All Things Digital

The economy may be slowing, the traditional wireline phone business deterioriating, but Verizon (VZ), as director Michael Bay says in one of the company’s new commercials (see below), is doing “awesome.”

The company’s first-quarter earnings met Wall Street expectations today thanks to strong growth in its wireless and FIOS home fiber-optic services businesses. With a 10% increase in first-quarter profit, and revenues that rose 5.5% to $23.83 billion, Verizon’s business would appear to be more recession-proof than others. “We’re really not seeing a change in trends,” Chief Financial Officer Doreen Toben said in an interview. “How many people are really going to drop their wireless phone?”

Not very many. Verizon added 1.5 million subscribers to its mobile business during the quarter. That said, there are plenty of folks willing to drop their landlines. Verizon wire-line subscribers declined 8.2% to 40.52 million from 44.15 million in the first quarter of 2007.

If there’s been a slowdown in U.S. consumer spending, nobody told Apple. This afternoon, the company reported second-quarter revenue of $7.5 billion on net income of $1.1 billion, or $1.16 per diluted share, pretty much blowing the doors off Wall Street expectations.

Apple (AAPL) shipped 2,289,000 Macs (up 51%), 10,644,000 iPods (up 1%) and 1,703,000 iPhones during the quarter.

“We’re delighted to report … the strongest March quarter revenue and earnings in Apple’s history,” said CEO Steve Jobs, recycling the soundbyte CFO Peter Oppenheimer used to describe the company’s 2007 March quarter.

Clearly, business is good in Cupertino. That said, Apple says it expects fiscal third-quarter earnings of $1 a share on revenue of $7.2 billion–a bit below analyst expectations. And the Street, which by now should be familiar with Apple’s under-promise-and-over-deliver earnings highjinks, isn’t at all happy with that forecast. The company’s shares slipped a bit in after-hours trading.

Yahoo (YHOO) just announced first-quarter earnings and–by sheer stroke of coincidence, I’m sure–they’re about as uninspiring as the mediocre earnings that inspired Microsoft’s (MSFT) hostile takeover bid. The company posted an adjusted profit of 11 cents per share, flat from a year ago, but a bit above the top end of the street’s lowered forecasts.

That’s a nice story on the face of things–one certain to give Yahoo CEO Jerry Yang and Co. the material they need to blather out more justifications for continued independence. But it doesn’t exactly prove Yahoo’s significantly accelerating its revenue growth as the company claimed in a recent investor presentation.

For one thing, operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. For another, the company’s forecast of total revenues between $1.73 billion and $1.93 billion for the current quarter ending in June doesn’t reflect traffic acquisition costs of roughly 26% of total revenue. Taking that into account, Marketwatch figures Yahoo is actually forecasting revenue minus acquisition costs of about $1.35 billion. Analysts are expecting $1.37 billion.

So the truth of the matter is this: Yahoo continues to struggle with profitability, and though the company’s strategy and investments are perhaps beginning to pay off, as Yang said during a conference call today, they’re clearly not paying off enough to thwart Microsoft’s takeover bid. Said Cantor Fitzgerald analyst Derek Brown: “The likelihood that Yahoo will be able to fend off Microsoft seems very low, mainly because in essence [Yahoo] is a company that’s in a multi-year slide. Even though the quarter was better than expected, there is uncertainty if it will be a trend.”

Investors who were chugging Milk of Magnesia in advance of Google’s (GOOG) quarterly earnings today were given a nice surprise this afternoon when the company posted solid profit and sales gains for the quarter.

Net income rose 31% on revenue growth of 42% from a year ago, exceeding Wall Street estimates. Overall paid clicks rose 20% in the quarter compared with the period a year earlier. That’s down from 30% growth of the previous quarter, but better much better than the forecasts of, ahem, certain third parties. “Our ongoing innovation in search, ads and apps helped drive healthy growth globally across our product lines, yielding another strong quarter for Google,” said Chief Executive Eric Schmidt. Apparently, the slowing U.S. economy hasn’t had much impact on the company’s business.

Shares of Google soared past the $500 mark in after-hours trading on the news. Seems the company’s historic run is far from over.

Oracle CEO Larry Ellison is a little lighter in the wallet today–about $2 billion lighter–thanks to a third quarter sales miss that sent the company’s shares down some 8% in after-hours trading.

Oracle (ORCL) posted a 30% increase in profits and a 21% increase in revenue, both in line with expectations. But a 16% rise in sales of new software that came in on the low end of its January forecast spooked investors who believed Oracle to be immune to the economic slowdown.

“A lot of investors had bought the stock in anticipation of a strong quarter,” said Avian Securities analyst Jeff Gaggin. “The applications business was definitely disappointing.”

If Yahoo is looking for a deus ex machina to resolve its seemingly insoluble difficulties, it best not look to News Corp.

The company, which just acquired Dow Jones (owner of this site) and which posted a moderate rise in fiscal second-quarter profit yesterday, has no plans to yank Yahoo from the jaws of Microsoft. “We are definitely not going to make a bid for Yahoo,” News Corp. Chairman and Chief Executive Rupert Murdoch said during a conference call to discuss the company’s earnings. “We’re not really interested at this stage.”

So who is interested? Well, apparently no one. Comcast has declined to make an offer, NBC Universal Chief Executive Jeff Zucker dismissed rumors that NBC was considering a bid during a conference call with JPMorgan analysts earlier this week, and the financing and operational risks are likely too high for a private-equity bidder. Seems the $44.6 billion price tag Microsoft’s slapped on Yahoo has given everyone a bit of sticker shock.

Everyone but Google, that is. And Google can’t really make an offer for Yahoo. With its absolute dominance of the search market, the “troubling questions” a Yahoo-Google alliance would raise are far, far more troubling than the “troubling questions” Google claims Microsoft’s hostile bid for Yahoo raises.

So what are these “many options” Yahoo claims to be evaluating? There are only two, it seems:

1. Accept the deal.
2. Turn it down flat and then accept under duress after an acrimonious shareholders meeting.

We’re not a conventional company and we don’t intend to become one, they said. See how we scorn the traditional stock offering process! See how we fearlessly test the large-scale viability of the so-called Dutch auction! Look at us! See how we refuse to give earnings guidance in the traditional sense! See how we make money without being evil! See how easily our share price passes the $200 milestone! And the $300 milestone, and the $700 milestone. See it twice! See how our newly rich employees drive up the prices of the Atherton, Calif., $25 million tear-downs! Our profit margins are among the highest in corporate America! Ha ha! See how we beat estimates quarter after quarter! See how they add us to the S&P 500! See how we refuse to sacrifice long-term opportunities to meet quarterly market expectations! See how our shares “plummet” and they’re still 20 times more valuable than Microsoft’s? And 40 times more valuable than Yahoo’s! Cower before our market cap! Bask in our arrogance! We are a golden god!

Well, we’re not so high and mighty now are we, Google? Not with financial results that come in a penny under estimates. A penny under estimates! That’s what they call a material miss, you Dutch auction dandies. Who cares if those estimates were inflated? Your fourth-quarter profit only rose 17%, compared to the 46% profit growth you posted in the third quarter. Ha! Your revenue rose a paltry 51% from a year earlier to $4.83 billion. You’ve only got $14.2 billion in cash and marketable securities on hand. $14.2 billion. A pittance. You are going down! Who cares a whit for your assurances about the state of the economy! (See how our CEO arrogantly dismisses the current growth recession as “rumors of future recessions”!)

Investors are not so easily consoled. Into the mud, Google! Your shares, which have dropped 18% already this year, are down more than $36 today! Kerplunk! $520 in after-hours trading! They’re only 29 times more valuable than Yahoo now, prigs. Ha! Oh you are going down, all right …

The Amazon bears are growling this morning.

Shares in the company, which have already lost more than 20% of their value in 2008, slipped further in early trading (but recovered later), though Amazon said yesterday that profits more than doubled in its fourth quarter. “This quarter showed accelerated sales growth and record operating profits,” CEO Jeff Bezos said in a statement released with the earnings. “In our view, these unusual financial results are driven by one thing: continuously improving the customer experience.”

But such enthusiastic pronouncements didn’t matter a whit to jittery investors worried about a slowing economy and Amazon’s tight margins. Shares of the retailer, which closed yesterday at $74.21, fell 8.2% to $68.15 before opening bell today. And they slipped even further, to $66.49, after Amazon announced plans to acquire Audible in a deal valued at about $300 million - a premium of more than 20 percent over the audiobook retailer’s Wednesday closing price.

Perhaps investors haven’t yet realized that Audible controls an astonishing 95% of the online audiobook market and, as Staci Kramer over at paidContent notes, is the top spoken-word provider for Apple’s iTunes Store. Amazon almost certainly plans to distribute Audible content wirelessly via its Kindle e-book reader, which may turn it into the iPod of e-book readers whether Apple CEO Steve Jobs likes it or not. “It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” Jobs said recently when asked about the Kindle. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

That may be so, but as Jobs well knows they do listen. Which begs the question: Why didn’t Apple buy Audible? “We have long suspected that Apple would be the party most interested in acquiring Audible, considering the close ties between the two companies,” Richard Fetyko, an analyst with Merriman Curhan Ford, wrote in a research note this morning. “Audible’s audiobook content is sold within Apple’s iTunes online music store, which represents about 25% to 30% of Audible’s revenue. Also, most of Audible’s customers are iPod users. We would not be surprised to see [if] Apple made a bid for Audible to preserve its leadership in online-audio content distribution. There are no alternatives to Audible in the marketplace with any significant scale.”

It’s never good news when the standout quote from your company’s quarterly earnings release includes the phrase “We will continue to face head winds this year.” Especially if it’s clear that “head winds” is really just a euphemism for Hurricane Larry and Sergey, which has been mercilessly beating your company into submission for longer than anyone would care to remember.

But according to Yahoo CEO Jerry Yang, “head winds” are what the struggling search outfit is facing as it stumbles, umbrella blown inside-out, into 2008. Said Yang, “While we will continue to face head winds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009.” And with that as preface, Yahoo reported a 23% drop in fourth-quarter profit and announced the “realignment” of 1,000 jobs. It’s not yet clear how many of the 1,000 jobs to be “realigned” will be cut. We’ll find out in February. But 999 sounds about right.

“Rather than across-the-board cuts, we’ll make targeted reductions alongside targeted investment,” Yang said during a conference call with analysts yesterday. “We’re not tinkering around the edges. We’re making necessary decisions to streamline. … This sort of transition takes time. But we have the talent and the strong cash flow it takes to succeed.”

PREVIOUSLY:

• Time to Put Yourself on That Layoff List, Jerry?
• Let’s Open This Up for Questions. Yes, You, the Man in Black With the Large Scythe
• It’s the Great Pumpkin Jerry Yang!
• Raise the Yangtanic!
• Decker Rearranges Chairs on Yangtanic
• Look at It This Way: Now That Yahoo’s an ‘Ecosystem,’ the EPA Can Finally Declare It a Superfund Site

(Fail illustration with apologies to Uncov)

We managed the existing book very well because we decided some time before the crisis to be long volatility and be less sensitive to correlation, so the losses were minimal. We suffered on our statistical arbitrage trading activity, but that was just for one month, and minimal compared to some hedge funds or other banks. Overall, our trading activities will be approximately flat compared to last year, which is a good performance.”

–Christophe Mianné, Société Générale’s head of market activities, Jan. 2007

How ironic is it that Société Générale, the French bank responsible for the biggest fraud in investment banking history, was just this month named Equity Derivatives House of the Year by the financial risk-management magazine Risk? Yesterday, Société Générale, one of the pillars of European finance, revealed that a junior trader, identified as Jérôme Kerviel, had made massive bets in the futures market and cost it more than $7 billion.

How could it happen that a lone rogue employee could lose what essentially amounts to a year’s worth of profits without it being noticed, especially one that human resources officials at SocGen described as a “fragile individual without particular genius”? The bank says that each time Kerviel took a position one way, he would enter a fictitious trade in the opposite direction to mask the real one. Essentially, he created a secret second firm within the bank’s market rooms.

“He succeeded in building this hidden firm, in building his positions by hiding them by other positions that were totally fictional,” Société Générale CEO Daniel Bouton told reporters at a Paris news conference yesterday. “That is what is so extraordinary about this case.”

Indeed. Though not quite as extraordinary as how he managed to do it without detection. Said one bond trading firm CEO, “One hundred thousand euros! He was earning 100 grand and was allowed to take a 4.9 billion euro position? I don’t believe it.”

Believe it. Certainly the 415 of members of the “Jerome Kerviel should be awarded the Nobel Prize in Economics” Facebook group do.