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Macromedia on a comeback

The provider of software tools for Web publishing has been rebounding ever since it announced that its Flash technology would be used in Netscape's browser.

Macromedia shares rose more than a point to $17.50 on June 9 after it was announced that its Flash technology would be used in Netscape Communications' browser.

Macromedia and Netscape also said they will participate in a variety of co-marketing activities, including online advertising and promotional campaigns.

NationsBanc Montgomery Securities analyst Greg Vogel, who upgraded Macromedia to a "buy" from a "hold" on May 8, thinks the company finally has turned the corner, noting that it has reached operating profitability for the first time since September 1996. For the fourth quarter ended March, Macromedia reported strong quarterly results of 5 cents per share, beating the consensus estimate by 2 cents.

About the company
Macromedia provides software tools for Web publishing, multimedia, and graphics on Windows, Windows NT, Macintosh, and the Internet. The company operates four business units: Internet and multimedia authoring, interactive learning, graphics, and audio/video. With its Flash technology, Web creators can make animated, interactive Web interfaces, logos, and cartoons.

According to Forrester Research, business-to-business transactions totaled $5 billion last year, and the company expects these transactions to reach a whopping $327 billion by the year 2002. The growing content-creation needs for the Internet and online media have created many opportunities for companies like Macromedia.

Increased demand for Macromedia's Web-creation products boosted its revenue to $30 million in the fourth quarter, a 127 percent improvement from the year-ago period.

Also, Macromedia successfully has weaned itself from its dependence on the Apple platform. In 1997, Windows products totaled 56 percent of the company's total revenue, while Apple platform revenues represented 44 percent. By comparison, Windows products totaled 44 percent of revenue, while Apple platform revenue accounted for 56 percent during the same period the year before.

The company's profitability continues to improve, with gross margins at an all-time high of 92 percent. Those margins resulted in earnings of 5 cents per share last year, up from a net loss of 40 cents per share last year.

Balance sheet
Macromedia's balance sheet remains solid, with $86 million in cash and no debt. DSOs were 23 days up from 14 days during the previous quarter, and are in line with revenue growth. The company's inventory of $700,000 is down considerably from about $2 million a year ago.

Earnings outlook
Citing the higher-than-expected gross margins and improved visibility, Vogel raised his fiscal 1999 earnings estimate on the company to 38 cents per Share from his original estimate of 25 cents per share. Revenues are expected to reach $141 million, up from $113 million reported in fiscal 1998.

Vogel pointed out that, relative to graphics tools companies such as Adobe Systems, which trades at about 19 times its fiscal 1998 consensus estimate of $2.11 per share, Macromedia already trades at a significant premium. However, the analyst said he believes that the successful transformation of Macromedia from strictly a graphics and CD-ROM multimedia authoring tools company to a developer of Web-based tools for the creation of content for the Internet significantly increases the company's long-term potential.

Price target
Macromedia shares may reach the mid $20s range within the next 12 months considering the company's business diversification strategy, the fact that it's in a fast-growing industry, and its three-year earnings growth of more than 35 percent.

Individual Investor Online is a periodic contributor to CNET NEWS.COM.

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