Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.


Microsoft Jumps on Big Beat, Strong Outlook

Shares of Microsoft surged more than 12% to $35.88 in extended trading Thursday after the company reported FQ1 2008 earnings per share and revenue that handily exceeded analyst estimates, on strong sales of Windows Vista and Microsoft Office software. The world's biggest software company said it earned $4.29 billion ($0.45/share) on revenue of $13.76 billion; analysts polled by Reuters had been expecting EPS of $0.39 on revenue of $12.54 billion. Last year, it earned $0.35/share on revenue of $10.81 billion (full earnings call transcript). For FQ2 2008, Microsoft said it expects revenue of $15.6 to $16.1 billion, and EPS of $0.44 to $0.46; Street estimates had been for $15.5 billion in revenue and earnings of $0.44/share. For the full-year, the company forecast revenue of $58.8 to $59.7 billion and EPS of $1.78 to $1.81, vs. Street estimates of $57.3 billion and $1.73/share. Windows sales were $4.14 billion in the quarter, up from $3.32 billion last year. Microsoft's Entertainment and Devices unit saw sales almost double, to $1.93 billion from $1.03 billion. Online services revenues jumped more than 20% to $671M from $536M, a fact Jensen portfolio manager Eric Schoenstein said, "bodes well for where they're headed." "It was a huge beat. The guidance I think is pretty good for the year," First American Funds analyst Jane Snorek said after the numbers were released. "These are all huge numbers in every division. I'm sure the (second-quarter) guidance is cautious. I'll take it. This is going to be good for the tech sector." Morningstar analyst Toan Tran agreed: "They're firing on all cylinders."

Vonage Surges 71% on Verizon Patent Settlement

Vonage announced Thursday it has settled its patent dispute with Verizon. Under the terms of the settlement, Vonage will pay a maximum of $117.5 million to Verizon. The actual amount Verizon will receive depends on how the Court of Appeals decides on Vonage's pending petitions associated with two of Verizon's patents. If Vonage is able to win either of the rehearings, it will pay $80 million; if it loses both, it will pay the full $117.5 million. "We're pleased to put this dispute behind us and believe this settlement is in the best interests of Vonage and its customers," said Sharon O'Leary, Vonage Chief Legal Officer. "This settlement removes the uncertainty of legal reviews and long-term court action and allows us to continue focusing on our core business and customers." Shares of Vonage surged 71.2% to $2.62 in extended trading Thursday following the announcement.

Sources: Press release
Commentary: Vonage Jumps 123% on Sprint Patent Suit SettlementCiti Sees 40% Chance Vonage Still Goes Bankrupt
Stocks to watch: VG, VZ. Competitors: S, T. ETFs: WMH, VOX
Earnings call transcript: Verizon Q2 2007

AT&T Paying Apple $18/Month Per iPhone Customer - analyst

Piper Jaffray analyst Gene Munster estimates AT&T is paying Apple an average of $18/month for each iPhone subscriber, or $432 over the course of a two-year contract, way ahead of his previous estimates of $6.50/month. Munster's estimate takes the 1.4 million iPhones that Apple has sold, subtracts the 250,000 iPhones Apple said it believes were bought to unlock from AT&T, giving him 1.15 million revenue-generating iPhones for Apple's Q4. Apple recorded $118 million in iPhone-related revenue during the quarter, from which Muenster subtracts his estimate of phone sale revenues to arrive at the final figure. Muenster says the figure surprised him, and sees this as extremely bullish for Apple. It also speaks volumes of how important it is for Apple not to open up the iPhone to other wireless providers, and explains why Apple has taken such a hard-line on iPhone unlockers. Ultimately, the new data caused Muenster to boost his Apple 2009 revenue estimate to $42.8 billion from $36.2 billion, and 2009 EPS by 14%. His price target on Apple goes from $220 to $250. On Thursday, Citigroup analyst Richard Gardner told clients he estimates Apple is receiving $12/month from AT&T for each iPhone customer.

BEA Sets $21/Share Takeout Price, Oracle Rejects (update)

BEA Systems announced Thursday it will discuss potential buyout offers if suitors are willing to pay $21/share, setting the stage for a potential $8.2 billion buyout. The company has already rejected Oracle's unsolicited $17/share bid (full story), saying in a release Thursday the bid price "significantly undervalues BEA, and is therefore not in the best interests of BEA shareholders." In a letter to BEA's board of directors, Oracle rejecting BEA's proposed acquisition price, calling it, "an impossibly high price for Oracle or any other potential acquirer," and pointing out no other potential buyers have come forward. However, BEA may not only be on Oracle's radar: "For the BEA board to make the claim that they are worth $21 (per share) without any detailed supporting analysis could mean that they have another interested party," said Jefferies analyst Katherine Egbert. Possible buyers besides Oracle include IBM and Hewlett-Packard. BEA noted its valuation was based on "a deep and diverse customer base including 75% of the Fortune Global 500 companies, compelling international growth opportunities in China and elsewhere, and a leadership position in the ongoing SOA evolution, as well as an exceptionally strong balance sheet with over $1 billion in cash and no debt." Shares of BEA are down 5.3% to $16.60 in pre-market trading Friday.

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Baidu's Net Doubles; In-line Oulook Disappoints

Baidu.com fell 4.2% to $320.20 in late trading Thursday, following the company's third-quarter earnings release in which its Q4 revenue outlook, in-line with analyst estimates, disappointed investors. Still, Baidu's Q3 net income more than doubled to 181.7 million yuan, or $24.2M ($0.70/share), with adjusted EPS of $0.72 beating estimates of $0.70. Q3 revenues also more than doubled to 496.5M yuan, or $66.3M, topping analyst expectations of $65M. Baidu said it expects Q4 revenues between 560M yuan to 575M yuan, or $74.7M to $76.7M. Baidu recorded a 39% increase in online customers (advertisers) to 143,000. R&D expenses climbed 53%, while sales and marketing expenses rose 57%. During Baidu's conference call CEO Robin Li said the company plans to introduce an online auction-like service in 2008 (full transcript). Alibaba.com's Taobao auction site controls 83% of the market as of Q2, according to research firm Analysis International. As for the domestic search market in Q3, Analysis International said Baidu maintained its sizable lead in Q3 domestic Chinese search market share at 61.5%, compared to Google at 22.5% and Yahoo! China at 10.6%. Baidu lost 0.5% to $334.30 during normal trading Thursday.

CNET Loss Widens; Sells Webshots Unit for $45M

Web publisher CNET Networks said Thursday its Q3 loss widened, but posted a 7% revenue gain. It also announced the sale of its Webshots online photo unit to American Greetings for $45 million in cash, effective immediately. Shares gained 4.5% to $8.39 in extended trading. Q3's net loss was $16.6 million ($0.11/share), compared to a $2.3 million ($0.02/share) loss a year ago. Revenue rose to $99.5 million from $93.3 million, slightly ahead of Wall Street targets of $99.4 million. For Q4, CNET expects total revenue between $119 and $125 million, and EPS of $1.27 to $1.30, excluding Webshots. According to a Reuters poll, analysts were expecting EPS of $1.33 on revenue of $129.55 million; analyst figures likely include revenue and earnings from Webshots. "We are building a vibrant company and have made great progress during the quarter," said CEO Neil Ashe. "Strategically, financially, and operationally we are making the changes necessary to seize the long term opportunity and create value for all stakeholders." During the company's earnings conference call (full transcript later), Ashe commented, "We consider ourselves in the market for acquisition targets." CNET has itself often been mentioned as a possible target (full story).

Sources: Press release I, II Reuters
Commentary: Why CNET Won't Be AcquiredIs CNET Networks Worth a Look?
Stocks to watch: CNET. Competitors: YHOO, TSCM, DJ, NYT
Earnings call transcript: CNET Networks Q2 2007


Macy's Snares Exclusive Deal With Hilfiger - NY Times

In what's being called a 'coup' for Macy's, fashion designer Tommy Hilfiger has agreed to sell his biggest clothing lines exclusively at Macy's, the companies will announce Friday, in a deal the New York Times says could rattle the department store industry. Terms of the deal have Hilfiger removing his signature lines, men's and women’s sportswear, from stores like Dillard’s and Bon-Ton by the fall of 2008. "This is a very big deal for us,” Macy's CEO Terry J. Lundgren told the Times during an interview last night. "Tommy is very significant brand." Hilfiger has lost ground over recent years, going "from preppy to urban and back again," but it remains a prominent force in fashion. During the interview, Lundgren didn't deny it may have other designers in its sites: "Our policy is to listen to any good ideas," he said. The exclusive deal may help him convince other prominent designers to come aboard with similar arrangements. Macy's has struggled to boost sales since merging with May Department Stores in 2005. Shares are down almost 15% YTD and almost 27% over the past year.


Nissan's Net Down on Items, But Operating Profit Surprises

Nissan reported a 27% decline in fiscal second-quarter net income to ¥120.1 billion ($1.01B) due to higher taxes and a one-off gain from the sale of shares of Nissan Diesel to Volvo AB. However, operating profit growth of 12% to ¥218.7B surprised to the upside, while sales rose 13% to ¥2.62T. Nissan maintained its full-year outlook for group operating profit of ¥800B and net income of ¥480B. CEO Carlos Ghosn appeared confident Nissan will reach its fiscal target of 3.7 million global vehicle sales. Nissan sold 1.82M vehicles in the first-half. Mr. Ghosn said he doesn't expect any negative impact on the company's sales this year from the subprime mess and a weakening U.S. market. Overseas, Nissan benefited from strong demand in Russia, China and the Middle East. Mr. Ghosn predicted the yen won't change much against the dollar over the rest of the current fiscal year. Ordinary shares of Nissan rallied 3.2% to ¥1,124, ahead of its earnings release, on the heels of Honda's strong earnings report Thursday. Nissan's ADRs gained 1.1% to $19.40 on Thursday.


Baker Hughes Reports In-line; Strong International Outlook

Oil services company Baker Hughes reported in-line Q3 earnings, "driven by strong international activity" and "a seasonal recovery in Canadian drilling," (full transcript later ). Net income rose 9% to $389.1 million, good for EPS of $1.22, versus EPS of $1.09 in the year-earlier period. Revenue climbed 16% y/y to $2.68 billion; the company's earnings were in-line with consensus analyst estimates, while revenue slightly topped expectations of $2.64 billion. While the outlook for North American activity, particularly in Western Canada and the Gulf of Mexico "remains uncertain," CEO Chad C. Deaton was encouraged that, "The outlook for our international business remains strong as our customers continue to be challenged in their efforts to increase reserves and production volumes for oil and natural gas. Today's high oil price is a clear signal that the industry must increase its activity in order to satisfy growth expectations for worldwide demand," he said. Baker Hughes competitor, Schlumberger Ltd., also recently reported uncertainty in the North American market was being more than offset by strength in its international operations (full story). BHI is up 25% YTD.


Merrill CEO Discussed Merger with Wachovia, Angering Board - NY Times

Merrill Lynch CEO Stan O'Neal approached Wachovia Corp. early this week to discuss a possible merger without first obtaining board approval, angering some members to the point that they considered replacing him, the New York Times reported Friday. Unnamed sources say, based on the board's reaction, that a merger is unlikely "for now." Merrill's board was so upset it discussed names of potential replacements, including Laurence D. Fink, CEO of investment firm BlackRock partly owned by Merrill, and NYSE CEO John A. Thain. On Wednesday Merrill reported a Q3 loss of $2.3 billion and said it would take a write-down of $7.9 billion on CDOs and subprime mortgages, far worse than the $4.5 billion it pre-announced on Oct. 5 (full story). The fact that O'Neal made contact with Wachovia, the Times says, underscores how much the subprime mortgage crisis has roiled the Wall Street investment bank. Wachovia has market cap of about $86 billion, versus Merrill's $52 billion, while Merrill is considered the more prominent of the two. Wachovia became the number-two retail brokerage firm after acquiring A. G. Edwards. Recent market turmoil has hit Merrill much worse than Wachovia; Merrill shares trade at $60.90/share from a 52-week high of over $98. A merger between Merrill, with 15,000 retail brokers, and Wachovia, with 10,137, would likely face antitrust questions, and may not be received well by Merrill’s brokers, the Times said.

BofA to Cut Out Middleman in Consumer Mortgage Lending

In the aftermath of its disappointing earnings report on October 18 which showed a 32% y/y drop in profit (full story), Bank of America will cut out the middle man in its home mortgage unit. The move, which means 700 layoffs by year's end, will allow America's second largest bank to focus on direct-to-consumer lending. The employee cuts, which will apply to mortgage brokers, are part of the 3,000 layoffs BofA announced Wednesday (full summary). The company's top mortgage executive, Floyd Robinson, said the move to forgo originating mortgages through brokers was not a result of increased delinquency rates on broker originated loans; rather, it would grant the bank greater control over the quality of the mortgages it issued. The move strikes another blow to the ability of Americans to obtain wholesale mortgages, forcing them to go the generally more expensive retail route. According to mortgage researcher Tom LaMalfa, BofA's latest move "will be looked at by all of the other large banks to see if they are going to do the same." BofA's shares are down 7.5% over the last month and 12% YTD as it continues to face challenging market conditions amidst one of the worst housing slumps in U.S. history.


WellCare Plunges 63% on FBI Raid

Shares of WellCare Health Plan plunged as much as 70% Thursday after the company revealed it was being investigated by the U.S. government and Florida prosecutors. Florida Attorney General's Medicaid fraud unit and members of the FBI searched WellCare's Tampa headquarters yesterday, according to James Klindt, acting U.S. Attorney for the Middle District of Florida. Neither the company nor members of the government involved would elaborate on what the probe was attempting to uncover. CEO Todd Farha said the company would comply with investigators and "all essential services remain operational and uninterrupted." John Rex, an analyst at Bear Stearns, noted, "The presence of the Florida Medicaid fraud unit indicates this component of the business is involved." The unit Rex is referring to is estimated to make up 20-25% of WellCare's earnings. WellCare manages medical care for the elderly and disabled under the U.S. Medicare program and the poor under Medicaid, a program run by both the federal and state government. It has 155,000 people enrolled in its coverage. Shares closed down 63% to $42.67 Thursday.


U.S. Market: The Fed Should Loosen 25bp Next Wednesday
Housing: The Impact of the Housing Crisis on Main Street
Long Idea: WCI Communities: Icahn's in Control
Short Idea: Red Flags at Terra Nostra Resources
Internet: What's Behind Microsoft's Interest in Facebook?
Software: How Can Microsoft Stay Competitive?
Gadgets: RIMM Launches Facebook Software
Media: Sirius: Expecting Extreme Profitability
Biotech: Staph Buzz Spotlights Cubist, Pfizer, Encysive
Retail: Comparison to Berkshire Hathaway - Sears Has Hope
Transport: Hexcel Reports Solid 3Q; Shares Soar 13%
Gold: Seabridge Gold: I'm Not Holding My Breath
Energy: Chevron Corporation: Time to Buy Abu Dhabi
Asia: Infosys Needs to Diversify
ETFs: Time To Head Out of Dollar Dodge?
Hedge Funds: Ernst & Young: Hedge Funds Remain Enigmatic
Sound Money: Time for a New Job
Jim Cramer: Latest stock picks
Transcripts: Microsoft F1Q08Dow Chemical Q3 2007Baidu.com Q3 2007Royal Dutch Shell Q3 2007XM Satellite Radio Holdings Q3 2007EMC Q3 2007Sony F2Q07Motorola Q3 2007Pulte Homes Q3 2007Bristol-Myers Squibb Q3 2007Boeing Q3 2007ImClone Systems Q3 2007F5 Networks F4Q07Express Scripts Q3 2007BorgWarner Q3 2007Penske Automotive Group Q3 2007Harman International Industries F1Q08Janus Capital Group Q3 2007EnCana Q3 2007MEMC Electronic Materials Q3 2007Travelzoo Q3 2007Digital River Q3 2007E.W. Scripps Q3 2007R.H. Donnelley Q3 2007Ingram Micro Q3 2007KLA-Tencor F1Q08McAfee Q3 2007Newell Rubbermaid Q3 2007Starwood Hotels & Resorts Worldwide Q3 2007Black & Decker Q3 2007EarthLink Q3 2007Aetna Q3 2007DaimlerChrysler Q3 2007General Dynamics Q3 2007Moody's Q3 2007Monster Worldwide, Q3 2007Rohm and Haas Company Q3 2007Regal Entertainment Group Q3 2007Interactive Data Q3 2007Varian Semiconductor Equipment Associates F4Q07Columbia Sportswear Company Q3 2007Bunge Q3 2007Enterprise Products Partners LP Q3 2007MDC Holdings Q3 2007sStericycle Q3 2007AsiaInfo Q3 2007Applera F1Q08Banco Santander Central Hispano SA Q3 2007Advanced Medical Optics, Q3 2007NII Holdings, Q3 2007Precision Drilling Trust Q3 2007Choice Hotels International Q3 2007Alcon Q3 2007Laboratory of America Holdings Q3 2007ENSCO International Incorporated Q3 2007AVX F2Q08SK Telecom Ltd Q3 2007Sybase Q3 2007Diamond Offshore Drilling, Q3 2007Enterprise Products Partners LP Q3 2007Avnet F1Q08UST, Q3 2007Fidelity National Information Services Q3 2007Devry F1Q08National Instruments Q3 2007Foundry Networks Q3 2007Zygo F1Q08Franklin Resources F4Q07Reynolds American Q3 2007IntercontinentalExchange Q3Apache Q3 2007MICROS Systems F1Q08SEI Investments Q3 2007Estee Lauder Companies F1Q08Autoliv Q3 2007Southern Q3 2007Ryland Group Q3 2007GATX Q3 2007Celgene Q3 2007Zimmer Holdings Q3 2007Covance Q3 2007Rollins Q3 2007Thermo Fisher Scientific Q3 2007EarthLink Q3 2007iGate Q3 2007Elan Q3 2007Respironics F1Q08ARM Holdings Q3 2007DaimlerChrysler Q3 2007Air Products and Chemicals F4Q07Ameriprise Financial Q3 2007AllianceBernstein Holding L.P. Q3 2007Fiat SpA Q3 2007National Oilwell Varco Q3 2007Desarrolladora Homex SA de CV Q3 2007NEXEN Q3 2007O'Reilly Automotive, Q3 2007Ryder System Q3 2007Occidental Petroleum Q3 2007

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