macrovision corp. (mvsn) matthew thompson & shengdong (stanley) zhu presented april 26, 2007
TRANSCRIPT
Macrovision Corp.(MVSN)
Matthew Thompson
&
Shengdong (Stanley) ZhuPresented April 26, 2007
Presentation
“The Business” Industry Background
Risk Factors
Firm Strategy and Development
Valuation DCF Analysis
Recommendation RCMP position
Stock Performance
Portfolio “fit”
Presentation
“The Business” Industry Background
Risk Factors
Firm Strategy and Development
Valuation DCF Analysis
Recommendation RCMP position
Stock Performance
Portfolio “fit”
“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
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
Sources of Revenue
MACROVISION CORP, 10-K, Feb. 28, 2007, p.44
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
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
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
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
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
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
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
Presentation
“The Business” Industry Background
Company Position Risk Factors
Firm Strategy and Development
Valuation DCF Analysis
Recommendation RCMP positionStock Performance
Portfolio “fit”
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
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
Risk Factors
Business Risk Market Risk Additional Risk
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.
Quantitative and Qualitative Market Risk Fixed Income Investment Foreign Currency Exchange Rates Strategic Investment
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.
Presentation
“The Business” Industry Background
Company Position Risk Factors
RCMP position Stock Performance Portfolio “fit”
Firm Strategy and Development
Valuation DCF Analysis
Recommendation
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
Performance
52wk Range:18.84 - 29.20 Market Cap:1.32B P/E (ttm):40.33 EPS (ttm):0.63
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
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%
Current DistributionDi stri buti on
AEE
AE
CPR
F
J KH
KMB
MS
J P
MSVSRC
SRZ
WA
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%
The new distributionDi stri buti on
AEO
AEE
CPRT
FR
J KHYJ PM
KMB
MS
MVSN
SRCL
SRZ
WAG
Presentation
“The Business” Industry Background
Company Position Risk Factors
RCMP position Stock Performance Portfolio “fit”
Firm Strategy and Development
Valuation DCF Analysis
Recommendation
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
Strategic Acquisitions
Presentation
“The Business” Industry Background
Risk Factors
Firm Strategy and Development
Valuation DCF Analysis
Recommendation
RCMP positionStock Performance
Portfolio “fit
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%
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
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
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$
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$
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
Presentation
“The Business” Industry Background
Company Position Risk Factors
RCMP position Stock Performance Portfolio “fit”
Firm Strategy and Development
Valuation DCF Analysis
Recommendation
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>.