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TheStreet.com's DAILY BULLETIN

July 14, 1999


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Name one company that has the ability to attract major players from the semiconductor industry? ANSWER:

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Market Data as of Close, 7/13/99:

o Dow Jones Industrial Average: 11,175.02 down 25.96, -0.23%

o Nasdaq Composite Index: 2,778.23 down 12.21, -0.44%

o S&P 500: 1,393.56 down 5.54, -0.40%

o TSC Internet: 653.10 down 5.69, -0.86%

o Russell 2000: 458.11 down 1.19, -0.26%

o 30-Year Treasury: 90 26/32 unchanged , yield 5.891%

Companies in Today's Bulletin:

Motorola (MOT:NYSE)

Iridium (IRID:Nasdaq)

Intel (INTC:Nasdaq)

Advanced Micro Devices

In Today's Bulletin:

o Silicon Valley: Motorola's Ball and Chain
o Wrong! Rear Echelon Revelations: Back in the Badlands
o Evening Update: Intel Gains After Hours as Wall Street Applauds Outlook
o Bond Focus: Long Bond Surrenders Gains as Argentina Rebounds

Also on TheStreet.com:

Internet: Excite@Home Plays Catch-Up

The company's plans to buy iMall reveal a strategy to take on AOL by focusing on small businesses.


Software: Notes from the Oracalapalooza Tour

Oracle execs go on the road to talk about the current quarter and explain new compensation plans for sales reps.


Latin America: Argentina Market Volatility Shakes Investors, Stirs Politicians

The country's refinancing needs and political rhetoric ahead of October's election will continue to batter market confidence.


The TaskMaster: Intel Bounces Back While a Hedgie Suffers; Elaine Weighs In

In a topsy-turvy after-hours session, a Motorola short would've paid off. Plus, Garzo talks.


Silicon Valley: Motorola's Ball and Chain


Carole Winkler

Special to TheStreet.com

In its second-quarter earnings release Tuesday,



said it will soon have a better idea of how much it will ultimately have to shell out to cover



financial failings. But some analysts already are betting the number could be huge.

Alex Cena, an analyst with

Salomon Smith Barney

, says Motorola could lose $1 billion to $1.7 billion thanks to Iridium's

continuing financial woes. (Solly hasn't performed underwriting for Motorola or Iridium.) After allowing for $800 million in reserves already, the financial hit would be $200 million to $900 million, depending on when Motorola had to recognize the losses. At a maximum, a loss of this magnitude could equal Motorola's earnings for a whole year.

But Motorola, which owns 18% of Iridium, said in its earnings release that "the previously announced sales of several businesses and assets are expected to generate significant gains and significant cash inflows in the third quarter, enabling Motorola to maintain a strong financial position, even with the negative impact of charges that may need to be absorbed by Motorola in the financial restructuring of Iridium LLC."

Still, the company said an Iridium restructuring could "necessitate an additional special charge" in the third quarter. It also noted that, in the second quarter, Motorola again deferred recognition of profits from its big operations and maintenance contract with Iridium. And it recorded a $126 million charge to write down the value of Iridium bonds.

Excluding charges, Motorola earned $273 million, or 44 cents a share, in the quarter, beating the

First Call

consensus of 41 cents a share and far better than the year-earlier's $6 million, or 1 cent a share.

Iridium's debt load is staggering -- totaling $3.5 billion -- which is forcing talk of a massive restructuring. It has $1.5 billion in high-yield debt outstanding; an interest payment is due on that debt July 15, with a 30-day grace period. It already is in danger of defaulting on financial covenants relating to an $800 million secured credit facility that is deferred until Aug.11. If Iridium defaults on that, then the company will also be considered in default of another $750 million credit line guaranteed by Motorola, not all of which has been utilized by Iridium. In addition, by Sept. 1 Iridium will owe approximately $470 million to Motorola: $400 on an operations-and-maintenance contract and $70 million previously owed to Motorola from Iridium.

Meanwhile, Iridium sits with slack demand for its satellite phones. Iridium was supposed to sign up 27,000 customers by May 31; it had only 10,294. It slashed prices July 1 by up to 68%, and its current subscriber base is estimated at 15,000 to 20,000. Iridium says it'll report new subscriber figures at month's end. One problem: Low-earth orbit satellite phones don't work well in buildings, a fact stated in the owners' manuals but which many impatient customers never read.

"Iridium, like others in the satellite industry, underestimated the time, energy and expense that have to be put toward the marketing, sales and distribution," says Ed Cornet, vice president of commercial space at

Booz-Allen & Hamilton

, which has done consulting for Iridium. "There is a belief in the industry that if you can do the rocket science of getting the satellites launched and working that you can do anything. Unfortunately, nobody makes any money until the systems are sold and used heavily."

Analyst John Bensche of

Lehman Brothers

believes Iridium will survive because it's in all parties' best interests for the satellite network to generate revenue. (Lehman hasn't performed underwriting for Iridium but has underwritten for competitor

Globalstar Telecommunications



"In a sense, the creditors have a gun to their own heads," says Bensche. That's because a majority of the shareholders -- including Motorola -- are strategic partners of Iridium that own the licensing and gateways in other countries, says Bensche. "If the creditors alienate the gateways by trying to grab too much of the pie, they will be stuck with 66 satellites with no salvage value," he says.

Motorola also has profited from its relationship with Iridium. It already received $3.5 billion as prime contractor to build Iridium, which was finished in November 1998. Of course, Motorola hasn't recognized the profits from that contract, instead placing around $800 million into financial reserves, including $50 million in the first quarter, according to Cena at Solly. Motorola didn't specify whether it put aside more reserves for Iridium in the second quarter. If Iridium survives, Motorola could complete the five-year operations and maintenance contract, bringing combined total revenue from Iridium to around $6.7 billion.

One analyst thinks that Motorola's profitable contracts with Iridium may be partially responsible for Iridium's financial woes.

"Motorola is playing both sides of the equation here," says analyst William Kidd of

C.E. Unterberg Towbin

, a firm that hasn't underwritten for Motorola or Iridium. "The operations and maintenance contract is very profitable for Motorola and expensive for Iridium. They are charging $500 million per year for services that cost them between $150 and $200 million to provide." Motorola declined to comment on the issue.

The trick will be to convince bondholders to accept more equity in lieu of payment and convince the shareholders to accept a large dilution, says Kidd. "Afterwards, if Iridium goes bankrupt, dilution will occur to an even greater extent because Motorola will acquire a pseudo-equity position proportional to the debt. The resulting dilution will be huge."

Wrong! Rear Echelon Revelations: Back in the Badlands


James J. Cramer

"Two cents light."

Those were the words that rang through my office at the moment that


(INTC) - Get Report

reported. Immediately we fixed our eyes on



Our trader,

Mark Kantor

, yelled out the cadence. "Offered at $65. Offered at $64 and a half. Offered at a quarter. They are hitting the $64 bid. Offered at $63 and three-quarters. Offered at $63 and a half. Offered at a quarter.

And then came the phrase "Intel sees a good second half."

"Take him, take him up to $63 and three quarters," I yell out.

"No, take him at $64. This is really bullish for Intel." I stare through

Jeff Berkowitz's

window into his office. He's nodding. "Grab it," I say. And then I heard the words no trader ever wants to hear. Kantor yells out, "Too late. It's gone."


"How about four, can we take four stock."

Gone too.

"Jeff, I don't think we should pay four-and-half, that's too tight, four-and-half," I shout to Jeff.




instant messages me, "Don't pay."

No matter, that stock's gone. Now it is offered at $65.

In the background


is talking about the stock being at $63. Holy cow is that wrong. Sure it was at $63, but that was a lifetime ago, I think to myself.

Better pen a piece fast, lest people get the wrong impression.

And that's what you saw at 4:57 p.m.

Random musings

: Weather forecast tonight: Blue Moon. That must mean "see you on




James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Intel and America Online. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at


Evening Update: Intel Gains After Hours as Wall Street Applauds Outlook


Heather Moore

Staff Reporter


(INTC) - Get Report

shares tumbled as low as 63 1/8 in heavy after-hours trading but then rebounded to 66 1/2 following the chipmaker's second-quarter earnings report. The stock closed the regular session at 65 3/8. Citing lower shipments in its motherboard and microprocessor units, Intel said it earned 51 cents a share. That's 2 cents below the 31-analyst

First Call

estimate but ahead of the year-ago 33 cents. After-hours traders seemed to find hope in Intel's claim that stronger results will come in the second-half.

Net income totaled $1.7 billion for the quarter, up 49% over the $1.2 billion the company reported a year ago but down 13% from the $2 billion it reported in the first quarter of this year. Second-quarter revenue came in at $6.7 billion, a 14% increase over the $5.9 billion last year but a 5% decline from the $7.1 billion the company reported in the first quarter of this year.

But how strong is strong? That's what analysts wanted to know on today's conference call with company executives.

CFO Andy Bryant said sales in the second half of the year would be "strong." But there's a big difference, some analysts pointed out, between a strong half in relation to last year's extremely strong second half and one that is strong only in relation to last half's more tepid results.

Bryant's answer was less than satisfying. "I don't want to get into finer detail about what a strong second half is," he said. "We really don't see anything dramatically different in the second half than what you would expect."

He was clearer on the definition of strong demand for the company's top-line products. Unit sales of the Pentium III chip, which saw disappointing sales in the first quarter, tripled last quarter and are now expected to make it the top-selling microprocessor in the world in unit volume this quarter.

Merrill Lynch

analyst Joe Osha had predicted Intel would come in with earnings of 55 cents a share. "It was not the greatest quarter," he said. Still, he hung up after the call feeling good about the rest of the year. "The outlook for the back two quarters looks great."

On the call, Paul Otellini, head of Intel's architecture business group, said the company has seen increased sales at both the high and low ends of the chip market. Unit sales rose for its low-priced Celeron chip but not at the expense of the more profitable Pentium lines, as has been feared. Instead, Celeron has been stealing customers away from other companies, he said, without naming prime rival

Advanced Micro Devices

(AMD) - Get Report


Better yet, Otellini said, the company is not gaining back the share by subsidizing these chips. While Celeron-based "free" PCs have been showing, Internet service providers and other "third parties" are eating the cost of the chips. "In general, those sales are not impacting our balance sheet or profit and loss," he said. Next quarter, he said, Celeron sales should be strong as the company continues to pummel its rivals. "Celeron will grow with the market," he said, "and with our ability to win back business."


previewed Intel's report this morning.


Marcy Burstiner

Elsewhere in earnings news,



shares slipped to 95 in after-hours trading from a regular close of 96 1/2 despite solid second-quarter earnings. The company made 44 cents a share, topping the 28-analyst estimate of 41 cents and moving way ahead of the year-ago penny.

In other postclose news (earnings estimates from First Call; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews

Centennial Cellular


reported fourth-quarter operating earnings of $1.6 million vs. the year-ago loss of $5.9 million. The company didn't provide per-share data.

Metamor Worldwide


restated first-quarter earnings to reflect discontinued operations, changing the results to 16 cents a share. The company's net income remained at 30 cents a share. Metamor also said it sees its 1999 net income rising $20 million to $22 million from the year-ago $19 million.

Norfolk Southern

(NSC) - Get Report

said it sees second-quarter earnings of 18 cents to 22 cents a share, below the 10-analyst forecast of 33 cents. The company, which made 48 cents in the year-ago period, attributed the expected shortfall to pressure on revenue and higher-than-anticipated costs from the integration of



Waste Management


said it sees 1999 earnings coming in around $2.65 to $2.70 a share and 2000 earnings of around $2.90 to $3 a share. The company also said it started a probe into allegations of insider trading.

In other earnings news:

Mergers, acquisitions and joint ventures

Chancellor Media



Capstar Broadcasting


said their shareholders approved the companies' planned merger. Capstar shareholders will receive 0.4955 of an AMFM share for each share held.

Offerings and stock actions

Goldman Sachs


Tibco Software's

(TIBX:Nasdaq) 7.3 million-share IPO top-range at $15. The company's products allow computer applications to communicate over the Internet. Tibco is majority owned by





Learning Tree


announced plans to shift the focus of its technology-based training products to Internet-based methods from CD-ROMs. The company expects to record a third-quarter charge of $6 million to cover development costs and equipment.

Bond Focus: Long Bond Surrenders Gains as Argentina Rebounds


Elizabeth Roy

Senior Writer

The benchmark 30-year Treasury bond ended the day unchanged, giving back strong gains made in the morning on fear that another chapter is being drafted of the pre-millennial emerging-markets meltdown, and that it will be set in Argentina.

Essentially, cooler heads prevailed as investors learned more about the situation. An Argentine sovereign default, the prospect that came up for debate yesterday, can't be ruled out, of course. But sometime this morning, investors decided that the bonds, which traded down sharply again today at the open, were over-discounting that possibility.

Investors started buying, and prices recovered to end slightly higher on the day. And that spelled the end of the flight-to-quality rally in Treasuries.

"The market" -- the emerging markets bond market, that is -- "has rebounded really quite strongly, which I associate with the retreat of Treasuries from their best levels," said Dan Peirce, head of emerging markets research at

BancBoston Robertson Stephens

in Boston. "Either somebody's risk-reward ratio flipped, or somebody looked and said, 'Hey, I didn't realize how cheap these things were.'"

"A lot of concerns linger, but default is a long way off," Peirce added, explaining what he sees as the reason for the rebound. "The proximate cause of what we've seen in the last week has been a large seller in the market, and because we had that market activity, it brought renewed focus on the news background," in a country that's in the midst of a presidential election which will give the country a new government for the first time in 10 years. Calling the concerns about the country "overdone," Peirce said: "We see the fiscal numbers, and the financial responsibility, and the general economic state as more resilient than other countries in Latin America."

The benchmark long bond ended the day unchanged at 90 29/32, its yield 5.90%.

Shorter-maturity Treasury notes traded up, however, as investors concluded that maybe the renewed focus on emerging-markets financial pain will stay the


hand when it meets to decide the fate of short-term interest rates on Aug. 24.

"A lot of people are beginning to feel that the chances of a Fed tightening are diminishing,"

Dresdner Kleinwort Benson

senior market economist Kevin Logan said. "With all the trouble in Latin America, maybe they'll hold off."

Market watchers are also saying that this week's rally, which has trimmed roughly 10 basis points from most Treasury yields, has also been driven by optimism about the next round of key economic reports. That round begins tomorrow morning at 8:30 a.m. EDT, with the release of the

Producer Price Index

and the

retail sales

report, both for June.

The PPI, which measures inflation at the wholesale level, is expected to rise a scant 0.1% overall and 0.1% at its core, which excludes volatile food and energy prices. Retail sales are expected to rise 0.3% overall and 0.4% excluding autos. In both cases, those estimates are for friendlier numbers than the bond market has seen in recent months.

To the extent that traders have been buying Treasuries in anticipation of friendly reports, the market is vulnerable to selling if the reports are stronger than expected, or even if they are as expected, analysts say. Especially since the next round of inflation reports -- the PPI and

Consumer Price Index

for July -- are already striking fear into bondholders' hearts, based on the recent rise in oil prices they will capture (the June reports won't).

"The market will be anticipating

that the next round of inflation reports will be a little nastier,"

Deutsche Asset Management Americas

chief economist Josh Feinman said. Combine that with hesitation to buy ahead of Fed Chairman

Alan Greenspan's



testimony on the economy and monetary policy, slated for July 22, and "it could be we're setting up for a classic 'buy the rumor, sell the fact' -- provided that Latin America doesn't blow up."



Street Sightings

Wednesday, July 14

o James J. Cramer will be appearing on CNBC's "Squawk Box" beginning at 7 a.m. EDT.

o Chat with George Mannes on AOL's MarketTalk at 4 p.m. EDT. MarketTalk is hosted by Sage Online. (Keyword:Live)

o Helene Meisler will be the guest host of CNBC-Asia's "Squawk Box" beginning at 8:30 a.m. Singapore time.

Catch the premiere of TheStreet.com on the FOX News Channel July 17! Join host Brenda Buttner and TSC regulars like Jim Cramer, Herb Greenberg and Dave Kansas. Saturdays at 10 a.m. ET and again on Sundays at 1 p.m. ET.

Copyright 1999, TheStreet.com