: MVSN/STEADY AND PROFITABLE BASE BUSINESS, WITH OPPORTUNITIES
FOR.../STRONG B --
07:44am EDT 1-May-01 SG Cowen Securities Inc. (STONE, ROB 617-946-3932)
MVSN
SG COWEN
R. Stone/C. Kinkade
617-946-3700
May 1, 2001
Macrovision (MVSN: $56)
Rating: Reiterating 1 (Strong Buy); Price Target $80-85
Steady And Profitable Base Business, With Opportunities For Upside
===========================================================================
EPS* (FY = December) Quarterly EPS
Old EPS New EPS P/E Q1 Q2 Q3 Q4
1998** $0.19 -- -- $0.03 $0.04 $0.05 $0.06
1999 $0.38 -- -- $0.06 $0.11 $0.10 $0.11
2000 $0.65 -- -- $0.12 $0.17 $0.17 $0.19
2001E $0.82 $0.83 68X $0.18A $0.18E $0.22E $0.25E
2002E $1.06 -- 52X -- -- -- --
Market Cap.: $2.9B
*EPS from operations, adjusted for amortization expense.
**Not adjusted for pooling of GLOBEtrotter
===========================================================================
Key Points:
1. Strong DVD Drove $1MM In Q1 Revenue Upside, EPS Of $0.18 Vs. $0.16
Street Consensus
2. GLOBEtrotter Continues Momentum (+54% Y/Y), Demand Across The Product
Line
3. CD Audio To Be Tested By A Second Major Record Label And 2 Independent
Labels
4. A Win Looks Likely For VWM Group, Potential For Hardware Revenues In
2002
Strong Buy For 12 Month Price Target Of $80-85 - MVSN is the dominant
worldwide provider of video copy protection. It should enjoy considerable
leverage as the market shifts from videocassettes to DVD (digital versatile
disc), for which both unit royalties and penetration are about two times
higher, and it should also benefit from market expansion in digital PPV
(pay-per-view). Its growth strategy includes introducing applications for
other technologies, channels and media. It acquired its development partner
for CD-ROM software and has made strategic investments in companies
developing digital video watermarking and audio applications. An investment
in TTR Technologies could potentially open a large market for audio CDs.
Because it is a high-margin, recurring revenue play on both the consumer
electronics and application software markets, we believe that MVSN should
be valued in comparison with other well established IP licensing names. It
enjoys net margins near 40%, while many of the comps have less established
business models, i.e. no earnings. Moreover, the GLOBEtrotter acquisition
added an established, profitable business in electronic software
distribution and license management. Further upside to our model could come
from new markets for CD audio and digital video watermarking. Our price
target of $80-85 is based on a 2002 P/E of 75-80X our 2002 adjusted EPS
estimate of $1.06.
Strong DVD Drove $1MM In Q1 Revenue Upside, EPS Of $0.18 Vs. $0.16
Street Consensus - Total revenue of $23MM (+42% Y/Y) was $1MM above our
estimate, mainly driven by strength in DVD copy protection. DVD revenues
of
$7.6MM (+110% Y/Y) were $1.6MM above our estimate and videocassette
revenues of $3MM (-17% Y/Y) were $400K above our estimate. PPV revenues of
$4.1MM were about $100K above forecast. Software copy protection revenues
of $2.4MM (-2% Y/Y) were $300K lower than our forecast as weakness in the
PC gaming industry continued. GLOBEtrotter sales of $5.3MM were $1.2MM
below our expectations, but still posted solid 54% Y/Y growth. Gross
margins of 91% were about 1% below our forecast, and in-line with Q1:00
gross margins. The lower gross margins were due to seasonality, some
license payments to partner, and commissions paid to the former European
distributor for GLOBEtrotter. Margins are likely to trend up 1-2
percentage
points over the balance of the year. Operating expenses of $9.5MM were in-
line with our estimate. The tax rate of 35% was lower than our 39% due to
positive benefits from new tax planning strategy. Adjusted EPS of $0.18
was
$0.02 above the Street consensus with one penny attributed to operations
and one penny due to the lower tax rate. The balance sheet remained strong
with cash and equivalents at $221MM, and operating cash flow was over
$13MM
(+110% Y/Y). AR DSO rose to 87 days vs. 58 in Q4 due to the timing of
major
long-term studio contracts which were billed in March. Deferred revenue
grew to $11.8MM (+41% Q/Q), on the strength of movie studio and
GLOBEtrotter contracts. We are maintaining our 2001/2002E EPS of $0.83 and
$1.06 on revenues of $109MM (+36%) and $142MM (+30%).
GLOBEtrotter Continues Momentum (+54% Y/Y), Demand Across The Product
Line - The GLOBEtrotter segment continues to post strong growth, despite
investor concerns over enterprise IT spending. MVSN continues to expand
its
sales channel and is seeing demand for products above and beyond its
flagship FLEXlm product. A recent deal with Shell included a significant
deployment of the SAMsuite product which helps enterprises track and
control software licenses across their IT infrastructure. GLOBEtrotter
products appeal to both ISVs and their customers in a tight IT spending
environment as asset and electronic license management (ELM) helps keep a
tighter control on expenses allowing for affordable "pay for what you use"
arrangements. GLOBEtrotter also enables greater efficiencies for ISVs as
electronic license delivery (ELD) can be used to automate the ordering and
delivery of licenses over a web interface. Other significant FLEXlm
contracts during Q1 included Silicon Graphics and Genesis Telecom.
CD Audio To Be Tested By A Second Major Record Label And 2 Independent
Labels - Momentum appears to be growing for MVSN's CD Audio copy
protection, with four record labels now in various stages of trials. On
its
year-end conference call in February, MVSN noted that a major record label
would be conducting an internal test, which is expected to conclude in the
next 30 days. If the test is successful, field trials will follow. On the
Q1:01 call, MVSN announced that a second label has begun replicating 10's
of thousands of discs for a trial release, and two independent labels are
also interested in conducting trials. We do not expect further
announcements until the completion of field trials (we guess sometime this
fall), because the record companies do not want to prejudice the data on
consumer sales and returns by disclosing which titles may have been copy
protected. However, given the large annual losses to piracy (about $5B),
we
would expect rapid adoption upon the completion of successful tests. One
proxy for potentially illegal copies is the volume of CD-R discs, which
the
IRMA estimates will grow by 50% in 2001 to 5.3B units. We estimate
penetration of 10% of the CD audio market could yield 8% upside in 2002
EPS, while penetration of 75% could drive as much as 61%.
A Win Looks Likely For VWM Group, Potential For Hardware Revenues In
2002 - Another source of upside for MVSN is digital video watermarking,
which will likely be added to the CSS (content scrambling system) used on
DVDs. While it is too early to size the incremental revenue per DVD disc,
the system should also drive royalties from semiconductor and hardware
makers to incorporate the technology into DVD-R platforms. Hardware
revenues are likely to commence in 2002 and ramp in 2003. Last week,
significant progress was made towards setting an industry standard for
digital video copy protection. The two major groups with competing
standards for digital watermarking technology announced a binding LOI to
combine forces as the VWM Group (Video Watermarking). The seven members of
the newly formed VWM group include the former Millennium companies (MVSN,
Digimarc, Philips) and former Galaxy members (Sony, Pioneer, NEC, and
Hitachi). As part of the agreement, the group has selected MVSN to be
responsible for all marketing, licensing, technical support,
certification,
and license enforcement programs. The VWM group will submit a combined
solution in response to a DVD Copy Control Association (DVD CCA) request
for bids. While we expect other competing solutions to be submitted to the
DVD CCA, we believe the VWM group has a tremendous advantage since they
have already completed the previous evaluation process successfully and
the
group holds a strong IP patent coverage in digital video watermarking.
Moreover, the VWM group is comprised of leading CE manufacturers, whose
support will be critical in establishing an industry-wide standard. The
evaluation process is on a fixed timeline which should result in a final
decision by September. We have no revenue from digital watermarking built
into our forecast, so any incremental royalties would be all upside.
SG Cowen Securities Corporation makes a market in MVSN securities.
SG Cowen Securities Corporation managed or co-managed an equity offering of
MVSN securities within the last three years.
SG COWEN SECURITIES CORPORATION BOSTON (617) 946-3700 NEW YORK (212) 495-
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Further information on any of the above securities may be obtained from our
offices. This report is published solely for information purposes, and is
not to be construed as an offer to sell or the solicitation of an offer to
buy any security in any state where such an offer or solicitation would be
illegal. The information herein is based on sources we believe to be
reliable but is not guaranteed by us and does not purport to be a complete
statement or summary of the available data. Any opinions expressed herein
are statements of our judgment on this date and are subject to change
without notice. Portions of this report may have been previously
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Cowen Securities Corporation, or one or more of its employees, including
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Copyrightc and TrademarkT SG Cowen Securities Corporation 2001. All rights
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Symbols:
US;MVSN
01-May-2001 11:44:30 GMT
Source FC - First Call Research Notes
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