Tic-tac-toe, investors want to know: Will digital media piracy-fighter Macrovision (NASDAQ:MVSN) make it three in a row for earnings beats when it reports its fiscal Q2 2006 numbers tomorrow afternoon?

What analysts say:

  • Buy, sell, or waffle? Nine analysts watch Macrovision (two more than last quarter), with five of them rating the company a buy and the other four a hold.
  • Revenues. Analysts collectively think sales grew 25% in the quarter, to $55.4 million.
  • Earnings. Profits supposedly did even better, up 31% to $0.21 per share.

What management says:
Macrovision was understandably laconic in describing it, but the big news this quarter may be contained in a little four-line SEC filing filed last month: Macrovision has been drawn into the stock option backdating battle.

Operationally, Macrovision had this to say about its business in last quarter's earnings report: quarterly results were "solid," and CEO James Budge was "optimistic" that the firm would achieve its targets for the fiscal year for "pro forma operating margin, pro forma earnings per share, and cash flow from operations."

What management does:
So call him "pro forma optimistic." If Budge thought in terms of generally accepted accounting principles, however, his optimism might look a bit more strained. Gross margins are continuing to erode at Macrovision, which continues to depress operating margins, which continues to depress net ... you get the picture.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

92.1

91

90.2

90.1

89.3

88.2

Op.

35.6

32.2

28.8

25.3

23.2

22.1

Net

20.2

16.1

14

16.6

10.9

9.4
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:
As I said, the problem begins with gross margins. Over the last six months, Macrovision grew its revenues a mere 6%; meanwhile, the cost of goods sold spiraled completely out of control, rising 49%. The (relatively) good news is that selling, general, and administrative expenses didn't grow quite so much (although they too outpaced sales growth at 8% year over year).

If there's any absolutely good news to report, it's that cash profits aren't suffering nearly as much as are accounting (GAAP) profits. Thanks to a very successful first quarter, the last six months saw Macrovision take in $35.3 million in free cash flow. Although that's down from the $35.9 million in FCF that the company generated in the equivalent year-previous period, it's down much less than the decline from $21.3 million in GAAP net earnings to $7.4 million would suggest.

Does that mean that Macrovision is, therefore, a kind of hidden gem, the true profitability of which is shrouded in the veils of GAAP? Maybe. Even so, it's a gem that still carries too high a price tag for this Fool. At a price-to-free cash flow ratio of 20, and with profits growth expected to average less than 17% per annum over the next five years, the firm is approaching bargain territory, but it ain't quite there yet.

Competitors:

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

For further Foolish musing on Macrovision, read:

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