Macrovision Solutions Corp. Q1 2009 Earnings Call Transcript

Macrovision Solutions Corp. (MVSN)

Q1 2009 Earnings Call

May 6, 2009 5:00 pm ET

Executives

Lauren Landfield - VP of Corporate Finance and IR

Fred Amoroso - President and CEO

James Budge - CFO

Analysts

Ralph Schackart - William Blair

Mike Olson - Piper Jaffray

Sterling Auty - JPMorgan

Brian Thackray - Deutsche Bank

Rob Stone - Cowen and Company

Richard Davis - Needham and Company

Kerry Rice - Wedbush Morgan

Andy Hargreaves - Pacific Crest

Presentation

Operator

Welcome to Macrovision's First Quarter 2009 Earnings Release Conference Call. (Operator Instructions). This conference is being recorded today Wednesday, May 6, 2009.

I will now turn the conference to our host, Mr. Lauren Landfield, Vice President of Corporate Finance and Investor Relations.

Lauren Landfield

Welcome ladies and gentlemen, to Macrovision's first quarter 2009 Earnings 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 would like to remind you, that all statements made during our conference call that are not statements of historical fact, including but not limited to, statements regarding the company's forecasts of future revenues and earnings, business strategies and product plans, as well as statements regarding the expected results of an IRS pre-filing agreement review of our operating loss, 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 March 31st, 2009, and other filings with the SEC that are filed from time-to-time.

Second, our results and estimates released earlier today, as well our discussion on the call, include non-GAAP or adjusted pro-forma information, which exclude as applicable, non-cash items or items that impact comparability, such as amortization, equity based compensation, transaction, transition, and integration costs, restructuring and asset impairment charges, insurance settlements, gains or losses on strategic investments, non-cash interest expense, such as debt amortization, and interest expense required under FSP APB 14-1, and discrete tax items and the tax effect of all other adjustments.

Depreciation expense, while on a non-cash item, is included in adjusted pro-forma operating results, as a proxy for capital expenditures to demonstrate recurring cash based earnings. Adjusted pro-forma combined company information assumes all acquisitions occurred on January 1st, 2007, and exclude all previously divested business, including the software, games, TV Guide Magazine, TVG Network, TV Guide Network, TV Guide online and eMeta businesses, which are classified as discontinued operations.

We have presented and are discussing adjusted pro-forma combined 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 our financial results presented in conformity, with generally accepted accounting principles in the United States, and investors and potential investors are encouraged to review a reconciliation of adjusted pro forma financial measures, included in our earnings release.

As a 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

As you may have seen in our earnings release, we posted excellent financial results in Q1. I'm pleased that we grew adjusted pro-forma revenue 7% year-over-year to $111.2 million in the quarter. Similar to previous quarters, our growth in Q1, was driven largely by new licensees, the continued conversion of analog TV subscribers to digital, and increases in device shipments that incorporate our products, or are licensed under our patents. These revenue trends, when combined with the execution of our Gemstar synergy actions, enabled us to increase our adjusted pro forma EPS by over 100% year-over-year to $0.31 in Q1.

Additionally, notwithstanding the macro market factors affecting the credit markets and M&A in general, we completed all planned divestitures, the proceeds of which were used to reduce our debt.

I'll discuss our progress and update our 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 Budge

At the start, I'd like to point out that some of my comments will focus on adjusted pro forma results, which among other things, will assume all acquisitions and divestitures were completed as of January 1st, 2007. Details used in calculating our adjusted pro forma results, along with their reconciliation to GAAP measures can be found in today's earnings release.

As Fred mentioned, adjusted pro forma revenue was $111.2 million in the first quarter, up 7% from a year ago and growth was due to gains in both our CE and service provider verticals.

Adjusted pro form revenues for our service provider vertical, which is primarily comprised of IPG products and patents licensed to cable, satellite, telecom, and mobile companies, grew 9% year-over-year to $52.4 million in the first quarter, friven by the continued conversion of analog to digital, as well as the addition of new licensees.

Subscribers worldwide, receiving a licensed or Macrovision-provided IPG, grew 14%, from Q1 2008, to 103.7 million by the end of Q1 2009. Excluding prepaid licensees, primarily Comcast and EchoStar, subscribers were approximately 69.2 million, up 16% year-over-year.

I'd note here, that to better characterize our penetration of the service provider vertical IPG market opportunity, we are now including in our subscriber count, those subscribers who receive a set-top box from their service provider, but where we are paid by a technology supplier, such as the set-top box manufacturer. This primarily relates to Scientific Atlanta set-top boxes, and by virtue of comparison to previous periods, covered approximately 11 million subscribers in 2008.

The IPG revenues associated with these households are now classified in the service provider vertical, rather than the CE manufacturer vertical. All historical subscriber data and revenue dating back to 2007, has been updated to reflect this shift, and this appears in our investor presentation, which can be found on our Investor Relations webpage.

Our CE vertical, includes guidance products and patents licensed to device manufacturers, as well as ACP for hardware connective platform and media recognition technologies. CE adjusted pro forma revenue grew 10% to 46.5 million in Q1 2009, compared to Q1 2008.

In Q1 2009, we benefited from growth in IPG patent and product licensing, both of which saw double digit percentage growth in shipments of IPG enabled devices. The CE IPG growth also benefited from additional licenses, not in place a year ago.

CE growth was partially offset by the accelerating decline in legacy VCR plus sales, as well as later than expected customer launches of new devices, utilizing some of our products.

Adjusted pro forma revenue for our other vertical, which included data licensing and entertainment, declined 8% in the quarter to finish at $12.2 million. Within this vertical, double digit growth in data licensing, where we license our metadata to online content distributors, such as Microsoft and Google, was offset by the anticipated decline in copy protection revenue from studios.

I'll now turn to adjusted judged pro forma profit measures. For the quarter, cost of goods sold totaled 14.9 million or 13% of revenue, versus 14% in the year ago period. SG&A totaled 27.7 million or 25% of revenue, a 34% reduction from a year ago due to our synergy actions.

R&D totaled 22 million or 20% of revenue, growing 15% year-over-year, given the substantial product investment underway. Adjusted pro forma EPS grew over 100% year-over-year from $0.15 in Q1 2008, to $0.31 in Q1 2009, much higher than the corresponding revenue growth, due to the Gemstar synergy, and our lower 2009 cash tax rate of 11%.

I would like to briefly comment on our GAAP results. Generally, we don't focus on our GAAP results when discussing our performance, as we believe excluding Gemstar's operating results for the period prior to May 2nd, 2008, diminishes the comparative value of results from the prior year.

However, for reference, the primary variances included not only the usual amortization and stock option compensation expenses, but also in conjunction with the completion of the media divestitures, we took additional cost reduction steps, including consolidating our facilities' footprint, which resulted in restructuring and impairment expenses of $8.4 million.

As to the balance sheet, our cash and investment balances at the end of March were 384 million, a $22 million increase since the end of December 2008. Debt at the end of Q1 was $623 million, as we used the proceeds from divestitures to pay down the term loan, leaving us with net debt of $239 million at the end of the quarter. These figures exclude proceeds from the sales of TV Guide Network and Online placed in escrow, and classified as restricted cash, which we expect to be released in Q2 2010.

Looking forward, we recognize that we just completed a strong quarter, with many key wins that bode well for future results. All, making us incrementally more comfortable, with our long-term opportunity and ability to execute.

Notwithstanding our predisposition to continue to take a cautious approach in light of the economy, we are shrinking our revenue and earnings estimates for 2009, as well as shrinking the range of expected outcomes.

We are raising our 2009 revenue estimates, from a range of between $440 million and $480 million, to a range of between 450 million and 480 million, and we are raising our 2009 adjusted pro forma EPS from a range of between $1.15 to $1.45, to a range of between $1.25 and $1.45. These adjusted pro forma EPS estimates include a tax rate, that reflects the benefit of the net operating loss carry forward from the sale of the magazine.

By way of update on taxes, we previously submitted an application with the IRS, to be accepted for what is known as a prefiling agreement review of the operating loss, for the process taken to convert the capital loss into an NOL.

I'm pleased to say, that the IRS recently accepted us into the review program. According to the IRS' 2008 PSA program statistics, the average review lasts about 11 months. We will not likely be providing any other updates until the review is completed. To reiterate we believe there is clear precedent in tax law, that support treating the magazine loss as an operating loss, and we look forward to a successful review process.

Regarding our quarterly expectations, while we don't provide quarterly estimates, I'd like to briefly comment on the linearity of our business, relative to comments I made last quarter.

We continue to expect between 52% and 54% of total revenue in the second half. Fred will update the outlook for the drivers shortly, but in terms of weighting the revenue throughout the rest of the year by vertical, on the CE side, having grown by 10% in the first quarter, we haven't yet felt the impact of economic decline.

While the rate of economic decline appears to have moderated, we are not yet out of the woods. Given the slightly stronger than expected reports in Q1, and the expected rollout timing of our customers' new products, we expect the first half and the second half to be pretty similarly weighted. Inherent in this, is that the second quarter, consistent with prior year's, will likely be our lowest, in CE.

On the service provider side, we continue to expect fairly linear growth in our multi-channel television service related revenues, through the conversion of analog to digital, boosted throughout the year by recent new customer wins, which Fred will discuss shortly.

In our other category, we continue to expect fairly linear growth, with the fourth quarter likely the strongest, assuming we continue to successfully broaden our licensing of BD+ to the MPAA studios.

Adding it all up, while we have had a number of excellent customer wins and a strong Q1, consistent with prior years, we would expect Q2 to be our lowest revenue and earnings quarter for the year. Although, not the same degree as previous years.

We continue to expect the second half to outweigh the first half, with approximately 52% to 54% 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 continue to expect operating expenses to decrease in the second half of the year, based on the timing of outside legal expense, aimed at generating new licensing wins later in the year.

The timing of this outside legal expense was originally expected to peak in Q1 and Q2, but the processes have been pushed out to now likely peak in Q2 and Q3. We expect to incur approximately 50% to 52% of our 2009 operating expenses in the first half of the year, with the remainder in the second half, as our outside legal costs subside.

Additionally, interest expense will be less than the second half, due to our reduced debt load. We expect all of this to translate into more operating leverage and earnings in the second half of the year, than in the first half.

Speaking of debt repayments, since the end of Q1, we further reduced the term loan by another $50 million, through a voluntary debt paydown, funded out of excess cash. Going forward, we expect to routinely reduce the term loan from cash flows.

That said, I would note that in Q2, we have a number of nonrecurring cash outflows. These include the payment of working capital adjustments, and transaction costs related to media divestitures, the Muze acquisition, the aforementioned $50 million debt reduction, and California State payments on the gains from the sale of the media properties.

Fred Amoroso

An excellent quarter indeed, and I'm pleased that the strength of our business allows us to take up our revenue and our earnings estimates. I'd now like to talk about our progress with customers and products since our last call.

First, regarding service provider, this area of our business continues to demonstrate resistance to the economic downturn, as consumers gravitate toward cheaper forms of entertainment. As James mentioned, Macrovision IPG license subscriber growth of 14%, demonstrates this business remains predictable and a strong growth engine.

Ability to generate growth above market trend will largely be a function of signing new licensees. I'll highlight a few of our key recent announcements in this regard.

In April, we announced our multiyear licensing agreement with NDS, one of the world leading providers of pay-TV conditional access platforms. According to NDS, over 70 pay-TV providers rely on NDS' solutions, including its VideoGuard conditional access technology, which is currently deployed on 104 million active devices.

Our agreement allows NDS to sublicense our IPG patents to its customers, with the value of the contract to us generally increasing, as the customers increase their digital subscriber base.

While we already have agreements in place with by BSkyB and SkyItalia, who are also NDS IPG customers, our NDS agreement not only adds an initial set of new licensees, but we believe it also further validates the value of our international patents, and streamlines the process for adding future licensees, by offering them the ability to participate, in what we feel are attractive terms.

Prior to this announcement, we believe NDS' customers had about 15 million IPG-enabled digital subscribers worldwide, that were not already covered by a Macrovision IPG patent license.

While I'm not at liberty to disclose the specifics around this deal, I would point out that there remain significant opportunities to expand our growth under the agreement.

For example, several significant pay-TV operators in Europe and Asia, remain unlicensed. We believe that the fact that the initial set of licensees under this agreement, includes not only European, but also Asia-Pacific licensees, highlights the value of our patents worldwide.

We are hopeful, other operators in these regions will agree, and we are naturally continuing to work on getting NDS' other operators wrapped in under the agreement.

As a reminder, expansion of international licensing is a critical strategic execution initiative for us in 2009. The NDS agreement is a key cornerstone to that end. It not only provides a solid baseline for the international expansion, but a basis for NDS' customers to join the licensing program.

We believe networks that average around 50% digital penetration, it should contribute meaningful growth, as the conversion from analog to digital subscribers has the potential to substantially increase the number of subscribers covered over the next several years.

In short, this agreement has the potential to generate above trend growth, relative to the rest of the digital TV market we're currently licensing, and can add to the service provider revenue growth we have seen in recent quarters.

Further, related to international expansion. In Europe, we also announced in April, an agreement with UPC, a Liberty Global company. As of yearend 2008, UPC announced it had about 9 million video subscribers, about 2.4 million of which were digital.

Given its slow digital penetration and its highly upgraded networks, we expect good growth from this account. Additionally, our agreement provides for a license, whereby we are able to utilize their IPG software built on the open TV middleware platform, and license it to other operators globally, which could speed time to market in our international product expansion efforts. Similarly, we are licensed to some of UPC's middleware patents.

In Latin America, we announced that Megacable, the largest MSO in Mexico, with 1.5 million subscribers, has agreed to use our Passport IPG, as well as our television listings data. I'm pleased with our ability here to displace the incumbent, as Megacable had been using Microsoft's IPG. It's similar in this respect to some of the other Latin American wins we announced last year. Overall with low digital penetration, Latin America continues to offer above trend growth opportunities.

At this point when considering these new wins, and analog to digital conversion proceeding as expected, we believe we are well positioned to achieve our estimates of high single digit to low double digit revenue growth for service provider overall.

On the product front, at NCTA, we made some notable tru2way product announcements. Tru2way is part of the North American Cable Standard called Open Cable, which is designed to simplify the deployment of advanced interactive services, such as VoD, gaming, DVR, and IPG on 2-way capable cable, or cable-ready CE devices, by standardizing the programming environment on Java, and using middleware API's.

It aims to promote interoperability and application development, and open up traditionally proprietary cable networks to CE manufacturers and software developers alike, with the goal of generating a richer user experience for the consumers.

Specifically, we launched our Passport tru2way solution, and demonstrated its rich feature set. Using Passport tru2way's platform, service providers will be able to implement a full-featured IPG, integrated with a variety of set-top box vendors, and third-party software stacks, giving MSO's a flexible and feature-rich platform for today's interactive consumer. We are targeting availability of this in Q4. Similarly, we recently released our tru2way compliance version of Connected Platform, which supports multi-room DVR functionality.

Cable has long experimented with standardization, but for various reasons, it is yet to take hold. However, the increasing availability of Internet-based content, telco competition, and the proliferation of interactive CE devices is catalyzing the change now.

While the rate of adoption of tru2way is unclear, we feel we're well positioned for the opportunity when the time comes.

Meanwhile, we continue to progress our native solutions. At NCTA, we also announced multi-room DVR support for Passport Echo 3.5, and iGuide A28 with the following features. Start and stop the show in one room and resume in another. View your recordings lists for multiple TV's. And play up to three HD shows on your various TV's on your network, while at the same time, recording two other HD shows.

We are targeting availability of these multi-room DVR features for Q4 2009 in North America on Motorola set-top boxes.

On the cable IPG advertising front, we made important progress in the quarter, in the area of set-top box measurement deployments. Clickstream measurement data, which reveals consumer usage patterns of the IPG, mainly when they view and interact with advertising, is critical for launching targeted IPG advertisements, and evaluating the success of the campaigns.

Additionally, by deploying Clickstream measurement, our service providers gain critical insights, into how their subscribers use their service, as well as how they view live DVR and VoD programming. These insights help our customers tune their marketing of VoD and other revenue generating services, understand how their channel lineup is performing, and improve their engineering and operations.

Recall that in the middle of last year, we started measuring Clickstream data, with an operator in the Midwest. We recently added a couple of more regional cable operators, one in the top 10 media market, and another in the top 20 market. We believe, providing data in larger marketing areas, boosts the value of the data measured, and further demonstrates our ability to measure ad impressions, which is critical for advertisers to decide where to spend their budgets. We expect to continue to add operator deploying measurements, which will further boost the quality of our data.

Turning now to the CE vertical. As demonstrated by the various announcements of continued positive growth in consumer electronics broadly, and flat panel TV specifically, the industry has thus far been relatively resilient, as has our business.

For example, US point-of-sale data from the NPD Group, which measures a subset of the domestic market, indicates that LCD TV unit sales grew 32% year-over-year in Q1. As a result, we believe inventories have come down, and this has now begun to work its way through the supply chain, reversing a declining trend we highlighted in the previous calls.

While this uptick is positive, the negative growth seen in Q4 and early Q1 panel shipments, is likely to showing up in our Q2 reports.

Additionally, I would not be surprised if the growth of retail flat panel TV shipments, trails wholesale panel shipment growth, given the inventory restocking situation.

As of March 31st, 2009 report, DisplaySearch, slightly revised downwards its flat panel TV shipments forecast for 2009, from 16% to 13%. While this growth remains robust, there are still plenty of macroeconomic reasons for us to remain somewhat cautious.

Elsewhere in CE, as we've discussed in the past, our ACP licensing for set-top boxes benefits from similar trends, as our service provider vertical, which allowed it to continue to drive growth.

Offsetting these trends, as James mentioned, VCR plus continues to decline at an accelerating pace. In terms of our new products, there have been some timing delays in terms of customer device deployments.

Therefore, for CE overall, after considering some licensing delays and pushouts in customer launches, as well as declines in VCR plus, I'm encouraged that underlying strength in CE IPG, allows us to slightly increase our expectations for the CE vertical. I look forward to incremental growth, as customer launches of products begin contributing to revenue.

When we look at the prospects in our product progress, I'm highly encouraged. As announced earlier this week, VIZIO agreed to an IPG technology and patent license agreement. Thanks in large part to its low cost, high performance offerings, and a successful brand recognition marketing initiative, VIZIO has become a market leader in only a few short years.

According to VIZIO, it is the number one selling brand of flat panel HDTVs in North American, and in the fourth quarter of last year, it became the second best selling flat panel TV set maker in the country, with 14.3% market share according to iSuppli.

Through our agreement, VIZIO will be covered by a patent license for any non-Macrovision IPGs, but we're also licensing them our product technology. We'll keep you posted on these offerings as they enter the market.

Speaking of entering the market, we're excited about Sony's Bravia TVs, now including our latest version of TV Guide On Screen. Many of you have probably seen at various trade shows this guide, while it was in the works. This IPG offers a customizable and image rich home menu of programming options, as well as recommendations.

Powered by our data solutions, TV Guide On Screen is enriched by more than 2.5 million program descriptions, 120,000 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.

As a connected product, TV Guide On Screen also provides advertisers, new tools to measure the effectiveness of their ad campaigns. It is an early example of the value that we can bring to our customers, by building upon the combination of our guide technology solutions, and our rich metadata.

As previously discussed, it forms the basis of our next generation guides, and we believe it will evolve to support even richer program descriptors, and images for TV shows, video enabled, and integration with a Connected Platform.

As we mentioned last quarter, Neon, the successor IPG product, will be delivered to customers this quarter. As previously discussed, Neon builds on top of the TV Guide On Screen framework, but has even richer program descriptors and TV show images. Plus, it supports European data, and we'll be able to integrate with Connected Platform.

Additionally, I'm excited about advances we're making in other next generation successor IPG's, namely Liquid, which we discussed on last quarter's call. We expect to be talking more about that in the near future.

Turning now to data. This business continues to grow nicely, and I'm excited about future growth prospects gained through the Muze acquisition. Muze adds new customers, both domestically and internationally, and gives us expanded US and European data with strong UK coverage. We know this type of business well, and have already commenced the restructuring, which we expect will make Muze accretive to earnings.

In Q1, our adjusted pro forma data revenue grew by double digit percentages year-over-year, and we continue to outgrow the new customer wins, including turning on additional data services to one of our largest retailers. With our worldwide reach improved by the Muze acquisition which closed on April 30th, I would expect this business to continue to ramp.

In terms of our entertainment business, I'm pleased that we were able to reach a long-term agreement with Paramount for various copy protection solutions. When combined with our other licensees, I believe we have good visibility into ACP remaining on DVD's, until at least the middle of the next decade. Not only did Paramount agree to use RipGuard and ACP, but it also became the second MPAA studio to license the right to use our BD+ Blu-ray copy protection technology.

While home video entertainment spending declined 7% last quarter, according to Video Business, sales of Blu-ray DVDs were up over 100% and analysts forecast remain robust.

While the rollout of BD+ has taken longer than initially hoped, I think Paramount's agreement along with other MPAA trials which we recently began, bode well for the future.

So I believe our entertainment business will continue to be a little soft in the near term given market trends, I expect it will be a steady revenue contributor in the coming years as BD+ grows.

To recap, based on the relatively resilient trend towards and additional licensing opportunities, we think high single digit to low double digit growth in our service provider vertical, which is almost 50% of our revenue, is still likely.

When combined with essentially flat to slightly positive growth for the balance of our business, we are comfortable with increasing and narrowing our 2009 estimates, and as we look for the product and customer traction we've been making, I am increasingly confident in our long-term prospects.

Finally, I'd like to touch on our corporate strategy and how it pertains to our corporate branding. I don't think our brands properly characterize who we are today. When we undertook the acquisition of Gemstar, clearly, the combination of our patent portfolios was a driver, but there was an even greater opportunity to offer significant additional value through our products.

Therefore, we made our core strategic objective, to become a leading provider of solutions, inclusive of not only patents, but also metadata and software required by service providers and CE vendors alike, to satisfy consumer demands for interactivity. Ever since we completed the acquisition of Gemstar, we've demonstrated traction towards unlocking this value.

While customers have begun to see that we are a new company, I want to make a clear statement to the market, that we are a partner first and foremost. Moreover, a number of new constituents continue to think of Macrovision, as the sum of the parts of the various different businesses that we've acquired, including all the properties that we've successfully divested. We do not believe that to be true.

We have assembled an assortment of world-class of intellectual property, technology, services, and data, that when combined into one cohesive offering, make us a premier provider of solutions for the connected digital home.

Further, some CE manufacturers have actually asked us to provide logos to imprint on their products, but we do not believe that Macrovision's existing brands are suitable consumer facing logos. As a result, we've decided to rename the company to something more befitting of our solutions oriented strategy.

We'll keep you posted as we provide details this later this month, as we're seeking stockholder approval of the rebranding at our annual meeting in July.

With that, I'd now like to turn the call back over to Chardonnay, so that we can respond to any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Ralph Schackart with William Blair.

Ralph Schackart - William Blair

Couple of questions, as it relates to the '09 guidance, either for Fred or James. When you set the original guidance, obviously you narrowed or increased the bottom. How much of that original guidance included some of the new deals that recently came across such as Muze, NDS, VIZIO etcetera?

James Budge

On the service provider side, it certainly anticipated some of the service providers under the NDS umbrella. Between that and UPC, I'd say that the guidance, as Fred pointed out, we're pretty comfortable with that service provider guidance, which now makes up about 50% of our revenue.

On the CE side, which is probably 40% of our overall revenue, certainly anticipated a deal like the VIZIO announcement, and some other deals that we're working on throughout the year. So there's still more work to do. We do have the sales force out aggressively selling, and we still have to go and get some wins. We're feeling pretty comfortable with, certainly, the service provider piece, which is the majority of our revenue.

Fred Amoroso

Let me just underscore what James said, Ralph. The NDS agreement, as I said in my comments, was a core cornerstone of international expansion. So it had to happen, and as a result, some of that baseline was built into our estimates. As I think James said just now, the opportunity of extending that to more of NDS' customers, and the opportunity of seeing hopefully rapid conversion of analog to digital amongst this customer base represent very strong growth opportunities beyond that.

Ralph Schackart - William Blair

As long as you brought it up Fred, NDS, I have a lot of questions from investors trying to frame the opportunity, and obviously there's certain limitations on what you can say. On the call today you said there were 15 million IPG subs that were not currently covered under Macrovision patents. Is it logical to assume that those would now start flowing through sort of the sub per month model of sort of $0.10 to $0.15 on a go forward basis?

James Budge

Yes that's fair. Certainly a big chunk of those. I think most people know that BSkyB and SkyItalia were already customers of ours. So those were the ones we were referring to that were already customers, and then the others, as you can look on NDS' website, would be incremental to the BSkyB and SkyItalia revenues.

Some of the 15 million subscribers, that Fred mentioned, we had as included in the initial NDS agreement, and others we expect to add as we go throughout the year.

Ralph Schackart - William Blair

One last one and I'll turn it over. James, just on the debt to make sure we have the right pieces here. End of the quarter, $623 million. You said you paid 50 million more down since the quarter ended, if I'm not mistaken, and then restricted cash 36 million. So debt total Q2 roughly $535 million. Does that sound right? Not net debt but just total debt?

James Budge

Total debt, if you peel away the $50 million we dropped from the $622 million, the $50 million comes off. So we're down to about $570 million now.

Ralph Schackart - William Blair

Then, would the restricted cash also take down another chunk of that?

James Budge

That's right.

Ralph Schackart - William Blair

Okay.

James Budge

As a reminder. the comments that the restricted cash doesn't come off until the second quarter of 2010.

Operator

Thank you. Our next question comes from the line of Mike Olson from Piper Jaffray.

Mike Olson - Piper Jaffray

So you guys are successfully getting deals with international operators, without having to use legal measures it seems. The more deals you sign, the more other operators are probably seeing the validity of the patents. So, my question is why do you have legal expenses built into the outlook, the significant expenses that you've talked about? Is it conservativeness, or will you really spend that, even if you don't have to end up getting into lawsuits?

James Budge

So there's two factors there Mike. First one is, as you know, we've been open about, talking about Virgin Media. Virgin Media has been going on for quite some time. It's expected to go to trial in June, and so we will have a fair amount of legal expense associated with that, as it gets into the fairly hefty spending time with lawyers.

While, we certainly hope and trust as you said, in your comments, and we believe as well, that as we continue to see the ability with new operators, new licensees come on in international, that makes it more apparent to the strength of those patents for others. Yet, there may be a case here or there that someone does decide to, not want to support the licensing program and we may in fact, wind up, having to go to litigation as a potential.

Those have been conservatively estimated, but the reality of that is not lost on us. We'll see how it develops on a month-by-month, quarter-by-quarter basis.

Mike Olson - Piper Jaffray

You're getting obviously some major operators in Europe. Are the major operators more likely to do a patent license versus IPG product license? Do you expect as you go to smaller operators, that you'll get more IPG product licensing, that will be at a higher ASP than the initial high volume patent licensing to the bigger operators?

Fred Amoroso

First, let me let me be clear. The European product that we have is in the CE side of our business, not on the service provider side. We actually do not have a service provider offering for guides today in Europe. It was one of the advantages I highlighted in my comments about the deal with UPC, where we get to take advantage of some of their guide technology.

However, we do look at Europe as a fertile and opportune ground for us to develop a guide product. We don't have that in our horizon at this point in time, but it is one of the strategic considerations we're looking at.

So, for Europe on the service provider, we are now primarily looking at patent licensing opportunities, and then the ability to extend that incrementally above those patent licensing through the value of the product that we create.

Operator

Our next question comes from the line of Sterling Auty with JPMorgan.

Sterling Auty - JPMorgan

So I just want to be clear. For NDS, for the contract, for the digital subscribers, are the ones that are covered in the territories that are covered by the contract, do they start paying immediately on all of those subs or is there some sort of phase in period?

James Budge

There's the 15 million which are unlicensed. There's a subset of those, let's just call it half for sake of argument, that got wrapped into the initial phase of the NDS agreement, and they're paying us immediately. Then the remainder, represents those other opportunities that Fred talked about, that we expect and hope to license up, as we go throughout the year.

Fred Amoroso

Let me let me clarify something, I just want to make sure you got the right view. So, we have varying territories we've defined with NDS, that they have the ability to grant sublicensing, if you will, or to offer to the service providers within those territories. Once a territory exists, it doesn't automatically assume that every single operator within that territory, would automatically, become part of licensing program. It's a decision that each operator has to make, as to whether they opt in, or not opt in, to the licensing program.

Sterling Auty - JPMorgan

So it works like the military, where you sell to the army, but then you've got to go to each military base to actually get the revenue?

Fred Amoroso

I'm not so sure I like that analogy. That works.

James Budge

The implicit risk the operator is running, which they know about is, if that they don't come into the program in short order, then they run the risk of a Virgin Media type lawsuit coming in their direction.

Fred Amoroso

Then the other comment I made in my prepared remarks, Sterling, was that the deal with NDS, actually we believe, is on attractive terms. So if somebody decides that they don't want to come in under the NDS agreement, obviously, we will go after them with terms that would be beyond what NDS' agreement would show, and more in keeping of other and higher priced licensing.

Sterling Auty - JPMorgan

But again as James started with, besides BSkyB and Italia, there's a number above and beyond that, that are already covered in this initial phase?

Fred Amoroso

Yes.

James Budge

Yes.

Sterling Auty - JPMorgan

Last question would be, as you think about the analog to digital conversion in Europe, so in other words, the growth opportunity. It seems like there's still some infrastructure investment that needs to be made. How do you guys kind of gauge…?

Fred Amoroso

Sterling I think you were on your mobile and we might have lost you. So let me interpret the rest of your question, in terms of how we look at the infrastructure challenge of digital expansion in Europe. I'm not sure I'm going to answer all the infrastructure question, but unlike in the United States, where set-top boxes are principally driven through the distribution of the service providers. In Europe, set-top boxes are predominantly a retail item. I know there are a number of set-top box manufacturers in Europe, that are creating some of the new, more interactive capability.

So the legacy set-top box infrastructure that exists in the United States, may not be as hard to replace in Europe, because the decisions on set-top boxes are in fact, a consumer by consumer decision, without requiring a service operator to expend a huge amount of additional capital, for replacing all of their legacy infrastructure. Chardonnay. could we have the next question?

Operator

Next question is the line from Brian Thackray with Deutsche Bank.

Brian Thackray - Deutsche Bank

Hey guys, good quarter. To follow-up on the NDS one more time. To use your guys numbers, the half that chose not to be part of this initial agreement. Can you just shed some more light into why that was? Is it the type of thing where you're going to have to carry a big stick to kind of whack them across the line? Is that the way to think about it, and is that tied to some of the litigation costs that you guys have alluded to above and beyond Virgin?

Fred Amoroso

Some of it is Brian, but honestly, I would think it would be more accurate for you to assume, have it characterized. Look the NDS agreement is pretty new, and as each company engages and understands the agreement, and the puts and takes, and how it affects them, it just takes a lot more conversation and communication, as opposed to people just fundamentally are objecting to it.

So I think it's more timing. That's the way I would interpret it. It's more timing than fundamental substance, and it's going to take a little time to work through it.

Now, I'm not saying that every single customer may in fact decide to come on. There might be some that we go down litigation route, but for right now I would characterize it as communications and timing.

James Budge

I think I'd add to that Brian that as it relates to the legal expense comments. Those actually don't have much, if anything to do, with the NDS related entities. That has specifically to do with Virgin Media, as well as our Toshiba case that's going to trial midyear in Japan. Where we originally thought that both those cases would be coming to trial, and we'd be through them by call it, April, May, that now got pushed out by about three months. So now it's over the Q2, Q3 timeframe, instead of Q1 Q2.

NDS to Fred's point, it's mostly timing. We think most of the folks will come in eventually, throughout the year.

Brian Thackray - Deutsche Bank

On the CE side, do you guys have a sense with the VIZIO deal now, what your current [run] rate is on both North American and even global, television shipments that are out there?

Fred Amoroso

What our market share is, is that what you asked?

Brian Thackray - Deutsche Bank

Yes. Tax rates for television. Yes.

Fred Amoroso

I'm not sure I have that number right off the top of my head, and it'd be a little premature maybe for us to say it. James might have something we can go through. The thing I want to highlight about VIZIO, as opposed to Sony, is, everybody had earlier thought that the guide and some of the more related solutions like widgets, would be something on just top end high end TV's. In fact with VIZIO, what it shows is that, the incorporation of guides and new technologies into TVs are being sold in Wal-Mart and Costco, represent a significant opportunity as it starts just transpiring throughout the rest of industry. James, I think has got some specific numbers.

James Budge

Yes, I think if you can allow us a fairly wide range here, Brian, we'd probably say with VIZIO Incorporated, on a global basis, we're in the 25% to 35% penetration range. So we still have a good runway ahead.

Operator

Our next come comes from the line of Rob Stone with Cowen and company. Please go ahead.

Rob Stone - Cowen and Company

A question with respect to the aspirations you have for BD+ picking up later in the year. How much of other revenue might BD+ reach for 2009 overall do you think?

Fred Amoroso

Well, we categorize the segments, the business areas as an aggregation of data entertainment, which includes BD+ and some other. So we don't break out the individual BD+ revenues, Rob. There are some trials going on now. As you saw Blu-ray discs are growing. Blu-rays have grown at about 100% year-over-year, but you also have to recognize that they're a small portion of the business right now.

James Budge

Yes without giving you specific numbers there, Rob, it'd be small today. Given the Paramount deal, we would certainly expect, that that could offer some legs for us here in the fourth quarter, when the traditional holiday season DVD outputs go out. As a reminder, we price BD+ on a per unit basis. So that will have some seasonality attached to it.

Rob Stone - Cowen and Company

I know you don't want give a specific number. I was thinking more of just sort of rough threshold, when something like that can become a material proportion of the other revenue segment. Maybe by Q4, it sounds like.

The second question, you had a nice step up in the service provider revenue sequentially, more than I was expecting. You talked about analog to digital conversion, plus new wins. Can you roughly characterize how much of the increase was from signing up new customers, versus the secular trend of just converting within existing customers, analog to digital?

James Budge

Yes. Its number one on that, Rob. We provided five quarters worth of tables in the back of press release. I know you guys haven't had a tremendous amount of time to analyze that yet. But recall, in our prepared remarks, that we did take some revenues out of CE, and reclassify them into service providers. So set-top boxes that go into the service provider environment in the US, where we get paid by the technology provider, but they're in the service provider environment. That's now classified as service provider.

So the step up in service provider went from revenues of just under 51 million in the December quarter, to just about 52.5 million in the March quarter. So maybe not as high of a step up, as you might have expected.

Rob Stone - Cowen and Company

So that was the reclassification. Great.

James Budge

Right.

Rob Stone - Cowen and Company

James, a couple of housekeeping questions, if I might. How much is the run rate for amortization of intangibles now? Does that stay at about 20.4 million?

James Budge

Yes. It's a prorata over the life of the intangible assets. So just assume $20.4 million over time.

Rob Stone - Cowen and Company

Okay.

James Budge

Each quarter.

Rob Stone - Cowen and Company

One other non-cash item, what's the run rate of non-cash interest expense for APB 14?

James Budge

So we have 2.1 million in the quarter, and I assume that's the run rate for awhile to go.

Operator

Thank you. Our next question comes from the line of Richard Davis with Needham and Company.

Richard Davis - Needham and Company

Question for you, on the mobile side, I remember a couple years ago, that was going to be a big area for a lot of people, the three screens and stuff like that. You guys have, as I recall, I think its G Guide and TV Guide for Mobile. Has that turned out to be as big as you thought, or what's the gating issues there to make that a bigger driver of revenue? Not that you're doing poorly elsewhere, but I was just curious.

Fred Amoroso

It's a great-great question Richard, and let me tell you the strategic decisions that we went through. We did have a mobile business segment, or I should say, initiative, where we actually had a focus on mobile and product development, and we had some of that product development out to third parties etcetera.

Going back to Q4, as we looked at our business, and as we looked at all of the areas that we wanted to make investments in our product, and which ones of those product areas had the greatest payoff. The maturity of the markets, so, some level of confidence, that the market developed.

We actually determined that mobile would not be the best area for us to invest heavily in at this time. The reason is that, the jury is still out on exactly how aggressive mobile may in fact grow, relating to guide and some of the solution areas that we had.

So as a consequence, what we decided strategically, was to devalue, if you will, or defocus our R&D budget and investment in mobile. We developed a relationship with an outside company, to create that product for us and we will work with them in a cooperative basis.

At some point down the road, if we see mobile really picking up, then we always have the opportunity to acquire our way back into the market. On a short-term basis, it wouldn't distract us from what we thought were better opportunities.

Operator

Our next question comes from the line of Kerry Rice with Wedbush Morgan. Please go ahead.

Kerry Rice - Wedbush Morgan

I jumped on the call a little bit late, so I apologize if you've asked this…

Fred Amoroso

Well, then you missed all of Lauren's insightful comments in the beginning.

Kerry Rice - Wedbush Morgan

Always a pleasure to hear Lauren's comments. You talked about debt, and what you've done so far. Did you also provide any insight into what you're thinking about throughout your debt service for the rest of '09?

James Budge

We did. Our specific comments was that, since the end of the quarter, not only in the quarter did we pay down the debt related to media properties when we got those proceeds, but post the end of the quarter, we made a voluntary payment of an additional $50 million. We indicated in the prepared remarks that we would continue to do that throughout the year. So, from time to time, we'll continue to make voluntary payments against the debt.

Fred Amoroso

So just, as a reminder, Kerry, that we could not actually pay down the debt, except for the divestiture proceeds, until May 2nd, the one year anniversary of the term loan.

Kerry Rice - Wedbush Morgan

These voluntary payments, should we kind of assume they'll be around the same level, $50 million?

Fred Amoroso

Probably in $50 million tranches here and there. Sure.

Kerry Rice - Wedbush Morgan

Then my second question is, obviously you guys are doing well in the service provider side in Europe. Can you talk a little bit about your opportunities in Asia? Again if you've already talked about this, I can pick it up out of the transcript.

Fred Amoroso

I'll just say it briefly. The sum of the territory that's under the NDS agreement, is in fact in the Asian markets. I think it was in the last call so, we made comments that or maybe it was investor day actually, that all of our patents are not completely worldwide. So there are some countries in Asia that we have less opportunity, just because we don't have as much as coverage. That has to be taken into account.

Operator

(Operator Instructions).

Fred Amoroso

Chardonnay, I think if there's anybody on, I think we probably have time for one more call.

Operator

Our final question comes from the line of Andy Hargreaves with Pacific Crest. Please go ahead.

Andy Hargreaves - Pacific Crest

So can you give us any early look at some of the options you're thinking about for the consumer brand?

Fred Amoroso

Did an employee put you up to that task?

James Budge

It's going to look really cool Andy.

Fred Amoroso

We even got James to think that the presentation is cool. That's taken like six to nine months for us to get him there.

Andy Hargreaves - Pacific Crest

Okay. It's not going to be Budge, is it?

Fred Amoroso

No. That's not cool.

Andy Hargreaves - Pacific Crest

To the real thing. So am I reading you guys right though, to assume that your guidance assumes a decent chunk of those NDS customers convert this year?

James Budge

Of the remaining NDS. Sure.

Andy Hargreaves - Pacific Crest

Okay.

James Budge

Of the another 15 million that Fred talked about, a good chunk, let's just call half are in the program, as we expected.

Andy Hargreaves - Pacific Crest

And there's some assumption, a decent chunk of the rest do as well?

James Budge

No.

Fred Amoroso

No. You're going too far. So we have built in some of the conversion as part of what we expect to be in our current forecast. If we get a higher level of adoption through NDS, then that will give us more strength in our outlook than we have today.

Andy Hargreaves - Pacific Crest

Then, I just want to ask you a question on the service provider side. You talked about tru2way a little bit. Is that or is there anything else going on in the market, that you think is going to make the service providers more open to third party solutions in general?

Fred Amoroso

Andy, the overarching changes that are happening within the marketplace, obviously, takes some time to work through different competitive camps. I think, what is causing kind of some insight, is that a lot of MSOs understand the IP that's available for multiple sources. Many of them have their own web portals that they're using to integrate into their subscriber offerings. They're seeing more and more competition from telcos, not just satellites.

They're also recognizing, that as more and more of these CE devices, connected devices have discovery capability, some of them, to be frank, are very cool, in terms of the user interface. That creates some level of pressure that might cause them to want to develop closer end strategies on that transition. Obviously, caveated by the amount of capital expenditure for the infrastructure.

We think, the tru2way migration though is going to happen over a number of years, three to five years. Don't look at all of the set-top boxes migrating from native to tru2way in 2010, because that's not going to happen.

Andy Hargreaves - Pacific Crest

Then really quick. As NDS signs new customers, do they have the same option of signing an agreement under the umbrella?

Fred Amoroso

Yes they do.

Operator

I'd like to turn it back to management for any closing remarks.

Fred Amoroso

We're sorry if we changed some of your calendars or schedules, but we thought as we looked at the lineup of who was announcing and when, that this would be easier for scheduling for many of you. So that's what we took the opportunity on there.

To go back, I think we had a darn good quarter. We accomplished a lot of the things that we set out to do, and we'll continue to work hard on your behalf, as we take this out to the next quarter.

So appreciate all of your time and attention to the company. Bye-bye.

Operator

Ladies and gentlemen this concludes the Macrovision's fourth quarter 2009 earnings release conference call. If you'd like to listen to replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with access code 4069141. ACT would like to thank you for your participation. You may now disconnect.

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