MACROVISION CORP (MVSN)

[kenco]

MVSN Q2 2004 Conference Call Script – 1 – 8/2/04
Q2 2004 Earnings
Conference Call Script
August 2, 2004

(Bill Krepick – CEO

Welcome, ladies and gentlemen, to Macrovision’s Q2 2004 earnings conference call.
I am here today with Ian Halifax, our CFO, and Dan Stickel, EVP/GM of our Software
Technologies Group, to discuss with you our operating results for the second quarter
of 2004. As you’ve seen in our earnings release of today, we delivered record second
quarter revenues, pro forma operating income, and net income. We accomplished this
while during the same period announcing a major strategic acquisition of
InstallShield® Software Corporation. We also continued to make progress on our five
major investment initiatives that we outlined at the beginning of the year: music CD
copy protection; Peer-to-Peer (P2P) file sharing management and control; FLEXnet™
electronic license management/electronic license distribution product and sales
expansion; and DRM patent interference resolution. I’ll speak about our operations
and trends in the market after Ian discusses our Q2 2004 financial results.

Ian Halifax – CFO and EVP, Finance & Administration

Thanks, Bill.
Before I discuss the Company’s Q2 2004 operating results and our Q3 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 archived
Webcasts located on our Investor Relations website at
www.macrovision.com/company/investor/financial_news.shtml,
www.streetevents.com (for subscribers) or www.fulldisclosure.com.

MVSN Q2 2004 Conference Call Script – 2 – 8/2/04
The following financial information and the financial statements released earlier today
reflect the inclusion of acquired companies, except for InstallShield, which was
acquired on July 1, 2004. 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 second quarter of
2004 were $35,670,000 reflecting a 22% increase from $29,212,000 in the second
quarter of 2003.
Overall, revenues from our video technologies, which include copy protection for DVD,
videocassettes, and digital pay-per-view, increased 19% to $21,614,000 in the second
quarter of 2004 from $18,183,000 in the second quarter of 2003.
DVD copy protection revenues were $16,880,000 in the second quarter of 2004,
compared to $14,203,000 in 2003, an increase of 19%.
Second quarter copy protection revenues from videocassettes were $961,000 in 2004
compared to $1,271,000 in 2003, a decrease of 24%, driven by the ongoing shift from
the VHS format to DVD.
Digital pay-per-view copy protection revenues for the second quarter of 2004 were
$3,773,000, an increase of 39% from $2,709,000 in Q2 2003.
Revenue from the Company’s music copy protection products was $1,045,000,
reflecting a 4% decrease compared with Q2 2003. We continue to see our business
coming from Japan and Western Europe.
SafeDisc® revenues for our PC games business were $1,004,000, down 25% from Q2
2003.
Revenue from the Company’s software products was $12,007,000 in the second
quarter of 2004, compared to $8,531,000 in 2003, an increase of 41% resulting from
new license transactions and renewals of existing contracts.
Gross margin for the second quarter of 2004 was 94% (excluding amortization of
intangibles from acquisitions), consistent with the second quarter of 2003.

MVSN Q2 2004 Conference Call Script – 3 – 8/2/04
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 second
quarter of 2004 was $13,834,000 or 13% higher than the second quarter of 2003,
which was $12,223,000.
Pro forma earnings for the second quarter of 2004 were $9,486,000 or 14% higher
than the second quarter of 2003, which were $8,351,000.
Net income for the second quarter of 2004 was $8,843,000, an increase of 93% over
the second quarter a year ago, which was $4,591,000. Impairment losses on our
private company investments had a material impact on net income in the second
quarter a year ago.
Our pro forma operating margins were 39% of revenues in Q2 2004, down from 42%
in Q2 2003. This stems from the strategic investment initiatives we are making in R&D
and Sales & Marketing.
Pro forma diluted earnings per share for the second quarter of 2004 were $0.19, up
12% from the $0.17 recorded in the prior quarter a year ago. Diluted net earnings per
share for the second quarter of 2004 were $0.18, double the $0.09 recorded in the
prior quarter a year ago.
Interest and other income was $985,000 for the quarter, up from $953,000 in Q2
2003.
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 June 30, 2004 was $302,417,000.
The accounts receivable balance as of June 30, 2004 was $22,266,000. DSO (days’
sales outstanding) was 57 days as of June 30, compared to 72 days in the prior
quarter a year ago.
Deferred revenue was $12,325,000 at the end of the second quarter, compared to
$11,163,000 in the second quarter a year ago, an increase of 10%.
Revenues for the third quarter of 2004 are estimated to be in the $45-$47 million
range, with pro forma EPS of $0.18-$0.19. For the full year 2004, we anticipate
revenues of $170M-$175M, with pro forma EPS of $0.86-$0.88. These projections
include the impact of InstallShield Software Corporation acquisition for the second half
of the year. Our guidance for Macrovision as a standalone business for the year is

MVSN Q2 2004 Conference Call Script – 4 – 8/2/04
consistent with that provided last quarter. InstallShield will contribute $9-$10 million
in revenue in the third quarter (net of the accounting treatment relating to
InstallShield’s deferred revenue), with a neutral impact on pro forma earnings per
share as a result of interest income foregone and incremental expenses we expect to
incur relating to integration activities.
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 Q2 2004 DVD copy protection revenues grew by 19% year-over-year to $16.9
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.
The quarter was important because we launched our Hawkeye™ P2P file sharing
management and control system. We are supporting a number of trials with both the
movie studios and record companies. On the music side, we completed several beta
trials with independent labels and majors, and we have signed one independent label
for commercial usage. We have several other Hawkeye service contracts in negotiation
for both music tracks and movies. We believe the Hawkeye P2P protection service is a
significant complement to our CD and DVD copy protection technology, as it works
hand in hand with physical media content protection to minimize the proliferation of
unauthorized digital files on the Internet. In the past year, many high profile movies
have been illegally copied onto a camcorder in a movie theatre and then compressed
and digitally uploaded to file sharing networks. By using Hawkeye in a short field trial,
one studio customer found that no unauthorized files of a hit movie appeared on the
leading file sharing networks. The studio believes that our technology is effective in
addressing this form of piracy and agreed to license our P2P file sharing services on
this title for the next 6 months. We expect other studios will be trialing Hawkeye
during Q3 2004.
In the SafeDVD area, we have renamed our anti-ripper product, RipGuard™. This
product is designed to combat the software ripper products like 321 Studios’ DVD X
Copy. We were gratified to see that our litigation against 321 Studios resulted in a
court awarded injunction. Our RipGuard product is designed to be the technologic
antidote to 321 Studios and other software ripper clones that are used to make copies
of DVD movies. During the quarter we demoed the RipGuard silver production discs to

MVSN Q2 2004 Conference Call Script – 5 – 8/2/04
four of the major studios and received very positive feedback. We are continuing to
refine our RipGuard solution and are still on track for a Q4 2004 commercial launch.
An announcement two weeks ago regarding a new encryption standard and content
management system for next generation high definition DVDs raised questions
regarding its impact on Macrovision’s DVD copy protection business. The short answer
is that we see more opportunities than threats from this consortium. We believe that
the consortium of 8 companies, called the Advanced Access Content System Alliance
(AACS), is mostly concerned with implementing a more robust security system that
will overcome the deficiencies of the current CSS access control encryption which is
used on today’s DVDs. We are confident that our current video content protection
solutions - namely our DVD copy protection, Hawkeye P2P file sharing management,
and RipGuard anti-ripper technologies offer the most comprehensive copy protection
solutions for rights holders. In addition, our engineers have developed a way to
piggyback additional rights control information on our DVD and PPV copy protection
solution which can be used to control the storage and playback of digital DVD, PPV
and VOD programs on PVR type set top boxes and home media PCs. We are calling
this solution ACP-E. If we are successful in marketing this solution, it will provide us
an opportunity to seek incremental set-top box, PVR/DVR and content royalties.
Our copy protection business for digital pay-per-view applications increased 39% to
$3.8 million, which reflected continuing strong demand for copy protection-enabled
digital set-top boxes around the world. We continued to work with several U.S. cable
operators and their hardware suppliers to test video-on-demand copy protection
activation and we expect that activation on one or more systems will occur some time
in 2004.
Our SafeDisc PC games copy protection business delivered $1 million in revenue,
which was 25% below Q2 2003, but 13% above last quarter. The PC games business
continues to show nominal growth and we believe we are the leading supplier of copy
protection technology. We also believe that games publishers are becoming
increasingly aware of the strength of our solution compared with Sony’s SecureROM,
our major competitor.
In the audio market, we generated $1 million in revenues in Q2, all of which came
from Europe and Asia. This was slightly below Q2 of 2003. Our product development
team completed work on our newest version of the CDS-300™ product, and we are in
the process of delivering CDS-300 version7 CDs to the major record labels around the
world. This version of the product has both an ‘active’ and a ‘passive’ copy protection
solution, a built-in Microsoft DRM, and a proprietary Macrovision controlled burning
feature. The record label can choose whether to invoke the active or passive copy
protection scheme, and can set the controlled burning feature to a limited number of

MVSN Q2 2004 Conference Call Script – 6 – 8/2/04
copy protected burns on the consumer’s CD-R device. With the addition of active
software copy protection, the major record companies can balance the level of
protection between our active driver installation and our passive protection.
Macrovision has significant experience in active protection as this was the basis for CDilla’s
CD-Secure and SafeDisc solutions dating back to the mid-1990 timeframe.
Macrovision currently ships an active software driver for SafeDisc in Windows XP.
There is a tradeoff between active and passive protection in terms of playability and
ease of circumvention and we understand that a couple of the major record labels
believe the active solution has 5-10% better playability characteristics than the
passive solution, and they believe that level of playability is worth sacrificing hack
resistance. We hope that the record labels will release albums with Version7 in Q3
2004 in the U.S. and around the world.
There is not much to report on the InterTrust Interference action, other than the case
is proceeding with the U.S. Patent Office administrative judge and both ourselves and
InterTrust have responded to the judge’s request for documentation and other proof
supporting the earliest invention dates and reduction to practice dates for each of the
patent claims. Over the next several months the judge will be studying the
information and asking each side to respond to his questions. In the meantime, we
will continue to pursue a positive outcome through discussions with potential DRM
licensors and licensees.
Turning now to our software business, Q2 2004 was another record second quarter for
our Software Technologies Group. Our combined enterprise and consumer licensing
businesses delivered $12.0 million in revenues vs. $8.5 million a year ago, reflecting a
Y/Y growth rate of 41%. We continue to have success in converting our healthy sales
pipeline into larger deals, and closed significant new business with companies such as
Hyperion, Synopsis, Schlumberger, and others. We also sold our first three FLEXnet
Manager systems, a new product launched in May that we sell directly to enterprise
end user customers of FLEXenabled software. FLEXnet Manager is a new expanded
enterprise version of our existing Software Asset Management (SAM) product line. In
terms of the overall Software Value Management ecosystem, Platform Computing
announced in June that they intend to use our FLEXnet Connector interface to the
FLEXnet platform, enabling their products to work more efficiently with the large array
of FLEXenabled™ software on the market.
In mid-June we announced our intent to acquire InstallShield, and closed the
acquisition on July 1. The customer reaction to the InstallShield acquisition has been
very positive. Our respective customers appreciate the fact that we now have
increased the breadth of our Software Value Management solutions and are building a
one-stop shopping experience for ISVs and enterprises to help them more efficiently
package, license, install, update, and administer their software applications. We have

MVSN Q2 2004 Conference Call Script – 7 – 8/2/04
combined the operations of our two companies, and already have unified sales,
marketing, customer support, professional services, and engineering functions. Last
week we announced, with IBM, a beta program for the InstallShield multi-platform
installer to support IBM’s autonomic computing initiative. And, we have kicked off an
internal project to define an integrated approach with our FLEXnet product activation
package and the InstallShield installer product that will provide an easy way for the
large InstallShield Installer customer base to learn about FLEXnet offerings and the
value management solutions we provide to software publishers.
We talked in prior conference calls 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 half of 2004
substantial progress in this regard, and we have maintained a high level of profitability
with our year-to-date pro-forma operating margins at 41%, and our revenues growing
a healthy 29% year-over-year. Our Q1 and Q2 performance demonstrated across-theboard
strength in our existing businesses, while our progress with new products has
us on track to expand our business further as the year progresses. In addition, our
acquisition of InstallShield gives us further opportunities to expand our business by
leveraging complementary products, sales forces and channels, and an expanded
customer footprint.
We thank you for your continued support, and now we’ll take any questions.


http://www.macrovision.com/company/investor/financial_news.shtml