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Macrovision Develops and markets copy protection and rights
management technologies and products to prevent the illicit duplication, reception, or use of video and audio programs and computer software
Purpose is to help right’s owner maximize revenues “Today, we are also beginning to get involved with
information that is transmitted over the Internet digitally.”
Offices in California, England, and Tokyo 40 U.S. patents, 200 international patents, another
340 pending
Company History 1983--Macrovision founded 1988--“Back to the Future” is the first motion picture ever
copy protected 1990--Developed technology for digital pay-per-view 1993--Their technology included in digital set-top
decoders, now included in 90% of these units sold 1997--Developed technology for DVD players and titles,
now included in 100% of DVD players sold worldwide 1999--Increases exposure to CD-Rom and internet-
delivered software products through acquisitions May 2000—Digital Millennium Copyright Act takes effect
—all new VCR’s sold in US must be compatible with Macrovision technology
Importance of Copy Protection
1996—unauthorized consumer copying of prerecorded videocassettes cost the industry about $370 million in lost revenues
1998 Industry Revenues—Theatrical Box Office: $3.1 billion, Home Video: $6.7 billion, Pay-Per-View: $357 million, Subscription Pay TV: $1.6 billion
Home video has surpassed the theatrical box office as the largest source of revenues for the motion picture industry
Macrovision has contracts with Disney, Columbia Tri-Star, PolyGram, Paramount, Dreamworks, and Universal Home Video to copy protect virtually all of the motion pictures that they release in videocassette and DVD format in the US
Business Units
3 Business Units: Video Copy Protection, Computer Software Rights Management, and Encryption Technologies
Video Copy Protection Copy protection for motion pictures that are stored on
videocassettes or DVDs and for media transmitted by cable or satellite (i.e. pay-per-view)
Approximately one third of all commercial videocassettes produced worldwide during 1998 were copy protected (550 million), and virtually all incorporated Macrovision’s technology– No competition
Used by every MPAA movie studio on some or all of their videocassette releases
Total Macrovision-protected videocassettes: 2.5 billion, 500 million alone in 1998
Video Copy Protection Currently used on 75% of all DVDs produced Allows movie studios to protect their DVD’s from
unauthorized copying to VCR’s The only technology of its kind currently available Used in both DVDs and DVD players (over 120
manufacturers incorporate Macrovision technology) Working with Philips to develop a digital-to-digital copy
protection system for next generation recordable DVD devices and other digital media
DVD software sales reached 9.3 million units in all of 1998, up from 1.5 million in 1997
Video Copy Protection
Digital Pay-Per-View copy protection is integrated in over 90% of the 20 million digital set-top decoders worldwide
Allows consumers to view, but not record, copy protected pay-per-view programs that are distributed via digital set-top decoders
Over 45 set-top decoder manufacturers are licensed to incorporate this technology in their products
Most major digital cable and Direct Broadcast Satellite (DBS) operators are deploying Macrovision copy protection-capable networks
Computer Software Markets CD-ROM copy protection and rights management
products to publishers of consumer entertainment, educational, reference,and applications software
“SafeDisc”—effective against consumer copiers and professional pirates and thwarts attempts to use CD-recordable drives or hard discs to make useable copies of CD-ROMs
SafeDisc was applied to over one million discs in the first 60 days of its launch
“SafeCast”—helps prevent unauthorized use and copying of software and helps publishers encourage trials and generate additional sales using electronic software distribution (ESK) technology. Supports secure software downloads over the Internet
Encryption
PhaseKrypt—a video scrambling technology that offers excellent security at a low price to manufacturers of analog cable television set-top decoders
Sells other proprietary video scrambling technologies and systems which prevent unauthorized viewing of video signals during transmissions from one location to another location
Future Media world is moving to digital. MVSN plans to
compete aggressively here. Growing computer software copy protection
business Growing Internet-delivered software business Looking into going into audio downloads Getting into audio CDs (CD copiers) (TTR
Technologies investment in January, 2000) DVDs are expected to more than make up for any
decline in video business
Recent News
Dec 8—signs copy protection agreement with Palm Pictures
Dec 8—announce partnership with TTR Technologies to develop music CD copy protection system
Dec 13—signs long term contract with Disney/Buena Vista to copy protect videocassettes and DVDs
Dec 17—signs copy protection agreement with Havas Interactive, Inc
Dec 20—signs long term contract with Universal Home Video to copy protect videocassettes and DVDs
Dec 23—files registration statement for stock offering, proceeds used for strategic investments
Recent News
Jan 13—completes strategic investment in TTR Technologies
Jan 25—Hambrecht & Quist raised 2000 EPS to $0.51 from $0.42 to reflect growing demand for the company’s products. “The company should generate 58% EPS growth over the next three years.”
Jan 31—U.S. Bancorp Piper Jaffray started coverage of MVSN with a strong buy rating and a price target of $91.5. EPS estimate for 2000 EPS is $0.47. Views the company as a “play on the massive growth of digital content software.”
Recent News Feb 14—announced fourth quarter 1999 net revenues of
$12.8 million (increase of 76% over fourth quarter 1998); earnings before goodwill amortization were $4.2 million (89% higher than 1998)
Feb 14—Sets 2-for-1 stock split Feb 29—MVSN survey finds that 47% of respondents who
had purchased PPV programs in the last year admitted to copying at least one of those programs; 11% admitted to copying ten or more in the last year.
Mar 13—DCM, Digital Communication Media AB Becomes Macrovision's First European Authorized SafeDisc Reseller
Mar 21—Tae-Bo video producer (#2 video for overall sales in 1999) renews contract with Macrovision
CAPM
ri = rf + Bi [rm – rf]
rf = 5.654% (3 month T-bill)
Bi = 1.66 (Yahoo profile)
rm = 12.615% (15 year S&P 500 average)
ri = 5.654 + 1.66 (12.615 – 5.654)
ri = 17.209%
Security Market Line
Management
Grew revenues by 53% in 1999. Expects future revenues and earnings growth to be 40-45%
Gross margins: 90% Operating margins: 40% Every employee in the company has stock options
(interests aligned) Variety of bonus plans that are tied to company
performance Cautious with investment decisions, but expanding
in rapidly growing areas (DVDs, Internet, etc…)
Income Statement1 YE 12/31/99 1 YE 12/31/98 1 YE 12/31/97 1 YE 12/31/96
Net revenues $37,390 $24,434 $20,340 $17,080 Costs and expenses:Cost of revenues 3,012 2,081 2,422 2,579 Research and development 4,402 2,578 2,248 2,527 Selling and marketing 8,973 5,985 5,765 5,090 General and administrative 5,529 4,621 4,149 3,566 Goodwill amortization 1,600 In-process research & development 4,286 Total costs and expenses 27,802 15,265 14,584 13,762
Operating income 9,588 9,169 5,756 3,318 Interest and other income (expense), net 1,603 1,102 478 (260)Income before income taxes 11,191 10,271 6,234 3,058 Income taxes 3,961 3,929 2,413 1,223 Income from discontinuing operations 1,835 Discontinued operations:Loss from operations of CAC business, net ofincome tax benefit of $204 (663)Provision for operating losses during holdingperiod, net of income tax benefit of $45 (164)Net income $7,230 $6,342 $3,821 $1,008
Selling and marketing expenses are high Profitable company
Balance Sheet12/31/99 12/31/98 12/31/97 12/31/96
AssetsCurrent assets:Cash and cash equivalents $4,317 $3,513 $1,314 $2,409 Short-term investments 31,452 22,877 11,241 --Accounts receivable, net of allowance for doubtfulaccounts of $838 and $684 as of December 31, 1998and 1997, respectively 11,662 5,574 5,240 3,376 Inventories 178 325 433 550 Receivable from related party -- 279 --Deferred tax assets 1,669 1,336 929 Prepaid expenses and other current assets 3,543 1,008 430 186 Total current assets 51,152 34,966 20,273 7,450 Property and equipment, net 1,655 1,297 1,722 2,017 Patents and other intangibles, net of accumulatedamortization of $1,034 and $796 as of December31, 1998 and 1997, respectively 1,647 1,526 1,098 1,161 Receivable from related party 329 Long-term marketable investment securities 52,241 18,795 1,763 --Other assets 7,823 8,910 4,000 996 TOTAL ASSETS $131,149 $65,494 $28,856 $11,953
Patents and intangibles A/R
Balance SheetLiabilities and Stockholder's Equity 12/31/99 12/31/98 12/31/97 12/31/96
Current liabilities:Accounts payable 1,267 $803 $919 $1,318 Accrued expenses 4,726 2,691 2,190 2,468 Deferred revenue 3,124 1,207 944 749 Income taxes payable 1,524 680 846 585 Current portion of capital lease obligations 76 112 108 105 Total current liabilities 10,717 5,493 5,007 5,225 Capital lease obligations, net of current portion 0 76 188 296 Deferred tax liabilities 0 383 84 360 TOTAL LIABILITIES 10,717 5,952 5,279 5,881
Commitments and contingenciesStockholders' equity:Preferred stock, $.001 par value, 5,000,000 sharesauthorized; none issued -- -- 1 Common stock, $.001 par value; 100,000,000 sharesauthorized as of 4 December 31, 1998 and 1997; 8,802,570 and7,215,195 shares issued and outstanding as ofDecember 31, 1998 and 1997, respectively 9 7 9,530 Additional paid-in capital 52,617 23,277 (157)Stockholder notes receivable (78) (131) (240)Deferred stock compensation -- (96) (135)Accumulated other comprehensive losses (82) (214) --Retained earnings 7,076 734 (2,931)TOTAL STOCKHOLDER'S EQUITY 59,542 23,577 6,072
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 131,149 $65,494 $28,856 $11,953
Cash Flows1 YE 12/31/98 1 YE 12/31/97 1 YE 12/31/96
Operating ActivityNet income $6,342 $3,821 $1,008 Adjustments to reconcile net income to net cashprovided by continuing operations:Depreciation and amortization 931 1,156 1,002 Amortization of prepaid future royalties toC-Dilla Limited 143 --Deferred income taxes (34) (683) (451)Amortization of deferred stock compensation 96 144 180 Loss on disposal of fixed assets 17 105 --Tax benefit from employee stock benefit plans 617 138 --Change in provision for accounts and notesreceivable 123 467 13 Discontinued operations 827 Changes in operating assets and liabilities:Accounts receivable, inventories, and othercurrent assets (958) (2,408) (590)Accounts payable, accrued liabilities, deferredrevenue, and income taxes payable 482 (221) 916 Other (12) (83) (17)Net cash provided by operating activities 7,747 2,436 2,888
Most of revenue comes from royalties
Cash Flow
1 YE 12/31/98 1 YE 12/31/97 1 YE 12/31/96
Investing ActivityPurchases of long-term marketable investmentsecurities (19,495) (1,763) --Purchases of short-term investments (56,527) (51,737) --Sales or maturities of long-term marketableinvestments 2,541 --Sales or maturities of short-term investments 44,957 40,500 1,200 Acquisition of property and equipment (285) (571) (476)Payments for patents and other intangibles (666) (332) (343)Proceeds from related party receivable 310 -- (329)Investment in C-Dilla Limited, Command AudioCorporation and --Digimarc Corporation (4,053) (3,480)Prepaid future royalties to C-Dilla Limited (1,015) --Other, net 15 (67) (4)Net cash used in investing activities (34,218) (17,450) 48
Financing ActivityPayments on capital lease obligations (108) (105) (117)Payments on long term debt (696)Proceeds from issuance of common stock uponexercise of options 561 288 171 Proceeds from issuance of common stock underemployee stock purchase plan 292 89 --Payment of stockholder note receivable 53 26 --Proceeds from sale of common stock, net ofissuance costs and payments of deferred offeringcosts 27,872 13,777 (543)Cash dividends -- (156) (401)Net cash provided by financing activities 28,670 13,919 (1,586)
Net (decrease) increase in cash and cashequivalents 2,199 (1,095) 123 Cash and cash equivalents at beginning of year 1,314 2,409 2,286 Cash and cash equivalents at end of year $3,513 $1,314 $2,409 Cash paid during the year:Interest $11 $12 $296 Income taxes $3,209 $2,364 $1,446
S-T investments are in municipal bonds
40 issues of patents, significant investment
Use stock to finance growth
DuPont Analysis
INT BURDEN TAX BURDEN LEVERAGE
Year % ROENET INC/ SALES
PRE TAX/ SALES
EBIT/ SALES
PRE TAX/ EBIT
NET INC/ PRETAX
SALES/ ASSETS
EBIT/ ASSETS
ASSETS/ COM EQTY
1999 6.003 0.193 0.299 0.342 0.875 0.646 0.285 0.098 1.0891998 10.651 0.26 0.42 0.421 0.999 0.617 0.373 0.157 1.11997 15.545 0.188 0.188 0.307 0.998 0.613 0.705 0.216 1.2241996 6.936 0.059 0.059 0.196 0.915 0.33 1.429 0.28 1.9691995 16.907 0.066 0.066 0.161 0.766 0.532 1.297 0.209 3.846
MARGIN TURNOVER
Ratio ComparisonMVSN Industry Sector S&P 500
% Owned Institutions 63.46 39.92 45.91 59.20Sales 1999 vs. Sales 1998 53.02 57.07 31.78 21.22Quick Ratio 4.01 0.64 1.16 1.16Current Ratio 4.45 1.11 1.72 1.65Gross Margin 91.27 42.49 42.79 50.15Gross Margin - 5 Yr. Avg. 86.33 37.75 40.12 48.55Operating Margin 23.47 14.88 9.65 18.60Operating Margin - 5 Yr. Avg. 24.33 8.91 7.23 16.83Net Profit Margin 19.34 5.10 0.81 12.22Net Profit Margin - 5 Yr. Avg. 16.36 0.69 2.77 10.47Return on Assets 10.08 3.92 2.21 9.95Return on Assets - 5 Yr. Avg. 16.02 0.04 3.17 9.17Inventory Turnover 10.44 8.75 12.76 9.60
*Industry = Motion Pictures
* Sector = Services
(All numbers are in millions except eps)
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Rev. growth (rate of growth slows by 10% each year starting in 2002) 53% 52% 50% 45% 41% 36% 33% 30% 27% 24% 22%
Rev. $24.40 $37.40 $56.85 $85.27 $123.64 $173.72 $237.04 $314.80 $407.75 $516.09 $639.52 $777.16
cost of revenues (@ 7% of rev) 2.08 3.01 3.98 5.97 8.66 12.16 16.59 22.04 28.54 36.13 44.77 54.40
r&d (@ 10% of rev) 2.58 4.40 5.68 8.53 12.36 17.37 23.70 31.48 40.77 51.61 63.95 77.72
selling & marketing (@ 18% of rev) 5.99 8.97 10.23 15.35 22.26 31.27 42.67 56.66 73.39 92.90 115.11 139.89
g&a (@11% of rev) 4.62 5.53 6.25 9.38 13.60 19.11 26.07 34.63 44.85 56.77 70.35 85.49
other (@ 6% of rev) 0.00 5.89 3.41 5.12 7.42 10.42 14.22 18.89 24.46 30.97 38.37 46.63
Total costs 15.27 27.80 29.56 44.34 64.30 90.33 123.26 163.70 212.03 268.37 332.55 404.12
operating inc. 9.17 9.59 27.29 40.93 59.35 83.39 113.78 151.11 195.72 247.72 306.97 373.04
int.&other inc. (grow at sales) 1.10 1.60 2.43 3.65 5.29 7.43 10.14 13.47 17.44 22.08 27.36 33.25
EBT 10.27 11.19 29.72 44.58 64.64 90.82 123.92 164.57 213.16 269.80 334.33 406.29
taxes (@ 36%) 3.93 3.96 10.70 16.05 23.27 32.69 44.61 59.25 76.74 97.13 120.36 146.26
N.I. 6.34 7.23 19.02 28.53 41.37 58.12 79.31 105.33 136.42 172.67 213.97 260.02
outstanding shares (grow at 5%) 34.21 38.26 40.18 42.18 44.29 46.51 48.83 51.27 53.84 56.53 59.36 62.32
eps 0.19 0.19 0.47 0.68 0.93 1.25 1.62 2.05 2.53 3.05 3.60 4.17
Current Assets (grow with sales) 34.97 51.15 76.73 113.55 164.65 230.51 311.19 404.55 505.69 622.00 746.39 880.74
Current Liabilities (grow with sales) 5.49 10.72 16.08 23.80 34.51 48.31 65.22 84.79 105.98 130.36 156.43 184.59
Working Capital 29.48 40.43 60.65 89.75 130.14 182.20 245.97 319.76 399.71 491.64 589.96 696.16
Change in NWC 10.95 20.22 29.11 40.39 52.06 63.77 73.79 79.94 91.93 98.33 106.19
Capital Expenditures (grow at 5%) 0.39 0.41 0.43 0.45 0.48 0.50 0.53 0.55 0.58 0.61 0.64 0.67
Depreciation (grow at 5%) 0.93 1.43 2.17 3.25 4.72 6.63 9.04 12.01 15.56 19.69 24.40 29.65
FCF -$2.71 $0.54 $2.22 $5.22 $12.19 $24.06 $42.99 $71.46 $99.82 $139.40 $182.81
WACC = cost of equity = 17.20%
period 1 2 3 4 5 6 7 8 9 10
FCF $0.54 $2.22 $5.22 $12.19 $24.06 $42.99 $71.46 $99.82 $139.40 $182.81
DFCF 0.4615876 1.615735 3.242174 6.462225 10.87911 16.58963 23.52718 28.04246 33.41359 37.38727
Perpetuity $18,827.86
Disc. Perpituity $2,803.30
Value of firm= $3,048.02
Value of equity= $3,048.02
Share Price= $77.72
DCF
2010 2011 Perpetuity
19% 17% 16%
$927.71 $1,089.44
64.94 76.26
92.77 108.94
166.99 196.10
102.05 119.84
55.66 65.37
482.41 566.51
445.30 522.93
39.69 46.61
484.99 569.54
174.60 205.03
310.39 364.51
65.44 68.71
4.74 5.30
1,021.66 1,174.91
214.12 246.24
807.54 928.68
111.39 121.13
0.71 0.74
35.40 41.57
$233.70 $284.20
11 12
$233.70 $284.20
40.78035 42.31498
P/E EPS Projection(millions)
Latest Actual 1999 2000 2001 2002 2003
Annual rate of growth in sales 53% 52% 50% 45% 41%
Net sales 37.4 56.848 85.272 123.644 173.720Interest and other income 1.6 2.432 3.648 5.2896 7.431888Total revenue 39 59.28 88.92 128.934 181.1523Net profit margin 19.33% 33.46% 33.46% 33.46% 33.46%Net after-tax earnings 7.23 19.0202 28.53028 41.3689 58.12331Common shares outstanding 38.26 40.18 42.18 44.29 46.51Earnings per share 0.189 0.473 0.676 0.934 1.250Payout Ratio 0 0 0 0 0Dividends per share 0 0 0 0 0
Earnings per share 0.189 0.473 0.676 0.934 1.250P/E ratio (declining by 12% per year after 1999) 195.808 172.311 151.634 133.438 117.425Share price at year end 37 81.5777 102.5548 124.6286 146.7531
Stock price appreciation based on purchase price of $70 today 16.54% 25.71% 21.52% 17.75%
Annualized appreciation from now to year end 2003: 21.80%
Forecasted Figures
O.k. . . . Is the price justified?P/E (based on projected 2000 earnings)
Earnings growth for 2000 (%) PEG
Next 5 year's earning's growth (%) PEG
MVSN 119.79 159.60 0.75 (1st of 5) 51.00 2.35 (3rd of 5)ORCL 130.00 158.80 0.82 25.70 5.06TLAB 36.08 28.40 1.27 29.20 1.24DELL 63.46 35.40 1.79 33.40 1.90AOL 191.43 77.60 2.47 48.30 3.96
YHOO 452.63 37.30 12.13 53.70 8.43
Recommendation
Buy 300 shares of MVSN at market (~ $73 per share)