This from Individual Investor:
Macromedia: Brings Websites to Life
by Chris Bulkey 9/6/99
Over the past few years, the Internet has evolved into a platform for businesses to sell
products and communicate with customers, vendors and employees. Meanwhile, for
consumers the Internet continues to provide a medium for everything from entertainment and
shopping to communication. Not to mention a source of free information.
In addition, a technology called multimedia applications has helped businesses make their Web sites more engaging by adding
sound, video, graphics, video and interactivity. E-commerce, in particular has fueled the demand for personalized multimedia
content that increases the effectiveness and return on investment of commerce Web sites. This in turn has led to a promising
outlook for software that enables designers to create eye-catching content.
A company that is effectively exploiting the need for software that helps companies quickly bring designs from development to
production is Macromedia (NASDAQ:MACR - news) . In fact, we believe that the company's suite of Web Publishing
software products will help establish a leadership position in the nascent market for multimedia applications.
Macromedia's software portfolio essentially provides businesses the ability to streamline the production process by automating
the various steps involved in designing and producing Web sites. In addition, the company has entered the consumer business
with Shockwave.com, which hosts products and services to provide interactive entertainment. By downloading the free
software, consumers can view everything from games and business presentations to entertainment and advertisements from a
Web browser.
Through strategic partnerships, Shockwave ships with Windows 95/98, the Apple Operating System (OS), Microsoft Internet
Explorer, America Online, and Netscape. This widespread distribution network has led to over 30 million successful
downloads to date and installations in over 70 million systems worldwide, making it the de facto standard for Web multimedia
playback.
Shockwave is also gaining increasing acceptance as an e-commerce application. In a recent interview on CNNfn, CEO Bob
Burgess used the new Volkswagen Beetle site as an example of a company using the product to extend the branding done on
television. Macromedia also claims that top sites like Disney.com, Intel.com, SharperImage.com, and thousands of other Web
sites use Shockwave to deliver a more interactive Web experience.
A new feature of Shockwave.com is Flash Player, the Web standard for vector graphics and animation. Flash provides more
fun content like cartoons, interactive interfaces, and information graphics.
Cisco Systems UK uses Flash to create its global Powered Network of Certified Partners Web site. Other companies using
Flash include IBM (NYSE:IBM - news) , Disney (NYSE:DIS - news) and Ford (NYSE:F - news) .
Flash is distributed in a wide range of channels including every AOL client, all Netscape Browsers, Web TV, in Real
Networks' Real Player, and has recently been licensed by ExciteAtHome (NASDAQ:ATHM - news) for inclusion in its
set-top boxes.
As a result, Flash is installed in more than 100 million systems or 83% of the Web population, a sharp increase from 77% just
four months ago. By the end of fiscal 1999 (ended March 31), Shockwave and Flash had reached a rate of over 500,000
successful downloads per day.
What may be surprising is the strong profitability of a company involved in the Internet arena. Fiscal 2000 first quarter revenue
increased 51% to $48.9 million, giving Macromedia's Web Publishing products the top market share position in the industry.
A near 90% gross margin and near doubling of operating margins, to 17.3%, helped earnings to increase 114% to $0.15 per
share. What's more, earnings came in a penny per share ahead of consensus forecasts, marking the fifth straight quarter in
which the company delivered a positive earnings surprise.
In July, investors seem to have over-reacted to the development of a strategic relationship with IBM's Lotus division. The
Street reacted by sending Macromedia shares down below $30, only to see them rebound to the low $40 level. As part of the
relationship Macromedia sold its Pathware product line, a portion of its Learning System, which includes products to help
develop enterprise wide applications.
The other two components of the deal should help Macromedia to further extend its presence. Lotus will sell many of
Macromedia's software products into their enterprise accounts, which the company expects to generate a minimum of $30
million over the next three years. At current profitability levels, that would generate at least $0.10 per share in earnings with the
potential for additional gains.
The two companies will also enter a joint development agreement to provide a more integrated solution for enterprise accounts
using each other's software.
Although investment in Shockwave could negatively impact earnings this year, the earnings outlook remains solid. US Bancorp
Piper Jaffray analyst Hany Nada expects Macromedia to earn $0.80 per share in fiscal 2000 and $1.25 in 2001. Macromedia
earned $0.44 per share in fiscal 1999.
At a recent price of $42.25, the stock is valued at 34 times forward earnings, which is reasonable for a company poised to
post a three-year compounded annual growth rate of 69%.
Besides high profitability, Macromedia has a strong balance sheet and excellent cash flow with $31.7 million generated from
operations in fiscal 1999.
Bottom Line:
A recognized Internet franchise with solid fundamentals is hard to find, yet Macromedia possesses exactly those characteristics.
Applying a current multiple of 52 times to Nada's fiscal 2001 forecast results in a 12-18 month price target of $66. |
