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Tuesday, August 02, 2005

Macrovision (MVSN) Gets Smacked, Should It Split Up?

Macrovision's results come in lower than expectations and guidance is lowered. Not good. The earnings underperformance is largely a result of DVD sales growth slowdown. They make a few cents off of every DVD that has their copy-protection scheme encoded in. It had to happen at some point as DVD sales growth rates have been exceptional and it's always hard to sustain that level of performance.
Macrovision's guidance revision:
"Looking ahead, we are lowering our FY2005 guidance for revenues to be between $205 and $215 million, and for our pro forma EPS to be between $0.89 and $0.92. For Q3 2005, we are estimating that our business will be essentially flat compared to Q2 in the range of $46-$48 million and our pro forma EPS will be in the range of $0.15 to $0.17. However, for Q4, we are expecting our traditional seasonally strong performance."
Prior to the call revenue estimates were $225MM and $57MM and EPS estimates were $1.05 and $.27 for 2005 and Q3, respectively. Given the size of the revision, it's surprising that the stock is only down 15%.
The positives for Macrovision include $268MM in cash and the fact that in a disappointing quarter they still generated $17MM in Cash Flow from Operations. Cash is a strategic asset that will enable Macrovision to potentially buy their way back into growth.
Given the stumble, however, I think we'll start to hear demands that they split the business. Macrovision seems to be having greater traction with their software licensing solution, FlexNet, while their copyprotection technologies business is less dependable. Right now, it's difficult for investors to really understand what they're holding and how the opportunity will play out for each side. I'm sure there are a whole raft of savvy Software/ISV investors that would like the software licensing story but aren't excited about the entertainment copyprotection business. Additionally, the copyprotection technology business seems much riskier since it is dependent upon the entertainment industry adopting Macrovision's technologies on a much broader scale.
I know I'd rather make those bets independently from each other and the fact they're combined confuses the story for me. Spinning out the copyprotection technology business to a new, entertainment-industry savvy management team that is located in Los Angeles and has considerable DVD, games and/or music industry experience would generate more interest from investors. Lastly, there is a lot of demand from institutional technology investors for companies that focus on one core competency and execute it well, especially for smaller names that are have had difficulty attaining growth or locking down their market.
I think that spinning-out the entertainment copyprotection technology business would enable Macrovision to unlock substantial value for shareholders.

7 Comments:

At 11:35 AM, Anonymous Anonymous said...

Macrovision split up? Now wait a minute. During the dark tech days of 2001-2-3, it was DVD revenues that saved the company. Software value management went flat, just like so much other enterprise software.

It is normal for products to cycle; when one is cold, the other can be hot. Having more than one product reduces overall risk. Investors want steady growth, thats what MVSN has given them so far.

There is a lot of synergy between these products, too. Software value management requires copy protection, and that expertise comes from the Entertainment Division of the company. Splitting them up would mean customers would have to buy product protection separately from the product delivery system. That makes both products less attractive.

 
At 11:48 AM, Anonymous Anonymous said...

You bring up an interesting point about diversifying the business model through different business cycles. While I can see why it would make the business more stable, that may not be what investors want. If an investor is concerned about diversification, then they can do that by buying both companies on the market.
Macromedia is a small company that is trying to capitalize on developing technology trends. That is the profile of a growth stock. Growth stocks should be levered to one story, not multiple stories. My hypothesis is that investors are turned off by the different end markets (consumer entertainment v. ISVs).
Additionally, while DVD sales have saved the company, many investors are disappointed by the company's inability to penetrate the entertainment industry in other avenues (music). Creating a stand-alone company would likely create a higher focus on moving this business forward, especially in such a dynamic environment.
Regarding licensing copy protection schemes, many software companies license protection schemes and it wouldn't kill the company if one division had to license from the other. You could build a long-term license into the spin-out agreements.

 
At 10:06 PM, Anonymous Anonymous said...

The single biggest problem with MVSN is the lack of vision - there is no single visionary leading the company. The company management consists of a CEO who has no operational responsibilities - reporting to the CEO are two Warlords ( GMs ) who run the entertainment and software divisions. The only technology that makes money for MVSN is the original analog copy protection technologies. All the other technologies aquired in the last ten years are loosers and they are building bigger and bigger infrastructure to support those loosing technologies - hence their costs keep on increasing. On the recent earnings conference call the CEO mentioned that two studios had renegotiated the contracts. Studios recognize that MVSN is desperate and will use that info to negotiate even lower prices.

 
At 8:48 AM, Anonymous Anonymous said...

Rumour is that one of the senior officers and executives of the company has resigned suddenly with no notice. This is tragic for the company. CFO resigned earlier year and took most of his team. CEO was suddenly replaced a month ago. MVSN lowered its guidance for the rest of the year. Earnings are down and expenses are up over prior year.

What is going on here ?

 
At 9:34 AM, Anonymous Anonymous said...

From Mark Cuban's Blog
http://www.blogmaverick.com/entry/1234000957046914/

What am I missing Macrovision?

So I’m catching up on my tech news and I come across this headline…

Macrovision Files Lawsuit Against Sima and Interburn’s DVD Copying Products
Macrovision Corporation (Nasdaq: MVSN - News) announced today that it has filed suit against Sima Products Corporation (”Sima”) and Interburn Enterprises Inc. (”Interburn”). The lawsuit charges that Sima’s “Video Enhancers,” which are principally used to allow consumers to make unauthorized copies of copyrighted DVDs, infringe Macrovision’s patented copy protection technology and also violate the Digital Millennium Copyright Act (”DMCA”).

Which got me completely confused on several fronts.

According to MacroVision CEO Bill Krepick, “Sima and Interburn infringe Macrovision’s intellectual property by offering products that enable users to make unauthorized copies of copyrighted content by illegally removing our copy protection system.”

Now maybe I’m reading this wrong, but the way I understand it, the CEO of MacroVision, a company that sells copy protection software to DVD publishers, is sending out a press release saying…

”Our software doesn’t work. It sucks. We can’t stop a bunch of little companies from writing software that completely busts our copy protection that we are selling for millions of dollars to publishers.”

If that’s the case, why in the world are DVD publishers paying Macrovision any money at all?

It’s not like they can stop ripoff shops that illegally rip DVDs, and manufacture counterfeit DVDs and sell them on the streets around the world. The cat’s obviously out of the bag. The software is readily available for those crooks.

For the folks who want to upload DVDs illegally for distribution on P2P sites, once again the cat is out of the bag and has been for years. It’s been easy for these bad guys and girls to crack the Macrovision code and make the content available in any number of file formats.

So if Macrovision can’t stop the bad guys, just what exactly is their purpose in life?

For the Average Joes, it’s not like its easy to rip a DVD. The time it takes, and the processes that you must go through, and then the size of the files, all make it more trouble than its worth to try to copy it to your harddrive to watch from your PC or say your laptop when you are travelling. In spite of the fact that you bought your DVD legally and own it fair and square.

For the average joes, it’s not easy to make a backup copy of the DVD that you know your little kid is going to scratch, or in my case, that I scratch from handling and playing often. Not only is it not easy, but because of the Macrovision copyprotection, it’s completely illegal, despite the fact that you paid your hard earned money for the DVD.

So just what is the purpose of having Macrovision copy protection on DVDs? To raise the price to consumers? To make things more difficult for them? To make sure its illegal to backup DVDs we have purchased?

Am I missing something here?

I could see if the stuff worked and it kept the bad guys from doing bad things. Then it would have to be a price consumers paid. Publishers have a right to protect their content. But, it obviously doesn’t work. If it did, there would be nothing to sue anyone over. Instead they would be taking out ads saying how they kicked all the bad guys’ asses. But they aren’t. They are suing companies and admitting their software sucks.

So hows bout we cut consumers a break and get this shit away from our DVDs

 
At 11:40 AM, Anonymous Anonymous said...

New blog to discuss Macrovision.

http://mvsnview.blogspot.com

Please visit and post your comments there.

 
At 2:20 AM, Anonymous Anonymous said...

>The only technology that makes money for MVSN is the original analog copy protection technologies.<

What are you smoking? That statement is garbage

 

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