Friday, July 13, 2007

Macrovision (NASDAQ:MVSN): Color on warning

Couple of firms comment on Macrovision (NASDAQ:MVSN) after the software maker cut its quarterly earnings forecasts last night, blaming its failure to close a major deal and a royalty dispute that cost millions of dollars in lost revenue:

- Deutsche Bank says that while they are disappointed with the execution this quarter, they are reiterating their Buy rating as their thesis remains intact and they believe the stock represents a compelling opportunity. DB believes upside potential exists in 2H07 and 2008 due to a solid DVD release cycle, Embedded Solutions momentum and better than expected operating leverage potential. At near-trough valuations, they view downside as limited.

Firm believes Q2 results are likely to mark the low-point for the year, as growth improves in 2H07. One important issue is that EPS leverage is accelerating much faster than they had anticipated. If MVSN had closed those two deals and met top-line guidance, it would have delivered significant EPS upside of almost $0.05. This suggests upside exists to firm's 2H07 and 2008 EPS forecasts based on margin expansion. DB's tgt remains $37.

- Piper Jaffray notes that while the news is clearly disappointing, they do expect the company will be able to re-capture the missed ISV deal and ACP royalty recovery revenue is not core to the story, but more of a one time issue. What has changed in firm's model is that what was previously expected to be upside in 2H07 is now necessary to achieve the FY07 guidance range.

In 2H07, they expect Macrovision will be able to recapture revenue from the ISV deal that was not completed, but revenue from the ACP royalty dispute could be somewhat unpredictable and assume the company will re-capture only a portion of that revenue. Firm believes the company expected to exceed guidance for FY07 and this set-back now brings expectations back within the guidance range.

Lowers tgt to $36 from $37 but maintains Outperform rating.

Notablecalls: To my knowledge, this is the first ever profit warning from MVSN. The stock was down over 9% in after market action. Given the one-time nature of the shortfall, I find this to be somewhat excessive. It looks like MVSN was targeting uspide to its guidance and if things turn out as the management expects, there may still be some upside. Also, note Deutsche's comments regarding EPS leverage!

With the stock trading at 16x its '08 EPS, the valuation is not high (especially given that historically, 15x has been the trough).

Possible catalysts include upside in Mediabolic, bundled deals with studios (possibly this yr), increased adoption of Vista (driving upside in Installshield) and better DVD schedules.

Looking at the action in after hours, there didn't seem to be any real selling interest. Very low volume, with bids coming in below. I think MVSN makes a nice bounce candidate today. Agressive accounts may bid the $27+ level (be prepared to pay up) with more conservative accounts looking for the 200 day MA providing support around $26.50 or so.

I also think MVSN may provide a buying oppy for LT players as the business the co is in is certainly going to grow over the next 5 yrs. One to watch!

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