Auric,
Long time no talk. Re: your TTRe post on CDDD board, Even though you are posting "off topic" which you know you should not do, I have decided to send this little tidbit of information on TTRe.
Read this one and begin your weeping ;-) or maybe start positioning yourself to finally make some $$$$/music this year.
Be smart....don't be short here. Just a friendly advisement.
-- 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.
-------------------------
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Please refer to ticker TWPDISC for important Thomas Weisel Partners
Disclaimer
information.
Symbols:
US;MVSN
Source FC - First Call Research Notes |
