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TheStreet.com's DAILY BULLETIN

August 11, 1999

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Market Data as of Close, 8/10/99:

o Dow Jones Industrial Average: 10,655.15 down 52.55, -0.49%

o Nasdaq Composite Index: 2,490.11 down 28.87, -1.15%

o S&P 500: 1,281.43 down 16.37, -1.26%

o TSC Internet: 488.40 up 8.37, 1.74%

o Russell 2000: 422.82 down 3.07, -0.72%

o 30-Year Treasury: 86 20/32 down 4/32, yield 6.248%

Companies in Today's Bulletin:

Cisco (CSCO:Nasdaq)

Abercrombie & Fitch (ANF:NYSE)

Legg Mason (LM:NYSE)

In Today's Bulletin:

o Software: ASPs Say They're Ready to Strike but Show Meager Profits
o Wrong! Dispatches from the Front: Cisco Is Up, and It's Good
o Evening Update: Cisco Rises After-Hours; Blockbuster IPO Priced Below-Range
o Bond Focus: Bonds Slip as Three-Day Auction Begins

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Software: ASPs Say They're Ready to Strike but Show Meager Profits

By

Medora Lee

Staff Reporter

8/10/99 7:19 PM ET

SAN FRANCISCO -- When Mike Abbaei, senior vice president and CIO at

Legg Mason

(LM) - Get Report

, looked at setting up the company's retail brokerage subsidiary

Legg Mason Wood Walker

last year, he quickly came to appreciate firsthand some of the costs of jumping into e-commerce.

Setting up shop online is easier said than done -- e-businesses require a new set of applications, including those that keep tabs on customers and allow customers to place their own orders. Another set of costs have to do with new applications needing to be integrated with earlier-installed systems and making sure they work round the clock.

Instead of embarking on what could have been an extremely expensive and technical venture, Abbaei picked application service provider

USinternetworking

(USIX)

to do the heavy lifting.

Application service providers, or ASPs, are the hottest

software

buzzword right now. Basically, ASPs host and maintain software for companies for a fee, allowing the companies to use very expensive software without having to pay large up-front licensing and implementation fees. For medium- to small-sized companies that don't have technology expertise, ASPs can significantly reduce the amount of money a company spends to maintain its in-house IT systems.

Proponents say ASPs allow companies to download applications over the Internet, with minimal customization and fewer in-house IT people to oversee the software. This can be a great help with back-office automation software, which costs millions of dollars and can take years to install and employ.

Software companies like

Oracle

(ORCL) - Get Report

and

Siebel

(SEBL)

have each laid down stakes in the ASP market. Oracle is offering to host its applications online on its own servers while Siebel has taken about a 3.25% stake in USinternetworking. USinternetworking is probably the most well-known ASP after its hot IPO in April in which shares soared as high as $60 from the IPO price of $21.

But if things sometimes sound too good to be true, they probably are. Though the idea of ASPs revolutionizing how software is leased through and distributed over the Internet sounds like a no-brainer, some fund managers are skeptical.

"Conceptually, it could be the next big thing, but what worries me most is the business model," says Michael Hahn, a fund manager at

Merrill Lynch

. ASPs have extremely high start-up costs in setting up data centers, and they have to pay for software licenses up-front but can only recognize revenue over time.

Take Annapolis, Md.-based USinternetworking as a case study. Hahn, who owns some shares of it in his personal portfolio, notes that the company's cash flows continue to fall deeper into negative territory.

USinternetworking lost $23.6 million, or 66 cents per share for the second-quarter earnings, although revenue rose 52% from the first quarter to $6.7 million. Cash flow or earnings before interest, taxes, depreciation and amortization were a negative $15.4 million.

Credit Suisse First Boston

analyst Mark Wolfenberger, who also noted the increasing operating losses, maintains a buy rating on the stock because he believes "the investment in USinternetworking is a play on the huge ASP market opportunity, not on short-term operating profits." First Boston was the lead underwriter in Usinternetworking IPO in April.

Just how "huge" is that market potential? The definitions vary among experts and leading market researchers.

Forrester Research

predicts the ASP market to hit $10.1 billion by 2001, while a less bullish

IDC

, forecasts the market to grow to $2 billion by 2003 from about $200 million now.

The demand for the hosting services is further clouded because many companies involved in the ASP market have yet to produce a long list of live customers. For example, Redwood Shores, Calif.-based Oracle spent a day outlining its ASP strategy to the press. Oracle claims 20 customers but only four are using the company's ASP offerings so far.

The ASP business doesn't generate much revenue for Oracle. Not that it concerns Mark Jarvis, vice president of marketing. "We only have four

active customers, but that doesn't matter right now because the

potential

number of customers is enormous."

In addition to hosting its own applications online, Oracle recently announced a suite of products to help Internet service providers, or ISPs, become ASPs and software developers make their programs Internet-based instead of client-server based.

Jarvis boldly claims that Oracle's ASP business could make up about 50% of Oracle's overall revenue within five years. For fiscal year 1999 Oracle reported revenue of $8.8 billion. "Net access is going to eventually be free, so ISPs will have to find another way to make money," he says. "One way to do that is to offer more services, and one of those services will be to host applications."

Siebel, which makes front-office automation software and is increasingly competing with Oracle, has also put a bet on the ASP market via its stake in USinternetworking. But CEO Tom Siebel believes the ASP market is "more hype than reality," according to a San Francisco-based analyst. The analyst, who declined to be named, says "everyone has to have a stake -- just in case," but Siebel believes the ASP market will be limited because "information is critical. Do you really want to outsource that? I wouldn't. I'd rather have my in-house IT staff to handle any problems." No one at Siebel was available to comment on those remarks.

USinternetworking vice president of marketing Michele Perry admits many companies have yet to be sold on the idea of outsourcing information. However, she's convinced that once ASPs get the initial burst of successful customers, the market will ramp up quickly.

Sure, but will USinternetworking still be around to see the ASP market take off?

"Sure, they can get the cash they need now with another round of financing because the market's good, but what happens if the market goes down?" says Merrill Lynch's Hahn. He says he will continue to hold his USinternetworking shares for now in hopes of striking some gold but is still nervous. Shares of USinternetworking fell 7/8 to 18 13/16 Tuesday.

Wrong! Dispatches from the Front: Cisco Is Up, and It's Good

By

James J. Cramer

8/10/99 5:29 PM ET

It's up, it's good. Of course, it is

Cisco

(CSCO) - Get Report

. What a delight their conference call continues to be. Nothing but upside. And no waffling. The stock has ramped right through to 60 1/2.

Sure they have their concerns. They worry about the world's state. But Asia is better and the U.S. is great. Europe is still good. And Y2K -- no change, they are worried but they have remained worried and they give me confidence.

I am buying some as I write. Can't wait until the Q&A. I like it too much. Bodes well for tomorrow.

******

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco. 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

jjcletters@thestreet.com.

Evening Update: Cisco Rises After-Hours; Blockbuster IPO Priced Below-Range

By

Eileen Kinsella

Staff Reporter

8/10/99 8:31 PM ET

OK, everyone ... exhale. Closely watched

Cisco

(CSCO) - Get Report

reported fourth-quarter earnings just a notch better than expectations, but considering all the pre-earnings anxiety in the

Nasdaq Stock Market

the news will be music to a lot of tech-tuned ears.

Excluding extraordinary items, Cisco said fourth-quarter earnings were 21 cents a share, a penny better than the 30-analyst estimate, and up from 16 cents a year ago.

Ahead of the news, Cisco was the most actively traded issue on Nasdaq today, with 38 million shares changing hands, and the stock stumbling 1 1/8 to 58 3/4 as investors worried about the potential impact of less-than-happy news. But following earnings news, things were looking brighter, and the stock reportedly was trading at 60 7/8 in after-hours activity.

Salomon Smith Barney

priced

Blockbuster's

(BBI:NYSE) 31 million-share IPO at $15 a share. The company didn't exactly receive four stars, missing its anticipated price range of $16 to $18.

In other postclose news (earnings estimates from

First Call

; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews

Abercrombie & Fitch

(ANF) - Get Report

reported better-than-expected second-quarter earnings of 17 cents a share, ahead of the 17-analyst estimate of 14 cents and up from the year-ago 10 cents. The company said it would open 24 adult stores and 18 stores for kids in the second half of the fiscal year and added that Internet sales were not yet a significant part of its business.

Chico's FAS

(CHCS)

said it expected to meet the three-analyst expectation of 44 cents a share in second-quarter earnings due to brisk sales.

Intevac

(IVAC) - Get Report

revised its second-quarter earnings results to include a patent infringement settlement. The settlement widened Intevac's loss to 23 cents a share in the latest quarter , compared with the previously reported 20-cent loss. The three-analyst estimate had been for a loss of 20 cents.

Vintage Petroleum

(VPI)

reported second-quarter earnings of 4 cents a share, better than the 16-analyst estimate of a 4-cent loss, and up from an 18-cent loss a year ago. Vintage said it would divest a number of nonstrategic oil and gas properties to improve efficiency and lower its financial leverage.

In other earnings news:

Miscellany

Neff

(NFF)

can't seem to figure out why its stock is in the red. The shares closed at 17 5/16 July 30 and have fallen in every trading day since, ending today down 1 5/16, or 11.4%, at 10 1/4.

Donaldson Lufkin & Jenrette

, the company's financial adviser, is exploring strategies that would bring the company back to greener pastures. Neff said a sale, spinoff or recapitalization are all under consideration.

Staff reporter

Tara Murphy contributed to this story.

Bond Focus: Bonds Slip as Three-Day Auction Begins

By

David A. Gaffen

Staff Reporter

8/10/99 4:34 PM ET

The bond market loosened its belt by a notch today to eat up $15 billion of five-year supply, the first leg of the three-day quarterly

Treasury

refunding. Bond prices hovered just above even for most of the day, but like a gourmand collapsing into a chair, relaxed in the waning hours in the knowledge that this was only the appetizer -- pasta and veal are still on the way.

The Treasury will sell $12 billion in 10-year notes tomorrow and $10 billion in 30-year bonds Thursday, so both those issues were marked down following today's five-year auction. Lately the 30-year Treasury bond was down 4/32 to trade at 86 19/32. The yield bumped up by 1 basis point to 6.25%.

By the accounts of three sources, the five-year auction was reasonably successful. The bid-to-cover ratio, which measures the total level of interest vs. what was sold, was 1.85 to 1, which compares favorably with 1.82 average for the last four five-year auctions. Total noncompetitive bids -- basically, that's retail investors who aren't trying to outplay other primary dealers for the best price -- were $557 million, slightly better than expected and also better than the $410.5 million average for the last four auctions. This was expected, especially since the five-year yield reached its highest level in 21 months, at 6.03%. The new notes sold at a yield of 6.014%.

Kevin Flanagan, money-market economist at

Morgan Stanley Dean Witter

, characterized today's auction as the best positioned of the three. The five-year is yielding about 100 basis points over the current fed funds target of 5%. This already "allows for a tightening" at the next

Federal Open Market Committee

meeting Aug. 24, he said. Meanwhile, the 10-year note is only yielding additional 13 basis points for a riskier security, and the 30-year just 22 basis points. "There really isn't an incentive by the investor, but the five-year note is situated well on the curve."

There are, of course, risks for the investor in upcoming weeks. The entire curve could continue to lose ground as more strong or inflationary economic data are released. This Friday features the July

Producer Price Index

, followed with next week's

Consumer Price Index

, both key inflation indicators. Of course, the

Fed

looms after that, and while most believe the market's prepared for the committee to raise the fed funds target to 5.25%, that doesn't mean the market's going to like it.

"It's hard to get long in front of two auctions," said Roseanne Briggen, market strategist at

MCM Moneywatch

. "We've got a booming economy, robust employment, and it looks like the Fed's going to tighten."

Another factor depressing the bond market is the rise in the

Bridge/Commodity Research Bureau

index, which rose to 198.48 today, just off the year's 198.96 high. The bond market worries about recovery in commodities because higher commodity prices could work its way into the economy in higher prices for producers and later, for consumers.

Electronic Trading Resumes on CBOT

The

Chicago Board of Trade's

computerized trading system, which handles overnight trading in interest rate and agricultural futures and options, finally resumed trading today after the futures pits closed at 3:15 p.m. EDT, after a three-day shutdown.

The system, also known as Project A, originally collapsed due to an outage at an

MCI WorldCom

(WCOM)

switching center, causing overnight CBOT trading to be suspended at 9:21 p.m. Thursday, and throughout the last two overnight sessions (Sunday to Monday and Monday to Tuesday).

The outage wouldn't affect the daily session from 8:20 a.m. to 3 p.m., known as "open outcry," when the bulk of trading takes place. However, it meant traders conducting business overnight -- primarily the European and Asian markets -- were frustrated in their attempts to make timely trades. "It's like online brokers going down," said one futures trader in New York. "You can't get out of your position, and you can't manage your risk."

Average daily volume for Project A during July was 45,575 contracts, compared with the total exchange's average daily volume of 1,020,424 contracts in July, a CBOT spokeswoman said.

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