Macromedia (MACR)

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Share price as of Wednesday's close: $12.70
Share price now: $16.81
Change: 34.4%
Volume: 9.9 million shares, daily average 943,700 shares
Last time this high: June 13, 2002
52-week high: $24.00
52-week low: $5.80
Forward P/E before announcement: 25.4 (based on 50 cents a share)
Forward P/E after announcement: 32.3 (based on 52 cents a share)

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ARE INVESTORS partying like it's 1999 all over again?
In a performance worthy of the tech bubble, shares of Macromedia (MACR) surged 34% to $16.81 on Thursday after the Web-software maker not only beat Wall Street estimates for the March quarter, but also raised the bar for the full year.

Late Wednesday, the San Francisco company reported net income of $6.9 million, or 11 cents a share, for its fiscal fourth quarter ended March 31, reversing a year-earlier loss of $83.4 million, or $1.42 a share. The pro-forma profit was 13 cents, beating the Thomson First Call consensus estimate by a penny. Revenue jumped 10% to $83.6 million.

"I think the digital-media space has been performing well overall," says Steven Frankel, managing director at Adams Harkness & Hill. "Macromedia is growing, profitable and has a strong outlook because demand for digital-media tools is robust."

Macromedia is best known for Dreamweaver, a Web-design program, and Flash, the ubiquitous application used to create moving graphics. With a strong new-product cycle, financial discipline and good execution, Frankel says, the company has managed to post double-digit year-over-year revenue growth for the past two quarters.

"Not a lot of software companies have done that," says Frankel. Amid the tough environment for technology, he says, Macromedia has done a great job of cutting overhead and focusing research and development on a few key projects. The payoff was a solid fourth-quarter operating margin of 11%.

With the bursting of the Internet bubble, Macromedia saw its client list devastated as both dot-coms and Web-design firms perished. The continuing drought of capital spending on new technology only added to the company's woes. But its recovery seems to be a testament to the strength of both its product line and its ability to appeal to a new set of customers. Look no further than fiscal 2003's results for proof. Macromedia's full-year profit of $1.6 million, or three cents a share, was a drastic turnaround from the fiscal 2002 net loss of $308.8 million, or $5.31 a share. (Even excluding amortization tied to the March 2001 acquisition of Allaire, the 2002 per-share loss was 48 cents.)

"It was a strategic shift to broaden the market from designer to developer," says Frankel, of Macromedia's move toward developers of Internet business applications and away from game designers. "There are four times as many developers as designers. This all pretty much played out within the last year."

Macromedia seems to be successfully making the transition because Web businesses have come to realize the importance of going beyond static copy and graphics to attract Web surfers to sites and ads. Enter Flash animation, which makes those images jump around the computer screen. Businesses are using the sophisticated animation capabilities offered by the software to catch fickle consumers' eyes.

"The effectiveness of Flash ads is 10 times that of non-Flash ads," claims Macromedia Chief Executive Rob Burgess. "The use of Flash ads has gone up 10-fold in one year. Basically, we're providing unique products that produce real business results."

One of those products is Breeze, which works with Microsoft's (MSFT) Powerpoint presentation program. Breeze lets users synchronize audio with Powerpoint, and converts it into Flash, shrinking down the typically huge files. As a result, it creates a faster, more efficient and more collaborative user experience, says Burgess.

"From a business perspective, the number of people creating Powerpoint slides is much larger than those creating specialized content in Flash," says Burgess. Other programs will work in cell phones, hand-held computers and toys.

The strategy seems to be paying off. For its current quarter ending in June, Macromedia expects revenues in the range of $80 million to $85 million, with gross margins between 88% and 90% and operating-profit margins between 5% and 10%. For all of fiscal 2004, the company projects a revenue increase of 10% to 20% year-over-year, and a jump in operating-profit margins of 10% to 20%. If realized, Macromedia's results would outpace analysts' current growth forecasts.

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"The consensus for 2004 revenue growth was 5%," says Adams Harkness & Hill's Frankel, "and management is now talking about a range that's two to four times the consensus. There are five or six new products that will contribute and drive the company. As we enter 2004, there are multiple new initiatives that will set up the company for growth. This is one of the few tech stocks that is growing, is profitable and is raising numbers. And it has a clean balance sheet to boot. That's why investors are buying it."