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THE DAY AHEAD: A look at what&#039s next for Micron Electronics

Micron Electronics (Nasdaq: MUEI) is one of many companies launching a "we're undervalued" tour, but the company may have a point, especially if its new businesses can deliver.

In recent quarters, Micron Electronics and growth were two topics that didn't go together. After two years of restructuring, the direct PC vendor appears to be gaining momentum.

Micron's third quarter earnings topped expectations and the company reported sales growth, even in its struggling PC business.

We recently spoke to Micron Electronics CEO Joel Kocher to see where he stands on the issues. You can decide whether Micron is a bargain or not.

On the company's HostPro business:

Kocher said Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) merely talk about Web hosting, but Micron actually has the customers and facilities. HostPro sales were $10 million. Micron currently has more than 100,000 paid hosted sites, 575 dedicated and colocated servers and 38,000 Internet access accounts.

"Dell and Gateway are partnering with Web hosting companies," he said. "They're basically resellers."

The Micron chief said the Web hosting distinction is slight now, but he added the company's strategy will pay off. "As it evolves there will be a big difference between organic hosting and reselling," said Kocher.

As for the comparable companies, Micron said its HostPro business should be compared with firms such as Data Return (Nasdaq: DRTN) and Concentric Network (Nasdaq: CNCX), which offers Web hosting along with other services. Data Return had revenue of $5.5 million for the quarter ending March 31. Comparing HostPro to Exodus (Nasdaq: EXDS) would be a "bit of a stretch," said Kocher.

In any case, Micron's hosting business may not be reflected in its valuation. Concentric's market cap tops $2 billion and Data Return is worth more than $700 million to the market. Micron is just north of $1 billion in market cap. Kocher said its Web hosting business is beginning to be appreciated by Wall Street.

Micron, which is also rolling out application service provider products, said it will get its market cap somehow. The company has retained Robertson Stephens to advise it on strategic alternatives. "We're going to optimize what we've done," said Kocher. "We're open to a whole range of possibilities."

Kocher on the PC business

Although Micron spent a lot of time talking about its other businesses, Kocher didn't want to neglect the PC business. The company recently re-entered the consumer business with its configure-to-order partnerships with retailers such as Best Buy (NYSE: BBY).

This clicks and bricks approach could benefit both retailers and Micron -- it's good branding and keeps retailers from getting stuck with bloated inventories.

Kocher credits its Best Buy partnership for driving PC unit growth up 19 percent in its latest quarter. Here's how VelocityNet Direct model works: Traditional retailers will load up on about six weeks of PC inventory and try to move the goods. If retailers don't move the goods, they have to eat the profits.

With Micron retailers buy half the inventory and Micron delivers PCs as needed. If retailers are out of stock, customers can also have PCs shipped to their home. "We may not have a brand as strong as Compaq (NYSE: CPQ) or HP (NYSE: HWP), but retailers are beginning to face the music," said Kocher. "The retail model is unprofitable."

The company recently expanded its Best Buy partnership and added Staples (Nasdaq: SPLS) and Cyberian Outpost (Nasdaq: COOL) to the fold.

On Net appliances

Although Kocher is high on the PC business, he's also big on Internet appliances.

He said Micron will be rolling out new Net appliances in upcoming months. Net appliances aren't a cash cow, but can deliver services revenue.

"No one gets rich on Net appliances," he said. "But it does drive the hosting business and creates annuity revenue."

On the outlook

Kocher said the company has emerged from its funk and should be able to post solid double-digit revenue growth for the foreseeable future.

Earnings will also accelerate as the PC business returns to profitability.

And Micron's biggest cash cow, its SpecTek memory business, continues to fund its new initiatives. As long as memory prices hold up, SpecTek, which we highlighted in a column last year, will continue to fund Micron's growth. "SpecTek is a cash cow and it's cash cowing at the right time," he said. TDAIN


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