Macrovision - CC Script
http://www.macrovision.com/company/investor/pdfs/MVSN_Q1_2004_confcallscript.pdf
Q1 2004 Earnings Conference Call Script May 3, 2004
Bill Krepick – CEO
Welcome, ladies and gentlemen, to Macrovision’s Q1 2004 earnings conference call. I am here today with Ian Halifax, our CFO, and Steve Weinstein, EVP of our Entertainment Technologies Group, to discuss with you our operating results for the first quarter of 2004. As you’ve seen in our earnings release of today, we delivered record first quarter revenues, operating income, and net income. Quite
frankly, these results exceeded our expectations and demonstrated robust business results especially in our DVD and pay-per-view copy protection business, and our electronic licensing software business. We accomplished this
while making significant incremental investments in our business as we discussed in our FY2004 guidance conference call. I’ll speak about our operations and trends in the market after Ian discusses our Q1 financial results.
Ian Halifax – CFO and EVP, Finance & Administration
Thanks, Bill.
Before I discuss the Company’s Q1 2004 operating results and 2004 guidance released earlier today, I would like to remind you that all statements made during our conference call, that are not statements of historical fact, constitute
“forward-looking statements” and are made pursuant to the Safe-Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements.
Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K and 10-Q, other periodic filings with the SEC, and our press releases.
A replay of this conference call will be available for one week through Webcasts located on our Investor Relations website at www.macrovision.com, www.streetevents.com (for subscribers) or www.fulldisclosure.com.
The following financial information and the financial statements released earlier today reflect the inclusion of acquired companies. Therefore, Macrovision has presented pro forma reconciliation income statements to show earnings before amortization of intangibles from acquisitions, in process research and development write-offs, amortization of deferred stock-based compensation and gains and impairment losses on investments, in order to reflect both the historical and the ongoing operations of the combined companies, as well as net income. We believe that this presentation may be more meaningful in analyzing the results of operations and income generation.
As stated in our earnings release, consolidated net revenues for the first quarter of 2004 were $37,982,000 reflecting a 35% increase from $28,052,000 in the first quarter of 2003.
Overall, revenues from our video technologies, which include copy protection for DVD, videocassettes, and digital pay-per-view, increased 21% to $22,575,000 in
the first quarter of 2004 from $18,624,000 in the first quarter of 2003.
DVD copy protection revenues were $17,530,000 in the first quarter of 2004, compared to $13,929,000 in 2003, an increase of 26%. We benefited from strength in volumes across the spectrum of rights owners, from major studios to
independent producers.
First quarter copy protection revenues from videocassettes were $958,000 in 2004 compared to $1,737,000 in 2003, a decrease of 45%, driven by the broad shift from the VHS format to DVD.
Digital pay-per-view copy protection revenues for the first quarter of 2004 were $4,087,000, an increase of 38% from $2,958,000 in Q1 2003.
Revenue from the Company’s music technology products was $1,174,000, reflecting a 54% increase over Q1 2003. We continue to see most of our business coming from Japan and Western Europe.
SafeDisc® revenues for our PC games business were $892,000, down 20% from Q1 2003.
Revenue from the Company’s software products was 13,323,000 in the first quarter of 2004, compared to $7,543,000 in 2003, an increase of 77% resulting from new license transactions and renewals of existing contracts.
Gross margin for the first quarter of 2004 was 95% (excluding amortization of intangibles from acquisitions), consistent with the first quarter of 2003.
Pro forma operating income (before amortization of intangibles from acquisitions, in process research and development write-off, amortization of deferred stock-based compensation and gains and impairment losses on investments) for the first quarter of 2004 was $16,245,000 or 34% higher than the first quarter of 2003, which was $12,099,000.
Pro forma earnings for the first quarter of 2004 were $10,930,000 or 33% higher than the first quarter of 2003, which were $8,248,000.
Net income for the first quarter of 2004 was $10,768,000, an increase of 55% over the first quarter a year ago, which was $6,945,000.
Our pro forma operating margins were 43% of revenues in Q1 2004, consistent with our pro forma operating margins in Q1 2003.
Pro forma diluted earnings per share for the first quarter of 2004 were $0.22, up 29% from the $0.17 recorded in the prior quarter a year ago. Diluted net earnings per share for the first quarter of 2004 were $0.21, up 50% from the
prior quarter a year ago, which were $0.14.
Interest and other income was $728,000 for the quarter, down from $1,100,000 in Q1 2003. This stems from lower interest rates.
We recorded a gain of $1,040,000 resulting from the sale of one of the private companies in which we had a minority interest, which was net of an impairment loss we had on another of our private equity investments. This is not included in our pro forma earnings calculation.
Our cash position remains strong. The total of the Company’s cash and cash equivalents, short-term investments and long-term marketable investment securities balance as of March 31, 2004 was $279,745,000.
The accounts receivable balance as of March 31, 2004 was $32,935,000. DSO (days’ sales outstanding) was 79 days as of March 31, the same level as Q1 2003. Certain contract negotiations resulted in payments being delayed until
after quarter end; had these payments been made prior to quarter end, DSO would have been below 75 days.
Deferred revenue was $12,148,000 at the end of the first quarter, up from $9,964,000, or 22%, from the same quarter a year ago.
Given the extremely strong Q1 performance, and the momentum we see across our various business lines, we are raising the 2004 earnings guidance we gave during our March 1, 2004 conference call. Revenues for the second quarter of 2004 are estimated to be in the $34-$36 million range, with pro forma EPS of $0.17-$0.18; for the full year 2004, we anticipate revenues of $150M-$155M, with pro forma EPS of $0.85-$0.87.
Now, let me turn the microphone over to Bill who will discuss the significant highlights of the quarter and the trends in our various businesses and markets.
Bill Krepick - CEO
Thanks, Ian.
Our Q1 DVD copy protection revenues grew by 26% year-over-year to $17.5 million which reflects continued strength in the DVD software business and continued growth by our customers who copy protect the vast majority of their
DVD titles. Approximately $2.2 million resulted from Q4 2003 studio volume replication that we were not able to record as revenue in Q4 due to delays in payment of receivables resulting from a prolonged contract renegotiation. This type of revenue is not unusual, as in most quarters 5-10% of revenues have been from volumes relating to prior quarters, notably the result of replicator
audits.
The quarter was also significant because we signed a multi-year contract with Twentieth Century Fox Home Video to copy protect 100% of their DVDs and videocassettes throughout the world. This is a pivotal contract for us as it gives
us visibility into an important piece of our future revenue stream, and sends a message to the other major Hollywood studios that Fox believes it is important to copy protect 100% of their packaged media products.
In the consumer electronics market, the recent blitz of advertising and the rapid adoption of the DVD recorder devices raise the threat of DVD-to-DVD/R copying. We believe this helps increase our copy protection value proposition since our DVD copy protection technology is the only widely available and effective solution for protecting against analog-to-digital copying or DVD-to-DVD/R and VHS-to-DVD/R copying.
Our copy protection business for digital pay-per-view applications increased 38% to $4.1 million, which reflected strong demand for copy protection-enabled digital set-top boxes especially in Europe with leading cable and satellite operators such as Premiere (Germany), TPS (France), and Sky Italia. We continued to work with several U.S. cable operators and their hardware suppliers to test video-ondemand copy protection activation and we expect that activation on one or more systems will occur some time in 2004.
Although our SafeDisc PC games copy protection business dipped below $1 million for the first time since Q2 1999, we believe that our SafeDisc business will rebound to higher levels in future quarters. In Q1 we did win back two accounts from our competition by demonstrating the effectiveness of our new API (application programming interface) level protection scheme that games publishers embed in their code. Outside of the PC games market, we did see increased adoption of SafeDisc in the automobile sector for use in car navigation software business, and SafeDisc was used in France for the first time on a new Microsoft® Windows Media® 9 hi def format DVD.
In the audio market, we generated $1.2M in revenues in Q1, all of which came from Europe and Asia. This was an impressive 54% growth over Q1 of 2003. We introduced our CDS-300™ product in January of 2004 and the U.S. record labels continue to conduct extensive playability and effectiveness testing on the product. While we wait for the major record labels to complete their evaluations, we have received commitments from some smaller independent labels to release CDS-300 copy protected albums in the U.S. in the coming months. In Japan, AVEX, our largest customer, has already introduced CDS-300 releases.
In another part of our audio business, we completed beta tests of our SafeWeb peer-to-peer file sharing control service and our customers reported that its performance exceeded their expectations. We have decided to use the name
Hawkeye™, instead of SafeWeb, for our commercial offering. We are confident that we have a proprietary technology that works to both track and control illicit music files on various peer-to-peer networks. We are expecting several record labels to begin using our Hawkeye technology in the 2nd quarter and we are expecting to complete our first video beta tests also in Q2.
Many investors have asked us what the impact is of the $440 million Microsoft settlement with InterTrust on our Patent Office interference action with InterTrust. We see no direct impact, and we intend to press forward on our
Patent Office interference action.
To recap the interference action, we have priority filing dates for our DRM patents in Europe and Japan, because our patents were filed two weeks before the InterTrust patents. These same DRM patent filings are the subject of the
interference action for the issued U.S. patents. The U.S. patents are in question because, in the U.S., patent priority is given to the party that invented first, not
who filed first. The interference action allows the Patent Office to determine which company invented first. We believe that several of our patents and claims that are the subject of the InterTrust interference action were also the subject of the InterTrust/Microsoft lawsuit.
We have publicly stated that we are willing to discuss various patent licensing alternatives and have an open door for such discussions with Microsoft, ContentGuard, and InterTrust. We are a participant in the Content Reference
Forum (MSFT, Universal, et al) where we are working with the industry to develop useful DRM implementations and standards to support secure distribution of digital media. We have an agreement with Microsoft where we have the rights
to integrate their Windows Media Player and DRM system in our CDS-300 dual session music CD copy protection product.
Turning now to our software business, Q1 was a record quarter for our Software Technologies Group. Our combined enterprise and consumer licensing businesses delivered $13.3M in revenues vs. $7.5M from a year ago, reflecting a Y/Y growth rate of 77%. We continue to see the favorable trend of converting our healthy sales pipeline into larger deals. Our optimism for this business segment has been
reinforced as our total 12-month pipeline rose another 40% to an all time high in excess of $40M. We continued to expand our sales force in the enterprise licensing business, as we believe the electronic licensing/license delivery/DRM markets continue to expand. On the product side we released the first version of our FLEXnet™ Publisher product. We also completed beta trials with 11
customers for our FLEXnet Manager product and are preparing for general release in May. In the development area, we began the effort to merge 3 different internal Macrovision technology development efforts in software asset management, license delivery, and utility pricing and unify them onto a single J2EE platform, resulting in superior performance for customers and reduced overlapping development costs for Macrovision.
In our last conference call we discussed five strategic investments for 2004. These investments are aimed at our single most important strategic goal which is to expand our business in our primary business lines, and successfully transition from being the leader in packaged media copy protection to being the leader in all forms of copy protection and rights management for Internet delivered
content – whether that be video, music or software. Let me update you on progress in each area:
(1) First in the DVD anti-ripper technology area, we are developing an antidote for DVD software ripper products and we are pursuing litigation against 321 Studios for their product “DVD X-Copy.” We believe our anti-ripper solution can help the Hollywood studios control PC-based DVD ripping – which has become a significant unauthorized copying source. We made significant progress in our development program, and at least one of the studios will be evaluating a production DVD in Q2. The studios are most concerned with the playability aspects of our antiripper
product, so they want to ensure that there are no visible artifacts introduced as a result of our protection techniques. In the 321 Studios’ lawsuit, the judge continues to deliberate over our request for an
injunction.
(2) Second, in the music CD copy protection space, our development of the proprietary controlled burning solution continued on track, and we expect to have the solution available for the record labels in the beginning of Q3. We have been advised by several of the labels that they are holding up introducing CD copy protection into the U.S. until they have controlled burning.
(3) Third, in the peer-to-peer file sharing space, I spoke earlier about the success we have had to date with our new P2P file sharing tracking and control technology. We are excited about the prospects for this technology across all of our customer base in music, video, and software. We expect several U.S. record labels will be using our first
commercial release of this product in the second quarter.
(4) Fourth, we believe that Microsoft’s three recent announcements in the DRM patent space (the investment in ContentGuard by Time Warner and Microsoft, the $440 million InterTrust settlement, and today’s announcement of their ‘Janus’ product to support extending their Windows Media DRM technology into consumer electronics’ portable
and home devices) served to heighten awareness and raise the value of patented DRM technology. We believe that our DRM patents hold untapped value, and we are vigorously continuing the pursuit of the patent interference action between us and InterTrust, all the while looking for opportunities to monetize those patents.
(5) Fifth, in Q1 we demonstrated that our continuing investments in R&D and sales in the electronic license management (ELM) and electronic license distribution (ELD) software space are paying off and we exceeded our own expectations. We think what we are seeing is a validation that the market is larger than we thought in 2003, and we
are having success with large ISV enterprise deals. We will continue to make significant investments in building our sales and development infrastructure, as well as our engineering and support teams, as we roll out the FLEXnet solutions to further accelerate our sales in this market.
We talked in our last conference call about the need to step up our rate of investment inside the Company in 2004 in order to position us better to capitalize on the shifts taking place in digital media – especially with the increasing emphasis on Internet and web-based distribution. We think we have demonstrated in the first quarter substantial progress in this regard. Our Q1 performance demonstrated across-the-board strength in our existing
businesses, while our progress with new products has us on track to expand our business further as the year progresses.