Color on news: Sandisk (NASDAQ:SNDK)

Several firms out with cautious comments on Sandisk (NASDAQ:SNDK) after the co issued weak guidance and news of restructuring. At least one firm is downgrading the stock.

- Citi notes SNDK reset its bar (aligning directionally with pricing they've noted) for 30-40% 1Q price cuts and an ugly 2Q. Gross margins severely pressured thru 3Q07 with only partial EPS offset from 10% staff cut ($0.10 per anum).

Why now? Citi's initial take = clear decks pre-2/26 analyst day to clarify messaging, though in reality an urgent need to get cost cuts implemented.

Could things get worse? Unfortunately, yes. 1Q07's worse-than-feared retail pricing (by 500-750 bps), and 2007's gross margin meltdown (~500 bps worse than thought) should cut Street EPS by 45% for 2007E and by 20% for 2008E. Further as fab III and fab IV cap ex plans are maintained, end-demand must solve oversupply problems, lending little confidence to 2Q07 and 3Q07 gross margin modeling and therefore conviction that SNDK shares may find a bottom today.

The firm is reducing 2007E/2008E to $1.04/$2.04 from $1.33/$2.10. Street ests, overly aggressive post-4Q06 results (43% and 20% above their prior '07/ '08 ests), if reset to more realistic levels, could help the stock find a bottom in 1H07. Maintains Hold and $44 tgt.

- Merrill Lynch notes SanDisk's announcement underpins their belief that there are few near term demand drivers that could soak up the industry oversupply. Combined that with limited manufacturing leverage for SanDisk prior to Fab 4 ramp and the ongoing integration with the former m-systems business, they believe SanDisk's margin will stay at a low level in the next few quarters. That being said, they think aggressive pricing will stimulate new demand sooner than the street expects, and they have written about the solid state drive (SSD) opportunity a few weeks ago.

Firm's GAAP earnings estimate for 2007 goes from $0.88 to $0.30, which includes the impact of restructuring charges. On an adjusted basis, estimate goes from $1.80 to $1.25. We assume 160% bit growth and 60% price decline in 2007.

The cautious tone was very similar to two weeks ago when management provided its business outlook during the earnings call. Until visibility on pricing improves, the firm recommends investors to stay on the sideline. Rating remains Neutral.

- ThinkEquity's Eric Ross looks like the most optimitic of the bunch saying that with the NAND flash market seeing significant ASP erosion in 1H07, SanDisk announced Friday a series of cost-cutting measures designed to help counter falling NAND flash prices. The company's announced cost-cutting programs should help offset some of the weakness in memory prices-the first in recent memory. Any upside to SNDK shares may be limited in the near term even though the firm believes sentiment may be reaching its bottom. They are lowering their estimates and price target from $47 to $45, but reiterate Accumulate rating.

Lower ASPs should not be a surprise. Two weeks ago, Micron said during its analyst meeting that ASPs are falling 30-40% Q/Q in NAND. Hynix had already said this as well. Now SNDK is saying this-this should not be new news. In fact, MU's comments were what prompted the firm to lower their price target to $47, and now they slightly lower it again.

The NAND market is further weakened by the fact that there are no new applications to help spur demand in the consumer electronics market that will help absorb the added capacity that is coming online and to materially tip NAND flash market demand in thenear term. Cell phones have not taken up the slack as soon as we expected, and the iPhone has not been the driver many in the channel were led to believe. However, management believes that the NAND market should pick up in the second half of this year. In our opinion, demand from mobile phones and new products such as the hybrid drives are possible long-term demand drivers.

- Baird is downgrading SanDisk to Neutral from Outperform and reducing price target to $43 from $55 on the basis of a reduced gross margin forecast. SanDisk announced cost cutting measures and said gross margin pressures (without quantifying) would likely continue in a press release last Friday. Stock fully valued on the basis of firm's new 2008 forecast (new 2008 GAAP and pro forma EPS estimates are $1.48 and $2.00, down from $1.73 and $2.25, respectively). Licensing term renegotiations in 2008 provide a murky profitability picture longer term.

Notablecalls: SNDK traded down 4-5% in after market action late Friday. I suspect the stock will open down no more than say 5-6%. While I have no feel for short term price action I think SNDK will keep going down over the next couple of months. How much would you pay for $1.80-$2.00 EPS power in 2008? 20x? Probably less, something more closer to 16x (SNDK's EPS power for 2007 is around $1.00-$1.50). No reason to own this one around current levels. Please see archives for further color.

Color on SIRI/XMSR merger

Several firms are out commenting on XM Satellite (NASDAQ:XMSR) and Sirius Satellite (NASDAQ:SIRI) merger:

- BofA notes XM shareholders will receive 4.6 shares of Sirius stock for each share of XM - implying an XM share value of $17.02 (based on Friday's close) and a total combined enterprise value of ~$13B.

Firm's contacts in D.C. maintain that procedural hurdles could stop a deal from getting through the FCC - we estimate the probability of obtaining regulatory approvals before end of 1Q08 at less than 50%. As the firm has stated previously, the Achilles heel for sat radio could prove to be the existence of a rule that prohibits the two providers from merging. The FCC might not be able to simply waive this rule; it might have to formally change this rule. This could take time and the window to get approval before the '08 elections is narrow. In addition, a lobby group like the NAB (National Association of Broadcasters) could seek a legislative 'solution' to prevent a merger.

Fukk realization of synergies could take several years, making value estimates more uncertain. Firm estimates that an XM/Sirius marriage would create $5B of value, but mot cost savings wouldn't be realized until the end of the decade.

Investment thoughts - they wouldn't chase these names and remain Neutral on the shares of both XMSR and SIRI. Firm's expect SIRI to open slightly higher on 2/20, perhaps near $4 - implying an opening price for XMSR of ~$18, based on the 4.6x exchange ratio. But they think that further appreciation potential from these levels is limited. Assuming $5B of synergies AND certain FCC approval, the firm estimates that Sirius and XM stock would be worth ~$4.25 and ~$19.50.

- Goldman Sachs notes that in their view, merging platforms could deliver significant operational, financial, and strategic benefits, likely exceeding $4 billion, though mostly years away. That said, they continue to believe that that the merger is unlikely to pass muster with the FCC, DOJ, and investors, assuming current terms. Finally, the firm cautions that some investors might view the
emergence of the merger proposal as a lack of confidence in the fundamental business outlook as stand-alone competitors.

The ~18% EV discount XMSR trades at relative to SIRI should be cut by 2/3 upon the open. Assuming SIRI shares trade toward $4 implies $18.40 per XMSR share, less an estimated net 5%-6% arb discount (10%-12% gross spread less rebate) yields XMSR shares around $17.40, or a 24% increase from Friday's close. This is close to the almost 22% premium assigned to XMSR shares via the proposed 4.6:1 fixed-exchange ratio.

- Wachovia has probably the best note on the subject saying they believe there is a 25% chance or less of obtaining regulatory approval with the deal in its current form and a 50% chance or less in any form. It is interesting how times have changed in the sat radio space as two years ago the sat radio industry was dubbed Coke and Pepsi and cable without the competition, yet today the expectation is that they will be allowed to merge. Recall their belief that a deal would not be approved is based on an FCC rule prohibiting the merger of the two players, no compelling reason to change that rule amidst likely aggressive opposition of the powerful broadcast lobby. Likelihood is further reduced by the fact that in most of the cars in the U.S. over the next five years, there are only likely to be two pay radio providers (XM and Sirius), which would be reduced to one by this deal. Over the long term, they believe more competition will emerge in the car, but as of today widely available factory install alternatives simply do not exist. Firm believes the sat radio players' strategy is get approval from the DOJ and hope that this will put pressure on the FCC not to vote against a deal.

For 2006, they estimate the combined companies generated $1.5B in revenue, yet some have publicly surmised there are $7B in synergies from the proposed merger. This level of potential synergies is extremely unrealistic, in firm's opinion.

Firm notes their historic caution on the sat radio stocks has been driven primarily by belief that results would continue to weaken amidst a rich industry valuation. This merger attempt despite long odds would seem to validate this belief that results for the industry are likely to continue to be
worse than expectation, which should be highlighted by weak '07 guidance for both players. Despite a likely move higher in the shares today, they believe even at current valuation levels assuming a deal is approved as is, the implied valuation of the combined company is rich. After a pop amidst potential merger/synergy euphoria these stocks again are likely to trade on weak fundamentals, regulatory milestones (or lack of milestones), and valuation.

Notablecalls: There will surely be a pop in both stocks as investors greet the news of a merger. It had long been my personal view that merging was one of the best ways for these two to generate some shareholder value. However, the odds of getting the merger done are not so favorable. The main hope here seems to be that Karmazin knows what he is doing. After all, he's the king of radio mergers. So, currently it looks like XMSR is a short around the $17.30-$17.50 level. Have no feel for SIRI but it sure looks like $4 is the line in the sand.

Paperstand (XMSR, SIRI, TA)

The WSJ reports that the proposed $11.4bn merger of XM (XMSR) and Sirius (SIRI) sets up a crucial test for the nation's regulators: how to weigh the limits of consolidation against rapid changes in media technology. The deal is structured as a 50-50 "merger of equals," giving XM and Sirius shareholders an equal stake in the combined co, and potentially uniting a roster of talent. The agreement calls for Sirius CEO Mel Karmazin to serve as CEO of the new entity, which would have more than $2.3bn in long-term debt. XM Chmn Gary Parsons would be Chmn. But b/c XM and Sirius are the only 2 co’s licensed by the FCC to offer satellite radio in the US, the deal is likely to face significant regulatory obstacles. Broadcasters said yesterday that they will fight the proposed merger, and FCC Chmn Kevin Martin released an unusually grim statement saying that the 2 co’s will face a "high" hurdle, since the FCC still has a ‘97 rule on its books specifically forbidding such a deal which would need to be tossed. The transaction also requires the Justice Department's blessing. "The benefits to the subscribers are awesome," Sirius's Mr. Karmazin said in an interview. "We can combine [research and development] resources and come up with cooler, more advanced products that will satisfy them more. We're going to have the ability to negotiate better with our receiver manufacturers."

“Heard on the Street” column out on TravelCenters (TA), whose stock has popped 38% since Feb. 1, when the co was listed on AMEX. The co was spun off from Hospitality Properties Trust (HPT). Article suggests, investors should be aware of the relationship between the truck-stop operator and its former owner. TravelCenters warned in its own prospectus: "We were formed for the benefit of Hospitality Trust and not for our own benefit." As a result, the co continued, "some of our contractual relationships and the terms of our initial operations may provide more benefits to Hospitality Trust than to us." TravelCenters' spinoff is part of an increasingly popular trend among REITs. These trusts have been buying property-rich firms, keeping the real estate and setting up separate operating co’s that pay rent back to the REITs, which are exempt from paying taxes on that income. Barry Portnoy, Chmn of REIT Mgmt & Research, has set up similar deals in the past. He is a managing trustee of Hospitality, as well as a director of TravelCenters. "Barry Portnoy is a very smart investor, but all of his deals are fraught with conflicts, which frustrate a lot of institutional investors," says Rod Petrik, of Stifel Nicolaus.

Paperstand - Sirius and XM to merge

The NY Post reports that satellite radio operators Sirius (SIRI) and XM (XMSR) are expected to announce their long-awaited merger today. The two sides were locked in negotiations over the weekend trying to hammer out a final agreement with an eye toward going public with the merger today. The transaction is expected to be structured as a merger of equals, but given Sirius' higher enterprise value, shareholders in the Mel Karmazin-led firm will likely come away with a larger percentage of a combined company. XM Chairman Gary Parsons will retain that title in the combined entity, with Karmazin likely taking the CEO role. It is unclear what role, if any, XM CEO Hugh Panero will play.

The WSJ reports that DaimlerChrysler (DCX) is moving forward with preparations to sell or spin off the Chrysler Group, raising the prospect that it could auction off the embattled US unit in the coming months. The co has already received several expressions of interest from around the world for Chrysler since saying last week that it was considering "all options" to turn around the unprofitable operation. DaimlerChrysler has also said it is interested in using alliances and partnerships to help Chrysler cut costs and expand sales in fast-growing intl mkts. It is already talking to General Motors about joining forces to develop a large SUV.

Barron's Summary

Fund holdings include CEN, CAG, UNM, SOV, NSM, BAX, HD and PRU. Another fund manager likes DCX, HMC, HBC, CS, UBS, PUB and BSY.

Bulls on Timken (TKR) think its stock, now around 29, is headed for the mid-30s. Eventually, that's likely, but it could head lower first until signs emerge that its restructuring is bearing fruit. Analyst Mark Parr of KeyBanc has a tgt of 35. "The co's sensitivity to autos in conjunction with all of its manufacturing-restructuring activities over the past couple of years clearly has hurt earnings momentum," says Parr. "But given the recent run-up in auto-supplier stocks, Timken looks very timely right now."

Electronic Arts (ERTS) isn't playing games. Its earnings could more than triple over the next 2 years, and its shares could jump from 51 to 65 within 12 months.

Barron’s thinks that the growing popularity of Jack Daniel's could propel Brown-Forman's (BFB) shares to 80 from a recent 66.

DaimlerChrysler's (DCX) shares, up nearly 40% in the past months, could climb above 80 if Chrysler fetched a decent price. But finding a willing buyer is sure to be difficult. The idea of a GM-Chrysler deal certainly strains credulity. "Take your pick - 'the blind leading the blind' or 'two wrongs don't make a right.' We ran out of clichés to use," wrote Shelly Lombard of Gimme Credit.

“The Trader” column out saying that Sony’s (SNE) stock has been dull and flat for so long a recent uptick warrants a closer look. Sure, predictions of a Sony revival have been consistently premature, and the electronics giant has become a cautionary tale about squandered opportunity. An unwieldy empire stretching from movies and music to financial services and insurance also makes it a symbol of bloat. But its push to improve efficiency will eventually pay off, and investors' decade-long disregard hints at the potential upside should they come around. "Nearly everyone hates it, nobody appears to have done any work on it, yet the stock continues to show technical improvement," says John Roque of Natexis Bleichroeder. Credit-Suisse, for example, says the sum of Sony's parts would value its ADRs at 64, 22% higher.

“Review” section discusses Nike (NKE), whose Air Force One turned 25 last month, and Nike celebrated by launching Air Force 25 and collaborating with MTV on a special highlighting the shoe's history. It's a sure bet AF25, like its predecessors, will fly off the shelves. That should help Nike maintain its dominant share of the athletic-footwear mkt, and keep its high-flying stock surging. In their plan to reach $23bn in annual sales by 2011, Nike officials last month called Air Force One "the most iconic product and loved basketball shoe ever...a cult of itself." Limited production and smart marketing have kept it cool: Prices of some collectors' edition models have hit $2K. As hot as Crocs (CROX) are right now, they are a long way from having their own MTV show or rap song. Nike stock's got game. The shares hit an all-time high of 106 last week. If Nike gains share and grows margins, the stock could reach 115 in a year, says BofA analyst Robert Ohmes.

Barrons’ “Follow Up” section speculates if BHP Billiton or Rio Tinto hopes to buy Alcoa (AA) they might have to pay a lot more than $40bn, the price tag attached to the rumors. John Buckingham, of Al Frank Fund, understands why BHP and Rio Tinto might be interested in a deal, especially at a bargain price. After all, he says, "the ugly duckling is now a swan." But he views a bid of $55 a share, or about $48bn, as a much fairer price for Alcoa holders.

According to the Barron’s, Adams Respiratory (ARXT) investors may have a bit more to worry about than the approaching end of cold-and-flu season, a potential generic version of Adams' popular mucus thinner Mucinex. Its shares, are up 142% since Jul05 IPO. But an application accepted by the FDA for a generic version of Mucinex by Pharma Holdings, Mutual Pharma and United Research Labs has remained largely off the Street's radar screens. Adams arrived at its patent by shrewdly taking a cheap compound that had been on the mkt for decades, testing it and gaining FDA approval and exclusivity. The rather routine challenge came Aug. 6. Adams, as is typical in such cases, sued the applicants in Federal District Court in Philadelphia to enforce its patent, gaining the requisite 30-month stay on any competing generic version. But a high-expectation stock with a multiple at 24x F07 earnings that sank 9% on a margin shortfall might not easily absorb the "headline risk" of a legal threat to its largest product.

“Technology Trader” out saying generic competition for biotech firms like Amgen (AMGN) and Genzyme (GENZ) drew a step closer Wed, when a bipartisan group in Congress introduced a bill to authorize FDA approval of generic biologic drugs. High prices for biologic drugs are welcomed by biotech shareholders, but not by health care's payers. The biggest biotech spender is Uncle Sam himself, under the Medicare program, which spent over $3bn on just 3 anemia drugs from Amgen in the F05. So after Amgen's patents expire, the govt and private insurers would love to see competitive pricing. Sanford C. Bernstein biotech analyst Geoffrey Porges said: "Amgen is obviously the big tgt here." Once biogenerics became law, the FDA would need a long time to draw up regulations. And even under those regulations, the "comparability" testing of some biogenerics could take years. And of course, patent claims must be put to rest. That long runway gives Amgen and Genzyme time to introduce new drugs. But it would also make the biogeneric game less competitive for those who can afford to play it. Those who've shown an interest include manufacturers like NVS, PFE, TEVA, BRL, ESRX and MHS.

Calls of Note Part 6

RBC says datapoints from industry contacts suggest that Yahoo's (NASDAQ:YHOO) Project Panama algorithm change on February 5th progressed fairly smoothly. Datapoints aggregated from numerous sources suggest that the algorithm change was smooth and that there were no major technical glitches or setbacks in the initial two weeks. Firm view this as a major positive.

After some initial volatility in highly-trafficked keywords, Panama started to learn and re-rank advertisers based on brand relevancy and better ad creatives, showing that the system is working.

In the aggregate, firm believes advertiser spend should increase modestly from pre-to-post Panama levels. Ad spend increases for advertisers with high ROI-focus is more pronounced, as daily limits and budgets are flexible. Spend increases at brand-oriented advertisers may lag by about one quarter, as these marketers typical have to go through longer approval processes for additional budget. Firm reminds investors that it is still early, that some advertisers have temporarily increased max-bids to influence CTRs, and that budget adjustments happen slowly for many advertisers.

It is too early to definitively say, but firm has heard anecdotally of some advertisers with limited budget flexibility (brand-oriented) shifting some dollars from Google and MSN.

Firm has raised their estimates to reflect positive y/y monetization impact in 1H07. Firm's FY07 revenue, EBITDA and EPS estimates are now $5.3b, $2.1mm, and $0.71 vs. prior $5.24b, $2.08mm, and $0.70.

Notablecalls: Project Panama continues to be the most important theme for Yahoo. Expect the share price to advance further as the word on positive launch continues to spread.

Calls of Note Part 5

Two interesting calls out on Google (NASDAQ:GOOG) this morning.

- Bear Stearns notes that within the next 2 weeks, Google will unveil an updated quality-based bidding system. Google periodically updates its algorithm, with the most recent change taking place this past summer. Google announcement was issued here: http://adwords.blogspot.com/2007/02/quality-score-updates.html

The major change is in the quality score rank, where lower volume ads without much historical data (or new ads for that matter), will be given more leniency on the minimum bid requirements. This has the effect of lowering the threshold for activation of these ads, driving more ad placements than before. The other ranking metrics are not changed, as this change is aimed at the lower volume campaigns.

Google is helping advertisers with the change by adding a new quality score column to the advertiser's interface. This began yesterday, but has been tested since December by a small group of advertisers. The tool will show advertisers an estimate of their ad's quality -- in general terms like "great," "ok" or "poor".

In speaking with SEMs, firm has learned they believe there are 2 major implications of these changes: 1) Google will be able to monetize advertisements that were previously deactivated, driving more revenues for Google, 2) Advertisers should see a better ROI, as they will have more information to guide their campaigns.

Firm thinks the algorithm update could therefore boost Google's sequential revenue growth in Q1 from the current consensus of 11.6%.

- Citigroup reiterating their Buy and $600 price tgt on GOOG for seven reasons: 1) They view current valuation as implying a relatively very attractive risk-reward outlook. 2) They believe recent industry datapoints -- including this week's release of the SEMPO survey -- continue to indicate a very robust profile for search advertising. 3) Firm's review of the underlying drivers of Google's search revenue demonstrates growth that is more sustainable than the market realizes. 4) Their tracking suggests that Goog continues to gain market share. 5) They believe GOOG's option value is underappreciated -- with updated worldwide traffic analysis as support. 6) Firm's proprietary ROIC analysis highlights materially very high value creation by Google. And 7) They believe that the potential loss of the Ask affiliate deal is a manageable risk.

Notablecalls: These notes should bring some buy interest to the stock following recent weakness. I especially like Bear Stearns' comments.

Calls of Note Part 4

Two firms out positive on Focus Media (NASDAQ:FMCN) ahead of 4Q results.

- Citigroup says they expect Focus to beat they US$67.6m rev and US$0.62 non-GAAP EPADS 4Q estimates when it reports on February 26. Guidance for FY07 should at least be in-line with the Street, and at least in-line with their new 1Q estimates. Firm reiterates their TP of US$100, which represents 28x our new ?08E non-GAAP EPADS of US$3.59.

While it is well known that the Commercial Location Network (60% of total revs) is shut-down for two weeks in 1Q due to CNY, last year, because the Target Media acquisition closed in late February, the qoq seasonality was significantly muted. To be conservative for 1Q07, firm lowers their estimates to US$57.0m and non-GAAP EPADS to US$0.42.

Despite trimming 1Q for seasonality and the 1.5m share dilution, firm has increased their 2Q-4Q07 estimates to reflect the strong demand environment and greater operating leverage assumptions than previously. As a result, their '07E remain unchanged at US$354m and US$2.75.

- CIBC expects Focus Media to report solid 4Q:06 results on 2/26 after the close, likely exceeding consensus and the company's guidance due to strong seasonality. Firm forecasts total revenues of $68.8M and non-GAAP EPS of $0.63, (vs. consensus of $68.5M and $0.62).

While they are hearing concerns that 1Q guidance may be weaker than expected due to seasonality, firm believes the company will provide FY guidance in line with Street estimates, making the 1Q forecasting exercise less meaningful. Based on strong pricing trends and higher margin assumptions, firm is increasing their '07 and '08 GAAP EPS estimates to $2.40 and $3.08, reflecting y/y growth of 53% and 28%, and our non-GAAP estimates to $2.68 and $3.40 (vs. consensus of $2.64 and $3.49).

Price tgt is raised to $100 from $76.

Notablecalls: Expect to see some buy interest today.

Calls of Note Part 3

Citigroup out with interesting call on Hynix, saying that even "M9" fab has begun to switch back to DRAM - Following several order cancellations amid increasing NAND capacity, firm's channel checks suggest that Hynix has begun to convert NAND wafers into DRAMs even in its "M9" fabs in addition to "M7" fab. Firm estimates the initial size of switch back to DRAM in M9 at 10~15k WPM (about 10% of M9's total capacity).

Accordingly, they forecast that start up of switch back in M9 will likely lead to about a 10% QoQ fall in NAND wafer output to 255k wpm (vs. initial forecast of 270k wpm). Firm expect s such a switch back to DRAM in Hynix?s M9 to lead to about 25~30% QoQ DRAM bit growth at Hynix and cause: 1) greater oversupply to 5~6% (vs. Citi's 4% in 1Q07E); and 2) a steeper ASP fall to as much as 30% HoH in 1H07E.

Notablecalls: This should provide a relief to NAND names (i.e. SNDK) and put additional pressure on DRAM names (i.e. MU, QI; though MU to the lesser extent given its ~15% NAND exposure) due to shift in oversupply from NAND to DRAM.

Color on news: Microsoft (NASDAQ:MSFT)

Microsoft (NASDAQ:MSFT) getting plenty of comments following analyst briefing yesterday.

- Cowen notes that while management did not surprise investors with spending plans at yesterday's analyst meeting, management tempered revenue expectations around Vista. Firm believes retail upgrades (FPP) may be the issue, as well as some analysts that have aggressive assumptions around Vista SKUs. Firm has tempered their FPP assumptions but left their other assumptions unchanged. Firm expects the market to react negatively, but they don't believe investors should change long-term assumptions that drive the core business. These trends all continue to look positive. Firm sees 10-15% upside vs. the market over 12 months.

Firm says bears will argue that management tempering investor expectations around Vista within two weeks of launch is a red flag. With many investors looking at Vista as a catalyst, tempering of expectations could remove this catalyst.

Firm's view is one of less concern. There isn't likely enough information, even at Microsoft's fingertips, to predict how Vista will play out in FY08. Firm looks towards better visibility into PC unit dynamics, uptake of premium SKUs and developing world attach, all of which have the potential to add a positive bias to numbers. The company has a pattern of setting very reasonable expectations and then overachieving and firm believes the risk of further numbers correction is now out of the way.

- Goldman Sachs says they are more optimistic on PC unit growth/Vista demand for 2008 than implied by management guidance, which they view as conservative and setting the bar low for 2008. They are also assuming higher spending on customer acquisitions than assumed by management guidance, although their EPS appears about inline with management's comments. Firm believes this meeting, while characteristically cautious in tone, preempts the normal April guidance and likely alleviates investor apprehension that might otherwise overhang the stock in anticipation of the April guidance. Upside for the stock will likely need to come from better than expected consumer PC/Vista demand.

- JP Morgan says Vista commentary was not as bad as first sounded. Mgmt. noted that some analyst forecasts for Vista were too high, which was certainly not what most people wanted to hear at the outset of a product cycle-and the 2% pullback in the aftermarket reflects that. At a high level, mgmt. is generally conservative at the start of a year with guidance-and MSFT is trying to set a low FY08 bar. It is also important to note that Ballmer seemed comfortable with a modest lift in PC growth this year, which is not in firm's current forecast of 8% unit growth vs. guidance of 8-10%.

It does not appear that mgmt. is comfortable with the assumption Vista units accelerate in FY08, and firm's $16.5B rev. estimate is based on 9% unit growth vs. 8-10% guidance this year. More importantly, firm raised their numbers on Wed. to reflect the revenue recognition change which mgmt. is not considering in its comments, and it added $600M to our model-with the change, it appears consensus for FY08 is achievable.

- BofA notes that while mgmt's attempt to temper Client growth expectations could potentially cause some weakness in the shares today, they believe the more important takeaway was the very reasonable op-ex forecast for FY08, which was below most Street expectations and more than makes up for any modest trim to Client revenue growth expectations, in their view.

Firm would be buyers on any pullback in the shares this morning, as they continue to see room for upside vs. their FY08 earnings forecast, due to the combination of the company's strong product pipeline and reasonable spending intentions.

Notablecalls: Think BofA is right about the stock for today. Any gap down will probably be reversed as Ballmer being cautious is not too surprising and Street estimates are staying put.

Calls of Note Part 2

Bear Stearns out with an interesting note, saying that they think both XM Satellite (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) believe a proposed merger could likely pass the regulatory hurdles, which they think would push them to attempt a merger. However, beyond the initial warming public comments made by both companies in early January, the public potential deal talk has slowed, hampering both share prices (XM is down ~25% since its recent highs and Sirius is close to 52 week lows).

Firm believes any public progress of making a deal has been slowed by the economics of the exact split in a MergeCo. However, they think that the sheer value proposition of a potential deal for both sets of shareholders vastly overshadows any disappointment in share of MergeCo. Due to a closing window of opportunity (based on how long we think it would comfortably take to close a potential deal), firm thinks investors would implore the boards of both companies to avoid quibbling over a few share points, to capture the much larger value of overall potential synergies. This would maximize shareholder value for both companies.

Firm provides a sensitivity of potential value accretion to XM shareholders based on the split of MergeCo which they center around ~55% for XM Radio. They believe both sides would argue a higher percentage in any potential deal, but feel this center point is appropriate given the estimates in their model.

They think that upon the expectation of a successful deal, the ~$6-7B in synergies would take the value of XM's stock to ~$25, presenting significant upside potential. Hence they think both sets of shareholders would benefit greatly upon a deal. With XM trading at a lower percent of industry EV, firm thinks the stock will Outperform and recommend investors buy pre any potential announcement.

Notablecalls: The merger chatter has cooled off lately due to regulatory hurdles, taking the stock prices down as well. While this note warms up the chatter, I'm not sure it will do the same with the stocks.

Calls of Note Part 1

Friedman, Billings, Ramsey out on Online Resources (NASDAQ:ORCC), reiterating Outperform after after stock weakness following CKFR's announcement of its intent to purchase Corillian. Of primary concern for investors is the relationship between ORCC's Princeton eCom division and Corillian. Investors may recall this was an issue when ORCC purchased PeCom last year. Some believed that CORI would stop reselling PeCom's product as ORCC (with PeCom) became more of a competitor than a partner. In firm's discussions with both CEOs, they did not believe there was much to that concern. Now, investors are again concerned that CKFR will "push" its way into PeCom accounts, yet again leaving ORCC in the cold. Again, based on firm's conversations today with both CEOs, they do not believe there are any risks over the next few years. However, without any clear evidence, the negative side of the story is an easy one to believe. Firm does not think much harm will come to ORCC and believe these are the times to increase positions.

Firm says that investors must remember CORI only has a true reseller arrangement with PeCom in just a few banks. That relationship covers approximately 1% of ORCC's revenue. The others have a direct contract with PeCom. Also remember the reason that many banks chose PeCom is because they did not want to go with CKFR. Additionally, most contracts are five years in duration and have termination fees attached to them.

Firm notes CORI will remain agnostic for some time. Based on their conversations, CORI will remain independent after the transaction (for a while). They consider this purchase a good deal for CKFR, as it will help defend its market share in the long term. CORI gives Checkfree a front end to integrate with its payment system. It will also be a good deal for ORCC. As CKFR pursues a full-suite approach, banks will start to realize the value of a complete application rather than piecing it all together; ORCC is already there.

Notablecalls: ORCC has been down on higher than usual volume in the past two days as smart money has been selling. This note from FBR may mark the beginning of covering, creating a nice bounce.

Paperstand (RDEN, TWX)

Barron's Online out on Elizabeth Arden (RDEN), saying that things are looking up for the co. Despite a sizable rally in recent months, the stock is more than 7% off its 52w high reached almost a year ago. And it's lagged the S&P's 500 over the last 12mo's amid worries about dilutive acquisitions and sales hobbled by dept-store closings and inventory cuts at Wal-Mart Stores. Yet Elizabeth Arden is sitting pretty. Though profits should accelerate and outgrow industry rivals, the stock still trades at a discount to the industry and the broader mkt. "The co's problems are reflected in the stock price, which is cheap compared to its growth rate," says Bill Chappell, of SunTrust, who recently upgraded the stock to Buy from Neutral. "Earnings should grow close to 15% annually over the next 3 years."

"Inside Scoop" section reports that Carl Icahn sold off nearly 2/3 of his stake in Time Warner (TWX) a year after the media conglomerate acquiesced to his demands in a proxy fight. Icahn and his vehicle Icahn Mgmt reported in quarterly filings on Wed that their combined stake in Time Warner stock shrank to 25M shares, or less than 1% of Time Warner's outstanding, at the end of the 4Q from the 68.7M shares, or 1.7% stake, held at the end of the 3Q. Joshua Hong, of OwnershipAnalyzer.com, says that while the percentage of Time Warner shares held by institutions has held steady over the past year, Icahn's sale may send out a bearish signal to other money managers. "It gives a negative signal that a major shareholder is selling off shares, given that the recent run-up wasn't based on fundamentals, and was pushed in part by the buyback program, which is coming to an end," says Hong.

MRU Holdings (NASDAQ:UNCL) - Update

ThinkEquity commenting MRU Holdings (NASDAQ:UNCL) following quarterly results.

Firm notes that MRU Holdings reported a loss of $0.42 on rev of nearly $2M in the DecQ06. This loss was in line with firms ests. Rev was below est of $4M b/c the co is not booking interest income from its Pre-Prime loans on the balance sheet, as these are off balance sheet pools in its Achiever Fund. In the qrtr, the co originated $35.7M of loans, compared to $45M in the seasonally strongest SepQ06.

Firm notes that MRU intends to do its first securitization in the JunQ07, with higher volumes, rather than in the MarQ, for efficiency. They estimate the June securitization will be $150M. They also think the co will do another securitization of $150M and possibly include about $75M of Pre-Prime loans in the DecQ07 quarter. As a result, analyst fiscal year ests have changed due to timing. The new rev and EPS ests for the Jun07 year are $25.75M in rev and a loss of $0.91 and for Jun08, rev of $48.63M and earnings of $0.16. On a calendar basis, firm est is a loss of $0.10 in C07 and EPS of $1.12 in C08. Firm believes after 07, loan volumes will begin to ramp quickly in all 3 categories and incremental margins driven by scale will push earnings up significantly as the year progresses. As a result, firm maintains $10 price tgt.

Firm says that due to strong demand from investors, the co intends to do a larger securitization in the JunQ07 than originally anticipated for the MarQ07. It may be a pre-funded deal in April for approximately $150-$175M in loans. They believe MRU is well on its way to establishing a strong presence in the private and govt student loan mkt for originations and securitizations, with a strong position in the mkt. Firm reiterates Buy rating.

Notablecalls: Delay in securitization is clearly negative, but may turn out to be non-event for long term investors. Holding my position.

Calls of Note Part 2

Morgan Stanley out on Nektar Therapeutics (NASDAQ:NKTR), saying that Despite the expanded Exubera launch to the GP community, January prescription trends do not in any way reflect the much anticipated "inflection" point. For 2007, firm is cutting their forecast in half for Exubera and additionally bringing down 2008 because they believe that it will be almost impossible for the drug to hit firm's previous targets based on current trends. For now, firm is maintaining their peak Exubera forecast of $800 million, which drives their fair value of $12; however, they see further downside risk to this. To help investors follow Exubera scripts, firm is initiating a monthly tracker that will look at where scripts are versus where they would need to be to hit forecasts.

Script data for Exubera following the GP launch have remained weak with January TRxs coming in at 4,336 (compared to December 2006 TRxs of
3,500). While firm recognizes that they only have one month's data following the GP launch and that prescriptions could pick up sharply, especially following the DTC campaign anticipated in 2H this year, they are reducing our 2007 Exubera forecasts to $156 million from $300 million. As a result, firm's EPS estimates for 2007 and 2008 have been reduced to $(1.26) and $(0.73) from $(1.18) and $(0.64) respectively. To reach their 2007 estimates will require 831,000 scripts to be dispensed in 2007 in the US (in addition to EU sales, which they estimate to be 30% of US sales). Firm notes that according to their tracker, even to hit their new target prescriptions in the US might prove a challenge for Exubera.

Firm maintains Underweight rating.

Notablecalls: Must feel for NKTR shareholders as the Exubera launch has been really painful. I've been looking for any signs of pickup in Exubera for quite some time, but doesn't look like there will be any change in the n-t.

Color On Quarter: NutriSystem (NASDAQ:NTRI)

Several firms commenting NutriSystem (NASDAQ:NTRI) after co surprised positively with its results and outlook yesterday after the close.

- Lazard notes that NutriSystem raised the guidance range for 1Q revenues and EPS to $205-$215 million and $0.88-$0.92, respectively, from the prior range of $200-$210 million and $0.82-$0.86, due to momentum in the men's segment and reactivations, as well as improvements in CAC over the course of the quarter. The company also provided initial 2007 revenue and EPS guidance of $720-$740 million (+27%-30% year-over year) and $3.00-$3.10 (+31%-35%) vs. firm's estimates of $745 million and $2.85. Firm is also introducing above-consensus 2008 estimates of $875 million and $3.50.

Firm says that reactivations key in offsetting higher CAC. As it becomes more expensive to add incremental new customers, firm expects NutriSystem to increase focus on reactivating prior customers, who convert at a much lower marketing cost through direct mail/email campaigns.

Management has targeted $80 million in revenues and $25 million in after-tax profit from reactivations in 2007 (~$0.65/share). Importantly, reactivating customers are not included in the company's new customer count; as a result, firm believes marketing as a percentage of revenues is becoming a more accurate measure of efficiency than CAC.

Price tgt goes to $75 from $72.

- BB&T notes that the company raised Q1 07 guidance from its initial thoughts on January 31, 2007. It raised Q1 revenue guidance by $5 M, to a new range of $205-$215 M, and EPS by $0.06 to a new range of $0.88 to $0.92. These figures are up 40% and 47%, respectively, from Q1 06. Firm thinks the major difference in guidance between Jan 31 and yesterday was the company's pullback from some ineffective media buys, which both raised advertising costs and decreased conversion rates earlier in the quarter.

NutriSystem also provided its first take at FY 07 guidance, at $3.00 to $3.10, significantly above $2.89 consensus and firm's $2.95 estimate. Factors contributing to 2007 growth should include a roughly 20% increase in media spending, targeting new customer segments such as
seniors, while continuing to penetrate men's and women's markets. This should drive roughly 25% revenue growth and roughly 35% EPS growth, with cost of goods being the most significant leverage point in the income statement.

- Stifel is the most negative of the bunch, noting that they have, since the outset, been focused on the negatives and continue to do so. Firm believes the company uses marketing gimmickry to convince customers to use its program and they believe the company has been very successful thus far because the market is so large. Firm believes the satisfaction rates of its overall customer base is low (online third-party opinion surveys) and they believe that there are several components of the NTRI's advertisements that are not inline with management's comments in 4Q06 press release of having a singular focus on its customer. Firm knows companies that have a singular focus on the customer such as Amazon and Blue Nile, and the NTRI consumer value proposition does not qualify, in their opinion. NTRI ads suggest five meals per day yet only four of the eighteen components of daily diet are purchased from NTRI (4/17 for women), the three NTRI foods and snack amount to approx 700 calories daily, low cost of $294 becomes $400-$450 after adding supplements, and convenience (the non-NTRI foods require grocery visits and refrigeration in many cases). Also, the average customer stay is 8.9 weeks which means the company churns its customer base 1.5x per quarter.

- Kaufman says that while the company continues to grow and deliver, the stock has become a target of the expectations game. While this is unavoidable for growth stocks, firm believe the share buyback will help in reducing the volatility in the stock. With confidence restored by the new guidance, firm believes that the stock has acquired characteristics that can be appreciated by both growth and value investors.

Notablecalls: Strange turn of events in quite a short time as the company upped the Q1 guidance provided just few weeks ago. While the guidance for Q1 and 2007 is better than expected, the Q1 guidance fluctuation shows how exposed the numbers (and even more, the stock) is to marketing experiments by the mgmt. As such, don't think the stock will command the multiples it used to enjoy before outset.

Calls of Note Part 1

Deutsche Bank out with interesting note on SiRF (NASDAQ:SIRF), saying that their checks with Motorola indicate that they are likely to ship SiRF-enabled GPS phones to Cingular as early as Q2,to support that carriers' LBS launch. This will include the Motorola Q9 smartphone,
part of what we think will be 2-3 phone models released at launch. These phones are part of the 10 models they believe MOT will ship this year with SiRF inside. Firm believes SIRF has been designed into the SCPL platform, MOT's next ultra-thin product line. They anticipate to see
these products at CTIA in March.

In their conversations with carriers at the show, firm thinks GPS is an important trend and a frequent topic of conversation. While not all carriers place as high a priority on LBS, they think GPS is likely to become an increasingly common feature in mid- and high-range phones. Firm thinks that by the end of next year GPS will be a standard feature in all smartphones, while some contacts think penetration will expand into more mainstream, mid-range devices in developed markets over the same period. They think carriers such as Cingular, Orange and China Mobile will all be drivers of the service this year.

Reiterates Buy rating and $35 price target.

Notablecalls: Nice catch by Deutsche! Phones may provide nice upside for the company (and the stock) l-t. S-t, this note should provide a pop in the stock early today, but would not overstay my welcome - just look at how the stock got faded yesterday after good GRMN results.

Color On Quarter: RealNetworks (NASDAQ:RNWK)

Couple of firm commenting RealNetworks (NASDAQ:RNWK) following 4Q06 report and 2007 guidance issued yesterday.

- Goldman Sachs notes that 4Q06 results beat their forecasts; however they are lowering 2007 revenue estimates by 4% and 12%, and maintaining their Sell rating. Areas of concern include: a slowdown with 100k net music sub adds (ex-WiderThan) vs. 125k in 4Q2005 and their 160k estimate; music ARPU fell for the 8th consecutive quarter; and other net subs (includes game subs) declined 25k vs. their forecast for a 25k gain.

Firm believes the lowered outlook is likely to be negative for the shares given that Street estimates must be reset lower. They also believe that slowing growth in music revenue and lower net other sub adds (including gaming) despite the still early stage of growth may increase concern regarding the growth potential as it may prove to be another initiative that matures at a faster rate than anticipated. Music growth has slowed from ~50% yoy in 2005 to 21% in 2006, and 11% in 2007E despite the lift from ad revenue, and a similar trend occurred with RealPlayer. In addition, visibility could be reduced across music, games, etc. as the company may not separate WiderThan metrics, which may mask the underlying ARPU and sub trends.

- Stifel notes that RNWK beat revenue and EPS 4Q guidance: Revenues of $125.6MM beat guidance of $117-123MM, while EPS of $0.22 beat guidance of $0.18-0.21. The upside to their estimates came mainly from WiderThan, which contributed $26.7MM in revs. vs. guidance of $22-24MM.

Firm says guidance was weak and implies significant sequential declines in 1Q07: 2007 revenue guidance was $540-560MM, below the Street at $577MM. They are lowering our 2007 EBITDA estimate from $60MM to $48MM.

Seasonality or deterioration? Management noted its business is more seasonal this year due to higher advertising revenues and WiderThan. While this seems reasonable, firm estimates the y/y growth rate for 1Q revenues excluding WTHN is just 5% and 2007 growth excluding WTHN is just 9%.

Firm believes changing EBITDA definitions/lack of EBITDA guidance could be a red flag: RNWK has changed its definition of EBITDA since 2005. The original definition included one-time equity gains which inflated 2005 EBITDA, which in turn helped show EBITDA growth in 2005. This quarter RNWK reported EBITDA for the first time in several quarters, which shows 2005 without those gains, which in turn aided 2006 EBITDA growth. To be fair, RNWK has a new CFO and they believe the newest definition makes sense. RNWK would not offer 2007 EBITDA/operating margin guidance on the call - why so secretive?

Reiterates Sell and $9 price tgt.

- Piper Jaffray says that while the quarter was in line, RNWK guided well below the Street for 2007 with revenue and GAAP EPS guidance of $540-560M and $0.18-0.23 vs. consensus of $573M and $0.40 (firm notes part of the EPS shortfall is due to higher non-cash charges). That said, they believe the financial accretion from WiderThan may have been overstated and it appears as if 2007 may be another year of investment for RNWK. As such, firm is lowering their EBITDA estimate for 2007 from $72.5M to $50.8M. Despite firm's more cautious view on fundamentals and estimates, they are maintaining Market Perform rating. Firm would expect shares to be down off the lowered outlook and note the company has a significant cash position (approximately $4/share which limits downside). Price tgt goes to $9.30 from $10.

Notablecalls: $10 seems to be line in the sand for the stock. Expecting the stock to trade below it today as the outlook seems to disappoint the Street.

Color On Quarter: Baidu (NASDAQ:BIDU)

Baidu (NASDAQ:BIDU) getting mainly negative comments following co's 4Q06 report.

- Goldman Sachs notes that 4Q2006 revenue of RMB271mn was below their RMB275mn estimate and the company's midpoint of guidance, while operating margin outperformed at 40.2% versus their 38.0% estimate, resulting in 5% and 8% upside to their EBITDA and EPS estimates (excluding a 1x tax benefit). The decelerating top-line growth is likely to continue in 1Q2007 with flat sequential growth expected vs. 18% in 1Q2006, their prior forecast of 11% and the Street's 11%. Baidu is experiencing frictional costs associated with its transition to a direct sales force in Beijing, its new monetization platforms, and a likely slowdown in the growth of the search advertising industry given just 6k new customers, down from 12k in 3Q2006 and ~10k in 4Q2005. Operating margin levels in 4Q2006 are likely to be offset in 2007 by the incremental USD$15mn of investment in Japan. Firm maintains Neutral rating and $128 price target, but they are incrementally more concerned with industry growth.

Shares could be flat to down given the significant deceleration in top-line growth and the third consecutive miss vs. expectations and the midpoint of guidance. Margin outperformance is likely to result in unchanged EPS estimates given the incremental investment in Japan. In addition, results, guidance, and recent strategic initiatives, namely Baidu's expansion into other markets (i.e. Japan) and other formats (i.e. branded, news), amplify firm's concern that the Chinese paid search market may be slowing until e-Commerce or other structural development accelerates.

- CIBC says the key concern is slowing customer growth and increasing churn rates. Baidu's transition from 3P distribution to direct, as well as algorithm updates remain disruptive. BIDU is the first Chinese search engine trying to pass local independent distributors. Firm is reducing their GAAP EPS estimates by $0.12 in '07 and $0.10 in '08, to reflect slowing customer growth, and '07 guidance of $15M additional spend to expand into Japan (more than firm's forecast). Management should continue to leverage SG&A.

Firm's thesis unchanged. Firm believes Baidu is well positioned to be China's search leader. However, it faces growing pains, near-term monetization challenges and an immature e-commerce market. Shares may be volatile, but could trade at$100-$130 based on 1.2X-1.5X PEG and 30-40X P/E.

- UBS notes Baidu reports Q406 EPS of US$0.45, higher than market consensus, mostly due to lower marketing and administrative expenses and the booking of tax income. On the negative side, Baidu guides for flat QoQ revenues growth in Q107 and US$15m spending related to its entry into the Japanese search market in 2007.

Firm is cutting their 2007/08 revenue forecast by 14%/11%. They expect spending related to Baidu's entry in Japan to offset higher-than-expected operational leverage. Firm's new EPS forecast for 2007/08 are US$1.57/2.58, down from previous forecasts of US$1.84/2.83.

Firm is upping price tgt to $99 from $96 but downgrading their rating to Reduce from Neutral.

Notablecalls: The EPS beat was mainly due to 1x tax benefit, so the qtr was not so great after all. Given the negative broker chatter this morning would expect the shares to trade down from afterhours prices.

Paperstand (JNY, PFG)

The WS's "Heard on the Street" column discusses Jones Apparel (JNY), saying that designer Isabel Toledo may be just the accessory needed to spiff up the co. On a conference call with analysts yesterday, Howard Socol, CEO of the co's Barneys NY unit, called the hiring of Ms. Toledo "the 2nd-best thing" Jones CEO Peter Boneparth has ever done, after acquiring Barneys in '04. Barneys, which chooses its own designers, has committed to carrying the Anne Klein collection. Upscale competitors such as Nordstrom and Neiman Marcus are expected to carry pieces, too. Boutique owners like Ikram Goldman, owner of Ikram, also wrote orders after the runway show. But whether the revival of Anne Klein can change the fortunes of its parent remains to be seen. After yesterday's announcement of the 4Q loss the stock slipped. "The Anne Klein thing is worth watching and worth noting, but we are still far away from where it could be a needle-mover," said Bob Drbul, of Lehman Brothers. Ted O'Connor, of Cooke & Bieler, agrees with the Lehman assessment. But he is excited about the revival of Anne Klein, saying that lately the stock has moved only on deal speculation. "I think they are doing the right thing," he said. The money-mgmt firm, which has about $9bn in assets, owned 4.7M Jones shares as of Dec. 31.

Barron's Online highlights Principal Financial (PFG), saying that some on Wall St. knock the stock as an expensive player in the mature insurance industry. But 70% of Principal's earnings come from mutual funds, institutional asset mgmt, and 401(k) plans and other retirement services. The 401(k) business is expanding as small co's catch up to the Fortune 500 with retirement offerings, and as 2006 pension reform encourages greater savings for retirement. Plus, Principal's annuities should be attractive to Baby Boomers, who should live longer than previous generations. Trading near an all-time high, Principal shares reflect some of that potential. But future growth should allow its P/E multiple to expand and push the stock higher. "Principal has an attractive portfolio mix that benefits from the increasing longevity of the aging population," says Sterling McMillan, of Greenleaf Capital Mgmt. "We believe Principal has the continuing opportunity for steady growth of earnings and revenue that justifies its current multiple."