It's been a while, but I am revisiting MVSN (still a shareholder) and I wanted to park some of my thoughts.
I liked this business a lot because of the high margins and the play on overall market growth trends (DVD, extensive pirating, internet based software distribution. Also the cash flow and cash position were great. However:
1) Software license revenues have grown 92% year over year for the first 6 months from $25 to $49M. In 2003, Installshield had $35M so clearly much of this gain is due to the Installshield acquisition. Organic growth seems meager in comparison, so 2006 numbers will not be as impressive year to year.
2) The company has been "close" to deals with major record studios to try to get adoption of their CDS-300 and Hawk-eye technologies which sound great on the surface, but I have been waiting a couple of years for them to sign on a major and I haven't seen one yet. I have held this stock for this one reason alone. Music sales globally was a $32B market in 2004 with the US having roughly 40% market share. In comparison,
1.2 billion DVDs were sold in 2004 amounting to $15B in revenue. So broad acceptance into music at a $0.04-0.06 price point would easily make up for declining Macrovision DVD penetration and overall decline in DVD sales growth. This hasn't happened yet and I don't know if it will happen at all. Unlike video, who grew up with Macrovision copy protection, music studios are battling backlash from customers who never were subject to copy protection before. And there are competitors.
3) Their numbers continue to be hurt by amortizing goodwill which they continue to rack up with acquisitions. Didn't new accounting guidelines allow companies to do away with this? Why can't Macrovision?! It would make their financial results much more appealing. It is almost to the point where I want to tell them to forget acquisitions and just buy back the stock.
4) They lost the patent interference with Intertrust in April 2005 where Intertrust maintains their patent on DRM in the US. However, Macrovision holds the rights to the patents outside the US. There is another patent interference decision due in Q4 2005. But this essentially severely limits the "get lucky" strategy of coming out on top in the CRM wars. Microsoft licensed Intertrust's patent portfolio in DRM for $440M. Don't think we will see that happen now.
5) The former CFO and CEO were both booted from the company. I thought Ian (CFO) was very good, and I had a lot of respect for (and still do) Bill Krepick, but the fact of the matter is that they couldn't get deals closed, couldn't execute, and found themselves being nickel and dimed by the movie studios and weren't able to generate any leverage. They did come up with a nice strategy, but never heard how it caught on. I can't say that I'm that impressed with the current CEO Amoroso. Don't see what's so great about him from his background
6) They continue to spend money on acquistions in the CD game protection space, but it seems that those revenues are nominal.
7) The chart sucks in general.
8) Due to the slowdown in the DVD industry, Macrovision has guided lower for the full year 2005. Putting a major damper on any share appreciation.
Needless to say, I am a bit frustrated here. I'm sure I have more thoughts, but for now this will do.
Tom |
