We’re not even halfway through 2007 and I’m ready to make a nomination for worst IPO candidate of the year: Orbitz.

You may recall that Orbitz – the online travel site founded by five major airlines in 2000 – went public at $26 a share in 2003. It filed documents Thursday to go public again. But the Orbitz of 2007 is very different from the Orbitz of old.

A lot has happened since that first IPO. Nine months later, Cendant bought Orbitz for $27.50 a share. Cendant rolled Oribitz into its online-travel segment, named Travelport, and sold it to private equity giant Blackstone Group last summer. Now Blackstone and Travelport want to spin off Orbitz to the public market.

Orbitz isn’t a bad company, and there’s nothing wrong its spinoff. The problem is how it’s being spun off. It’s happening way too early, and with little consideration of Orbitz itself or its future shareholders.

Look through the financials in the prospectus. As Paul Kedrosky pointed out on his blog, “these are absurdly complex financials with difficult historical comparables.” After so many deals and restructurings, only its name hasn’t changed.

But there’s one simple thread running through Orbitz’ financials: Any way you slice it, the company had a net loss and an operating loss in 2004, 2005 and 2006. It used to be companies in the red couldn’t get through the IPO gates. Now most are, but they’re not doing so hot afterwards.

That’s okay, because as a fund manager buying a big stake in Orbitz, you’ll have some say in how it’s run, right? Wrong: As the prospectus says, “Travelport’s controlling holders will continue to control us and may have strategic interests that differ from ours or yours.”

So let’s see – no voting rights, a history of losses, a financial statement complex enough that a doctoral student could base a dissertation on it, and more plastic surgery in the past three years than the Gabor sisters combined – what’s not to like?

But wait. IPOs can raise capital to help companies expand with new staff, marketing and R&D. So surely Orbitz will benefit from that?

Wrong again. Take a look at this document, marked “confidential” but posted for all to see on Travelport’s investor-relations site. It’s from a presentation Travelport CFO Mike Rescoe made at a UBS investment conference Wednesday. On page 11, it notes that the IPO will happen by October, then says this:

“All net proceeds will be used to pay down Travelport OpCo debt. In addition, Orbitz will raise debt at its OpCo level, a portion of which is also expected to be used to pay down Travelport OpCo debt … We expect the Orbitz related transactions to result in a $1.3 billion paydown of Travelport OpCo debt.”

This latest Orbitz IPO is a lamb being rushed to the sacrificial altar simply to pay off Travelport’s debt. Why is Travelport in such a hurry? The answer may lie on page 12 of the UBS investors presentation:

“Additional potential paths to drive additional debt repayment include (i) follow-on sale of Orbitz shares and (ii) IPO of a combined Travelport/Worldspan and GTA business, among others.”

In other words, after wringing Orbitz dry through initial and secondary offerings and new debt, Travelport will take itself public. Travelport’s biggest and most profitable business is Galileo, which started out as Europe’s answer to Orbitz, but now includes data from nearly every airline in the world.

Given how cavalier the markets have grown about IPOs, I don’t blame Blackstone for this gambit. I actually admire its boldness. As for anyone bold enough to buy into this IPO, the payoff isn’t anywhere as sure.

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Hewlett-Packard caught Wall Street off guard by essentially giving a sneak preview into its second-quarter earnings 75 minutes before the markets opened. The announcement, the result of an errant email, caught a lot of attention. But just as interesting, I thought, was the way it all unfolded.

H-P was supposed to deliver its earnings a week from tomorrow, but an unnamed employee emailed financial information from the quarter to clients to an unnamed recipient. It must have been to someone who could easily have shared the info – a reporter, an analyst or a well-connected investor – because H-P hustled to release “guidance” before the markets formally opened.

H-P did the right thing, of course, and it’s hard to think of how a company could have reacted better. But the incident reveals two interesting aspects about how companies have come to handle financial information and how the markets are able to react immediately.

Let’s take the market’s reaction first. H-P’s announcement rolled across Business Wire’s feed at 8:45 a.m., EST (when even Om was still asleep.)

H-P said its latest quarter’s revenue would be between $25.50 billion and $25.55 billion and EPS of 69 or 70 cents a share. That’s basically revenue 3.9% above the mean forecasts of analysts, and EPS that is four or five cents higher than the 65 cent estimate – a fairly substantial surprise. It also said EPS in the current quarter would be two to four cents higher than the 61-cent estimate the Street had guessed.

The chart below, using Google Finance’s nifty pre-market charts, shows what happened next. Within a minute, there were 128,600 shares traded in pre-market trading. That is, investors who saw the release had one minute to re-value the stock based on the unexpected numbers.

By 8:46, the stock had shot up 2.7% to $44.92 a share. That’s not a huge percentage gain per se, but for a stock as large as H-P’s, it meant $3.2 billion injected into its market cap in one minute.

After the stock opened, sell orders more than made up for buying demand at first, but throughout the day, as investors had a chance to digest the new numbers, the stock recovered to $45.01, or only nine cents higher than the initial valuation accorded to H-P’s stock only moments after its announcement was revealed.

That’s a pretty nice example of quick thinking on someone’s part.

The other aspect that H-P’s action illuminates is just how ridiculous the ritual has grown surrounding the quarterly earnings report. This is hardly unique to H-P, but part of the culture of Wall Street. H-P insisted on using the term “guidance” but they have essentially announced most of the key numbers everyone was waiting for.

Couldn’t H-P have just delivered its actual announcement a week early? Maybe not, if all of the details haven’t been confirmed. Even so, it’s going to look very silly next Wednesday when H-P goes through the old sclerotic ritual – the tedious conference call and its perfunctory chants (“We are encouraged by these financials,” “Great quarter, guys,” etc.) – where executives, analysts and reporters act their parts even though they know now the play’s happy ending.

It feels a little archaic that, in an era of realtime information and ever-improving financial-management software, companies still adhere to the decades-old practice of announcing financials once a quarter. In 2007, the market can adapt to a big surprise in one minute, yet companies are disclosing financials as if it were still 1957.

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ANALYSIS (Q1 2007 Earnings Season): Internet companies are playing a game of stump the analysts. And they’re winning.

For the second straight quarter, the research desks on Wall Street have significantly and pretty consistently fallen short in their earnings estimates.

This is no small matter for analysts. Their job is to query the company, talk to its customers and crunch its numbers to distill it all into a single number: an EPS forecast that, if short by a penny or two is no big deal. But a forecast off by 23 cents, as happened with Apple this quarter – well, that can cost clients money. And clients hate to lose money.

Take a look at the graph below. With the exception of Yahoo – whose earnings were among the few tech giants to disappoint Wall Street this quarter – all of their net profits came in at least 9% ahead of the consensus of analyst estimates.

The biggest surprise of all – in every sense of the word – belonged to Amazon, whose 26 cents a share profit was 11 cents, or 69%, above the 15 cents the Street had been forecasting. Most analysts had given up hope that Amazon’s profit margins would ever rebound, with some arguing the company was no different from an old-fashioned bookseller.

Boy were they wrong. Amazon’s net profit more than doubled while its ever-scrutinized operating margin expanded thanks to some spending discipline. Piper Jaffray downgraded Amazon’s stock a day before its blowout earnings. Amazon’s stock rallied 40% in the next two days.

Even Microsoft, which many had assumed was aging into a steady machine of predictable profits, took the Street by surprise Thursday. All of the 34 analyst forecasts were calling for EPS in a narrow range from 45 cents to 47 cents. Microsoft’s number came in three cents ahead the highest of all those forecasts.

Nor is this parade of surprises a one-quarter aberration. In January, when the same companies were reporting earnings for the fourth-quarter of 2006, it was Yahoo who had the biggest surprise. Apple followed closely behind. All of the others had surprises that were at least 9% above the consensus.

What’s going on? Most of these companies were easier to predict a year ago, when the surprises were much more modest. Did they suddenly become harder to read?

Part of the disconnect is due to analysts, who were probably inclined to paint the tech sector with a broad brush, one that foresaw a market slowdown. A slumping housing market was expected to spill over into the economy at large. Overall profit growth this year was expected to be half the 14% rate of 2006.

Within that mindset, most analyst expected some tech giants to come up short: One or two might surprise to the upside, but surely not all of them. But companies like Amazon, Microsoft and eBay, under pressure for years to rein in spending while ensuring past spending would translate into present growth, were starting to deliver.

All of this is good for contrarians and for spectators like us in the press. Aside from Yahoo, these companies have in aggregate several tens of billions of new dollars in their stocks that weren’t there a couple of weeks ago.

But it makes life tough for analysts. Having resuscitated their reputations after the excessive antics of Blodget, Grubman et al, they are now facing a new crisis: Relevancy. If they don’t get a better handle on earnings of the biggest tech names, it won’t be hard to forecast the impact on their own income.

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Thursday will mark a red-letter day for Apple: For the first time its stock will rise above $100 a share, a tenfold increase in a little more than three years. Think about that: If Google had risen that much since its IPO, it would be trading at $850.

Apple’s stock was trading at $102 in aftermarket trading Wednesday, a 7% surge above its formal closing price of $95.35. Unless something big happens overnight, Apple’s stock is likely to see a similar jump Thursday.

And why not? The company posted a net profit of 87 cents a share. That’s 85% above the 47 cents a share in the year-ago quarter and 36% above the consensus forecasts among analysts. This is a textbook case in a blowout earnings report and reason to wonder why analysts bother with Apple estimates.

Unfortunately, the success will also probably keep CEO Steve Jobs from facing deeper scrutiny for the company’s backdating scandal, an omission of clarity that could cause harm far beyond Cupertino.

The future looks just as bright. Sales for Mac products were up 36% year over year, substantially faster growth than in iPods and iTunes, which were up 25%. Apple is successfully broadening away from dependence on music products, a trend likely to strengthen later this quarter with the introduction of the iPhone.

The report caps a week that will probably be remembered as a milestone in the apotheosis of Steve Jobs. Looking past Apple’s earnings and its stock price, it’s getting harder and harder to pretend that Jobs didn’t violate securities law in the options-backdating scandal facing the company.

The SEC filed civil charges this week against Apple’s former CFO Fred Anderson, who has settled with regulators, and its former general counsel Nancy Heinen. Then Anderson, who might just as soon put the episode behind him, took the extraordinary step of issuing a public statement saying Jobs misled him on board decisions on options and that Jobs knew about the risk of a backdating charge.

Mark McQueen, CEO of Wellington Financial, a firm that manages $400 million, summed it up well on his blog

“When was the last time in recent memory that a corporate scandal led to very serious charges being brought against the CFO and General Counsel, but not against the CEO? … It’s curious that a former Apple CFO pointing fingers isn’t sufficient for the Securities Exchange Commission to proceed against Steve Jobs.”

Anderson’s version of events actually makes sense, given Jobs’ reputation as a control freak and his instrumental role in using options to lure in talent after he returned to Apple. But Jobs is unlikely to face any action from the SEC, even though Anderson’s statement is begging for a deeper probe.

Why? Ask any attorney who has left the SEC’s enforcement division in the past few years. They’ll tell you the department is well-intentioned and talented, but criminally understaffed and toothless. They took on Anderson and Heinen to set a high-profile example in the options scandal, which involves more than 100 companies.

But they didn’t take on Jobs. And the Justice Department, which may be looking into the Apple as well, is unlikely to either. He has become, more than any American businessman, an icon of success. It’s like throwing the golden goose under the train. There would be a massive revolt among Apple shareholders.

It was a similar case with Mark Hurd, who accomplished the near impossible by turning around H-P. When it became clear he was involved in the pretexting scandal, ethicists suggested he should step down. Shareholders said he shouldn’t, and they won.

I like Steve Jobs. As a consumer, I’m grateful for his achievements at both Pixar and Apple. But I’m troubled by the very real possibility he participated in options fraud and is being treated as above the law. Otherwise, regulators are sending a disturbing message to tech executives: As long as your stock is soaring higher, you can dabble in whatever scandals. If we ever get back in a bubble – when all stocks are surging, not just the deserving ones like Apple – that thinking will cause a lot of accounting messes.

An open, clean investigation would prevent this: If Jobs is innocent, the debate is over. If not, he makes amends while shareholder support will keep him as CEO. Either way, this image of Steve Jobs as above the law, a toxic one for the stock market, would go away.

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Taking a look at Yahoo’s first quarter number, one word comes to mind: heedless.

Not “heedless”, as in Yahoo executives who led the Street on until it believed that, thanks to its vaunted Panama search technology, revenue and profits would surge in the first quarter of 2007. Or even “heedless”, as in investors who had gotten a little ahead of themselves by betting that Panama would deliver sooner than promised.

No, Yahoo CEO Terry Semel was clear on that point a quarter ago: “The first time we see any benefit will be at the end of the second quarter,” he told the New York Times. “Every quarter thereafter we will start to get better.”

Despite that cold dose of reality, Yahoo bulls bid up the stock 19% since that cautionary interview. It could charitably be written off to long-term optimism. But today, people are slamming Yahoo for getting it wrong.

“Yahoo recently overhauled its online advertising system, giving some investors hope for a positive earnings surprise. So far, that hope hasn’t materialized,” the Wall Street Journal wrote Tuesday. Who knew?

Any selling Wednesday on Yahoo’s first quarter results may miss the point. Yahoo could be facing tough times in 2007, but not because Panama didn’t lift profits in the first quarter, but rather because of something that happened last week: Google is finally getting serious about banner ads.

The real threat for Yahoo is that it could well remain on the wrong side of the profit pendulum. Here’s what I mean by that.

Yahoo was a big player in search before Google came along. But it didn’t capitalize enough on that position. Instead, it focused on branded ads (a nice way of saying banner ads – something that regular Web users have learned to either ignore or block, but not enough for Yahoo or, now Google, to care.).

Want to know the dirty little secret of Yahoo’s stock? It’s this: In the two years before Google went public, its stock rallied 376% to $28.61 from $6.01. As of Tuesday, before Yahoo’s first quarter 2007 report, it had risen another 12% to $32.09.

That’s partly because, before Google IPO, investors had nowhere else to put their money than Yahoo. Then came Google, who knew better than Yahoo how to make ad money off search results: that is, no banner, only text ads that maybe, just maybe may be relevant to you.

In other words, the pendulum swung. Search/text ads grew like crazy even if banner ads grew at a more-than respectable pace. Yahoo realized it had to match Google in its intuitive search algorithms, so it began to hatch Panama. It wasn’t an easy proposition. There were critical delays.

Still, Yahoo remained clear about Panama’s timing, warning investors if it would release later than expected – which is more than Google did for the un-beta release of Google News or that Microsoft did for … well, pretty much anything Microsoft ever did. No one ever called Panama vaporware.

And they shouldn’t today. Because the real risk for Yahoo is that Panama is finally catching up to Google right as Google is catching up to Yahoo in its core market of branded – er, banner – advertising.

This could go either way: If you’re a true believer in Google’s instincts, banner ads (along with video ads) will catch up with its text and search ads. But if Yahoo has been right all along, Google is essentially leveling the playing field to Yahoo’s advantage.

The antitrust concerns about the DoubleClick buyout are off mark, but I do wonder if they may help tip the balance from Google toward Yahoo.

Take Semel Tuesday on Yahoo as a alternative to Google: “We have heard concerns from various advertisers, ad agencies and others,” he told Reuters. “My guess is there’ll be some who are fine and there’ll be many who, perhaps, aren’t fine. That’s up to them.”

So it is. Everyone else, place your bets now.

Who will be the real heedless: Investors in Yahoo, which loses ads to Google because of its superior ad-personalization algorithms? Or investors in Google, because Yahoo’s Panama eats into its search pie, while the DoubleClick deal prompts advertisers to defect to the prime alternative, Yahoo?

Thank you, Internet gods. Just maybe, it is once again a two-horse race.

Kevin Kelleher is a writer living in Berkeley, Calif. He has a regular stock column at TheStreet.com and is a contributor to Wired, Business 2.0 and Popular Science. He has previously worked at Bloomberg News, Wired News and The Industry Standard magazine.

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A funny thing is happening to Google on the way to near-certain immortality. Its stock, it seems, is as fallible as any other.

Consider the year-by-year appreciation of Google’s stock price:

• 2004: Up 126.8%, from the offering price of $85 to $192.79.
• 2005: Up 115.2% to $414.86.
• 2006: Up 11.0% to $460.48.
• 2007: Up 1.5%, as of April 12.

Google, which joined the S&P 500 a little more than a year ago, has since failed to outperform that index: The S&P 500 returned 16.5% in 2006 and is up 2.1% this year. So after two years of glorious gains, Google has since lived a life less ordinary.

What’s going on here? It’s well known that Google’s revenue growth rate is slowing, as it does with any company that is getting larger. But it’s not as simple as that. Google’s profit margins are rising. And investors can be awfully forgiving about slowing revenue growth if margins are getting fatter.

Whether or not you factor in traffic acquisition costs, Google’s revenue percentage growth has slowed from three digits to two in recent years. But its operating margin has risen to 33% in 2006 from 20% in 2004 (the year of its IPO), while its net profit margin has risen to 29% from 13%.

But as any investor knows, there are other factors besides profit growth at play in stock performance: things like financial transparency, speculative trading and liquidity. All of these have buffeted Google’s stock at one time or another since it went public, but liquidity – that is, the balance or imbalance of supply and demand for its shares – is right now the determining factor.

One event that is having an underappreciated impact on Google’s stock is the secondary stock offering in September 2005, which added 14.2 million shares to the 19.6 million already in the market. That offering began a gradual tilting of the balance-o-meter of Google stock in favor of supply over demand.

Demand for Google remained high in 2005 as the company blew away earnings in the third quarter ($1.51 a share vs. the Street’s estimate of $1.36) and Net stocks in general rallied toward the end of the year. But think about this: Google ended the first week of 2006 at $465.66. If you bought it 15 months ago, you haven’t made money.

The supply caught up with demand. If anyone was hot on Google, thinking it might fulfill the orgiastic fantasies of analysts who had a $2,000 price target on the stock, there was always someone more than happy to sell shares to them.

Google added to the supply of shares when it bought YouTube for $1.65 billion in a stock acquisition. Google’s 10-K says it issued another 3.2 million shares for that. Since those stocks were issued on Nov. 13, the stock has traded flat to down.

Then there are all those stock options that are starting to trickle into the total number of Google outstanding shares as they are vested and exercised. In a thoughtful article Wednesday, the San Jose Mercury News asked whether employees who are receiving the last of their four-year allotments of Google’s pre-IPO options will bolt.

The story pointed to the obvious cultural and HR questions that such events raise: will Google’s valued veterans move on to create startups that could steal Google’s thunder? Will a class-system emerge where wealthier employees are resented by the newly hired? Google, as you’d expect, is making intelligent moves to stave off these problems.

But from a liquidity standpoint, there remain problems. On the one hand, exercised options add to the number of stocks outstanding, further dampening demand. On the other, a stagnant stock price – like Google has seen for five quarters – could deter new hires who are motivated by the lure of options gains.

Google could solve this problem the way most tech companies do: by buying back its stock in the open markets. At nearly $500 a share, that’s a pricey proposition. And it would betray the company’s oft-declared intention to invest only in future growth, not its stock.

In the now legendary “Owners Manual” that Larry and Sergey penned for shareholders, Google swore that it wouldn’t care about capital gains as much as “doing no evil” and “making the world a better place.”

Now, like so many tech giants before it, Google is faced with the unsavory reality of taking cash that could be spent on its future and instead spending it on the unglamorous reality of stock buybacks. Whether it makes this move or not will have, in time, an increasingly bigger weight on investors and employees, past and future.

Kevin Kelleher is a writer living in the San Francisco Bay Area. He has a regular stock column at TheStreet.com and is a contributor to Wired, Business 2.0 and Popular Science. He has previously worked at Bloomberg News, Wired News and The Industry Standard magazine.

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