Macrovision Q4 2008 Earnings Call Transcript

Macrovision Inc. (MVSN)

Q4 2008 Earnings Call

February 10, 2009; 05:00 pm ET

Executives

Fred Amoroso - Chief Executive Officer & President

James Budge - Chief Financial Officer

Lauren Landfield - Investor Relations

Analysts

Sterling Auty - JP Morgan
Brian Thackery - Deutsche Bank
Mike Olson - Piper Jaffray & Co.

Kerry Rice - Wedbush Morgan Securities
Andy Hargreaves - Pacific Crest Securities
Todd Mitchell - Kaufman Brothers

Ralph Schackart - William Blair

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Macrovision fourth quarter 2008 earnings release conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Lauren Landfield; please go ahead.

Lauren Landfield

Welcome, ladies and gentlemen to Macrovision’s fourth quarter 2008 earnings conference call. I’m Lauren Landfield and I’m joined today by Fred Amoroso our CEO; and James Budge, our CFO.

Before we discuss our results and estimates released earlier today, I’d like to start with some housekeeping items. First, I’d like to remind you that all statements made during our conference call that are not statements of historical facts, including but not limited to statements regarding the company’s forecast of future revenues and earnings, business strategies and product and divestiture plans, constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-Q for the quarter ended September 30, 2008 and other filings with the SEC that are filed from time to time.

Second, our results and estimates released earlier today, as well as our discussion on this call include non-GAAP or adjusted pro forma information, which exclude as applicable non-cash or items that impact comparabilities such amortization and depreciation, equity based compensation, transaction, transition, integration and restructuring costs, insurance settlements and an accrual reversal related to a former Gemstar CEO.

Adjusted pro forma, combined company information assumes all acquisitions occurred on January 1, 2007 and exclude all previously divested businesses, including the software, games, TV Guide Magazine, TVG Network and e-managed businesses, the results of operations of the TV Guide Network and TV Guide Online, both of which are pending sales and are classified as discontinued operations, as well as our discontinued Hawkeye product line.

We have presented and are discussing adjusted pro forma company information because this is how we evaluate our business. We believe that this presentation may be meaningful to our investors in analyzing the company’s results of operation. This presentation is not intended to be a substitute for financial results presented in conformity with Generally Accepted Accounting Principles in the United States and investors and potential investors are encouraged to review the reconciliation of adjusted pro forma financial measures included in our earnings release.

As the final piece of housekeeping, the replay of this conference call will be available on the Investor Relations webpage until our next quarterly earnings call. I’d now like to turn the call over to Fred.

Fred Amoroso

Thank you Lauren and thank you everyone for joining us today for our fourth quarter 2008 conference call. As you may have seen in our earnings release, we had a solid Q4. Despite a decline in GDP and an even sharper decline in consumer electronics spending, which fell approximately 6% year-over-year in Q4, I’m pleased we grew adjusted pro forma revenue 15% to $118.2 million in the quarter.

Our growth in Q4 was driven largely by the continued conversion of analog TV subscribers to digital and increases in device shipments that incorporate our products or are licensed under our patents; the same trends we highlighted during our investor day and our Q3 earnings call.

These revenue trends when combined with the execution of our synergy actions, enable us to increase our adjusted pro forma EBITDA by 152% to $52.7 million in Q4, resulting in a 45% margin for the quarter. Additionally, notwithstanding the macro market factors affecting the credit markets and M&A in general, we have entered into sale agreements for all planned divestitures and have closed the sales of TV Guide Magazine, TVG - The Horse Racing Channel, and eMeta operations.

Regarding our sale of TV Guide Network and TV Guide Online, we believe the transaction is continuing on track to closing. The closing is not contingent upon the buyer’s ability to finance the transaction, the buyer’s business performance or upon the effect of the industry on the buyer. It is also not contingent upon the financial performance of either TV Guide Network or TV Guide Online, which I might add are both performing as we expected. So we are currently tracking to close as we expected, and if anything changes, we will keep you apprised.

I’ll discuss our progress and outlook shortly, but first I’d like to turn the call over to James to review some of the financial metrics in more detail. James.

James Budge

Thank you, Fred. To start, I’d like to point out that some of my comments will focus on adjusted pro forma results, which among other things assume all acquisitions and divestitures were completed as of January 1, 2007 and exclude discontinued operations and product lines. Details used in calculating our adjusted pro forma results along with their reconciliation to GAAP measures can be found in today’s earnings release.

Adjusted pro forma revenue was $118.2 million in the fourth quarter and $432 million for the year, up 15% and 9% respectively from a year ago. Growth was due to gains in both our CE and service provider verticals. Adjusted pro forma revenues for our service provider vertical, which is primarily comprised of IPG products and patents licensed to cable satellite, telecom and mobile companies, grew 15% year-over-year to $47 million in the fourth quarter and 23% to $184.4 million for the year.

Growth was driven primarily by the continued conversion of analog to digital. Subscribers worldwide receiving a license or Macrovision provided IPG, grew 11% from Q4 2007 to $84 million, including $17 million international by the end of Q4 2008.

In the quarter we added customers in Canada and Latin America, demonstrating continued execution against the international opportunity, which we’ve discussed in prior calls. Our CE vertical includes guidance products and patents licenses to device manufacturers as well as ACP for hardware, connected platform and media recognition technologies.

CE adjusted pro forma revenue grew 31% to $58 million in Q4 2008, compared to Q4 2007 and grew 9% to $197.7 million for all of 2008. The growth rate difference between the annual and quarterly figures was largely attributable to a significant ACP licensing transaction in Q3 2007.

In Q4 2008, we benefited from growth in IPG patent licensing as well as continued gains in ACP, both of which benefited from double digit percentage growth in shipments of both IPG and ACP enabled devices. The IPG growth reflected the presence of additional licensees, which were not contributing in the prior year period. We also received contributions from connected platform as we completed several customer projects allowing us to recognize service-related revenues.

On the downside, CE growth was partially offset by the anticipated continued decline in legacy VTR plus sales. Adjusted pro forma revenue for our other vertical, which includes data licensing and entertainment declined 28% in the quarter to finish at $13.2 million and was $50 million for the year, down 22%.

Within this vertical, adjusted pro forma revenue for data licensing, where we license our metadata to online content distributors such as Apple and Blockbuster, grew double digits in the quarter, driven by improved pricing and new customer wins. This growth was offset by the anticipated decline in adjusted pro forma revenue from copy protection licensed to studios.

I’ll now turn to adjusted pro forma profit measures, focusing primarily on Q4, as full year results were burdened by costs that we have now eliminated as part of our synergy plan. For the quarter, adjusted pro forma EBITDA totaled $52.7 million or 45% of adjusted pro forma revenue. This represents a 152% increase over the prior year, much higher than the corresponding revenue growth, demonstrating the realization of the Gemstar synergies.

Adjusted pro forma EBITDA for the year totaled $164.6 million or 38% of revenues; full year results were still burdened by the duplicative costs ultimately eliminated by our synergy actions, which we completed by year’s end. I’m very pleased that we are able to exceed the high end of all 2008 adjusted pro forma measures we communicated throughout the year.

I’d like to briefly comment on our GAAP results. Generally we don’t focus on our GAAP results when discussing our performance, and we believe excluding Gemstar’s operating results for the period, prior to May 2, 2008, diminishes the comparative value of results from the prior year; however, I do want to point out something in our GAAP results.

In today’s press release we reported a 2004 GAAP net loss of $209.9 million. It’s worth noting that the fourth quarter GAAP net loss for 2008 included significant impairment charges related to the goodwill and intangible assets of TV Guide Network, TVG Network and TV Guide Online, all of which are classified as discontinued operations.

As to the balance sheet, our cash of investment balances at the end of December were $362 million, a 7% decrease since the end of September; as Q4 operating cash flows were offset by a $25 million stock repurchase and the $7.4 million loan in conjunction with the sale of the TV Guide Magazine, as well as initial interest payments for our Gemstar acquisition related debt.

We expect operating cash flow to trend directionally like adjusted pro forma net income in the coming quarters. Debt at the end of Q4 was $887 million, but will be reduced significantly in Q1 2009 as the divestiture proceeds from TVG, TV Guide Network and TV Guide Online go directly toward paying down the $550 million term loan. In fact, on February 2 we used the TVG divestiture proceeds to reduce the term loan.

Looking forward, while we had a strong quarter and are incrementally more comfortable with our long term opportunity and ability to execute, we are taking a cautious approach in light of the economy. Therefore, we reiterate our full year estimates of between $435 million and $475 million in revenue, $180 million to $210 million in adjusted pro forma EBITDA, and $1.15 to $1.45 in adjusted pro forma EPS for 2009. These adjusted pro forma EPS estimates reflect a tax rate that approaches 10%. I’d point out that this tax rate is already reflected in our result, as Q4 cash taxes were approximately 11%.

For 2009, this lower tax rate offsets an increase in interest expense as a result of reduced divestiture proceeds relative to earlier expectation. While we don’t provide quarterly estimates, I’d like to briefly comment on the linearity of our business. While we grew total company revenues 15% year-over-year in Q4, the results only partially reflected the weakness evident in the broader economy.

Given that the current macroeconomic downturn doesn’t appear to have abated, we believe we will start seeing some of the weakness reflected in our results over the next couple of quarters, particularly on the CE side, as we anticipated when we initially provided estimates for 2009 back in November.

Fred will give more details on the drivers shortly, but in terms of weighting the revenue throughout the year, on the CE side we expect the second half to outweigh the first half just as it did in 2007 and 2008. In the first half, while Q1 typically is slightly higher than Q2, I would expect that to even out this year.

The delay in the FCC mandated analog transition from February to June will likely push some revenue from DTV converter boxes out of Q1 and into Q2. Meanwhile, the second half should benefit from initial shipments by our customers of connected platform and media recognition, where recent design wins hold the potential to raise penetration from practically zero now to more meaningful levels.

We expect to see fairly linear growth in our multi channel television service related revenues as the conversion of analog to digital will likely continue to drive revenue during the first half, while we expect some new customer wins to augment growth later in the year.

In other category, while we expect to see fairly linear growth, we do expect the fourth quarter will be the strongest, assuming we are successful at broadening our licensing of BD Plus to the MPA studios. Adding it all up, we expect approximately 53% to 55% of our 2009 annual revenue coming in the second half, similar to our adjusted pro forma revenue weightings in 2007 and 2008.

Turning to costs, we expect operating expenses to decrease over the course of the year. We are spending early in the year on outside legal resources that we expect to pay off in new licensing wins later in the year. We expect that approximately 52% to 54% of our 2009 operating expenses will be incurred in the first half of the year, with the remainder in the second half, as these outside costs subside.

Additionally interest expense will fall over the year as we reduce our debt load. We expect all this to translate into more operating leverage and earnings growth in the second half of the year than in the first half.

With that, I’d now like to now turn the call back over to Fred.

Fred Amoroso

Well, thank you James. I now like to review some of the key growth opportunities we detailed on various occasions in 2008, as well as update you on how we believe the market is unfolding in the context of our previous estimates, which we believe demonstrates the resilience of our business in this current macro economic climate and the value of our significant recurring revenue streams.

We have previously stated that those areas of the business, primarily driven by multi channel pay TV service, should demonstrate resistance to an economic downturn, as consumers gravitate towards cheaper forms of entertainment and while the rate of growth and the conversion from analog to digital in our core North American market is slowing amid increased penetration, we expect service providers to eventually convert virtually all legacy analog subscribers to digital.

With over 100 million paid television households and about 75 million digital, there is still room to grow; plus several factors could weigh positively in the near term. The now June FCC mandated analog to digital terrestrial television broadcast transition could tabalize some households to subscribe to a pay TV service.

Additionally we understand some cable operators have been discounting conversions to digital to open up bandwidth for advanced revenue generating services such as HD and broadband. As we have highlighted since the outset of the Gemstar acquisition, our international penetration remains relatively low, which we expect to continue to translate into revenue growth in excess of the market trends.

So at this point in time, we think these factors are offsetting the otherwise declining macro trends in the economy for the service provider side of our business. As James mentioned, subscriber growth was 11% and this was driven primarily from organic growth as the number of licensed digital subscribers and customers who were customers in a year ago period grew 10% last quarter.

This in addition to pricing improvements and new customer wins contributed directly to the 15% year-over-year adjusted pro forma revenue growth rate in the quarter for our service provider vertical, which accounted for 40% of Q4 revenue.

Benefiting from the same analog to digital conversion trend is our ACP embedded business, where shipments of ACP enabled set top boxes grew double digits in the fourth quarter. As we’ve detailed in the past, set top boxes shipped with analog outputs, protected by ACP and we expect this to continue for the foreseeable future.

This part of the ACP embedded business, which in included in our CE vertical, accounts for the majority of our CE related ACP revenue. The minority relates to the non volume based license fees paid by DVD player manufacturers. While this bodes well for our service provider and ACP set box business, we need to continue to monitor rising unemployment, as I think that this could constrain subscriber growth.

When you add the aforementioned service provider and ACP embedded businesses, you have about 60% of total revenue that we believe is experiencing relatively inelastic demand and where we expect high single digits to low double digit growth on a combined basis in 2009.

Our other vertical includes our data licensing business, which is covered primarily by long term agreements with fixed prices and our studio entertainment business which is also primarily non volume driven. Most of our ACP and RipGuard business at this point is fixed price, but we price BD Plus on a variable basis, and while is small now, given that we believe we are in the high growth cycle for that industry, this could prove beneficial.

Overall, we think we’ve established a floor in the entertainment business as long term agreements predominate and BD plus ramps, and as James mentioned, data grew double digits in the quarter, a trend we expect to continue. So overall we think the vertical labeled other, which accounted for 11% of revenue in Q4, will grow this year.

So we have discussed about 70% of the business where we think we are less susceptible to abrupt downturns in consumer spending and without getting too specific, if you multiply out all of the growth rates and weightings for the 70% of the business we have discussed, I think we are looking at mid to high single growth rates for this portion of the business as a whole.

On the other hand, as we mentioned in the past our CE IPG business should more meaningfully feel the impact of a prolonged downturn in consumer discretionary spending. Our main exposure is through high end flat panel televisions. Sorting out the various cross currents and attempting to quantify the impact requires the consideration of a number of data points.

First, while several of our major CE manufacturer customers have recently reported sharp declines in revenues, it’s important to distinguish between revenues and unit shipments. In this current environment, average selling prices on TVs are declining much faster than unit shipment growth rates.

According to the Consumer Electronics Association, in December, the wholesale selling price of flat paneled displays declined by over 20% as manufacturers trimmed costs to capture market share. This led a number of major LCD TV manufacturers to announce revenue declines in Q4 despite increases in shipments.

That said, it appears shipment rates are declining. Overall our flat panel TV shipments globally grew 40% year to date through Q3. According to Display Search, leading indicators point to a market slowdown later in the year. For example, US point of sale data from the NPD Group, which measures a subset of the domestic market, indicates unit sales grew 3% year-over-year in the fourth quarter. This has also worked its way back through the supply chain.

LCD TV panel shipments, which are inputs to course LCD TVs, declined 10% in the fourth quarter and deteriorated even further late in the quarter, according to display search. LCD TV panel shipments greater than 10 inches declined 13% in December versus November and 17% year-over-year, which is the lowest since July of 2007.

Q4 panel shipments are likely inputs into Q1 TV shipments by CE OEMs, which could show up in our Q2 royalty reports. At the same time we are starting to see some data points in January and February that indicate the market may be stabilizing somewhat, but one thing’s clear; a prolonged weakness in the economy will affect big ticket items. Therefore, we expect growth rates to continue to decline if conditions persist.

As of a December 2008 report, Display Search still forecasted flat panel TV shipments would grow 16% in 2009, down from 28% in 2008. While that report took into consideration the current economic weakness, we are taking a more cautious view.

We highlighted these trends at our analysts’ day and I hope this serves as an update on where we see the market. Of course we will remain vigilant in watching the market of indicators of weakness and we will guide our business accordingly, but so far, 2009 is playing out as we expected when we established our estimates back in November.

As a counter balance to market trends, I’d also like to point out that while the pace of shipments appear to be slowing significantly, given our IP, our IPG licensing remains stable. Furthermore, a sizeable amount of our business includes license enforcement activities, where we bring into compliance companies that haven’t been paying for products that contain technologies protected by our patents or who are under license but have under reported. This in the past has provided incremental growth beyond underlying trends and we expect some of this to occur this year, albeit at reduced rates when compared to last year.

On balance, despite the rising penetration of IPGs, our increased licensing penetration of CE OEMs selling IPG enabled TVs, our stable license pricing, potential licensing enforcement activity and industry forecast for continued high growth, we anticipate flat panel TV end market volume pressures to constrain our growth in CE IPG.

Looking at our CE vertical as a whole, after considering the cross currents CE IPG, combined with growth from new products, namely the media recognition and connected platform, tempered by the anticipated continuing decline in VCR Plus, we believe our CE vertical will be relatively flat.

To recap our revenue expectations overall, based on a relatively resilient trends towards digital and licensing opportunities, we think high single digit to low double digit in the multi channel television service related businesses, which is over 50% of our revenue is still reasonably likely. When combined with flat to mid single digit growth for the balance of our business and our strong Q4 and 2008 results, we feel comfortable with our 2009 estimates. I hope this discussion gives you an update outlook on our estimates for the year and some context for the possibility of higher growth pending an economic upturn.

The economy notwithstanding however, we continue to execute well by posting new customer wins which support our growth plans. To this end, I’d like to highlight and put some context around some of the more recent announcements. On the CE side we’ve announced a number of deals recently that demonstrate progress against our strategy. In November we announced that HitachiSoft will provide a connected platform service in Japan. HitachiSoft will also provide a range of professional services, including software product support, system integration and customization for our connected platform. We are pleased to have a distributor of this stature putting resources behind our product.

Also in Japan, Panasonic agreed to a multiyear IPG patent license for cable set top boxes and agreed to work with us to develop and promote a cable version of G-Guide for Japan. That marks our first G-Guide cable win and an important first step for expanding our penetration there. Continuing our momentum in Japan, we announced Panasonic’s new Viera televisions will be receiving an upgraded G-Guide.

The G-Guide will now provide information on a selection of recommended TV programs for up to one month as opposed to the current eight-day configuration. Moreover, the new feature incorporates program pictures in addition to text information, providing users with more enjoyable detailed program information. This is a good example of our current generation of guides enabling rich media such as enhanced graphics and images that is available through our metadata licensing.

In Europe, during the quarter we continued our recent licensing momentum by announcing multiyear patent licensing agreements with three additional retail set top box manufacturers; Alba, COMAG, and SM Electronics. They are now able to imbed IPGs in their retail set top boxes as well as certain other CE devices. Licensing retail set top boxes is important in Europe, given the penetration of free to air digital as an alternative to cable or satellite service and of course at CES, we had several notable announcements as well.

Onkyo had selected our connected platform to power its next generation IP audio video receiver or AVR and the AVR will give consumers the ability to acquire, manage and play back personal and premium digital auto content from a variety of DLNA or UPNP enabled connected devices from various locations in the house. Users also have the ability to access and control their music content via graphical user interface on a television monitor.

Onkyo has announced that Onkyo AVR will be available mid-2009 in North America as well as in other regions. I’d add that those of you that visited our demos as CES saw similar application on a Sony Home Theatre in a Box device, which allows audio streaming from the internet or any DLNA device. This product utilizes our connected platform and implementation services and the device recently started shipping commercially.

You also saw the Sony Bravia TV with our latest version of TV Guide Onscreen. This IPG offers a customizable and image rich home menu of programming options, as well as recommendations. Powered by our data solutions, the TV Guide Onscreen is enriched by more than 2.5 million program descriptions, 127,000 celebrity profiles and searchable data on virtually every TV show since 1960.

It also features advanced advertising, providing advertisers with the opportunity to deliver targeted graphically rich messages to an engaged audience and as a connected product, TV Guide Onscreen also provides advertisers new tools to measure the effectiveness of their ad campaigns. It is an early implementation of the value that we can bring to our customers by building upon the combination of our guide technology solutions and our rich metadata.

We also announced that our Guide Daily IPG is going to be incorporated into Sanyo’s digital TV product line. Guide Daily features 24 hours of program listings that populate with limited delay. Sanyo will deploy Guide Daily into its flat panel TV products for its value line of digital televisions to be available early this year through Wal-Mart, which could catalyze the value end of the market to adopt features such as IPGs that previously were the domain of lower volume and higher end TVs.

I’d like to take a moment to briefly comment on our next guide, code named Neon, which we also announced at CES. Neon builds on top of the framework of TV Guide Onscreen, but has even richer program descriptors and cover art for TV shows. Like our current TV guide onscreen, it also includes the personalized TV dashboard DVR functions for recording and playback of broadcast TV and recommendations to help consumers discover new programs. It also adds rich media for Europe, allowing us to deploy in a large number of devices.

In addition, Neon features graphically rich interactive advertising for promoting relevant programs and products to consumers. Essentially, it adds video enabled banner ads rather than static images in the current version. This is a much richer experience and we hope it will therefore generate more clicks and therefore more advertising dollars. Neon will be available for CE manufacturers in Q2 2009, in both the US and Europe and we will be able to integrate it with our connected platform.

So we are making good progress on our IPG advertising as well, as it pertains to both service provider and CE markets. While we are still in the nascent stages on the sales basis, we are executing against the opportunity.

In the middle of last year on the service provider side, we started measuring click screen data with Sunflower Broadband. This implementation proved our ability ad impressions, which is critical for advertisers to decide where to spend ad dollars. We have now begun to present this data to advertisers and are receiving strong responses.

Another key driver for this success here will be the introduction of video enabled ads. A key step for that to happen is deployment of our advanced guide applications such as our Video Mosaic which lets operators deploy a custom screen of video thumbnails in the guide, an attractive resource for advertisers.

We had our first implementation of this last quarter with CBS content and I expect more rollouts soon and of course on the CE side as I mentioned, we think the video enabled Neon guide will be a real catalyst, building on the recently released graphically rich and measurement enabled TV Guide Onscreen.

In terms of data licensing, adjusted pro forma revenue grew by double digit percentages year-over-year and we extended our leadership position by adding about 20 new customers in the quarter. Many of these customer wins came at the expense of entrenched competitors, including when we won a major US retailer that has a strong online presence. By virtue of this win, we now supply metadata to each of the top 10 online music stores.

In terms of our entertainment business we believe BD Plus has a bright future. While home and video entertainment spending declined 5.7% last year, according to Video Business, sales of Blu-ray DVDs were up 300% and are expected to continue to double this year, according to preliminary estimates by the Adams Research.

The proliferation of players in the $200 range is boosting sales as this was a bright spot in the holiday CE season, and CEA says there are nearly 10 million Blu-ray players in households now.

Turning to synergies, as we previously mentioned, our cost reduction activities are complete. I am also very gratified to see that the strategic synergies are playing out as we had planned. In many conversations we are having with CE customers, there is interest in multiple products.

On the data side, we have meaningful customer interest in licensing the complete breadth of our metadata. Similarly, in the service provider area, operators globally are interested in the breadth of our solutions. I look forward to keeping you posted on the progress as it plays out.

So as you can see, there’s been a lot of tangible progress both in the core business and in transforming the company to steady state operations. Since April of last year, we’ve acquired and integrated Gemstar TV Guide and sold or entered into agreements to sell seven businesses. Our goal from the outset has been to be the leading, pure play, digital media technology solutions provider and I believe we are making great progress on that vision.

At this point, I’d now like to turn the call back over to Marissa so we can respond to any questions that you may have. Marisa.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Sterling Auty. Please state your company followed by your question.

Sterling Auty - JP Morgan

Yes, JP Morgan. Hi guys.

Fred Amoroso

Hi, Sterling.

Sterling Auty - JP Morgan

Good. So a couple questions. I want to be clear; so you said the CE industry saw 6% declines in the fourth quarter. You talked about flat CE revenue for 2009. What have you kind of embedded into those forecasts for your business as it relates to what you think the industry does versus maybe some new design wins to get you to flat for the year?

Fred Amoroso

Sterling, I’m going to turn this over to James, but before I do that I just want to highlight one thing about market trends versus where we are. So assuming if we were a fully embedded and fully developed within the market on our CE guides or CE patent license, we would generally hit market trends. Please realize that obviously this is a new and very growing market for us, so on year-over-year comparisons, it doesn’t have a direct correlation to market trends, but to answer your question James.

James Budge

Yes, you heard the market trends right, is for the relationships we currently have, figure we knock off about 10 points from there and go down about negative 10% in 2009. That’s offset by growth from new customers we expect to get throughout the year that brings it back up to about flat for the year.

Sterling Auty - JP Morgan

Okay and then to a different topic on the expenses. You talked about the synergies are done, but expenses are supposed to decline through the year. Just highlight for us again what are the specific expenses you’ve taken out, that would cause a decline? How much of it is headcount, how much facilities, how much is other expenses that come out of the model through the year?

James Budge

Okay, it’s mostly related to outside legal costs. We’re putting a lot of energy into some offensive execution of sales activities that we expect to turn into revenue throughout the year and those costs will subside in the second half. It doesn’t have anything to do with synergies; on an overall basis we probably expect to spend about that for any annual basis. We’re just putting more of it in the first half of the year as compared to the second half. As far as synergies are done, we are definitely done.

Sterling Auty - JP Morgan

Okay and last question. You mentioned the tax rate approaching 10%; is there any update in terms of in an actual feedback point that you’re expecting from the IRS on the NOL, kind of valuation or just where does that stand and how should we track the progress of that other than just seeing what you report quarterly?

James Budge

You’ll probably track the progress by asking the question every quarter and you should expect that sometime around the summer, late summer, is when we would expect the feedback, at least the initial feedback or maybe even finalization if we get fast enough with the IRS.

I would point out again that as far as our cash taxes in the fourth quarter, we started paying the lower rate, we paid 11% on an aggregate basis for the fourth quarter, we put some foreign taxes and some state taxes and some AMT taxes in the US. So, we’re operating under the assumption that we are correct in our analysis and that we expect to get where we expect to not pay much taxes on a federal basis in the US.

Sterling Auty - JP Morgan

All right. Thank you.

James Budge

Yes.

Operator

Thank you. Our next question comes from the line of Brian Thackery. Please state your company followed by your question.

Fred Amoroso

Hi, Brian.

Brian Thackery - Deutsche Bank

Hi. Deutsche Bank. Guys good quarter. Could you give a little more granularity into the CE out performance this quarter? It was a really good number given the overall environment. Was there any one time royalty or one time new customers; I think you alluded to it a little bit. Can you give a little more granularity into that?

James Budge

We mentioned we had double digit increases in device shipments for both ACP and IPG enabled devices; that was the primary driver. As with multiple elements of our business, we do have what you might refer to as one time items that come in from time to time, but that’s a regular part of our business now so I’m not sure I’d even classify it as one time. So I think the predominant reason we are up is because we had a great quarter of shipments.

Brian Thackery - Deutsche Bank

Okay. I look at the cost structure throughout the year; first half versus back half. Can you just give us a sense for what that means to the EBITDA margins as you exit 2009? Are they a little bit higher than they otherwise would have been and is that sustainable?

James Budge

Yes. So, if we’re talking about 2009, second half heavier revenue and first half heavier expense will translate definitely into higher EBITDA and then when you couple in the lower interest expense in the second half of the debt pay downs, you’ll definitely have a much higher weighting of EPS in the second half of the year than in the first half. So those comments were intended to address.

Fred Amoroso

And if you remember Brian, from the analyst day, we put out models that we think are long term EBITDA would be approaching 50% as part of our ultimate business plan.

Brian Thackery - Deutsche Bank

I guess does that change at all now that Online Networks is no longer a piece of the business?

James Budge

Online and the media networks were factored into the 45% to 50% targets that we set out.

Brian Thackery - Deutsche Bank

And the last question; in terms of the debt pay down can you just give us a little more specificity in terms of when you expect that through the quarters, so we can model that in?

James Budge

Yes. I mean our assumptions really haven’t changed since the November analyst day, which had a big pay down coming here in the first quarter with our divesture proceeds. We are obviously waiting for the closing of the TVGN transaction to get the rest of the proceeds. So if we pay down the TVG that will be a bunch of money. There are $250 million to $300 million, and some escrow holdback and such. Then as we go throughout the year, we will go beyond the prepayment penalty phase and probably start paying down debt as we go.

Brian Thackery - Deutsche Bank

Thanks, guys.

Operator

Thank you. Our next question comes from the line of Mike Olson. Please state your company.

Fred Amoroso

Hey, Mike.

Mike Olson - Piper Jaffray & Co.

Piper Jaffray. Nice work in a tough environment.

Fred Amoroso

Thanks.

Mike Olson - Piper Jaffray & Co.

I guess one thing I wanted to ask is just with such a wide guidance range and I understand why it is just given some uncertainties, but can you just talk about some of the factors that would lead to the low or high end of the range? Is CE I guess the biggest swing factor in your eyes?

James Budge

I mean I’d definitely say yes. As we talk, about 65% to 70% of our business is tied to what we would characterize as recession resistant businesses. The remainder is definitely tracked to the broader economy and as I mentioned to Sterling’s question if that falls off faster than 10% declines, then you could be towards the lower end. If it is flat or even slightly up in ‘09 then you could be at the higher end, but that’s definitely the biggest risk factor for the revenue there.

Fred Amoroso

And as I just made in my comments, we wanted to be conservative in how we are looking at this market develop over the year because we don’t really know what will happen in the future on a macro market.

Mike Olson - Piper Jaffray & Co.

Okay and then on Europe; is there any update you can give us as part of an opportunity with operators for IPG and just your efforts to receive royalties there and maybe what are the steps and where are we in that process?

Fred Amoroso

So we have talked about NDS before as one of the key opportunities for us that is still going on. We are still in good conversations. I believe we are making progress and so we’ll be able to describe something when it comes to pass and as you saw, we also announced deals with other service providers in Europe and so we are starting to see that international expansion occur and like anything, as we continue to execute, we will describe these more in our disclosures to you.

Mike Olson - Piper Jaffray & Co.

Okay. Thanks a lot.

Fred Amoroso

Take care, Mike.

Operator

Thank you. Our next question comes from the line of Kerry Rice. Please state your company.

Kerry Rice - Wedbush Morgan Securities

Wedbush Morgan Securities. Nice quarter.

Fred Amoroso

Thanks.

Kerry Rice - Wedbush Morgan Securities

Most of my questions have been asked, so most of these are housekeeping questions. I just want to make sure I fully understand where the adjusted pro forma EPS came out for the quarter. If you guys can give me that; and then I’ve got a couple other questions.

James Budge

I can give you that. The elements are sprinkled throughout the press release, but if you take the adjusted pro forma EBITDA, that’s $52 million, the factors that bring down the EPS would be interest, debt and depreciation. You can get depreciation and interest expense and income off the P&L and PON. Then the 11% cash tax rate will get you down, if you do the math there, to about $0.28 to $0.29 per share.

Kerry Rice - Wedbush Morgan Securities

Okay, great and then you guys kind of alluded to some advertising revenues. Can you give a percentage or any type of quantifying number on what kind of revenue you are receiving on advertising now? I think that’s in service provider and the service provider bucket?

Fred Amoroso

No, it’s on both sides and we’ve previously said, it’s the very low tens of millions, but it’s growing in excess of 100% year-over-year. So small numbers, but create significant opportunity and as you know we think this one is going to be a fairly large opportunity for us as time goes on and as we see increased penetration of the guides in the homes and so we have been aggressively working on this part of the business.

We have added significantly to the team and the staff and technology to put the fundamentals in place for this to grow. What I think I had previously announced is more in a 2010 timeframe where we hope to get appreciable growth in that or I should say appreciable revenues in that as opposed to 2009.

James Budge

I might add Kerry there, that the two buckets, it’s not intuitive, it’s the service provider bucket and the CE bucket that is sort of split across more heavily weighted slightly to service provider. I would also add that while it’s certainly something we expect to grow significantly in the future, it actually is growing nicely now. We had a record year for advertising and the fourth quarter frankly was the highest quarter for advertising revenues that we’ve ever had. So it is now withstanding the lousy macro economy, a growing part of our business.

Kerry Rice - Wedbush Morgan Securities

Okay and one final question. On auction rate securities, I know some companies have been able to work out a settlement with some of the sellers. Are you guys working on that or do you have anything you can update us on your auction rate security balance?

James Budge

Sure. We have a little over $70 million of auction rate securities. We have the ability to put it to UBS, most of those are held with UBS. We have the ability to put it to them by June of 2010.

Kerry Rice - Wedbush Morgan Securities

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Richard Davis. Please state your company name followed by your question.

Fred Amoroso

Hello, Richard.

Richard Davis - Needham & Co.

Hi. Needham & Company. So this was a question that actually kind of stumped me, so I’d figured I’ll ask you guys. So, what happens to your business if websites like Hulu and others become meaningful ways by which consumers watch TV shows? I’m not sure if it will be that big of a thing, but let’s play the scenario out. How do you play in that kind of world?

Fred Amoroso

Actually, that would help us, Richard. If you remember, the whole orientation about the strategy about what’s happening in home entertainment is there’s an increasing amount of content from varying sources that would create opportunities for the consumer to try and sort their way through and find it.

So when you bring it all together, we have both in our data as well as in our technologies something called the Online Video Guide which is syndicated to TVGuide.com, as well as the Grid Listings, which is syndicated to TVGuide.com. We did not sell those as part of the sale to Lions Gate and so within those environments, as we look at the consumer having availability of information, our ability to show what’s being available for download from varying sources such as Hulu, Voodoo, any other, just make the guide and discovery of what’s playing much more valuable for the consumer and much more of an opportunity for us to embed as part of an IP connected guide.

So we actually encourage those changes to occur, as we ultimately think it creates more value proposition for the technology, the metadata, and the ability for the platform to be a source of how people find things.

Richard Davis - Needham & Co.

Thank you. That’s helpful.

Fred Amoroso

You’re welcome.

Operator

Thank you. Our next question comes from the line of Andy Hargreaves. Please state your company followed by your question.

Fred Amoroso

Hey, Andy.

Andy Hargreaves - Pacific Crest Securities

Pacific Crest. A couple of questions on the US market. James, I think you mentioned converter boxes, but I was under the impression those didn’t have guides. So, can you just clarify, are you guys getting paid on those federally mandated converter boxes?

James Budge

Some yes, some no.

Fred Amoroso

But the real issue on that is with the conversion of the analog or the mandated conversion from analog to digital, the opportunity for us is that creates a shift to people signing up for service, cable service or satellite service where they might use rabbit ears today and as that shift occurs, it creates increased service provider royalties for us, for those digital customers.

Andy Hargreaves - Pacific Crest Securities

Okay, that makes sense. Then my second question is with the integration of IP video in a lot of TVs that will be coming out over the next couple of years, are those TVs going to be including guides even in this market, so that you could effectively be doubling up on revenue from guides because you could have one embedded into the TV, but also be getting paid from the service provider?

Fred Amoroso

That’s the plan.

Andy Hargreaves - Pacific Crest Securities

Thank you.

Fred Amoroso

I mean fundamentally there will be multiple guides that a consumer has access to in their home that could be from the service provider, because obviously that is the dominant user interface between the service provider and their customers and from the TV manufacturers that are looking to establish long term relationships with their customers through the same interest of discovery, what’s playing.

As a matter of fact, we have previously announced, that I think there are over 50 million flat panel TVs that already have guides embedded on them on a worldwide basis.

Andy Hargreaves - Pacific Crest Securities

What approximately is the geographic split of that?

Fred Amoroso

I don’t have that in my hand, but it is mostly in Europe and sprinkled around the rest of the world.

Andy Hargreaves - Pacific Crest Securities

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Todd Mitchell. Please state your company followed by your question.

Fred Amoroso

Hi, Todd.

Todd Mitchell - Kaufman Brothers

Kaufman Brothers. Just a quick question; on your efforts to get more service providers to license from you, I noticed from your comments you’ve mentioned NDS and then you mentioned Alba and COMAG. Is there some chance that these deals will be structured different than the US service providers? It seems that you’re going after the infrastructure providers here. Could this be a one time licensing or will these deals be structured as sort of ongoing relationship on a percent per month basis?

Fred Amoroso

So they vary okay, because there are some unique market differences in Europe than there are in the US. For example, what I said in my comments is that set top boxes in Europe are sold on a retail basis as opposed to in the US; they are distributed through the service provider. So anybody that’s developing a set top box for retail distribution that wants to put a guide in it, yes, will have to have a license from us.

In addition, obviously the service providers want to have their own guides embedded within these technologies and we typically will generate fees on a per sub basis there, but regardless of whether it is per sub or per set top box, each of them operate on a continued recurring revenue rate on volume based methods.

Todd Mitchell - Kaufman Brothers

Can you elaborate on that last; you had me until that very last sentence.

Fred Amoroso

In the United States today, there are some set top box manufacturers that pay us fees per set top box for the right to put the guides in the boxes, and we get a predominant amount of revenue on a per sub basis per service provider. That phenomenon is going to be the same that exists in Europe, even though there might be a slight different split between what we might get paid set top boxes versus service providers just because of the different market trends.

Todd Mitchell - Kaufman Brothers

So the deals that you’ve announced so far are essentially device deals and therefore over the free to air set top boxes basically?

Fred Amoroso

So in one part of my script today where I talked about those three manufacturers, yes those are set top boxes, but for example, previous relationships we have with BSkyB and Sky Italia, what we just recently announced last quarter with Telecom Portugal are on a per sub basis.

Todd Mitchell - Kaufman Brothers

Okay and then with NDS, what you’re looking at there is their free to air boxes as well?

Fred Amoroso

No, no, we are looking at the broad range of the guides that NDS have implemented for several of their customers where they have done that and they have a relationship with the service provider. So they have mostly done it for service providers as opposed to set top box manufacturers.

Todd Mitchell - Kaufman Brothers

And they have indemnified their operators?

Fred Amoroso

I’ll let you work with NDS on their relationship with them.

Todd Mitchell - Kaufman Brothers

Okay and then one last question. Just at the beginning of your script, did you say that you bought shares back in the quarter?

James Budge

We did.

James Budge

$25 million.

Todd Mitchell - Kaufman Brothers

How much and can you explain why?

James Budge

We bought 2.3 million shares for $25 million and the why is we thought the price was nice and low. I think our average price was just over $11. The debt agreement allowed us to buy $25 million and so we maxed out in November.

Fred Amoroso

And we had an ongoing opportunity that the board had given us to buy back those shares. It was a standing decision or board resolution they made.

Todd Mitchell - Kaufman Brothers

Okay. Thank you very much.

Fred Amoroso

You’re welcome.

Operator

Thank you. Our next question comes from the line of Ralph Schackart. Please state your company followed by your question.

Fred Amoroso

Hey, Ralph.

Ralph Schackart - William Blair

Hey guys; William Blair. I know Blu-ray is a pretty small part of the business, given particularly that you guys are at the midpoint of view, roughly $450 million in revenues, but if the market does double this year, could it be meaningful earnings contributor given the leverage and business model there in ’09 or would it be more likely 2010.

Fred Amoroso

It would be meaningful towards the end of 2009.

Ralph Schackart - William Blair

Okay, thanks.

Operator

Thank you. Our next question is a follow-up question from the line of Sterling Auty. Please state your company followed by your question.

Sterling Auty - JP Morgan

JP Morgan. James, given the complexity in terms of the timing of the pay down in debt, you’ve got a couple of different debt trenches out there between the term and the high yield etc. Can you just lend us a hand in terms of the way that you looked at the EPS range? What’s kind of the range of other income that you’re looking at this year that leads the EPS number?

James Budge

It’s a fairly wide range. We have to go after the term loan first which is paying about 6% to 6.5% right now in interest expense. That’s what gets paid down with all the proceeds first. We might be able if we pay it all down make a meaningful some dent in our high yield, which is at 11% and then the convertible debt at $240 million at 2.58% interest, we would not be able to pay that down nor do we want to, because of the low interest rate this year.

So, if you work through the math on that; I don’t have the numbers on top of my head, but you figure an even pay down of the term loan throughout the year at the 6% and 7% going away, and the high yield pay down probably doesn’t make any meaningful dent at any point this year, but could in 2010, and the convert stays on the books for a while.

Sterling Auty - JP Morgan

Well, as you look at what you can pay down in the first quarter, should the other income, which is actually other expense which I think was close to $16 million, if I’m not mistaken in December, should that actually be lower in the first quarter or is it going to take longer than that before we see the impact?

James Budge

No, it will definitely come down in the first quarter. In the fourth quarter you had the full impact of 100% of the debt. You’ll definitely have less debt on a weighted basis in the first quarter.

Fred Amoroso

We can’t pay off the high yield until November, anyway.

Sterling Auty - JP Morgan

All right, great. Thanks, guys.

Operator

Thank you. (Operator Instructions) We show no further questions; please continue.

Fred Amoroso

Well, I appreciate everybody’s participation in our Q4 2008 earnings call. We are obviously pleased with the results and with the significant revenue growth and obviously significant growth in earnings beyond revenue growth in what obviously is a very difficult economy. We think it shows the value of having a significant recovering revenue stream that gives us certainly more stability in this market than most companies have, and we look forward to getting together with you again in the next earnings call for Q1 2009. Thank you all.

James Budge

Thanks everyone.

Operator

Thank you. Ladies and gentlemen, this concludes the Macrovision fourth quarter 2008 earnings release conference call. If you’d like to listen to the replay of today’s conference call, please dial 303-590-3000 or 1800-405-2236 using access code 11125042. AT&T would like to thank you for your participation. You may now disconnect.

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