and $34 target based on peaking Vista/Office 2007 cycles, uncertain online strategy, and increased investment.
OTHER INITIATIONS:
Goldman started AON Corp. (NYSE: AOC) with a Neutral rating.
Broadpoint initiated Covanta (NYSE: CVA) with a Buy rating and $32 target.
According to people familiar with the matter, Robert Verrone, one of the most zealous commercial real-estate lenders during the industry's boom, will leave Wachovia Corporation (NYSE: WB) within the next week, the Wall Street Journal reported.
WEB SITES:
Bloomberg reported that the Department of Justice is probing whether UBS AG (NYSE: UBS) helped clients evade American taxes. In an e-mailed statement, the firm said one senior bank employee was "briefly detained" by authorities.
Bloomberg also reported that Vallejo, California's city council voted to go into bankruptcy. Officials said that after talks with labor unions failed to win salary concessions from police and fire fighters, the city does not have enough money to pay its bills.
According to a rumor, TechCrunch reported that the Yahoo Inc (NASDAQ: YHOO) board of directors yesterday authorized Yahoo chairman Roy Bostock, rather than CEO Jerry Yang, to call Microsoft Corporation (NASDAQ: MSFT) CEO Steve Ballmer about re-starting negotiations.
The dust is settling after the withdrawn purchase offer of Yahoo Inc. (NASDAQ: YHOO) by Microsoft Corporation (NASDAQ: MSFT). During that fascinating process, speculation ran high as to why Steve Ballmer chose the strategy that he did. People were asking what the probable outcomes could be and what would possibly be created by the acquisition. What I have found to be lacking in the realm of the public keyboard is a synopsis of what exactly Steve Ballmer has accomplished through this seemingly fruitless process.
Even though Microsoft Corp. (NASDAQ: MSFT) could have upped its offer for Yahoo, Inc. (NASDAQ: YHOO) this past weekend, it did not. Microsoft CEO Steve Ballmer walked away from the deal after Yahoo held out for more money. At this time, Microsoft was wise to walk away from Jerry Yang's ego. The reason? No company should spend over $40 billion for a bunch of unmonetized eyeballs. But then again, Microsoft needs to up its game in the consumer space; not so much in the enterprise business space.
Yahoo! has one of the most lucrative audiences on the web, if not the most lucrative. The company, to save its life, can't figure out how to continuously grow revenue with that huge audience it has. I won't beat a dead horse here, but if Yahoo! thinks it's really worth $37 per share, some reality needs to be put in its pipe and smoked. Microsoft would have purchased the rights to combine its ailing Internet properties with a huge audience that Yahoo! can't seem to squeeze money out of with any kind of strategy. Customers want everything for free, but Yahoo! doesn't have the advertising strategy down to allow that. We can thank former CEO Terry Semel for that.
And the kicker is this: If Google, Inc. (NASDAQ: GOOG) will soon be providing Yahoo! with its search infrastructure (after a successful test), just what was Microsoft buying, anyway? Engineering talent? Employees with a combative culture? We all know Microsoft wanted Yahoo! badly, but the mixing of oil and water here would not have instantly made a neat company or anything. And Yahoo!? It's not worth what it thinks it is. Period. Get over it, find out how to more effectively compete and monetize those eyeballs -- then come back to the table if anyone will sit there with you then.
Back in the Roaring 1980s, Carl Icahn was known as a prototypical corporate raider as he went hostile on a myriad of old-world companies such as B. F. Goodrich and American Can.
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