F2H EXPECTATIONS
For F3Q (Dec.) and F4Q, we expect gross margin to return to the 83-85% target range and operating expenses to remain in the $24-26 million range, as R&D expenditures resume a more normal upward pace. We expect revenues to decline sequentially to $27 million and remain flat in F4Q. Year-to-year comparisons are especially tough in F3Q since FreeHand 7 was released in F3Q last year and drove roughly 50% of sales. Comparisons become easier in F4Q, but just "how" easy will be a function of Macromedia's ability to get out new products.
ESTIMATE RECAP
We recently raised our FY 1999 EPS estimate to $0.30 from $0.25 based on better-than-expected product visibility gained from attending Macromedia's user conference. We also raised our revenue estimate, to $145 million from $142 million. However, we lowered our near-term estimates for F3Q and F4Q based on tough comparisons (release of FreeHand last F3Q) and continued transition (Mac to Windows, CD to Internet, products-only to products-and-services, and new management). Our F3Q estimate was lowered to a loss per share of $0.05 from EPS of $0.03; our revenue estimate to $27 million from $31 million. Our F4Q estimates were lowered to break-even per share from EPS of $0.03 and our revenue estimate was lowered to $27 million from $29 million.
OUTLOOK
Importantly, a cohesive turnaround strategy (product-driven) has been set in motion, with management's attention focused primarily on execution. The vision is clear and the market opportunity is large (for example, Internet authoring is a larger pie than is CD authoring, which has not gone away). We are pleased with management's candor regarding its challenging near-term outlook and the uncertainty of timing and marketdemand for new products. Currently, 3-5 new products are expected to launch in the F4Q/F1Q time frame, with Dreamweaver likely to ship in January or February.
We believe the long-term outlook is positive for Macromedia as we review the Company's strategy for building its three-core businesses, leveraging its existing portfolio of franchise products (e.g., Director, Authorware, FreeHand) and introducing a number of new products with compelling (some ground-breaking) new features. New products demonstrated at Macromedia's recent users' conference were highly applauded and strongly received among the roughly 4,000 developers (users) in attendance.
ú MULTIMEDIA AUTHORING. Some of the new products coming out of this division include: (1) Dreamweaver (a visual Web authoring tool with in-depth support for Dynamic HTML--a more interactive version of HTML, the main Web development language); (2) an "Aftershock" utility that intelligently identifies the playback medium (browser) and automatically generates the HTML code for content created using Director and (3) Flash; and the next generations of Director and Flash--expected in 1998.
ú GRAPHICS. Current plans are to extend FreeHand's capabilities to the Web with an animation power pak; it will integrate several products to enable interactive deployment of content on the Web. FreeHand 8 is slated for release next year, and a new companion product, code named Monkey Boy, is in development. Growth expectations for the graphics business are fairly moderate; however, it is expected to be profitable and have the potential to increase Macromedia's Windows presence.
ú LEARNING. Macromedia is taking its authoring expertise a step further, by providing full solutions (development, management and deployment services) to corporations setting up interactive/Web-based training programs. The acquisition of Solis (October 6) brought with it the Pathware on-line learning management systems, which support both open and proprietary development standards. Macromedia plans to target companies with tens of thousands of employees who have ongoing training needs. While the Company has a number of pilot programs in place, ultimate success in this market, in our opinion, will require building a direct salesforce and support team (currently recruiting) over a couple of years.
RISKS AND MILESTONES
Since the key risks are execution and timing, we've set forth some milestones/events investors we believe should look for:
(1) Major learning client "wins" over the next couple of quarters; (2) progress building its direct salesforce; (3) User conferences--Asia week of October 27; Europe/London Janaury 29-30; (4) continued operating expense control, gross margin improvements; and (5) new product releases beginning in F4Q, e.g., Dreamweaver.
INVESTMENT CONCLUSION
We are maintaining our "market perform" (3) investment rating on the shares of Macromedia, given that a 1-2 quarter transition (longer than some had hoped) could shake out some investors. However, we are substantially more positively inclined toward the stock given the upcoming product cycle and management's proactive approach to tackling lingering issues. All else being equal, we look forward to reevaluating our |
