Tuesday's Earnings: The Ugly, The Bad, and The Good

 |  Includes: ALDN, ARW, LVLT, LXK, SAY
by: Tiernan Ray

I know you like bad news first, so herewith, a reverse-catechism of some of Tuesday’s stand-out earnings reports.

The Ugly:

Electronics distributor Arrow (NYSE:ARW) Tuesday morning reported better than expected third-quarter sales of $4.03 billion and profit that was in line with estimates, at 79 cents a share, except that profit was boosted by a 5-cent gain from taxes, and so adjusted earnings of 76 cents fell short. The forecast for the current quarter, at 90 to 95 cents in profit on sales expected in a range of $4.15 billion to $4.45 billion, is in line with estimates at the mid-point of those ranges. The shares fell 9% to $38.70. Note: Competitor Avnet (NYSE:AVT) reports earnings on Thursday.

Shares of $5 billion (market cap) enterprise and wholesale telecom operator Level 3 Communications (NYSE:LVLT) were tanking Tuesday, down 20% at $3.46, after the company said its net loss deepened year-over-year to $174 million from $138 million, and dropped its full-year outlook to a range of $813 million to $833 million, from $860 million to $920 million. The company also slashed its 2008 outlook. Needham & Co. analyst Greg Mesniaeff writes in a note Tuesday that a collection of “disparate systems and processes” that have accumulated from Level’s various acquisitions caused disruptions in the company’s operations that “have resulted in unfulfilled orders and lost business.” Nonetheless, he is sticking with his Buy rating on the company, because “the carrier remains uniquely positioned to transform itself into the go-to delivery provider of rich media and next-generation communications traffic.” Whatever. Mesniaeff’s target price is $5, which seems a lot farther away Tuesday afternoon.

Shares of printer maker Lexmark (NYSE:LXK) were tumbling, down over 8% at $39.90, despite reporting profit in its third-quarter of 60 cents, excluding some costs, ahead of analysts’ estimates of 13 cents, as revenue dropped 2% year-over-year. Despite the earnings upside, the company’s outlook remains ominous, with profit expected to fall again year-over-year in the current quarter as the company deals with “the continuation of a very challenging situation in our consumer market segment,” according to chief executive Paul Curlander. The company said Tuesday it will cut 1,650 jobs by the end of the year in order to save $60 million annually.

The Bad:

Computer security software vendor Aladdin Knowledge Systems (ALDN) Tuesday morning beat analysts’ profit estimates for its third quarter with 30 cents per share, and brought in sales slightly ahead of analysts’ estimates, at $26.1 million, and forecast profit ahead of estimates for the full year, with profit in a range of $1.06 to $1.15 per share and sales of between $102 million and $107 million. Aladdin shares fell 1.3% to $23.89. Commenting on the forecast, Friedman Billings Ramsey analyst Daniel Ives, with a Market Perform rating on the stock, said the upside disappoints, as Aladdin is not proving choosing to reinvest in its business and so, “The beauty of the software model (margin leverage) is not taking hold [with] Aladdin modeling operating margins to decline 150 basis points in 2007 […] despite solid double-digit top-line growth).

The Good:
Shares of Indian computer services firm Satyam (SAY), the smallest of the top four consulting firms in India, Tuesday were up over 11% at $30.07, a new 52-week high, after the company reported third-quarter profit that rose 52% to 31 cents a share on an astounding 45% rise in sales — despite a steady rise this year in the Indian Rupee against the dollar (which should, one figures, drive up costs and hinder sales, in other words). Revenue of $509.6 million was well ahead of estimates of $480 million. And the forecast was very strong as well: Susquehanna Financial analyst James Friedman noted that Satyam’s revised forecast for the current quarter is well ahead of the Street, with the mid-point of the projections at $539.3 million versus the consensus forecast of $512 million. Friedman thinks the stock is a deal, too, trading at roughly 19x forward earnings, below the multiple of competitors such as Infosys (NYSE:INFY). The whole group of outsourcing firms, including Satyam, had been under something of a cloud for several months, as investors worried that financial firms would stop buying their services. I think Satyam has heartened some folks Tuesday.