Foolish Forecast: Macrovision's Good, Bad, and Good News

For the past three quarters, Macrovision (Nasdaq: MVSN  ) has beaten the stuffing out of Wall Street earnings estimates. On Thursday, the digital media piracy-fighter tries to make it one straight year's worth of outperformance when it reports its third-quarter 2006 numbers. Will it succeed?

What analysts say:

• Buy, sell, or waffle? Eleven analysts watch Macrovision (two more than last quarter). Eight of them now rate the stock a buy, and the other three a hold.
• Revenues. On average, they think sales grew 24% in the quarter, to $57.7 million .
• Earnings. . and that profits rose 57% to $0.22 per share.

What management says:
In last quarter's earnings release, CEO Fred Amoroso pronounced himself "pleased" with how the firm has been executing, and reaffirmed prior guidance of $239 million to $249 million in revenues for this year. Noting that the firm has been doing particularly well in low-tax jurisdictions, CFO James Budge posited a 22% tax rate for the company for the year, and raised full year pro forma (Latin for "no carbs -- or vitamins") earnings guidance to $1.10 to $1.14.

What management does:
While we'd prefer that Macrovision break with its historical practice of giving investors only pro forma numbers, and tell us what it expects its results to look like under some generally accepted standard -- like, oh, the generally accepted accounting principles, for example -- pro forma's all we've got to work with so far. But the firm's margins are reported under GAAP, so let's also take a look at them.

In the table below, you'll see that Macrovision's rolling gross margin continues to deteriorate, as it has for at least the last 18 months. Same deal for operating margins. The net margin is jumping around a bit -- and depends heavily on how the firm does in any given Q4, its most profitable -- but generally seems to be headed downwards as well.

Margins %	3/05	6/05	9/05	12/05	3/06	6/06
Gross	91.0	90.2	90.0	89.3	88.2	86.6
Op.	32.2	28.7	25.2	23.2	22.1	21.8
Net	16.1	14.0	16.6	10.9	9.4	8.8

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In August, Macrovision went back to the financing well to take out $240 million in convertible debt (of which it will get to keep about $232 million after expenses).

• The good news: It locked in a low, low interest rate of 2.625%.
• The bad news: If converted into common stock, the paper could dilute existing shareholders out of 16.3% of their stake in the company.
• The other good news: Conversion isn't likely to happen until the company's share price hits the conversion price of $28.28 per share, which is about 6% north of where the shares sit today.
• And the last bit of good news: Macrovision used $50 million of the debt issuance proceeds to buy back shares at a price considerably lower than where they trade today. My back-of-the-envelope scribblings suggest that on Thursday, we'll learn Macrovision bought back upwards of 2.1 million shares, or about 4% of (non-diluted) shares outstanding.

Competitors:

• Altiris (Nasdaq: ATRS  )
• Digital River (Nasdaq: DRIV  )
• IBM (NYSE: IBM  )
• Philips (NYSE: PHG  )
• Microsoft (Nasdaq: MSFT  )
• RealNetworks (Nasdaq: RNWK  )

For further Foolish musings on Macrovision, read:

• Foolish Forecast: Monitoring Macrovision
• Macrovision Measures Up
• Foolish Forecast: Macrovision Checkup

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Fool contributor Rich Smith does not own shares of any company named above.