In what is becoming a quarterly habit, Verity Corp. (Nasdaq: VRTY) once again creamed Wall Street's estimates for its fourth quarter. The big question is whether Verity shares can break out of their current trading range and establish a new plateau.
The intranet search company reported fourth quarter earnings of 34 cents a share, a whopping 9 cents above expectations. Sales were strong at $19.3 million. Verity also easily topped estimates for the year with earnings of 88 cents a share. Verity may get a pop today, but any investor that buys Verity now has to wonder how much upside is left after 24 hours.
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First, a little history. Verity shares went on a tear last November and December (chart) after the company emerged on Wall Street's radar on a strong second quarter.
After that quarter analysts knew Verity was one of the better Internet plays around even though it doesn't get a lot of press. Meanwhile, the company has become a victim of its own success.
Despite sequential quarterly sales growth of 15 percent and annual revenue growth of 47 percent, analysts are hoping Verity can crank up the top line growth even more.
Verity showed the revenue growth this quarter, but most analysts had already expected sales of at least $19 million.
Bert Hochfeld, an analyst at Josephthal & Co., speaks for at least three of the five analysts covering the company when he said he wants more top-line growth. Hochfeld's argument is that the market for intranet and enterprise search tools is growing faster than Verity.
The analyst added that Verity should be able to land more lucrative corporate deals and then expand into new markets. "I believe it's realistic," said Hochfeld. "But they have to tell people to change their numbers going forward."
We don't know if Hochfeld heard the guidance he was looking for on the conference call, but the positive comments from analysts today should tell the tale.
But Verity's results for the fourth quarter should only be a start if the company's stock is going to take off again. The company needs to land more deals to boost revenue and ink more original equipment manufacturer (OEM) pacts. Then Verity needs to extend its strong technology into other areas, analysts said.
And more importantly, Verity has to tell Wall Street about the deals to keep the stock moving. We need to hear more than once a quarter that Verity "saw significant sales activity in key markets."
Verity as an Internet stock needs to be a bit more generous with the updates. It's refreshing that Verity stays away from the bogus press release theory to stock movement, but that's the way the game is played. There is definitely something to the "revenue per press release" metric when it comes to Internet companies.
3Com: Same old story
We just hate it when there's no new news from companies quarter to quarter. In fact, investors should be a bit concerned too -- especially when the company without news is 3Com Corp. (Nasdaq: COMS).
3Com beat earnings estimates for its fourth quarter after the bell Tuesday, but sales were light at $1.42 billion, a jump of a mere 3 percent from a year ago. Analysts were expecting sales of $1.4 billion or so.
Want to know why 3Com's quarters look this way? Read last quarter's column on 3Com. The business model still stinks. 3Com is trapped with a hybrid business model that saddles networking equipment and commodity products such as network interface cards and modems.
The only good news is that sales from 3Com's Palm Computing unit now top 10 percent of sales and growing. Officials say the success of the Palm unit will transform the company, but as one analyst noted, "that's the tail wagging the dog." 3Com execs also said modem sales will become only about 25 percent of sales.
But 3Com's options are limited. Forty-five percent of 3Com sales still come from commodity products and another 45 percent is getting squeezed by Cisco Systems Inc. (Nasdaq: CSCO). And the company doesn't have the stock currency to buy itself out of its jam. How do you unlock the good stuff in 3Com?
"I'm still not very sanguine about 3Com's prospects," said Kevin Slocum, an analyst at SoundView Financial. "I'm not sure what they can do. "
Unfortunately, 3Com doesn't know either.