DY: MVSN (TWP): Macrovision/TTR Pilot a CD Music Solution --
> 09:05am EST 16-Nov-00 Thomas Weisel Partners LLC (R. Keith Gay
> 415-364-2582)
> November 16, 2000 Thomas Weisel Partners LLC
>
> Digital Information, Intellectual Macrovision Corporation1-BUY
> Capital and e*Learning While Bertelsmann Shows "Sympathy for the
> Devil,"
> NASDAQ: MVSN-$65.63 Macrovision/TTR Quietly Pilot a CD Music
> Solution
>
> Keith Gay 415.364.2582 kgay@tweisel.com
> Brian Neigut 415.364.7106 bneigut@tweisel.com
>
> Executive Summary
>
> *As Bertelsmann strikes a deal with Napster, we agree with Business Week's
> assertion that, "the thief has been charged with developing technology to
> protect the family jewels." We believe Macrovision, in partnership with
> TTR
> Technologies (TTRE: Not Rated), may be the best solution and first to
> market
> in relieving the music industry's pain.
>
> *Macrovision and TTR are developing a unique solution that will prevent
> unauthorized copying of audio content stored on CDs. To our knowledge,
> there
> is no technology presently available that provides copy protection for
> audio
> CDs. Macrovision/TTR have completed a 2,000 household US field trial, and
> preliminary results are encouraging. We believe product revenue could
> come
> as early as the first half of FY01.
>
> (Executive Summary continued below)
> Key Data: 1999 2000 2001
> Price: $65.63 *Pro forma EPS
> 52-Week Range: $109-$21 Q1 $0.05 A $0.12 A
> Market Cap.(mn): $3,427.6 Q2 $0.06 A $0.14 A
> Shares Out.(mn): 52.2 Q3 $0.10 A $0.17 A
> Avg Daily Vol.: 302,750 Q4 $0.11 A $0.16 E
> Fiscal Year End: 31-Dec Year $0.31 A $0.59 E $0.74
> E
> P/E 211.2x 110.7x 88.4x
> P/E/G 528% 277% 221%
> *Debt/Total Capital: 0% Revenues (mn)
> TEV/ TTM Sales 62.3x Q1 $7.2 A $12.7 A
> Net Cash/ Share $2.54 Q2 $8.1 A $13.5 A
> Book Value/ Share: $4.9 Q3 $13.8 A $20.4 A
> Price/ Book Value 13.3x Q4 $12.8 A $21.5 E
> Secular Growth Rate: 40% Year $41.9 A $68.2 E $100.1
> E
> Cap/ Sales 81.9x 50.2x 34.3x
> **Before goodwill amort., non-cash deferred compensation expense and
> one-time
> acquisition related expenses; Note: 1Q99, 2Q99, 4Q99, 1999, 1Q00, 2Q00
> have
> not yet been restated for the GLOBEtrotter acquisition, which was treated
> as
> a pooling of interest. These numbers will be available with the release
> of
> the 3Q00 10Q.
>
> Company Description: Macrovision is the leading provider of video,
> multimedia,
> and software copy protection and digital rights management technologies.
> MVSN
> develops and markets technologies to prevent the unauthorized
> duplication,
> reception or use of video and audio programs and computer software.
> MVSN
> licenses it products and services primarily to home video,
> consumer
> multimedia, pay-per-view, cable, satellite and video security markets.
>
> (Executive Summary continued from above)
>
> *Assuming $0.04 per audio CD, we estimate a total audio CD copy protection
> market of at least $100mn. Keep in mind that there is no audio CD revenue
> currently in our model. Also, future revenue levels and timing depend on
> the
> outcome of the current pilot and adoption by the music industry. With
> approximately 53mn shares outstanding, we estimate that every $10mn of
> incremental revenue could add approximately $0.08 to EPS. Our FY01 EPS
> estimate is $0.74.
>
> WHILE BERTELSMANN SHOWS "SYMPATHY FOR THE DEVILa," MACROVISION/TTR QUIETLY
> PILOT A SOLUTION
> As Bertelsmann strikes a deal with Napster, we agree with Business Week's
> assertion that, "the thief has been charged with developing technology to
> protect the family jewels." In any event, the deal shows that the music
> industry is willing to pay big dollars to get rid of its Napster headache.
> We
> believe Macrovision, in partnership with TTR Technologies (TTRE: Not
> Rated),
> may be the best solution and first to market in relieving the music
> industry's
> pain.
>
> Bertelsmann's deal with Napster illustrates the extent to which the music
> industry is willing to pay to corral Napster. The terms of the
> Bertelsmann
> deal are as follows: (1) Bertelsmann will lend Napster $50mn with an
> option
> for an equity stake, (2) Napster will use the money to develop technology
> designed to get users to pay for music they now download from the Net and
> 3)
> Bertelsmann's music division, BMG, will withdraw its lawsuit against
> Napster
> and lobby other music companies to do the same. However, we believe it
> will
> be awhile before peer-to-peer file sharing will incorporate technology
> that
> effectively protects the digital rights of content owners. It will be an
> enormous technical challenge for Napster to track its 38 million users and
> ensure they are paying. In our view, due to Napster and MP3, the "songs
> are
> out of the barn;" however, Macrovision/TTR may be on the verge of shutting
> the
> door.
>
> According to estimates by the Recording Industry Association of America,
> $5bn
> is lost annually to piracy within the $40bn audio CD industry. As for
> CDs,
> with an investment of less than $150, digital pirates, sometimes a.k.a.
> college students, can purchase a CD burner, which can be used to set up a
> piracy factory. Use of this technique is becoming increasingly popular
> because of its lower cost and simplicity. Another development is the
> widespread use of MP3 compression technology enabling electronic
> transmission
> of music via the Internet.
>
> Macrovision/TTR to the Rescue. Macrovision and TTR are developing a
> unique
> solution that will prevent unauthorized copying of audio content stored on
> CDs. To our knowledge, there is no technology presently available that
> provides copy protection for audio CDs. If Macrovision/TTR successfully
> completes the final phase of audio CD copy development, they will provide
> the
> music industry with a much desired method of cutting off unauthorized
> copying
> at the source.
>
> The Macrovision/TTR solution requires no changes in the recording studio.
> Protection will be embedded on the glass master in CD production
> facilities,
> and simple modifications to an encoder will allow for insertion of subtle
> distortions across CD tracks that render copies unusable. The technology
> is
> transparent to a legitimate end user (i.e., music quality not compromised
> -
> "playability"), but any attempts to copy a protected CD either abort or
> produce unacceptable audio quality ('effectiveness"). The TTR technology
> also
> protects against attempts to produce an MP3 file from a protected CD.
> However, we believe the technology may not be as effective against MP3
> files.
> Despite this, we believe the music industry is very interested in CD-to-CD
> copy protection combined with partial MP3 protection.
>
> Thus far, TTR has completed a field trial of 850 UK households with
> "encouraging" results. Macrovision/TTR has just completed a third-party
> field
> trial covering 2,000 U.S. households. The final results are due in the
> current quarter.
>
> TTR reported on its November 15 conference call that preliminary results
> are
> "encouraging." TTR states that if it adheres to a fast track schedule,
> that
> it expects to have its first major music industry contract in the first
> half
> of FY01.
> Terms of the Macrovision/TTR Licensing and Investment Agreement. In
> November
> 1999, Macrovision signed an agreement with TTR to jointly develop and
> market
> music copy protection technology for optical based media. TTR's
> proprietary
> anti-piracy technology, MusicGuard, is a unique hardware-based technology
> designed to prevent the unauthorized copying of audio content distributed
> on
> CDs. TTR has granted to Macrovision an exclusive worldwide royalty
> bearing
> 10-year license to design, develop and market the copy protection which is
> being jointly developed. Macrovision is responsible for sales and
> marketing of
> products developed and receives a 70% split on future revenue. In January
> FY00, Macrovision invested $4mn in TTR for an approximate 10% interest in
> the
> company.
> Audio CD Revenue is all Potential Upside. We believe the market potential
> for
> Macrovision could be over $95mn annually. Not bad, considering we are
> estimating $100mn in revenue for the entire company in FY01. According to
> the
> International Recording Media Association, approximately 4.9bn audio CDs
> will
> be replicated in FY00. We believe Macrovision could potentially address
> roughly 70% of this market, or 3.4bn CDs at current volumes. A key
> question
> is, "what will the music industry be willing to pay per CD?" Macrovision
> currently charges approximately $0.06 per DVD and $0.03 per videocassette.
> Assuming $0.04 per audio CD, we estimate a total audio CD copy protection
> market of $136mn (3.4 bn x $0.04 = $136mn). A 70% share represents
> approximately $95mn in potential revenue to Macrovision. Of course,
> actual
> pricing will remain to be negotiated with the music industry, so these
> numbers
> could vary significantly from our initial estimate.
> Keep in mind that there is no audio CD revenue currently in our model.
> Also,
> future revenue levels and timing depend on the outcome of the current
> pilot
> and adoption by the music industry. However, any incremental revenue
> would
> fall almost directly to the bottom line. With approximately 53 million
> shares outstanding, we estimate every $10mn of incremental revenue could
> add
> roughly $0.08 to EPS. Our FY01 EPS estimate is $0.74.
>
> Valuation. As we initiated coverage of Macrovision last week, we fielded
> a
> number of questions on valuation. Macrovision's stock is not inexpensive,
> in
> our view; however, we believe this is a very unique intellectual property
> company with a compelling value proposition. Macrovision is the de facto
> protection standard for the video and DVD industries. It is also the
> industry standard for enterprise and application software management.
> Based
> on its unique, defensible intellectual property position, Macrovision
> enjoys
> long-term recurring revenue streams, extraordinary margins and
> relationships
> with all the major content producers. In addition, we believe there is
> the
> potential for Macrovision to deliver significant upside from entirely new
> product areas such as audio CDs.
> *At a current price of $65.63, MVSN is trading at 88.4x our 2001 pro forma
> EPS
> estimate of $0.74, and a P/E to growth rate of 221% (assuming a 40%
> long-term
> earnings growth rate). Our pro forma EPS estimate is adjusted for
> amortization of intangibles from acquisitions, non-cash deferred
> compensation
> expense and one-time transaction expenses. Gemstar trades at 55.6x
> projected
> 2001 EPS and a P/E to growth rate of 174%. VeriSign trades at 226.3x
> projected 2001 EPS and a P/E to growth rate of 453%.
> Over the next 12-18 months, we believe investors will value MVSN using a
> multiple of earnings. Applying a current P/E multiple of 102.8x to our
> initial 2002 pro forma EPS estimate of $0.96 supports our 12- to 18-month
> price target of $98, 49% above current levels. With the stock off 40%
> from
> its high, we believe that it has found a resistance level in the low $60
> range, and we recommend that investors buy at these levels.
> *Our IGRA supports a 20% annual rate of return on the stock over the next
> five
> years. We assume EBITDA margins should increase from a current level of
> 53%
> to 55% over the next five years. We also assume a one-year forward
> terminal
> EBITDA multiple of 35x. Gemstar and VeriSign currently trade at 136.2x
> and
> 41.6x, respectively. As shown below, MVSN will need to grow revenue at a
> 33.5% CAGR for the next five years to reach $424.4mn in revenue. Based on
> rapidly growing electronic markets in DVD, pay-per-view, software, music
> and
> eventually electronic books, we believe that this target is very
> achievable. |
