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Technology Stocks : TTRE (TTR Incorporated) -- Ignore unavailable to you. Want to Upgrade?

To: StockDung who wrote (300)	2/26/2001 11:02:45 AM
From: afrayem onigwecher	Read Replies (10) \| Respond to of 609

MVSN/MUSIC INDUSTRY IN URGENT NEED OF COPY PROTECTION SOLUTIONS/STRONG BUY -- 07:58am EST 26-Feb-01 SG Cowen Securities Inc. (STONE, ROB 617-946-3932) MVSN SG COWEN R. Stone/C. Kinkade 617-946-3700 February 26, 2001 Macrovision (MVSN: $49) Rating: Reiterating 1 (Strong Buy); Price Target $80-85 Music Industry In Urgent Need Of Copy Protection Solutions =========================================================================== 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 -- 59X $0.16E $0.18E $0.22E $0.25E 2002E $1.06 -- 46X -- -- -- -- Market Cap.: $2.6B EPS from operations, adjusted for amortization expense. *Not adjusted for pooling of GLOBEtrotter =========================================================================== Key Points: 1. Recent Copyright Actions In U.S. & Europe Should Drive Demand For Copy Protection 2. Huge Potential Market For CD Audio Protection, $5B Lost Annually To Pirating 3. Deferred Revenue Applies To Minority Of Video Contracts, A Weak Predictor Of Sales 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. Recent Copyright Actions In U.S. & Europe Should Drive Demand For Copy Protection - Recently a U.S appeals court declared Napster's facilitation of the trading of copyright protected music illegal. With a legal victory all but assured, we expect the music industry to turn its focus to new technologies used to prevent copyright infringement. Moreover, recently in Europe the European Parliament endorsed rules granting artists and record labels greater copyright protection for works downloaded from the Internet. Under the legislation, called the Copyright Directive, the sharing of music without payment to the content owners will become illegal. This is a significant development for major record labels and artists as it allows them to actively enforce their intellectual property rights. We view the recent ruling in the U.S. and legislation in Europe as a catalyst for the market for digital rights management and copy protection technologies. Huge Potential Market For CD Audio Protection, $5B Lost Annually To Pirating - While digital rights management technology will be required to protect downloadable music, we see a more urgent need to protect music on the existing CD audio format. With CD burners under $200 and CD-R media costing less than $1.00 per disc, one can easily imagine the amount of music sales being lost to casual copying (above and beyond illegal professional duplicators). According to The Recording Industry of America estimates, the recording industry loses about $5B annually to global piracy of recorded music. To date, there have been no commercial rollouts of CD Audio copy protection. While the opportunity is tremendous, the technological challenge is significant as the protection must not interfere with the playback and usability of the original music CD. Deferred Revenue Applies To Minority Of Video Contracts, A Weak Predictor Of Sales - MVSN reported Q4 deferred revenue decreased $1.1MM Q/Q to $8.4MM. The deferred revenue balance has two main components: 1) pre- paid video royalties and 2) GLOBEtrotter annual software contracts and maintenance agreements. It is important to note that a majority of videos are not pre-paid, and the deferred revenue account is only used for a small number of contracts. For studios that do prepay, it varies with each contract whether they pay at the start of the year, quarterly or bi- annually. Therefore, we view the deferred revenue balance as a weak indicator of future video copy protection revenues. The video portion of deferred revenue is seasonal and typically declines in quarters with large unit shipments (such as Q4:00). A better predictor of future revenue is the GLOBEtrotter portion of deferred revenue, which in Q4 doubled Y/Y and was up $500K Q/Q. Overall, we expect deferred revenue to increase in Q1:01 due to normal seasonality in video shipments and continued momentum of GLOBEtrotter sales.