MACROVISION CORP (MVSN)

[kenco]

MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 1 —
Q3 2004 Earnings
Conference Call Script
November 1, 2004
Bill Krepick – CEO
Welcome, ladies and gentlemen, to Macrovision’s Q3 2004 earnings conference
call. I am here today with Ian Halifax, our CFO. Dan Stickel, EVP of our Software
Technologies Group, and Steve Weinstein, EVP Entertainment Technologies
Group, are also joining us to answer any questions you may have after I discuss
our operating results for the third quarter of 2004. As you’ve seen in our
earnings release of today, we delivered record third quarter revenues, pro forma
operating income, and pro forma earnings. This was the first quarter which
included the results of our InstallShield® acquisition. In addition to delivering
record revenues we made substantial progress with our integration of
InstallShield during the quarter in all functional areas: engineering, customer
support, professional services, sales, marketing, finance, and IT/IS. I’ll speak
about our operations and trends in the market after Ian discusses our Q3
financial results.
Ian Halifax – CFO and EVP, Finance & Administration
Thanks, Bill.
Before I discuss the Company’s Q3 2004 operating results and our Q4 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/company/investor/financial_news.shtml,
www.streetevents.com (for subscribers) or www.fulldisclosure.com.
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 2 —
The following financial information and the financial statements released earlier
today reflect the inclusion of acquired companies, including 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 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 third quarter
of 2004 were $48,859,000 reflecting a 57% increase from $31,216,000 in the
third quarter of 2003.
Overall, revenues from our video technologies, which include copy protection for
DVD, videocassettes, and digital pay-per-view, increased 19% to $23,954,000 in
the third quarter of 2004 from $20,106,000 in the third quarter of 2003.
DVD copy protection revenues were $18,296,000 in the third quarter of 2004,
compared to $15,926,000 in 2003, an increase of 15%. During Q3 we recognized
approximately $1.7 million of revenue from studio volume replicated during the
first two quarters of 2004. We were not able to record these revenues in the
quarter in which the volumes were replicated as a result of prolonged contract
negotiations.
Third quarter copy protection revenues from videocassettes were $794,000 in
2004 compared to $1,335,000 in 2003, a decrease of 41%, driven by the
ongoing shift from the VHS format to DVD.
Digital pay-per-view copy protection revenues for the third quarter of 2004 were
$4,864,000, an increase of 71% from $2,845,000 in Q3 2003.
Revenue from the Company’s music copy protection products was $2,011,000,
reflecting a 61% increase over Q3 2003. We continue to see our business coming
from Japan and Western Europe. Our Q3 revenues included a large up-front
technology license for the delivery of our controlled burning feature to an
international e-music store operator, as well as initial Hawkeye revenues.
SafeDisc® revenues for our PC games business were $1,307,000, a 10% increase
over Q3 2003.
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 3 —
Revenue from the Company’s software products was $21,484,000 in the third
quarter of 2004, compared to $8,678,000 in 2003, an increase of 148% resulting
from new license transactions and renewals of existing contracts, as well as the
impact of a full quarter of revenues from the InstallShield acquisition, which were
in line with expectations.
Other revenues were $103,000.
Gross margin for the third quarter of 2004 was 88% (excluding amortization of
intangibles from acquisitions), which reflected a 7 percentage point decline from
Q3 2003 due to the impact of the lower gross margin of InstallShield business.
Pro forma operating income (before amortization of intangibles from acquisitions,
in process research and development write-off, amortization of deferred stockbased
compensation and gains and impairment losses on investments) for the
third quarter of 2004 was $16,737,000 or 18% higher than the third quarter of
2003, which was $14,191,000.
Pro forma earnings for the third quarter of 2004 were a record $11,193,000 or
21% higher than the third quarter of 2003, which were $9,288,000.
Net income for the third quarter of 2004 was $1,324,000. Net income includes
non-cash, non-operating charges we exclude from our pro forma earnings
calculation such as the charges from the InstallShield acquisition, other prior
acquisitions and the write-down of our investment in Digimarc Corporation.
Amortization of intangibles from acquisitions was $2,627,000 (including
amortization of acquired patents from TTR). In-process research and
development write-off was $5,400,000. Impairment loss on our Digimarc equity
investment was $5,298,000, with a related $1,343,000 one-time tax impact.
Our pro forma operating margins were 34% of revenues in Q3 2004, reflecting a
6 percentage points drop from Q2 2004. This resulted from the strategic
investment initiatives we are making in R&D and Sales & Marketing, and the
impact of the InstallShield acquisition and related integration efforts. We expect
that our operating margins will rebound to approach 40% in the fourth quarter as
our fixed costs are absorbed by our seasonally higher fourth quarter revenues.
Pro forma diluted earnings per share for the third quarter of 2004 were $0.22, up
16% from the $0.19 recorded in the prior quarter a year ago. Diluted earnings
per share for the third quarter of 2004 were $0.03.
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 4 —
Interest and other income was $755,000 for the quarter, reflecting a decrease of
10% due to our lower cash position.
Our cash position remains strong, even after funding the $76 million InstallShield
acquisition. The total of the Company’s cash and cash equivalents, restricted
cash, short-term investments and long-term marketable investment securities
balance as of September 30, 2004 was $224,062,000.
The accounts receivable balance as of September 30, 2004 was $31,105,000.
DSO (days’ sales outstanding) was 58 days as of September 30, compared to 73
days in the prior quarter a year ago.
Deferred revenue was $15,437,000 at the end of the third quarter, compared to
$10,257,000 in the third quarter a year ago, an increase of 51%.
We are projecting revenues for the fourth quarter of 2004 to be in the $50-$53
million range, with pro forma EPS of $0.25-$0.27. For the full year 2004, we
anticipate revenues of $172M-$175M, with pro forma EPS of $0.88-$0.90. These
projections include the impact of InstallShield acquisition for the second half of
the year, combined with our view of the trends in DVD copy protection
penetration and pricing, as well as our belief that we closed some deals in Q3
that had been anticipated for Q4.
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 Entertainment Technologies business unit had very strong 21% year-overyear
revenue growth in Q3. DVD continues to be the dominant business in this
sector – contributing 2/3 of the division’s revenues. DVD copy protection
revenues grew 15% Y/Y which, as in prior quarters, is below the overall industry
shipments’ Y/Y growth of 33% projected by Understanding & Solutions, a leading
entertainment industry market research firm. Our results reflect the impact of
price discounting and loss of market penetration as certain studios have moved
away from 100% usage to a title-by-title copy protection policy. We expect this
trend to continue in the future and you should not be surprised to see certain
blockbuster titles released to the market without copy protection. We have talked
about this phenomenon in prior conference calls, and our strategy to bolster
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 5 —
revenue growth in the packaged media video segment of our business is to
combine our anti-piracy technologies into what we call the “ActiveReach™” suite
of anti-piracy solutions – which include DVD copy protection, Hawkeye™ peer-topeer
file sharing content management services, and Ripguard™ anti-ripper
protection. Looking ahead to Q4 we anticipate that our DVD business may
increase 5 to 10% above our Q3 results due to the factors above. We are not
expecting to see the results of selling our solutions as a product suite until early
in 2005.
Before moving to discuss our PPV copy protection business, I am pleased to
announce that we have just signed a multi-year renewal with HBO Home Video
that includes copy protection on 100% of their DVDs and VHS cassettes.
Our PPV copy protection business was exceptionally strong as we recorded $4.9M
in revenues – mostly from set top box royalties, but we also signed a number of
new $100,000+ international manufacturer licenses during the quarter. One
North American cable operator activated our copy protection in their video-ondemand
(VOD) network and has experienced no adverse consumer reaction. We
believe that two other U.S. cable companies will activate our technology by the
end of the year in support of ‘day/date’ trials for the simultaneous release of
home video and VOD movies. We are encouraged by these moves toward copy
protection activation on VOD.
The quarter was important also because we received our first revenues from our
Hawkeye P2P file sharing content management service from an independent
record label and a major Hollywood studio. We continue to support a number of
trials with both the movie studios and record companies. We expect revenue for
Hawkeye will be modest for the balance of this year as there are a number of
competitive contracts in place with the record labels that extend through
12/31/04 that will be difficult to replace.
During the quarter four major studios conducted further testing on RipGuard, our
anti-ripper solution for DVDs. Our RipGuard product is designed to be the
technologic antidote to PC-based software ripper products that are used to make
unauthorized copies of DVD movies. During the quarter we completed our
RipGuard replicator production tool, and are prepared to support a limited
number of replicator production sites in Q4. Assuming we get studio orders, full
scale RipGuard production could commence in Q1 2005.
We announced that TiVo® and ReplayTV® had signed license agreements with us
for our ACP-E content management solution, which is a simplified rights
management solution for DVR/PVR devices and home media center PCs. Various
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 6 —
hard drive content management rules such as allow temporary storage and
playback for 24 hours, or allow storage for 7 days, etc. can be embedded in our
DVD and PPV copy protection data streams. Most digital set-top boxes,
DVRs/PVRs, and home media center PCs can be modified with simple firmware
downloads that will allow content owners to control the storage and playback of
PPV and VOD programs on DVR/PVR type set-top boxes and home media PCs.
We expect that this product will open up more hardware licensing opportunities
with PCs and Internet protocol devices.
Our SafeDisc® PC games copy protection business was up slightly, 10% for Y/Y.
We were gratified to see that our advanced Hack Protection (API) based security
solution helped Electronic Arts keep the hackers at bay for a full three weeks
following the release of their popular Sims2 game. We believe we have shored up
our value proposition during the year.
In the audio market, we delivered our CDS-300™ Version 7. 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. We
generated $2 million in audio-related revenues in Q2 – comprised of our CDS
copy protection royalties, a small amount of Hawkeye revenues, and a large upfront
technology license for the delivery of our controlled burning feature to an
international e-music store operator. We have three record labels in Europe that
have committed to deploying it in the Q4. In the U.S., the RIAA issued an
industry vision and specification for the record labels’ ideal copy protection
solution. We believe that our V7 meets most of the criteria.
Turning now to our software business, Q3 was the first quarter when we included
the results from our July 1 acquisition of InstallShield. 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. Our combined product
portfolio has resulted in an unrivaled software value management product line.
All these factors helped us deliver record $21.5M in revenues in Q3.
During Q3 we spent considerable time and effort integrating InstallShield, and
among other things, now have a trained sales force that is beginning to sell
products from both companies. In addition, our product development teams have
now completed our first joint InstallShield/Macrovision product integration
incorporating the “Try-and-Die” feature of our FLEXnet™ Product Activation
software in one of the InstallShield Installer products. This “Try-and-Die” feature
will be introduced later this week to software developers who buy the
MVSN Q3_04_ConfCallScript_11-1-04FINAL.DOC — 7 —
InstallShield Installer – ‘Premium Edition’. We expect customer feedback
regarding the “Try-and-Die” feature to help us fine tune our subsequent
integration of the full scale Product Activation feature next year. I am proud of
this product development accomplishment because it showed how well three
engineering teams in Chicago, the UK, and Santa Clara could work together to
incorporate new features and merge InstallShield heritage and Macrovision
products under compressed development schedules.
Other items of note during Q3 included an announcement with Microsoft that
they will be making a special version of our InstallShield AdminStudio™ available
to all Microsoft SMS customers, seeding the market for our full-fledged version.
We also began getting traction with our new FLEXnet Manager™ product, aimed
at enterprise users of FLEXenabled™ applications, closing several deals, the
largest being several hundred thousand dollars. And we continued to see strong
growth with the InstallShield Update Service™, in particular closing a multihundred
thousand dollar deal with a leading ISV. Both the FLEXnet Manager and
Update Service product have had average selling prices in the past in the
$20,000- $40,000 range.
Finally, we worked hard in Q3 preparing for our annual SoftSummit industry
conference which brings together leading ISVs and enterprises to discuss the
latest trends and best practices in software value management and electronic
licensing. We had record attendance, up 40% over 2003. Sponsor participation
was up over 100%. Speakers from General Motors, Microsoft, Peoplesoft, IDC,
McKinsey, and other leading companies contributed to the broad appeal of this
conference for all ISVs and enterprises. We believe the success of SoftSummit
mirrors our success in establishing thought leadership with FLEXnet as the
premier electronic licensing and electronic license distribution platform, and
extending our franchise to a leadership position in the software value
management space.
We thank you for your continued support, and now we’ll take any questions.
# # #

http://www.macrovision.com/company/investor/pdfs/MVSN_Q3_2004_confcallscript.pdf