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.

MACRO AND HOUSING

Subprime Woes Not Over Yet, Kroszner Warns

Problems in the subprime mortgage market aren't likely to get better anytime soon, Federal Reserve Governor Randall Kroszner said Monday, indicating that things could even "get worse before they get better." Speaking to the Consumer Bankers Association, Kroszner said indications were that the housing sector would continue to struggle, particularly in the subprime mortgage market, that house prices would be "sluggish for some time," and that loan delinquencies and home foreclosures were likely to rise for a number of quarters. Separately, Federal Reserve Governor Frederic Mishkin made the first comments following last week's interest rate cut by the Fed, saying "The FOMC perhaps could have waited for more clarity and left policy unchanged last week, but I believe that the potential costs of inaction outweighed the benefits, especially because, should the easing appear to have been unnecessary, it could be removed." The cuts, he said, were aimed at forestalling damage from the credit crisis to the broader economy. Since credit access began to decline in April, the central bank has cut the benchmark lending rate by 0.75 percentage point to 4.5% and the charge for direct loans to banks by 1.25 percentage points. Mishkin noted that stresses remain and markets haven't fully recovered even though the summer's volatility has eased.

Beazer Cuts Jobs, Suspends Dividend; Estimates Charges

Beazer Homes USA late Monday announced a series of steps to reduce its cost structure and improve operating efficiencies including job cuts and the suspension of its quarterly dividend, after net new home orders skidded 53% in the fiscal fourth quarter. The homebuilder blamed the tightening of mortgage markets in August and September, which resulted in an "unusually high" cancellation rate of 68%, for the decline. "The housing industry continues to face the most difficult business conditions in over a decade," said CEO Ian J. McCarthy. Although he believes long-term fundamentals remain compelling, McCarthy said, "We must continue to adapt to the realities of the current market by remaining disciplined in our operating approach and continuing to focus on initiatives aimed at responding to what we believe will continue to be a challenging environment in the near-term." To that end, the company, in October, slashed 650 positions, or 25% of its work force, which has declined 50% from its March 2006 peak, in a move that was expected to result in annualized cost savings of at least $30M. Elimination of the $0.10/share quarterly dividend was expected to save $16M annually. Beazer is also continuing to reduce its land holdings. Fourth-quarter results, it said, will include charges of about $230M for inventory impairments and the abandonment of land option contracts and also may take goodwill impairments during the quarter. Beazer is unable to report full financial results because it is in the process of restating results dating back to 2004, as a result of an investigation into accounting mistakes. Beazer shares lost 5.5% to $9 AH following the announcement.

Hovnanian Reports Double-Digit Decline in Deliveries and Contracts

Hovnanian released preliminary fourth-quarter operating data before the bell Tuesday. The upscale U.S. homebuilder said it delivered 3,969 homes during its Q4 ended Oct. 31, a y/y decline of 19%, while net contracts decreased 10% to 2,781 homes. Cancellations increased to 40%, compared to 35% in Q3 and last Q4. In a statement, Hovnanian cited "the tightening of mortgage underwriting standards, which has lead to some customers cancelling their contracts due to an inability to obtain mortgage loans" for the increase in cancellations. Backlog fell 30% to 5,938 homes. Hovnanian also said Q4 total debt was reduced by $390M, as management remains focused on "improving its balance sheet and on generating cash flow." All of the data exclude unconsolidated joint ventures. Hovnanian is still completing a review of its Q4 results and plans to officially report on December 18, after the close of the NYSE. Shares of Hovnanian lost 2.2% to $10.11 on Monday and untraded in early pre-market activity.

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TECHNOLOGY

Sun Microsystems Slips on Sales Miss

Sun Microsystems reported its fourth consecutive profitable quarter after the bell Monday, but the company's quarterly sales fell short of expectations. Net income for the company's fiscal first quarter was $89 million ($0.03/share) compared to a net loss of $56 million ($-0.02/share) last year. Excluding certain costs, Sun earned $0.06/share, beating analysts' targets of $0.03/share. However revenue increased less than 1% to $3.22 billion, failing to meet the $3.26 billion analysts forecasted. "Looks like they are losing share to Dell, HP and IBM," said Brent Bracelin, an analyst at Pacific Crest Securities. CEO Jonathan Schwartz (earnings call transcript) has been leading a company turnaround by changing company's product line and cutting 4,000 jobs over the last year. He called the quarter, "seasonally challenging, as expected." Server sales increased 5.6%, the smallest among large server companies according to the research firm IDC. Shares of Sun dropped 2.5% to $5.57 in after-hours trading Monday

Dell to Buy Storage-Maker for $1.4 Billion

Dell Inc said Monday it agreed to buy EqualLogic for $1.4 billion, marking the PC maker's largest purchase ever. EqualLogic links computers to make it easier and cheaper for businesses to store and locate vital data. Sales in that type of storage technology are expected to increase ten-fold in the next four years, according to researcher IDC. Dell's PCs account for 60% of its sales, but have been losing market share to rivals such as Hewlett-Packard. The acquisition will offer Dell another source of major revenue growth, as EqualLogic's sales jumped 127% last year. "This is the kind of thing that Dell needs to continue to do to make their business healthier," said Tony Asaro, an analyst Enterprise Strategy Group. "Storage is a much healthier margin business." Dell's gross margins were less than a third of EqualLogic's last year. Dell paid a hefty sum for the company, but EqualLogic was planning to file for an IPO, and compared to valuations for similar companies, the acquisition price could have been much greater. The market value for the newly public company Compellent Technologies, another storage-maker one-third the size of EqualLogic, topped $800 million last month. Shares of Dell lost 0.3% to $29.97 Monday.

Symantec Buys Data Loss Prevention Company for $350M

Symantec announced late Monday it has agreed to acquire privately-held data loss prevention [DLP] solutions firm Vontu for $350 million in cash and assumed options. The acquisition had been rumored since last month and was expected to be announced during Symantec's quarterly update on Oct. 24 (full story). Symantec said its expects the acquisition to be $0.02 dilutive to FY 2008 non-GAAP EPS and projects further dilution for GAAP EPS due to purchase accounting, stock based compensation and charges related to the acquisition. The transaction is seen closing by the end of the year, subject to regulatory approvals. In a statement, Symantec Security and Data Management president Tom Kendra commented, "The combination of Symantec’s existing portfolio and Vontu’s leading products and dedicated team enables us to deliver a central component of our Security 2.0 vision to customers - information-centric security that protects both the device and the information itself." Rivals McAfee and Trend Micro, as well as Websense and EMC, have made recent acquisitions of DLP-related firms. In a note to clients, Citi analysts wrote, "The Vontu deal is consistent with SYMC’s strategy to continue to build-out its portfolio of security products in order to sell a broader suite of technologies and capabilities to its customer base. SYMC adds a new growth engine in the rapidly growing Data Loss Prevention market segment, an area independent analysts expect will grow ~33% over the next few years... We see the Vontu deal as evidence SYMC will continue to build a product portfolio that enables it to scale its business by bringing a relevant set of security and storage products to enterprises across the globe." Shares of Symantec lost 0.8% to $18.36 on Monday.

Nortel Swings to Modest Profit; Margins Jump

Nortel Networks, North America's number-one telecom equipment maker, said Tuesday it swung to a modest profit of $27 million ($0.05/share), having lost $63M ($0.14/share) a year ago. About $45 million in Q3 revenue was deferred due to "difficulty in fulfilling certain customer orders during the third quarter," as revenue fell 8% to $2.71 billion, down from $2.93 billion. Analysts were expecting EPS of $0.12 on revennue of $2.78B, according to Reuters Estimates. Gross margin jumped to 43% of revenue, compared with 38.4% in Q3 2006, and the company's best margin level in nine quarters. For the coming quarter, Nortel expects flat revenue growth, and a slight drop in full-year revenue compared to 2006. I am "encouraged by the top-line activity," CEO Mike Zafirovski said. "Adjusted for the UMTS [Universal Mobile Telecommunications System -- a 3G network sold to Alcatel for $320M last year] sale, orders in the third quarter were up 9% and up 5% year to date, which demonstrates Nortel's increasing relevance in the marketplace," (full earnings call transcript later today). In a note to clients, Morningstar wrote recently, "Nortel limited scale and financial flexibility leaves it between a rock and a hard place... In a communications equipment market that is increasingly becoming dominated by either megavendors or targeted niche players, we believe Nortel's lack of scale and exposure to declining areas of telecom spending leave it on weak competitive footing." Shares are up 2.1% in pre-market trading; they have lost 39.1% YTD.

Activision Falls Despite Beat and Raise

Shares of game maker Activision fell 1.8% after-hours Monday on fairly heavy volume of nearly half a million shares, despite a solid beat and raise quarter. Activision swung to a profit of $0.7 million (EPS was $0.00) in its latest quarter (F2Q08), reversing a $24.3 million ($0.09/share) loss a year ago. Adjusted EPS was $0.02, beating consensus analyst estimates of -$0.01. Revenue jumped 69% to $317.7 million, well above consensus estimates of $269 million. The company sees next quarter adjusted EPS of $0.55 on sales of $1.05 billion; the Street had been looking for $0.51/share on sales of $896.2 million. For FY2008, Activision raised its estimates to adjusted EPS of $0.67 to $0.68 on sales of $2.07 billion; consensus estimates hade been $0.65 on sales of $1.93 billion. Activision's new game, Guitar Hero III: Legends of Rock, brought in more than $100 million during its first week of sales, which will be recorded in F3Q08. CEO Robert Kotick admitted during the company's conference call it may have under-anticipated Guitar Hero demand, or at least, in the words of one pundit, "gambled wrong on which platforms will be most attractive," "There is a probability that this holiday, we won’t be able to satisfy all the demand for every platform, but we will have millions of Guitar Heroes around the world," (full transcript).

BEA Systems to Give Icahn Confidential Information

BEA Systems on Monday agreed to provide activist investor Carl Icahn with confidential business information to convince its largest shareholder that a sale of the company at $17/share "significantly undervalues" the infrastructure software company. "We are confident this information will enable him to appreciate that the $17 per share bid from Oracle significantly undervalues BEA in a sale. All shareholders' interests are aligned in this regard," said CEO Alfred Chuang. "We also want to dispel any speculation that we would engage in 'scorched earth' transactions to entrench ourselves at shareholders' expense or discourage a fully valued acquisition of the company. We will undertake no such actions. Our goal has always been to maximize shareholder value, and we continue to explore ways to further this fundamental goal, including the possible sale of the company." BEA is hoping to convince Icahn it is worth at least $8.2B, or $21/share, after turning down Oracle's bid, which subsequently was withdrawn after Oracle called BEA's demands "impossibly high" (full story). Icahn, who owns more than 13% of BEA, has been pushing for a sale of the company. He, too, has called $21 too high, terming it a "management entrenchment tactic." One analyst said the move, which is designed to bring Icahn into the company's camp, could backfire if he, too, determines even after reviewing the confidential information that $21 is excessive.

Income Beat, New CEO Lifts DivX

Shares of DivX Inc. jumped more than 12% in extended trading after the video-compression software developer posted adjusted Q3 net income that beat Street estimates, boosted its full-year forecast, and announced a new CEO. DivX net income was $816,000 ($0.02/share), from $3.1 million ($0.10), a year ago. Net of one-time items, net income was $5.9 million ($0.17/share) on revenue of $21.9 million, up 42% from $15.4 million. Analysts had expected EPS of $0.14 on revenue of $24 million. The company also raised its 2007 forecast to an adjusted $0.57-0.59/share on revenue of $82.4-83.4 million. Analysts had forecast a 2007 profit of $0.49/share on revenue of $82 million. The company said Kevin Hell would take over as its new CEO. "DivX is a great company, and I believe we are in a strong position to emerge as the de facto standard for high-quality digital video across any device," Hell said in a statement. "I am excited to lead our team forward as we focus on three key market opportunities: growing our licensing business, launching our new DivX Connected platform, and expanding our content solutions," (full earnings call transcript). Hell has served as acting CEO since July, and has been with the company since 2002.

Sources: Press release, TheStreet.com, MarketWatch
Commentary: DivX Buys Fine Art And Search TechnologyDivX Buys Fine Art And Search Technology
Stocks to watch: DIVX. Competitors: AAPL, MSFT
Earnings call transcript: DivX Q3 2007

INTERNET

IAC to Split Into Five, Stock Climbs

Internet and media conglomerate IAC/InteractiveCorp announced Monday it would spin off four of its largest divisions to allow the company to focus on its Internet and web services operations. IAC will continue to manage its portfolio of websites such as Ask.com, Match.com, and Citysearch. The four spin-offs will be HSN, the Home Shopping Network; Lending Tree mortgage referral business; timeshare company Interval International; and Ticketmaster. Each segment's management will stay in place and run each business, and CEO Barry Diller, who owns a 27% stake in the company, will retain his position at IAC as well. Explaining the restructuring, Diller said, "One of the reasons we've stayed with some of our more transactional businesses is that we needed their earnings to allow us to invest in emerging Internet businesses. Now that we have real scale in the pure Internet units, it makes nothing but sense to me to reorganize the whole." The new companies will be 100%-owned by current IAC shareholders, and the transactions should be completed in the second or third quarter of 2008. Investors, who usually respond positively to conglomerate break-ups, gave their stamp of approval to the move Monday; shares of IAC traded up 7.5% to $31.84.

Google Enters Wireless Market with Android OS

In a bid to tap a potentially vast new resource for ad revenue, Google announced Monday that it has formed an alliance with 33 partners, including handset manufacturers, cellular carriers and other tech companies, to provide a new mobile phone platform for free. Google-enabled phones are forecast to hit the market in H2 2008. The platform, dubbed Android, offers an OS, a user interface and Web-browsing software. It will be made available to developers next week. "We're hoping thousands of different mobile phones will be powered by Android," said Google CEO Eric Schmidt. Because the software will be free, operators could pass savings on to consumers through phone subsidies or better rates. The Open Handset Alliance includes Samsung, Motorola, T-Mobile and Sprint Nextel. Conspicuous absences include Verizon Wireless, Nokia and Research in Motion. Verizon Wireless is said to be unconvinced that Android will prevent invasions of consumer privacy or security breaches. Google's software will compete with many other platforms, including those of Microsoft and Palm. Nokia points out that it preceded Google in providing open source software for phones: its high-end phones use the Symbian OS and have a "large community of application developers," according to the WSJ. "It's great to see others following the trail we've been blazing," said Nokia executive Bill Plummer. Google shares hit a record $730.23 Monday before closing up 2% at $725.65.

MEDIA

As Print Circulation Slides, Papers Draw Attention to Online Audience

In an effort to encourage advertisers put off by flagging print circulation, newspapers are showcasing the new metric of Internet plus print readership rather than papers delivered. The Audit Bureau of Circulations reported that average weekday circulation at 538 U.S. dailies fell 2.6% over the past six months from the year-ago period, continuing the industry's 20-year decline. Sunday circulation fell 3.5%. Of the top 10 papers, those suffering the worst slides in weekly circulation were the Tribune Co.'s Newsday, which fell 5.6%, and News Corp.'s New York Post, which fell 5.2%. Gannett's USA Today gained 1%, but Dow Jones's Wall Street Journal fell 1.5%. The New York Times lost 4.5%. For the first time, the Audit Bureau also reported not only how many papers were delivered but how many people read them, including online. The Washington Post, for example, was shown to have average weekday print circulation of 635,087 but a combined print and online audience of 3.09 million. Advertisers remain to be convinced that the new data should change their ad expenditures. "They're saying print is declining, but oh, by the way, our online properties are increasing, but I don't think it will change the buying dynamic significantly," said Edward Montes, MD for Havas's online media buying arm Media Contacts.

Bewkes Named Top Exec at Time Warner

Time Warner's current President and COO, Jeffrey L. Bewkes, will take over for current Chairman and CEO, Richard D. Parsons, effective January 1, 2008, ending Parsons' seven-year reign at the diversified media company. Parsons will retain his role as Chairman indefinitely, while Bewkes will remain President after becoming CEO. Investors are embracing Bewkes' assertion that "everything is on the table" when it comes to restructuring Time Warner, whose shares have risen just 17.5% over the last five years, versus a comparable gain of 68% for the S&P 500, of which TWX is a component. Bewkes said in the press release announcing his appointment: "We have a lot to do, and I’m intensely focused on building shareholder value." Bewkes' background is in cable TV; he served as President of HBO from 1995-2002, when he came on board at Time Warner as Chairman of the Entertainment and Networks Group. In 2006, he was promoted to be President. Bewkes has said it is "likely things will be somewhat different" a couple years into his term as Time Warner's Chief Executive. There is speculation he will sell off several assets including part or all of the company's 84% stake in Time Warner Cable, and online portal AOL. TWX shares are down 18% YTD; they rose 1% in after-hours trading Monday.

HEALTHCARE/BIOTECH

Pfizer Stumped On Torcetrapib Risk

Pharmaceutical giant Pfizer Inc. said Monday it has been unable to ascertain the cause of the problematic death rate that prompted the company to halt development of torcetrapib, its once-promising experimental "good cholesterol" drug. Work on torcetrapib -- one of a class of experimental drugs called CETP inhibitors -- was halted in December 2006 after a study showed it to increase the risk of death among heart patients. The 15,067-patient trial, called Illuminate, showed the drug to raise good cholesterol and lower bad, but also to cause a dangerous elevation in blood pressure in some subjects. In its subsequent analysis of that study, Pfizer identified several ways in which the drug appears to harm blood chemistry. The company was unable to determine, however, whether those negative effects are unique to torcetrapib or endemic to all drugs in its class. "I think we're going to see cautious development of CETP inhibitors," said cardiology professor Dr. B. Greg Brown of the University of Washington. Such caution could affect not only Pfizer but also Merck and Roche Holdings, which are in the race to develop good cholesterol drugs. Still, "it is premature to announce the death of CETP inhibitors on the basis of the torcetrapib experience alone," according to Dr. Daniel J. Rader of the University of Pennsylvania. University of Chicago cardiology professor Michael Davidson notes that the FDA is unlikely to approve any CETP inhibitor before it has undergone large-scale clinical trials -- a process that could take up to a decade.

Cardinal Health Sinks on Disappointing Outlook

Cardinal Health reported an 11% increase in net income for its fiscal first-quarter Monday, but shares of the company slipped on lower sales guidance in a key division. Net income came in at $301.8 million ($0.82/share) compared to $270.7 million ($0.66/share) a year ago. Revenue increased 4% to $21.97 billion. Both the company's earnings and revenue missed analysts' targets of $0.86/share on $22.51 billion of revenue. Cardinal also said it would fall short of the 7%-10% it had previously forecasted for its 2008 sales growth in its drug distribution business (earnings call transcript). It was the second announcement lowering forecasts for the company's largest division in the last two months. Mark Parrish, who managed the distribution of drugs and medical supplies, stepped down Monday as well to "pursue other interests." The company reaffirmed its full-year 2008 outlook, excluding some charges, of $3.95 to $4.15/ share; analysts forecast $4.07/share. Shares of Cardinal Health dropped 6.4% to $62.61.

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Why the Fed Continues To Cut Rates
Internet: Huge Surge In Alibaba.com Could Spur Yahoo
Hardware: Digi International: Great Numbers, Great Brand, Great Management
Gadgets: Nokia Hit By Second-Tier Insurgency
Media: Tribune/Zell Deal: No Longer 'If' - Just When?
Healthcare: Red Flags on HearAtLast Holdings
Retail: Sharks are Feeding on Crocs, But It's Due for a Bounce
Gold: Titanium Metals: 3Q Miss Offers Good Entry Point
Financial: Don't Say Citi Didn't Warn You
Asia: Waiting For China's Real Test to Begin
ETFs: Dividend Focused ETFs: What's in the Beef?
Sound Money: Clean Your Credit Report
Jim Cramer: Latest stock picks
Transcripts: CNET Networks Q3 2007Limelight Networks Q3 2007DivX Q3 2007Sun Microsystems F1Q08Marvel Entertainment Q3 2007Stifel Financial Q3 2007Burger King F1Q08Ness Technologies Q3 2007Cardinal Health F1Q08Citigroup Business Update CallWarnaco Group Q3 2007CompuCredit Q3 2007Cutera Q3 2007Activision F2Q08American Science & Engineering F2Q08TNS Q3 2007American Oriental Bioengineering Q3 2007Novatel Wireless Q3 2007Exelixis Q3 2007Elizabeth Arden F1Q08WMS Industries F1Q08RAIT Financial Trust Q3 2007Acadia Pharmaceuticals Q3 2007Warnaco Group Q3 2007T-3 Energy Services Q3 2007Kimball International F1Q08Balchem Q3 2007Calgon Carbon Q3 2007National Retail Properties Q3 2007Mercury General Q3 2007OMRIX Biopharmaceuticals Q3 2007Newpark Resources Q3 2007Central Vermont Public Services Q3 2007RAM Holdings Ltd. Q3 2007LSB Industries Q3 2007SYSCO F1Q08Griffon F4Q07TETRA Technologies Q3 2007Max Capital Q3 2007OneBeacon Insurance Q3 2007Northeast Utilities Q3 2007Multi-Fineline Electronix F4Q07Allos Therapeutics Q3 2007Randgold Resources Q3 2007
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