Macromedia's Silence Is Hardly Golden


By Jane Black What's up with Macromedia (MACR)? In a conference call last month, company executives of the once high-flying graphics-software company flat out declined to discuss short-term revenue projections or sales. Instead, analysts and journalists heard a chorus of "No comments." At one point, an exasperated analyst, Eugene Munster of U.S. Bancorp Piper Jaffrey, groaned: "Can't you at least give us a flavor? What are you seeing that's so dramatic that it makes you want to pull back on all guidance?"

What indeed. Does no comment mean no future? Investors sure don't seem to think so. Despite two recent downgrades, the stock has risen into the $22.50 range, a 70% bounce from its all-time low of $13.60 reached on Apr. 4. Confidence in the stock appears to stem from Macromedia's dominance of the Web-developer tools market. The company's lead product, Dreamweaver, has grabbed 75% of the professional Web-design market. It outsells its closest competitor, Adobe's GoLive, by four to one. And its Flash product owns more than 80% of the graphic and animation market.

In addition, Macromedia boasts that its recent $360 million acquisition of Allaire, which makes the ColdFusion Web server software, will bolster its Net-development franchise. ColdFusion helps developers push dynamic content to sites at a low price. Add a loyal clan of graphics developers, and it's no mystery why many investors believe things look good for Macromedia.

DISTORTED NUMBERS? Are they right? Despite a valiant effort by management to diversify Macromedia's product line and streamline costs, some analysts believe that company execs just don't have anything to talk about right now. Revenues on Macromedia's top products are going to remain flat, or decrease, for the foreseeable future, these analysts say.

No wonder, considering E-consultants continue to axe Dreamweaver-loving Web developers from their payrolls. And the flashy animations born from Macromedia products are coming under closer scrutiny from CFOs demanding a real return on their Net investments. With a price-earnings ratio of about 28, the stock looks to some to be fully valued. So for now, savvy investors might want to stay on the sidelines.

In the company's latest earnings release, Macromedia announced a 47% surge in gross revenue, from $255.9 million for fiscal year 2000 to $376.4 million in fiscal 2001. That pushed pro forma net income up 56%, from $42.9 million in fiscal 2000 to $66.9 million in fiscal 2001. Sounds good. But a closer look reveals that revenues for the company's fourth quarter, which ended in March, were down 10% from the previous quarter, from $99 million to $89 million. First Call expects next quarter's revenues to be up just 4.2%, to $92.8 million, or 15 cents a share, and that's including the big Allaire merger.

LOOKS DECEIVE. What's more, the Allaire deal has clouded the analysts' crystal balls. Due to that linkup, Macromedia revenues will grow to $474 million, up 22%, says Banc of America Securities analyst Greg Vogel. Again, that looks pretty good. But Vogel estimates that Macromedia's core software business will grow just 1%, to $377 million, from $373 million in 2001. And by dropping its ownership of money-losing online entertainment site Shockwave.com below 50%, Macromedia no longer has to report losses on its stake going forward.

The bottom line: Core revenue growth is stagnating even though it doesn't appear to be. "The Allaire deal will distort year-on-year comparisons, particularly for revenue growth," says Bill Lennan, a software analyst with WR Hambrecht.

Then there are the changing desires of Macromedia's cash-strapped customers. Though Flash is much revered in the design community, it's hard to prove that Web animation adds to the bottom line. To date, Flash has gained notoriety mainly for slow-to-load "intro" animations. So annoying to so many surfers are these Web welcome pages that they've spawned a parody site, www.skipintro.com, which shows an endless animation of the message: "This may take forever, but hey, it's an intro."

PINK-SLIP BLIZZARD. Macromedia marketing head Tom Hale says that intro animations make up only about 35% of Flash applications. The remaining 65% consists of developers using the animation tool to build navigation systems or for presentations. But Hale concedes the company must educate designers about how to use Flash to deliver value to clients.

And what about customers? The demise of e-consultancies could threaten Macromedia's client list. MarchFirst, which once employed 2,500 developers, filed for Chapter 7 bankruptcy on Apr. 12. IXL has slashed 1,500 jobs. Razorfish, one of the premiere e-consultants, pink-slipped at least 530 workers and maybe more -- the company declined to reveal layoff totals. Both Viant and Scient have likewise tossed pink-slips by the bushel.

In the long term, Web developers will rebound. Research firm IDC estimates that from 2000 to 2003, the number of Web pages will increase more than 50%. That translates into an addressable market of about $4.3 billion by 2004. And as companies begin to spend again, Macromedia is positioned to benefit. "Flash is the de facto design program for the Web," says John Morris, head of new media at Refac, a design firm based in Edgewater, N.J.

Macromedia is relying on that kind of loyalty from both developers and its investors. Says marketing head Hale: "It's hard to see the short-term with any confidence, but we are very comfortable for the long term. And that's what we're in it for." A certain amount of faith will probably pay off for Macromedia's long-term investors, too. But for now, what the company won't talk about could still hurt you. By Jane Black in New York


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