Foolish Forecast: Tuning In to Macrovision

Last quarter marked Macrovision's (Nasdaq: MVSN) first "earnings miss" in nearly two years of outperformance, as profits fell a mere $0.02 short of Wall Street's consensus. After the three months it's had to pause the movie and search beneath the sofa cushions, will we learn that management found the extra pennies last quarter? Tune in Tuesday afternoon to find out, as Macrovision reports its fiscal third-quarter 2007 earnings.

What analysts say:

• Buy, sell, or waffle? A dozen analysts watch Macrovision, where buy ratings outnumber holds 10-to-2.
• Revenue. On average, they expect to see sales rise 19% to $69.4 million.
• Earnings. Profits are predicted to rise 30% to $0.30 per share.

What management says:
Perhaps the biggest news at Macrovision this quarter came in the form of a two-line 8-K filing with the SEC earlier this month: Macrovision settled a lawsuit and counterclaim between itself and Motorola (NYSE: MOT) "related to the use of [Macrovision's analog copy protection] technology."

Financial terms "remain confidential," and the dispute is not mentioned in the firm's most recent 10-K (which predated Macrovision's lawsuit by five months) or in its most recent 10-Q (filed a month after the lawsuit was filed). The 10-K does explain that Macrovision's ACP technology "has been used to protect over 4.7 billion videocassettes worldwide ... and over 7.1 billion DVDs worldwide [while at the same time allowing] consumers to view programming stored on prerecorded videocassettes and DVDs or transmitted as digital pay-per-view ("PPV") or video-on-demand ("VOD") programs via cable or satellite ... Most of the Motion Picture Association of America ("MPAA") studios use our video content security technology ... In addition, nearly every DVD player, VCR, DVD recorder, DVD drive and PC manufactured contains software and/or hardware technology, licensed by Macrovision ..."

Sounds pretty important to me. Pity we haven't a clue how this will affect Macrovision's business.

What management does:
That business has been heading downhill of late. Macrovision has shed 550 basis points' worth of gross margin over the last 18 months, and it isn't making up the difference on operating costs -- operating margin is down 640 basis points. The company isn't losing money like RealNetworks (Nasdaq: RNWK) yet, but it's got a long way to go to return to earning the kinds of margins that rivals like Microsoft (Nasdaq: MSFT) and Digital River (Nasdaq: DRIV) rake in.

Margins	3/06	6/06	9/06	12/06	3/07	6/07
Gross	87.2%	85.4%	84.1%	82.9%	82.0%	81.7%
Operating	18.5%	16.0%	14.4%	13.8%	13.0%	12.1%
Net	9.1%	8.9%	8.9%	13.3%	14.2%	12.6%

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:
Looking forward, Macrovision expects to wrap up this year with about $285 million in sales, for a 15% improvement over fiscal 2006. The company predicts its pro forma non-GAAP earnings guidance will range between $1.33 and $1.43 per share this year. (Speaking of which, the analysts' guidance described above is also non-GAAP.)

Checking out the firm's last 10-Q filing, we see that it generated about $41.2 million in free cash flow over the first half of this year -- essentially flat against the $41 million generated in the first half of last year, and a better result than the 11% slide in net profit would suggest. Annualize that free cash flow, and we're looking at a run rate that could approach $82 million or so this year, giving Macrovision a price-to-free cash flow ratio of 16 -- not a bad price at all for a firm expected to grow its profits at 16% per year over the next five years.

I must admit that I find that quite tempting ... but first, I want to know what the Motorola lawsuit was all about, and who paid whom how much in the end.

For further Foolish musings on Macrovision, read:

• Foolish Forecast: Macrovision's Moving Picture
• Foolish Forecast: Macrovision's Good, Bad, and Good News
• Foolish Forecast: Monitoring Macrovision