Macrovision Q2 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

Macrovision Corporation (MVSN)
Q2 2007 Earnings Call
August 7, 2007, 5:00 PM ET

Executives

James Budge - EVP and CFO
Alfred J. Amoroso - President and CEO

Analysts

Michael Olson - Piper Jaffray
Brian Thackray - Deutsche Bank
Sterling Auty - JP Morgan
Robert Stone - Cowen and Company
Alan Davis - D.A. Davidson
Ralph Schackart - William Blair & Company
Ross Macmillan - Jefferies & Co.
Sasa Zorovic - Goldman Sachs Securities

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Macrovision's Q2 2007 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]. As a reminder, this conference is being recorded today, August 7, 2007. I would now like to turn the conference over to Mr. James Budge, CFO. Please go ahead, sir.

James Budge - Executive Vice President and Chief Financial Officer

Thank you, and welcome, ladies and gentlemen, to Macrovision's second quarter 2007 earnings conference call. I am James Budge, CFO of Macrovision. And I'm pleased to be joined by Fred Amoroso, our CEO.

Before we discuss our results and estimates released earlier today, I would 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 facts, including but not limited to statements regarding the company's estimates of future revenues and earnings, business strategies and product 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 are described in our Form 10-K for the year ended December 31, 2006, our most recent quarterly report on Form 10-Q, and our other filings with the SEC that are filed from time to time.

Second, our results and estimates released earlier today include non-GAAP information which exclude, as applicable, non-cash or one-time item such as amortization of intangibles from acquisitions, equity-based compensation, and restructuring and other charges. We have represented information in this form because this is how we report our business for our internal financial reporting and measurements. We believe that this presentation may be meaningful to our investors in analyzing the results of operations, and income and cash generation for the company.

This presentation is not intended to be a substitute for our financial results presented in conformity with accounting principles generally accepted in the United States. And investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures included in our earnings release.

Third, we disclosed on our 8-K filed today amended severance agreements for our executives, including Fred and myself. You maybe familiar with a relatively new section of the tax code Section 409A, which creates certain requirements necessary to avoid a potential 20% deferred compensation surtax in certain matters. Our amended executives' severance agreements were modified primarily to conform to the new requirements of 409A.

And as a final piece of housekeeping, the reconciliation of GAAP to non-GAAP is available and a replay of this conference call will be available on the Investor Relations page of our website www.macrovision.com until our next quarterly earnings call. I'd now like to turn the call over to Fred.

Alfred J. Amoroso - President and Chief Executive Officer

Thank you James and thanks everybody for joining us today for our Q2 2007 earnings call. Our actual Q2 results were in line with our estimated preliminary results as discussed on July 12th conference call. In Q2, we achieved revenues of $57.1 million, non-GAAP net income of $10.3 million, non-GAAP diluted earnings per share of $0.19, and cash flow from operations with $23 million.

As previously discussed, we had a large software transaction that didn't close in the second quarter, which we have since closed. Further, we had a contract dispute negotiation with one of our consumer electronics device manufacturer customers related to the unpaid use of our ACP technology in units that have been shipped over the past year and that we did not resolve in the quarter. For those of you that follow the lawsuit that we filed on July 31st, you know that the previously unnamed customer is Motorola. I will have more to say about this latter in the call.

While I am displeased with our inability to achieve our original estimates, we do believe that we are executing against our full year financial plan and business strategy. During the quarter, as reported in our June 5th reorganization press release, we realigned our organization to sharpen our focus on long-term growth, capture market opportunities, and better serve our customers' needs. We intend to play in more consultative industry role, thereby enabling us to more closely match our solutions with customer challenges. We believe that the fundamental market trends remain strong and that we are well positioned to leverage those trends. I will come back to discuss our business and our strategy in a little while. But at this time, I'd like to turn the call back over to James to review the financial results in more depth.

James Budge - Executive Vice President and Chief Financial Officer

Thank you Fred. As Fred mentioned, in Q2, we achieved revenue of $57.1 million, non-GAAP net income of $10.03 million, non-GAAP diluted earning per share of $0.19, and cash flow from operations of $23 million. First half revenues grew 6% year-over-year and at a business unit level, first half revenue performance was as follows. Embedded Solutions revenues were $34 million and contributed 28% of total revenue. Entertainment revenues were $23.3 million and contributed 19% of total revenue, roughly split 60-40 between MPAA and Independent studios.

Software revenues were $55 million and contributed 45% of total revenue, and Distribution and Commerce revenues were $10.3 million and contributed 8% of total revenue.

Non-GAAP gross margin for the second quarter was 81%, down from 82.6% in the comparable period in 2006, primarily due to the Mediabolic business, which was acquired at the beginning of this year, contributing to cost of goods sold in 2007 as compared to 2006. Our non-GAAP operating expenses in Q2 were $36 million, an increase of 8% over the $34 million in non-GAAP operating expenses in Q2 2006. The absolute increase in operating expense primarily resulted from a quarter of Mediabolic-related expenses that were not present in the comparable quarter in 2006.

Non-GAAP operating income for the second quarter was $9.9 million or 17% of revenues, down from the $14.6 million in non-GAAP operating income in Q2 2006, which represented 25% of revenues in that period. Our non-GAAP net income for the second quarter was $10.3 million, down from the $14.2 million posted in the second quarter of 2006. Our non-GAAP earnings per share for the second quarter were $0.19, down from the $0.27 posted in the second quarter of 2006.

At a business unit level, we are measuring profit based on segment operating income, which we define as business unit gross profit less operating expenses directly attributable to the business unit, but excluding shared corporate services and overheads such as infrastructure, marketing and administrative functions. These results are presented in a non-GAAP format, excluding one-time or non-cash charges such as employee stock compensation expense, intangible asset amortizations, and restructuring costs.

In the first half of 2007, Embedded Solutions generated $26.9 million in segment operating income for a margin of 79%. Entertainment generated $13.5 million in segment operating income for a margin of 58%. Software generated $21.9 million in segment operating income for a margin of 40%. And Distribution and Commerce generated $13.7 million in segment operating losses. As discussed in our June 5th press release, as we focused around our business unit structure, we eliminated some product and resource redundancies and reallocated certain resources, resulting in a net reduction of worldwide headcount of approximately 8% and restructuring costs of $2.9 million in the second quarter.

As to the balance sheet, our cash and liquid investments balance at the end of June was $523 million, up $60 million compared with the $463 million as of the end of March, primarily as a result of cash flow from operations and cash from the exercise of stock option. Cash flow from operations was $23 million and cash from operations per share for the quarter was $0.42, over two times our non-GAAP diluted earnings per share demonstrating once again our continued ability to generate cash earnings well ahead of GAAP and non-GAAP earnings.

Our days sales outstanding for Q2 was 67 days, which is in the range of where we'd normally expect to see it.

As to estimates going forward, we're maintaining our revenue estimates for the full year of $280 million $290 million. In our third quarter, we expect a revenue range of between $68 million and $72 million. Likewise, we're maintaining our full year non-GAAP diluted earnings per share estimate to range between $1.33 and $1.43, and in the third quarter of 2007, we expect diluted non-GAAP earnings per share within a range of $0.28 to $0.32.

And with that, I would like to turn the call back over to Fred. Fred?

Alfred J. Amoroso - President and Chief Executive Officer

Thank you James. I would like to discuss some of the highlights from each of the respective business units in the quarter as follows. First, our Embedded Solutions business unit, we continue to capitalize on a digital set-top box upgrade cycle and a ramp of video-on-demand domestically and pay TV internationally. The shortening of windows between theatrical release and VOD pay TV release by the studios, plus the increasing number of devices that are using our ACP technologies has allowed us to grow revenues in this part of our business over 80% year-over-year.

Further during the quarter, we announced that Scientific Atlanta became a customer of our Digital Home Media Solution. In Q2, we also signed a valuation agreement with two other set-top box manufacturers that are working to provide a new generation of devices, got adhered to the digital living network alliance of DLNA standard, and the universal plug and play or UPnP standard for interoperability and connectivity. And lastly, we are seeing interest in the digital TV manufacturers to provide this level of capability as well.

As it relates to Motorola, I commented on the call on July 12th that we had hoped that this dispute would not have to come to the point of our recently filed lawsuit. We have been and continue to be willing to work with Motorola every step of the way, but we did not feel that they are willing to negotiate to a reasonable outcome. We are confident in our position in this lawsuit and we expect a favorable outcome. I cannot comment beyond this giving the lawsuit, but for those of you that would like more information, the complaint that we filed sets out the basics of the facts.

Next for entertainment. While we have shown tremendous growth in the hardware licensing portion of our business, we have done so without the benefit of a new bundle deal with the MPAA Studios. Also while we have opportunities to add additional MPAA studios to license our technology that have previously not used our technology or used it for isolated titles, as I mentioned in our July 12th call, there is one studio that decided to not renew their contract as we work with them on a current proposal we have in front of them for a bundled deal. In addition, overall Q2 DVD 2007 volumes were weak when compared with volumes in the comparable quarter of 2006.

As you may expect, I have been asked on numerous occasions why the bundle deals have taken so long to sign and what are the impediments to getting them signed. Well, there are a number of factors and each studio is different. First, we limited our discussion of the bundle deals to only a few studios as we validated the approach. Second, while we believe the studios with whom we discuss the offering have liked the bundle package, they are currently focused on business issues relating to the expansion of electronic channels and changing release windows. These business discussions typically have preceded the discussions on protection as the relationships they develop to new distribution partners will naturally take priority. While we have yet to sign a bundle deal with a major MPAA studio, our entertainment business unit continued to make progress in Q2 in signing bundle solution deals with several more independent studios.

Further, we expect overall DVD volumes to strengthen during the third and fourth quarters as the blockbuster movies of the spring and summer move to replication in advance of the holiday buying season.

Now on to software. As I have mentioned in the past, our software business is undergoing a product transformation. While many independent software publishers have employed licensing technologies to control the distribution and use of their software by their customers, some companies prefer less of an enforcement approach to software compliance, to more of an audited usage approach. Our new compliance product is beta-ready, and currently we are in discussions with potential beta customers. The solution coupled with the new products we introduced in electronic software delivery and hardware licensing have resulted in the strong pipeline for software that we believe will pay off for us in the second half of 2007 and beyond into 2008.

Despite this transformation, we did close several key transactions in the second quarter and we have already closed in early Q3 the software customer contract that we mentioned in our July 12th call; that was one of the reasons for revenue miss in Q2.

We also shipped FLEXnet delivery in the quarter as the first beta customer took a full license to the software. FLEXnet delivery is our entry into electronic software delivery and a great complement to our overall FLEXnet business. Further, we are pleased to announce last month a collaboration with Citrix to release an enhanced version of our AdminStudio product that can package applications for streaming, be it a Citrix Presentation Server 4.5.

In addition to simplifying Windows Vista deployment, the AdminStudio product helps IT administrators ease their workload by automating the package process in Citrix-driven network environments, which will help their customers to more easily package and deploy their applications in a virtualized environment, and in the process, reduce their cost and complexity.

And finally, Distribution and Commerce had been growing substantially over the course of 2006. However, early in Q2, one of our customers launched his own website to sell games, and as a result, their business with us has ceased. We have been investing heavily in the business unit and while we are not expecting this business unit to be profitable in Q3 or even in Q4, we are taking actions to improve the top and bottom lines of our Distribution and Commerce business.

Further in Q2, we added 25 new customers in our games business and are pleased that we are showing continued adoption despite the loss of the aforementioned customer.

Lastly, we delivered the most complex and demanding implementation to-date of our RightAccess and RightCommerce solution to one of the world's largest pay-for-content subscription services that boasts over 2 million active users and processes demands of 25,000 orders per week. This has provided us the capability to benchmark our solutions and in demonstrating our capabilities in a high volume, high revenue implementation.

As I close, I'd like to summarize with a few key thoughts. We have made many changes in Macrovision over the last two years and we are not done making changes as we transform ourselves to provide higher value products and services in markets that are more important and more relevant to our customers, and that will allow us to capture an increasing market share of broader opportunities. Since 2005, we have acquired 4 companies, developed new products organically, created a new culture, and proved our infrastructure, procedures, and policies, and improved our relationships with our customers in every segment of our business.

We have increased revenues, generated significant profits, and even taking into consideration the four companies that we have acquired, we have more net cash today than at the start of our transformation over two years ago. In short, we have made progress in virtually every area.

As I tell my team, I am most pleased when we drive success, not only in the broader longer term transformation, but in the short term as well. In Q2, we missed the opportunity to deliver on those short term results. But we believe the overall opportunity in the marketplace is even larger and more apparent than we first thought several years ago.

The marketplace in digital media is changing dramatically and I believe we are well positioned to take advantage of these changes rather than be compromised by them. We have the resources to make the investments necessary and the drive to make critical decisions in the timeframes required. The Macrovision team is excited at the transformation we are undertaking and the prospects that are ahead of us. We will continue to evaluate every area of our business and make the appropriate decisions to make sure we are positioning ourselves to successfully reinvent ourselves and take advantage of the market opportunities in front of us.

On an overall basis, we are seeing our strategy to continue to be executed in the marketplace to protect, enhance, and distribute our core components of our strategy and are being well received in the marketplace.

I would like to now turn the call back over to the Operator so that we can respond to any questions that you may have. Larry?

Question And Answer

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. Our first question comes from the line of David Hines [ph]. Please state your company name followed by your question.

Unidentified Analyst

Hi, thanks, it's Needham & Company. Just one quick question. Fred, now that you have the four business unit divisions Heads, how are you spending your time differently? Thanks.

Alfred J. Amoroso - President and Chief Executive Officer

That's an interesting Q2 question. So, look I am spending my time not much different than I spent it before. In the past, I spent a lot of time with customers, I spent a lot of time in terms of operationally looking at inspecting and driving our business. Since we established the business units just a short time ago on June 5th, we've already had a first round full day operational review that dealt with both strategic and tactical issues and performance across each of the business units, identified the strength, the weaknesses, the market opportunities, what we needed to do to achieve those results. From those operational reviews, we came down with pages of strategic and tactical actions and directions to continue to drive our business.

I spend time with the investment community, as you would expect, in terms of responding to questions, inside [ph] perspectives, new investors and our existing investors. I spend a tremendous amount of time with our employees in terms of continuing our transformation, our cultural movements, building the organization, recruiting to the team, and managing each of the different components of our business, which, as you would expect, includes getting involved in specific transactions. As you would imagine, I am pretty intimately involved in Motorola. In fact I had a conversation with them this morning. As you would expect, I am personally involved and maintain personal involvement in a lot of the discussions with the Hollywood Studios relating to bundled deal. I am heading down there tomorrow morning for a dinner with one of the executives. And continuing to drive key relationships in Software and Embedded Solutions as well. Does that answer your question.

Unidentified Analyst

I got it. Thanks.

Alfred J. Amoroso - President and Chief Executive Officer

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Mike Olson. Please state your company name followed by your question.

Michael Olson - Piper Jaffray

Hey, it's Piper Jaffray. Just had a quick question about, one on the ISV that you closed in Q3. That will be revenue in Q3, it wasn't revenue in Q2. Correct?

Alfred J. Amoroso - President and Chief Executive Officer

Correct. It was a miss in the Q2. It was a seven figure deal that we have subsequently and already closed in Q3, so is Q3 revenue.

Michael Olson - Piper Jaffray

Okay. So it's like $2 million or $3 million in the quarter?

Alfred J. Amoroso - President and Chief Executive Officer

Seven figure.

Michael Olson - Piper Jaffray

Okay. Is there any chance that this issue with Motorola could hurt their potential adoption of some of the Mediabolic-related technology?

Alfred J. Amoroso - President and Chief Executive Officer

It's a good question Mike. We have been in discussions with them in the use of the different technology as we have said on a number of occasions, the adoption of the technology, there is a few minor competitors that we deal within the marketplace. The biggest competitor that we deal with is in fact their individual development group. And so that is the case within Motorola. The conversations are actually going on with them separate and distinct though in terms of the two different component, the ACP use relating to protection and the middleware usage relating to DLNA and connectivity.

Michael Olson - Piper Jaffray

Okay. And then just one last one. You have a lot of ISV customers out there that we are going to need to upgrade to InstallShield so they could be fully compliant with Vista. And just wondering... I know a lot of them were planning on moving in '07. Where do you think we are in that upgrade cycle of those customers? Have most them already made the move or do you think there is still ways to go or do you expect most ISV customers will move in '07?

Alfred J. Amoroso - President and Chief Executive Officer

So, it's a good question. Let me just refresh. There is two aspects relating to our InstallShield business. We have about 60,000 customers worldwide. Of our 60,000 customers, about 30,000 of them actually are ISVs. The other half are software developers within enterprises. So the fact that some enterprises might actually be moving more slowly, in my mind, is going to elongate the period of time that we have to take advantage of the Vista upgrade cycle. The ISVs, as you would imagine, are going to be quicker on the adoptions so that they could be ready for their customers to move to Vista when they want to. But all of the existing enterprise developers are probably going to move slow... more slowly and so I think the movement and the uptick to Vista will probably occur well into 2008.

Michael Olson - Piper Jaffray

Okay, thanks a lot.

Alfred J. Amoroso - President and Chief Executive Officer

Thanks Mike.

Operator

Thank you sir. Our next question comes from the line of Brian Thackray. Please say your company name followed by your question.

Brian Thackray - Deutsche Bank

Hi Deutsche Bank. Thank guys.

Alfred J. Amoroso - President and Chief Executive Officer

Hi, Brian.

Brian Thackray - Deutsche Bank

On Motorola, can you talk maybe a little bit about from a risk perspective, the other business that you are currently getting paid for by Motorola, is there any risk around that as you go through this lawsuit?

Alfred J. Amoroso - President and Chief Executive Officer

So the business that we are currently getting paid from for Motorola is pretty much all wrapped up within the current dispute that we have. So perhaps a response to your question or maybe the one you didn't ask is there is no other revenue at risk with Motorola other than what is defined in our disagreement.

Brian Thackray - Deutsche Bank

And you continue to think even now that you will get that done by the end of the year, from a revenue... recognize that revenue from --?

Alfred J. Amoroso - President and Chief Executive Officer

Well, it's interesting and we spend a lot of time debating about what we think our forecast should be and I guess relative to where our stock is, one could make an argument that the market has already baked in that we will not do that. As James and I have discussed this at length, we still believe that there is a very real and reasonable chance that we can get the Motorola thing resolved before the end of the year. And as a result, we have actual chance to achieve our full year results, but I believe the market has probably discounted all of that in the stock price today. So, the fact of the matter is we think we can, we see a pass to be able to get there. Could we be in a position where Motorola does completely go down the legal route, we can negotiate a successful outcome that it could slip beyond the end of the year? Sure, that is absolutely a possibility.

Brian Thackray - Deutsche Bank

I guess what incentive does Motorola have to pay outside of a legal decision?

Alfred J. Amoroso - President and Chief Executive Officer

So I don't ant to comment on the lawsuit itself, or the strategies or the issues relating to it, but I will point to the fact that every day that goes by and they produce more set-top box and ship them, the royalty exposure increases. So, if you remember at the end of June when we spoke about this, we spoke about it from the standpoint that the royalties that were owed to us were actually through first quarter, Q1, and that those numbers amounted to something in excess of $6 million, not counting interest etc. At the end of June 30th with the projections of volume of se- top boxes that have been shipped, that number is now in excess of $9 million, not counting interest on that and so as we continue to go out each week or each quarter, the number increases in terms of the exposure. So there is I think a motivation to try and get this resolved and get it behind us on both of our parties.

Brian Thackray - Deutsche Bank

So then, we are thinking about then the back half of your numbers is kind of $14 million, $15 million in terms of revenue, what you are expecting the back half of the year from Motorola?

James Budge - Executive Vice President and Chief Financial Officer

Exactly.

Brian Thackray - Deutsche Bank

Okay. And then just finally on the Mediabolic business, sounds like you guys have made some additional advancements there with some set-top box manufacturers and digital TV manufacturers. Can you kind of quantify what do you think that could add for the holiday season this year? And maybe from a 12-month perspective, where you think you can be at as you look down the road for Mediabolic?

Alfred J. Amoroso - President and Chief Executive Officer

So, we don't forecast at that level of finiteness in this and nor should you consider, Brian, that the design wins that we have at this stage or the evaluations, in some cases, are going to develop into 2007 holiday season revenue. I just don't believe the manufacturers will be able to get products out the door in time for the holiday season at this stage of the game. So, I would not build it into this year.

When I speak of the television manufacturers, one of the largest chip suppliers that we work with, in our discussions with them have said that there is virtually no TV manufacturer that doesn't have the issue of connectivity in their product plans or on their roadmap. So we're encouraged by how fast the marketplace is adopting it, but I don't think it's a this year issue at all. I actually think what will happen is we'll start seeing a number of interesting products prototyped at CES this coming year and start being introduced over the course of 2008.

Brian Thackray - Deutsche Bank

Okay. Thanks guys.

Alfred J. Amoroso - President and Chief Executive Officer

Thank you.

Operator

Thank you sir. Our next question comes from the line of Sterling Auty. Please state your company name followed by your question.

Sterling Auty - JP Morgan

Yes, JP Morgan. Hey guys. A couple of questions. First, what jurisdiction was the complaint actually filed with Motorola?

Alfred J. Amoroso - President and Chief Executive Officer

State Court California.

Sterling Auty - JP Morgan

Okay. And on the bundle deal kind of situation, what's actually baked in to the guidance for the rest of the year when it comes to bundled deals?

James Budge - Executive Vice President and Chief Financial Officer

So, we are assuming that as go throughout year will likely continue to be on a per unit basis, as the bundles happen, that will turn this into a subscription license, but they will primarily affect 2008.

Sterling Auty - JP Morgan

Okay. So no bundle deals were done through the rest of '07 if the DVD volumes meet your expectations, then you shouldn't have any influence on the outcome versus your guidance?

James Budge - Executive Vice President and Chief Financial Officer

Yes

Sterling Auty - JP Morgan

Okay. On the electronic software distribution, you mentioned the beta customer. Can you give us an idea in what way they are using the software distribution or a software delivery platform?

Alfred J. Amoroso - President and Chief Executive Officer

So as customers look at getting software to their customers, some of them still burning it, some of them could use some competitive product that's hosted. For example, Intraware, and so what we provide is an alternative for them to be able to delver it electronically as a competitive environment to them. And today that is a non-hosted environment. I think Intraware, as you might know, was a completely hosted environment. So, we give that to the software publishers to be able to do it themselves should they desire. We are also in process of creating a hosted version of that product that we'll be introducing early next year for those customers that would rather have us host the distribution of their software for their customers. That actually ties in nicely with the rest of our product portfolio, not only in licensing obviously, but also in the packaging and installation side as well.

Sterling Auty - JP Morgan

Well, the version of it the customer can buy and do it completely themselves, when is that essentially generally available, what's the GA for that?

Alfred J. Amoroso - President and Chief Executive Officer

We made that GA last quarter.

Sterling Auty - JP Morgan

That's what I thought. So, from here regarding the sales force is out there selling that just... it's not going to be ought to be sold on a hosted basis?

Alfred J. Amoroso - President and Chief Executive Officer

Not until early next year, correct.

Sterling Auty - JP Morgan

Okay. And what's your sense as to what the market is looking for and also just kind of what do you think competitive dynamics outside the Intraware into some of the other larger hosted vendors? What do you think the opportunity and the competitive dynamites are going to look like?

Alfred J. Amoroso - President and Chief Executive Officer

So, I think it's early product, customers are using it, it's being successfully deployed. We haven't had any negative reactions. Matter of fact, the customer that beta did it is actually port it. So, that's always a great sign. So, I think the marketplace is there. I think, to be honest, though there is a bigger market for the hosted environment, we are seeing a number of customers that we have been talking to that would say it sounds great, we'd love to deploy it, but we really don't want to deal with the operational aspects ourselves, why don' t you just go do it, call us back when you have to host environment. So, I think as most markets, there are some that would prefer doing it themselves and already have built up infrastructure and there is also a lot that would rather be in a hosted environment, and we will be able to accommodate both of those.

Sterling Auty - JP Morgan

Do you think that there is a big opportunity just because of customers that are unsatisfied with their current hosting solutions?

Alfred J. Amoroso - President and Chief Executive Officer

Well, that maybe the case, but far be it for me to comment on that.

Sterling Auty - JP Morgan

Okay. Thanks guys.

Alfred J. Amoroso - President and Chief Executive Officer

The other part of this, Sterling, that just in the interest of where things are, I think the compliant solution as opposed to the hard licensing solution is one not to be underestimated as well. That one is out in beta now. We've got fairly good responses from the customers that we have spoken to about an alternative approach towards licensing. That is more audited based as opposed to formal license-based. So that's another great scenario that's out there.

Sterling Auty - JP Morgan

Okay. One last question before I let you go. As you look at the third quarter, look at the back half, with the miss in the second quarter, I think maybe some of the business segments, whether it be software or others had center pipelines coming in. What do you feel like your visibility or pipeline, or how you want to describe it, your comfort level and the guidance numbers for the back half outside of what needs to happen with Motorola to achieve the guidance?

Alfred J. Amoroso - President and Chief Executive Officer

Good question, that's a very good question. So, I will break it down by business unit. BMC is small, we understand some of the pipeline that's there. We actually have more proposals out today in our right products than we've had probably for the last 9 months. So we feel good about an increasing opportunity that's developing there.

The second part of our market, if we looked at Embedded Solutions, we feel comfortable not only in the middleware component, but again realize that the middleware component as we win designs doesn't materially affect profit in the quarter or revenue in the quarter, but we feel good about that. And we feel very good about our ACP hardware licensing technology. It continues to be a very solid performer for us as we look going forward.

Entertainment Q3 volumes, so just as a side, I think one of the analysts wrote about the Q3 volumes. Q3 volumes for the industry, I am sorry, Q2 volumes, DVD volumes for the industry was down 14% year-over-year from 2006. That is the largest decline in DVD volume sales that have occurred since the beginning of the introduction of the DVD. We believe that this is a slump and in fact we believe based upon the data that we have seen that the volumes for Q3 and Q4 are actually stronger a result of the blockbusters that have been previous released and will be replicated for sale going into the last part of the year. And on the software side, the last part of our business, I think we have more pipeline today than we've had in the last year.

Sterling Auty - JP Morgan

Alright, great. Thank you.

Alfred J. Amoroso - President and Chief Executive Officer

Thank you.

Operator

Thank you sir. Our next question comes from the line of Rob Stone. Please state your company name followed by your question.

Robert Stone - Cowen and Company

Cowen and Company. Hi guys.

Alfred J. Amoroso - President and Chief Executive Officer

Hey Rob. How are you?

Robert Stone - Cowen and Company

So Fred, just a follow up on that last comment. If entertainment is down about 20% roughly on a six-month basis and you've been picking up incremental revenue from the independents that you signed to bundle deal so far. Tell me if I'm processing this incorrectly. There is... that implies a greater than 6% down in the rest of the business. Is that from pricing, is that from less usage or what accounts for the fact that in spite of signing some number of bundles with independents that you're still down significantly more than your volume are down?

Alfred J. Amoroso - President and Chief Executive Officer

So it's a good question and one of the comments I made in the script is that one of the customers have not renewed their ACP license. I mentioned that in our July call and I mentioned it in my script. That certainly was an additional contributing factor. The other thing to look at this Rob is that I think we have said previously that our independent studio, MPAA studio was roughly 35: 65 in the past. You will notice that in James comments in this quarter that ratio was about 40:60. So the independents who are in fact taking some of the bundle deals and we are growing revenues in those areas, are contributing a greater portion to our entertainment revenues overall.

Robert Stone - Cowen and Company

So if you effectively conclude a bundle deal, last one of the majors and you said you solved that if you didn't sign more bundle deals the volumes on the balance of the year would work out isn't there a potential that you just loose that piece of business for another quarter or maybe rest of the year until they start to operate under bundle contract?

Alfred J. Amoroso - President and Chief Executive Officer

Yes and we have taken that into account.

James Budge - Executive Vice President and Chief Financial Officer

It has been factored in Rob. We are assuming that particular studio business actually not contribute to revenue for the balance of the year. But we think they will, we think we will get some level of deal done but we haven't factor it into the revenue forecast.

Robert Stone - Cowen and Company

Well that's the case, you know you are still operating with essentially the same forecast situation at the beginning of the year.

James Budge - Executive Vice President and Chief Financial Officer

Yes, the same forecast for the overall company.

Robert Stone - Cowen and Company

Yes.

James Budge - Executive Vice President and Chief Financial Officer

And we didn't breakout the business segments before it.

Robert Stone - Cowen and Company

Alight. Okay, the last housekeeping thing. Would you able to post... now that you've got the Q1, Q2 of last year in the new business segment breakdown. Would you able to post in the mean time Q3, Q4 of last year?

James Budge - Executive Vice President and Chief Financial Officer

Well we will consider it. You will for sure get Q3 when we announced Q3, we will talk about whether we put out the other two items.

Robert Stone - Cowen and Company

Okay, thank you.

James Budge - Executive Vice President and Chief Financial Officer

Thanks Rob.

Operator

Thank you sir. Our next question comes from the line of Alan Davis. Please take your company name followed by your question.

Alan Davis - D.A. Davidson

Yes D.A. Davidson. Just a couple of quick question guys. In the third quarter guidance are there any assumed revenues for Motorola?

James Budge - Executive Vice President and Chief Financial Officer

No, that's not likely expected until the fourth quarter.

Alan Davis - D.A. Davidson

Okay and then I am wondering it sounds like some of the opportunity for renewed growth in the software piece of business. It looks like what will happen in '08? I am just curious if you could just characterize a little more for us, the growth opportunity in the back half of this year were there any compliance products?

Alfred J. Amoroso - President and Chief Executive Officer

So if that's the perspective you got, I misspoke. We actually believe that we will start seeing some of the stronger revenue growth for software materializing in the latter half of 2007, Q3 and Q4.

Alan Davis - D.A. Davidson

Okay and then building in '08?

Alfred J. Amoroso - President and Chief Executive Officer

Yes, exactly.

Alan Davis - D.A. Davidson

Okay thanks.

Operator

Thank you sir. Our next question comes from the line of Ralph Schackart. Please state your company name and your new question please.

Ralph Schackart - William Blair & Company

William Blair. Hi Alfred how are you ? Quick question on the Motorola boxes. Are they still producing boxes today with ACP technology and --?

Alfred J. Amoroso - President and Chief Executive Officer

They are and you would note that we did not cut off that supply and are trying to work this out as equitably as we can.

Ralph Schackart - William Blair & Company

Okay thanks and then the 25 new customers and distribution in commerce. These would be the one that you'd ask. Can you give us sense of the new revenue coming in versus the customer that is no using the services?

Alfred J. Amoroso - President and Chief Executive Officer

That's correct. The customer that we lost was a larger customer that's not made up by the 25 new customers that we had. They were games publisher that basically had catalogue and decided to move into their own internal operations, their ability to host that environment. So it's a little bit of a unique situation and that we mostly create catalogue and manage catalogue for series that don't have their own catalog to leverage. So that increases our value proposition. When we're dealing with a games publisher that has their own catalog, they become much more self-sufficient in the marketplace and so what they did is in essence by hosting it themselves, have created an opportunity depending upon how efficient they are to be able to operate that and keep a little bit more margin for themselves assuming that they're efficient in the way they do that.

Ralph Schackart - William Blair & Company

Okay and then the last question. $500 million in cash and the balance sheet is dock down of its highs and a bad take. So can give us a sense of how you're thinking about cash deployment both from acquisitions and essentially would you reconsider a buyback at this point?

Alfred J. Amoroso - President and Chief Executive Officer

So you would expect we consider that topic all the time. It is certainly more pertinent today. We also believe that we're operating in the market that requires transformation fast and quick, relative to the opportunities that are in the marketplace. We still believe acquisitions are a key part of our growth. So we really haven't at this point changed any of our approach to the use of cash Ralph.

Ralph Schackart - William Blair & Company

Okay. Thank you.

Operator

Thank you sir. Our next question comes from the line of Ross Macmillan. Please state your company name followed by your question.

Ross Macmillan - Jefferies & Co.

Yes Jefferies. Hey Alfred and James. Hey would you...Fred, would you... when would you actually consider the supply side shutting off supply from Motorola. How does that work and when might you consider that?

Alfred J. Amoroso - President and Chief Executive Officer

So I would reserve comment on it. Obviously it's a... it's an important issue. It's a key issue. I would certainly hope that we don't get to that point. I will tell you that we are in conversations with the business people of Motorola. My expectation is that we will continue to have conversations and we just won't comment on other actions that we'd contemplate that we could take or the timing that we would take those. The only thing I would say to you is that we have reserved all of our rights under the contract to be able to execute as we see them.

Ross Macmillan - Jefferies & Co.

Have you sort of supplied to a consumer electronics device manufacturer before and how does that work with the actual chip provider and isn't it detrimental to their revenues well. How do you balance that?

James Budge - Executive Vice President and Chief Financial Officer

Sure it's a last resort issue. We have done it on very, very selective basis in the past. Most of the time we are successfully able to work through a discussion and a negotiation before we get to that point. So were are just assuming that we going to be able to be successful in this as well.

Ross Macmillan - Jefferies & Co.

And then on the bundle contracts for the CDO; it sounds like you could probably get some done at a certain price today. But the prices in where you want it to be. Could you help us understand... do you think if we move to another three months here you might be able... you might be willing it to do those deals at a price may be doesn't quite match what the annual volume relative rates would have been, is that the possible outcome here?

Alfred J. Amoroso - President and Chief Executive Officer

You mean, the spike for the studios?

Ross Macmillan - Jefferies & Co.

[Multiple Speakers]. We always see it's going to ... you have to get it down at 75% or you just stay in the stalemate and you could do on for an awful long time?

Alfred J. Amoroso - President and Chief Executive Officer

So it's a good question and I am been a little suspicious obviously. It is a good question. When I commented in the script that one of the considerations is that, I do believe that some of the studios are in fact looking at the business issue that they dealing with the expansion of the business, the electronic channels as one of the considerations and that has some precedence before they'll be willing to engage in a decision on a bundle deal. I think that is in fact one of the major issues. Could we lower the prices? Is there a price elasticity component to the discussion? Sure there always is.

Ross Macmillan - Jefferies & Co.

Okay, thank you.

Alfred J. Amoroso - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question comes from the line of Sasa Zorovic. Please go ahead.

Alfred J. Amoroso - President and Chief Executive Officer

Hi Sasa, how are you?

Sasa Zorovic - Goldman Sachs Securities

Yes hi. Some of following question; so how... I am looking at the year-over-year trend for the quarter in distribution in commerce and then for the trend. So I guess I will ask the same question two different ways, how big was this particular customer that you no longer have and I guess asking it differently is, did the rest of the business if we take this one away, actually grew. Did it grow first half of '06 to first half of '07?

Alfred J. Amoroso - President and Chief Executive Officer

No,Sasa I am sorry. Can you restate the beginning. I thought you talked about the loss about the customer in relation --

Sasa Zorovic - Goldman Sachs Securities

Right. So you mentioned that in the distribution in commercial you lost a customer. So if you take that customer first how big was the customer if you could qualify in terms of percentage of the revenue of that segment or asking the same question differently, if we take the customer out would you have revenue grown to the first half of '06 to first half of '07 excluding that customer?

Alfred J. Amoroso - President and Chief Executive Officer

That's a very good question. So I would say that, had we not lost that customer, our revenue would have grown at a similar pace as it had previously grown in each of the last quarters over the last year or 1.5 year. So the cost of, it was a large customer and did represent a relatively significant decline in the quarter.

James Budge - Executive Vice President and Chief Financial Officer

I think there is out a little bit if you look at the chart in the press release Sasa the first half revenue in distribution commerce is actually up, a reasonable amount over 10% in the first half of 2007 compared to 2006. In the second quarter, June 30 of '07 compared June 30 of June '06 it's actually down. So you can reasonably conclude from that this was somewhat sizable customer.

Sasa Zorovic - Goldman Sachs Securities

And then the... we could also or rather we should conclude that also direct to the business group. Correct?

James Budge - Executive Vice President and Chief Financial Officer

Yes.

Sasa Zorovic - Goldman Sachs Securities

Okay, now then if sort of look to not just second quarter but if kind of look sort of first half trend okay. It is maybe more of a trend then just like in a quarter worth of data. I mean it does seem that entertainment is down a fair bit and then also the software is down a bit. Now I guess with software we should start seeing sort of stronger second half. So I guess basically my question is here so, why is this is trend then? Why is this then to turnaround? Why is the trend not downwards? Why would this be anomaly even if you look at the first half of the year?

Alfred J. Amoroso - President and Chief Executive Officer

So you are talking about overall company revenues

Sasa Zorovic - Goldman Sachs Securities

Right but these are particular segments.

Alfred J. Amoroso - President and Chief Executive Officer

so for software as I mentioned, software we are going through a product transition first half of the year was relatively weak. Especially in the FLEXnet publisher side of the house, the admin studio and especially the star shield is taking the benefit of Vista. So that's actually executed well in the first half and we expect to continue that to execute in the second half and into next year. The pipeline in software though relative to the offering of the new products, the hardware licensing and the deals that we see on the table is stronger now than it has been probably for the whole last year or more. So we are bullish about software for the second half of the year. On entertainment and why we feel confident, the net revenue is as I said, DVD volume declination of 14% year-over-year in Q2 was the lowest DVD volumes that we have seen in years and from all of what we see in blockbusters turning to replication in Q3. We believe that number should grow appreciably, Q2 was the anomaly and it's not a trend.

Sasa Zorovic - Goldman Sachs Securities

Yes

James Budge - Executive Vice President and Chief Financial Officer

and I guess DVD Q1--

Sasa Zorovic - Goldman Sachs Securities

Go ahead.

James Budge - Executive Vice President and Chief Financial Officer

I was just going to add to that. If we again look at the Q2 in the first half pretty much the entire drop in the entertainment was there in the second quarter roughly flat in the first quarter. So principally we think second quarter was more of an anomaly in terms of trend.

Sasa Zorovic - Goldman Sachs Securities

Again then my final question with sort of this one ACP sort of customer, a major who did not renew, what was sort of really the reason and why sort of would that should be like a one-time event?

Alfred J. Amoroso - President and Chief Executive Officer

The customer did in a new primarily from financial pressures in headquarters.

Sasa Zorovic - Goldman Sachs Securities

I guess slide with others not, we will see of that kind of financial pressures I mean that sort of the tenet is this really important technology?

Alfred J. Amoroso - President and Chief Executive Officer

So the issue with the studios as I said, is they all look at it differently. As you know now, some of the studios uses selectively. Some of the studios uses across of that content and different customers make different decisions at different points in time based upon different facts; so this is a studio that had believed in the use of the technology and the protection that had afforded and at a higher level than the people that we were dealing with decided that they would fairly whole scale cut budget. The question is each of the studios may react to that challenge differently in terms of the areas that they would cut.

Sasa Zorovic - Goldman Sachs Securities

Okay, thank you.

Operator

Thank you, sir. And gentlemen there are no further questions, please continue.

Alfred J. Amoroso - President and Chief Executive Officer

I appreciate everybody coming in the quarter and joining the call. Again, we are not particularly happy at all in the fact that we missed Q2. We do believe that the fundamentals are there for a lot of the things that we are dealing. We are continuing to direct invest in our future and drive the decisions that we think are critical for our success. We believe strongly in our Q3 and remaining part of the year and we look forward to having you join us in the next earnings call. Thank you.

Operator

Ladies and gentlemen, this concludes the Macrovision's Q2 2007 earnings release conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1800-405-2236, entering pass code 11094096. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000, or 1800-405-2236, entering pass code 11094096. AT&T would like thank you for your participation. You may now disconnect. Have a pleasant day.

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