macrovision corp. (mvsn) matthew thompson & shengdong (stanley) zhu presented april 26, 2007

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Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

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Page 1: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Macrovision Corp.(MVSN)

Matthew Thompson

&

Shengdong (Stanley) ZhuPresented April 26, 2007

Page 2: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Risk Factors

Firm Strategy and Development

Valuation DCF Analysis

Recommendation RCMP position

Stock Performance

Portfolio “fit”

Page 3: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Risk Factors

Firm Strategy and Development

Valuation DCF Analysis

Recommendation RCMP position

Stock Performance

Portfolio “fit”

Page 4: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

“The Business”

Macrovision enables businesses that are reliant on the deployment of software or content to protect, enhance, or distribute their offering among digital distribution channels and destination devices.

MACROVISION CORP, 10-K, Feb. 28, 2007, p.1

Page 5: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

In simple terms…

Macrovision has two key segments: A entertainment technology unit that develops and

licenses copy protection and digital rights management technology for CDs, DVDs, pay-per-view/video-on-demand programs, and PC games

A software technology unit provides solutions to help software vendors and end users manage licensing

Page 6: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Sources of Revenue

MACROVISION CORP, 10-K, Feb. 28, 2007, p.44

Page 7: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Content owners (VHS/DVD/CD) Per unit royalties based upon # of copy-protected units produced

Cable & Satellite operators (PPV/VOD) Royalties on digital set top boxes One-time and annual license fees from manufacturer Transaction fees from PPV/VOD upon activation

CD-ROM/PC games/P2P Service-based fee for right to use p2p file sharing content management

technologies

Future revenues expected to increase with new contracts and business from Hawkeye, RipGuard DVD, and ActiveMARK products

ET Revenues

MACROVISION CORP, 10-K, Feb. 28, 2007, p.45

Page 8: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

CustomersSolutions offered to 3 distinct customer groups:

1. Entertainment and Content Producers and Distributors

2. Software Publishers

3. Enterprise End-Users

Customers include major Hollywood studios; independent video producers; game producers and distributors, hardware and software vendors; information publishers; consumer electronic, PC and digital set−top box manufacturers; PPV and VOD network operators; online retailers and portal and enterprise IT organizations

MACROVISION CORP, 10-K, Feb. 28, 2007, p.2

Page 9: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

1. E&C Producers and Distributors Solutions Continued

PC Games Technology1SafeDisc, 2ActiveMARK

1 unique digital signature designed to prevent pirated copies; if burned, signature won’t be found, decryption won’t take place and copy won’t run

2 provides ease for digital distribution of game content online

Current network has over 300 partners offering over 1600 games

Enable an entirely new revenue channel with online merchandising and digital distribution of games

Page 10: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

1. E&C Producers and Distributors Solutions

Video Technology Packaged Media Solutions (RipGuard DVD): Protect packaged media

(CDs,DVDS,etc.) from being copied without authorization Motion Pictures generate approx 2/3 of revenue from PM Majority of MPAA studios use MVSN security technology

Declining dvd sales should be offset by increase in next 2

PPV/VOD Solutions (ACP-VOD, ACP-WMDRM): used by content owners to control how long PPV/VOD content may be stored on compliant digital units or home media centers

DVR, extremely important to E&C owners b/c of ease of DVD replication

P2P File Sharing Solutions (Hawkeye P2P Anti-Piracy service): Global network solution that allows content owners to prevent illegal file sharing over the internet

MACROVISION CORP,10-K, Feb. 28, 2007, p.3

Page 11: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

2. Software Publishers

FLEXnet Publisher offered to software publishers and hardware manufacturers

Enables customer to electronically track, enforce, and update their software licenses and guard against unauthorized use by implementing product activation or content security

Simplify product marketing strategies Reduce unpaid usage and lower costs associates

with product development, distribution, and delivery

Page 12: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Software as a service

Rights Products (RightAccess1, RightCommerce2): available to: media, publishing, entertainment, and software

companies

*helps customer generate revenue and improve customer relationships by controlling and commercializing digital rights and services

1-access control application providing advanced authentication, authorization, product segmentation, and delegated administration

2-billing application allows customers to implement a myriad of pricing models

*Advantages- put control in hands of business users

Page 13: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

3. Enterprise End-Users

FLEXnet Manager captures and analyzes software usage data to help enterprises determine where to allocate their software purchases and related costs

Also helps administer software access rights over global networks

Reputable Brands using MVSN technology:

HBO, NBC, Netflix, TiVO, Microsoft, Disney, Yahoo!, Adobe, Cisco Sytems, IBM, etc

Page 14: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Company Position Risk Factors

Firm Strategy and Development

Valuation DCF Analysis

Recommendation RCMP positionStock Performance

Portfolio “fit”

Page 15: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Industry Background

Experiencing unprecedented amount of change

Inexpensive, easy to use in-home copying devices enable consumers to make unauthorized copies of video, audio and software content.

publishers have become more concerned with protecting their intellectual property

Page 16: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Company Position

Security solutions are proprietary and have broad U.S. and international patent coverage.The only analog content security solution that has been widely deployed on commercial products.

Currently,video content security technology is embedded in nearly 100% of all DVD players and most digital set-top boxes worldwide.

Take years for the competitive technology to be accepted by hardware manufacturers or embedded into the consumer electronic devices.

Sole player in the market, no comparable companies

Page 17: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Risk Factors

Business Risk Market Risk Additional Risk

Page 18: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Business Risk

Depends on the continued use by major movie studios

Depend on a few key customers for a high percentage Limited control over customers’ decision to include services If customers decide to focus on other methods to inhibit

piracy, the business would be harmed Customers try to minimize costs by decreasing their content

protection usage.

Page 19: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Quantitative and Qualitative Market Risk Fixed Income Investment Foreign Currency Exchange Rates Strategic Investment

Page 20: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Additional Risk

Seasonality affect the price of common stock A significant portion of sales are derive from

international sales. customers decide to focus on other methods to

inhibit piracy, the demand for products may decrease and business would be harmed.

Page 21: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Company Position Risk Factors

RCMP position Stock Performance Portfolio “fit”

Firm Strategy and Development

Valuation DCF Analysis

Recommendation

Page 22: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

RCMP position

Bought 200 share on April 3rd 2000 @ $75.00

Current price @ 25.25 Losing $9,944.00, 66.29% of the initial

investment

Page 23: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Performance

52wk Range:18.84 - 29.20 Market Cap:1.32B P/E (ttm):40.33 EPS (ttm):0.63

Page 24: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Correlation with other stocks

 Highly correlated with some stocks in portfolio

AEE AEO CPRT FR JKHY JPM KMB MS MVSN SRCL SRZ WAGAEE 1.00AEO -0.08 1.00CPRT 0.35 0.21 1.00FR 0.49 -0.02 0.36 1.00

JKHY 0.17 0.40 0.38 0.21 1.00JPM 0.32 0.47 0.45 0.15 0.55 1.00KMB 0.30 0.08 0.47 0.14 0.31 0.22 1.00MS 0.17 0.50 0.39 0.11 0.46 0.68 0.15 1.00

MVSN 0.21 0.44 0.33 0.20 0.57 0.51 0.06 0.57 1.00SRCL -0.25 0.13 -0.08 -0.03 0.09 0.04 -0.07 0.06 -0.11 1.00SRZ 0.14 0.21 0.43 0.20 0.40 0.40 0.01 0.48 0.50 0.07 1.00WAG 0.07 0.09 0.11 -0.18 0.02 0.16 0.26 0.18 -0.07 0.07 -0.17 1.00

Page 25: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Portfolio Fit

The initial purchasing decision is proved to be wrong

Month AnnualRisk-free Rate 0.2% 2.3%Sharpe Ratio(Include) 8.6% 31.1%Sharpe Ratio (Exclude) 10.1% 36.8%

Page 26: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Current DistributionDi stri buti on

AEE

AE

CPR

F

J KH

KMB

MS

J P

MSVSRC

SRZ

WA

Page 27: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

New Portfolio Fit

Current EstimatedPrice 25.29 31.64Share 300 300Holding 7587 9492Gain 1905Return 25.1%

Month AnnualRisk-free Rate 0.2% 2.3%Sharpe Ratio (old) 8.6% 31.1%Sharpe Ratio (new) 8.8% 31.9%

Page 28: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

The new distributionDi stri buti on

AEO

AEE

CPRT

FR

J KHYJ PM

KMB

MS

MVSN

SRCL

SRZ

WAG

Page 29: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Company Position Risk Factors

RCMP position Stock Performance Portfolio “fit”

Firm Strategy and Development

Valuation DCF Analysis

Recommendation

Page 30: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Firm Strategy and Development

Growth Strategy:Build upon key customer relationships

Intend to target these customers for delivery of future digital and distribution management technologies

Introduce new product applications and technologies

Expand and Protect Patent Position Continue to make strategic acquisitions

Next Slide

Page 31: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Strategic Acquisitions

Page 32: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Risk Factors

Firm Strategy and Development

Valuation DCF Analysis

Recommendation

RCMP positionStock Performance

Portfolio “fit

Page 33: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

Basic Assumptions Total revenue will increase by 30% in 2007 due to

success of newly integrated recent acquisitions and expanded product range, followed by volatile growth in the following years

Net income will continue to grow at very conservative rate

WACC of 11.36%, sustainable growth rate of 5%

Page 34: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

DuPont AnalysisForecasted

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

19.4% 11.8% 21.0% 20.2% 10.9% 13.3% 14.5% 17.4% 15.6% 18.3% 17.5% 17.3%

x

28.8% 31.5% 33.3% 40.2% 40.8% 30.2% 35.8% 36.1% 37.4% 44.2% 46.4% 48.2%

=

5.6% 3.7% 7.0% 8.1% 4.4% 4.0% 5.2% 6.3% 5.8% 8.1% 8.1% 8.4%

x

1.08 1.09 1.13 1.14 1.16 1.76 1.68 1.63 1.62 1.59 1.52 1.53

=

6.0% 4.1% 7.9% 9.2% 5.2% 7.1% 8.7% 10.2% 9.4% 12.9% 12.4% 12.8%

Net IncomeNet Sales

1Net Profit Margin

2

Total AssetsNet Sales

TAT

Stockholders EquityNet Income

ROE5

Stockholders EquityTotal Assets

Financial Leverage4

ROI3

Net IncomeTotal Assets

Page 35: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

Step 1: Free Cash Flow

Step 2: WACC WACC = 11.36%, gterminal = 5% Also, see sensitivity analysis

2007 2008 2009 2010 2011 2012Net Income + 46,828 63,105 68,081 111,866 131,241 158,997 Depreciation - 25,492 27,496 29,330 56,459 57,721 38,801 D in NWC - (33,758) 41,923 (31,928) 7,544 53,412 -

CAPEX 18,428 28,498 85,136 28,913 29,072 38,801 FCF 87,650 20,181 44,202 131,869 106,477 158,996

Page 36: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

Step 3,4,5,6: PV of FCF, and PV of TV1 2 3 4 5 6

2007 2008 2009 2010 2011 2012

FCF 87,650 20,181 44,202 131,869 106,477 158,996

PV of FCF 78,710$ 16,274$ 32,010$ 85,755$ 62,181$ 83,381$

PV of TV 1,377,086$

Page 37: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

Step 7: Firm Intrinsic Value (Price per share)PV of FCF = 358,311$

PV of TV = 1,377,086$

minus

LT Debt = 240000

divided by Fair Value

# out. shares= 52731 Range:

plus 10% 31.19$

DCF share price 28.36$

minus 10% 25.52$

Page 38: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Valuation

Sensitivity Analysis 52 week range: $18.84-$29.20

28.36$ 3% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%8.25% 39.79$ 43.86$ 48.88$ 55.25$ 63.57$ 74.92$ 91.31$ 117.07$ 163.43$ 271.62$ 812.56$ 9.00% 33.69$ 36.66$ 40.22$ 44.58$ 50.02$ 57.02$ 66.35$ 79.41$ 99.01$ 131.67$ 197.00$ 9.75% 28.96$ 31.21$ 33.84$ 36.98$ 40.77$ 45.46$ 51.40$ 59.17$ 69.77$ 85.07$ 109.12$

10.50% 25.19$ 26.94$ 28.95$ 31.29$ 34.07$ 37.40$ 41.46$ 46.55$ 53.08$ 61.80$ 74.00$ 11.25% 22.13$ 23.51$ 25.08$ 26.89$ 28.99$ 31.45$ 34.38$ 37.93$ 42.31$ 47.86$ 55.12$ 12.00% 19.58$ 20.70$ 21.96$ 23.38$ 25.01$ 26.89$ 29.08$ 31.68$ 34.79$ 38.59$ 43.34$

WACC 12.75% 17.44$ 18.35$ 19.38$ 20.52$ 21.82$ 23.29$ 24.98$ 26.94$ 29.24$ 31.98$ 35.30$ 13.10% 16.55$ 17.39$ 18.32$ 19.36$ 20.53$ 21.85$ 23.36$ 25.10$ 27.13$ 29.51$ 32.36$ 13.50% 15.61$ 16.37$ 17.21$ 18.15$ 19.20$ 20.37$ 21.71$ 23.23$ 24.99$ 27.04$ 29.47$ 14.25% 14.03$ 14.67$ 15.38$ 16.15$ 17.01$ 17.97$ 19.04$ 20.25$ 21.63$ 23.21$ 25.05$ 15.00% 12.66$ 13.20$ 13.80$ 14.45$ 15.16$ 15.95$ 16.83$ 17.80$ 18.91$ 20.16$ 21.58$ 15.75% 11.46$ 11.92$ 12.43$ 12.97$ 13.57$ 14.23$ 14.96$ 15.76$ 16.66$ 17.67$ 18.80$ 16.50% 10.39$ 10.79$ 11.23$ 11.69$ 12.20$ 12.76$ 13.37$ 14.04$ 14.78$ 15.60$ 16.52$

Sustainable Growth Rate

Page 39: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

Presentation

“The Business” Industry Background

Company Position Risk Factors

RCMP position Stock Performance Portfolio “fit”

Firm Strategy and Development

Valuation DCF Analysis

Recommendation

Page 40: Macrovision Corp. (MVSN) Matthew Thompson & Shengdong (Stanley) Zhu Presented April 26, 2007

RecommendationBuy 300 shares @ Market!

Reasons Supporting Decision: DCF shows price undervalued in

market with conservative assumptions

Recent strategic acquisitions and future possibilities really expand product range

Strong and experienced management team

Growing need for new technologies in future

Microsoft Vista, internet gaming, etc

Content owners lose $billions per year, continued need for MVSN technology

Online industries rapid expansion will create large market for MVSN products and solutionslead to adoption of new technologies

Worldwide broadband penetration to reach 364MM households by 20101

MVSN providing customers with easier access to broad variety of distribution hannels

1 Press Release. “Macrovision Announces Online Games Distribution Agreement with Activision.” Business Wire. 7 March 2007 <http://biz.yahoo.com/bw/070307/20070307005278.html?.v=1>.