Macrovision Q3 2007 Earnings Call Transcript

Macrovision Corporation (MVSN)

Q3 2007 Earnings Call

November 6, 2007 5:00 pm ET

Executives

James Budge - CFO

Fred Amoroso - CEO

Analysts

Ralph Schackart - William Blair & Company

Sterling Auty - JP Morgan

Brian Thackray - Deutsche Bank

Michael Olsen - Piper Jaffary

Richard Davis - Needham & Company

Alan Davis - D.A. Davidson

Horatio Zambrano - Jefferies & Company

Andrew Hargreaves - Pacific Crest Securities

Robert Stone - Cowen and Company

Presentation

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Macrovision's Third Quarter 2007 Earnings Release Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, conference will be open for questions. (Operator Instructions)

This conference is being recorded Tuesday November 6, 2007. I would now like to turn the conference to James Budge, Chief Financial Officer. Please go ahead, sir.

James Budge

Thank you, Eric and welcome everyone to Macrovision's third quarter 2007 Earnings Call. I am James Budge, CFO of Macrovision. I am pleased to be joined today 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 forecast of future revenues and earnings, business strategies and product and acquisition 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 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, asset impairment charges, equity-based compensation, and restructuring and other charges.

We have presented 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.

As a final piece of housekeeping, the reconciliation, a replay of this conference call will be available on the Investor Relations page of our website until our next quarterly earnings call.

I'd now like to turn the call over to Fred.

Fred Amoroso

Thank you, James and thanks to everyone for joining us today for our Q3 2007 earnings call. In Q3, we achieved earnings of $76.8 non-GAAP net income of $26.3 million, non-GAAP diluted earnings per share of $0.48, and cash flow from operations of $12 million. All record results for any third quarter in Macrovision’s history.

As discussed in our Q2 earnings call in August, we had a large software transaction and a contract dispute negotiation with Motorola neither of which closed as expected at the end of Q2. We are pleased that both transactions closed in Q3 and help to makeup the gap to allow us to maintain the same annual revenue guidance that withheld all year.

I’m pleased with our third quarter results, as they demonstrated excellent execution and additional fruit points validating our strategy. The results also provide early validation that we made a good decision to align across business units, as we have tightened up our operational focus and delivered solid and improving bottom line results.

Also, as you may have read in the separate press release, we announced earlier today that we have entered into a definitive agreement to acquired All Media Guide, AMG: A metadata content company that provides descriptive content covering video, music and games.

AMG has been accumulating and creating deep information for over 15 years and we are extremely pleased to invite their employees to be part of our team. I’ll comment more about this and other items latter in the call.

But at this time, I’d like to turn the call back over to James to review the Q3 financial results in more depth. James?

James Budge

Thank you, Fred. We did have a strong financial result for the third quarter including $76.8 million in revenue. Non-GAAP net income of $26.3 million and non-GAAP diluted earnings per share of $0.48. As Fred indicated, all record results for any third quarter in the company’s history.

Revenue through the first nine months of the year grew 15% year-over -year at a business unit level nine months performance was as follows; embedded solutions revenues were $67.3 million and contributed 34% of total revenue.

Entertainment revenues were $35.4 million and contributed 18% of total revenue, the studio portion of which was roughly split 65, 35 between MPAA and independent studios. Software revenues were $81.2 million and contributed 41% of total revenue. And Distribution and Commerce revenues were $15.2 million and contributed 7% of total revenue.

Non-GAAP gross margin for the third quarter was 88% up from 83% in the comparable period in 2006 as a result of the strong revenue in the quarter. Our non-GAAP operating expenses in Q3 were $37.5 million, an increase of 7% over the $34.9 million in non-GAAP operating expenses in Q3, 2006. The absolute increase in operating expense primarily resulted from Mediabolic related expenses that were not present in the comparable quarter in 2006.

Non-GAAP operating income for the third quarter was $29.7 million or 39% of revenue, up 126% from the $13.2 million in non-GAAP operating income in Q3 2006, which represented 23% of revenues in that period.

Our non-GAAP net income for the third quarter was $26.3 million, up 121% from the $11.9 million posted in the third quarter of 2006. Our non-GAAP earnings per share for the second quarter were $0.48, up 109% from the $0.23 posted in the third quarter of 2006. We are very pleased that our revenue and earning result exceeded the high end of the estimates we previously provided for Q3.

As we described last quarter, 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 overhead such as infrastructure, marketing and administrative functions. These results are also presented in a non-GAAP format, excluding one-time or non-cash charges such as employee stock compensation expense, intangible asset amortization, asset impairment charges and restructuring charges.

For the nine month ended September 30, 2007, Embedded Solutions generated $55.9 million in segment operating income for a margin of 83%. Entertainment generated $21.9 million in segment operating income for a margin of 62%. Software generated $30.4 million in segment operating income for a margin of 37%. And Distribution and Commerce generated $17.5 million in segment operating losses.

You may recall that in our Q2 earnings call in August, we indicated that we were taking actions to improve the financial performance of the Distribution and Commerce business unit .A business unit, which experienced substantial losses in the first half of the year.

We decided in the third quarter to abandon our project, where we had made some investments over the past year and half. The results of abandoning this project resulted in a GAAP asset impairment charge of over $8 million and help to reduce our non-GAAP quarterly losses for the Distribution and Commerce business unit from over $6.5 million in each of the past two quarters to under $4 million in this Q3 just ended. The savings from the abandonment of this project are reflected in our estimates going forward and we expect these savings and other measure will help result in profits for this business unit in the future.

As to the balance sheet, our cash and liquid investments balance at the end of September was $493 million down $30 million compared with the $523 million, as of the end of June primarily as a result of our repurchase of $50 million of our stock during the quarter offset by cash generated from operations.

Our DSO for Q3 was 73 days, which is about where we would normally expect to see it. And I would remind everyone of our announcement on September 18^th that we had completed our dent existing $100 million stock buyback program and authorized a new $60 million program, which we have not yet executed again.

As to estimates going forward, given only one quarter remaining in 2007, we know the range of our full year revenue estimate to $280 to $285 million. We are increasing our full year diluted non-GAAP earning per share estimate however from a range of $1.33 to $1.43 per share to a new range of $1.41 to $1.46 per share.

In Q4, we expect revenue to be in the range of $80 to $85 million and diluted non-GAAP earning per share to be in a range of $0.47 to $0.52. As we have done in prior years, we will provide 2008 estimates during our regularly scheduled Q4 and full year 2007 earnings call next February. We are delighted with the transaction with AMG that we announced today.

Well, we have not yet provided baseline organic 2008 estimates. We do expect the addition of AMG to add approximately $20 million to the 2008 revenues and $0.05 to the 2008 diluted non-GAAP earnings per share.

The consideration we expect to pay for AMG is $82 million in cash and the transaction is subject to customary closing conditions. We do expect the transaction to close by the end of year.

With that now I would like to turn the call back over to Fred. Fred?

Fred Amoroso

Thank you, James. I would like to discuss some of the highlights from each of the respective business units in the quarter and as follows. First, with the Embedded Solutions team, that business grew 191% year-over-year with growth in each geography.

As previously announced, we settled the dispute with Motorola. Also, it was previously announced, the terms of this agreement are confidential and thus we will not be commenting on any specifics relating to the settlement, in my prepared comments or in response to the Q&A.

Ultimately, the process resulted in a very good relationship with Motorola. Discussions took place at a high business level between the organizations and we believe that Motorola has made a strong commitment to the continue deployment of ACP technology in their relevant devices.

That said well, Motorola was a significant transaction for us in Q3. There were other large hardware licensing agreements relating to ACP in various devices. Even without Motorola we achieved significant year-over-year growth for this business unit. So, on an overall basis, the Embedded Solutions business continues to drive ACP usage and devices as the world changes to an increasingly digital distribution of content.

Regarding on middleware offering, we are making continued progress developing our relationships with set-top box manufactures as well as refining our strategy to participate in digital TV devices. We are expecting a number of design wins in Q4, as we are working towards final approval stages with the number of the device manufactures.

Next, on to entertainment: Entertainment revenues declined 18% year-over-year primarily due to loss of an MPA customer that we had mentioned in the previous earnings call. DVD volumes were up significantly, however on a sequential basis that coupled with increases in system operated revenues contributed to sequential quarterly growth of 34% for our entertainment business unit.

We continue discussions regarding our offerings with the major MPAA studios regarding bundle deals and while, we did not close any bundle deals in Q3, we are pleased with our progress and expect to have one or two done by the end of the year.

Looking forward to Q4, there are a number of blockbuster hits being released for the holidays that [got us] to expect the fourth quarter to be our biggest quarter of the year for the entertainment business unit as it has been in prior years.

Now, on to software: Software business unit grew slightly in Q3 with growth [in our] installation products offset by declines in our licensing products. We continue to enjoy growth in installation products driven by Vista deployment on a part of ISVs and expect continued growth in Q4 and 2008 as Vista is slowly, but increasingly being adopted with many enterprise environments.

We are building new opportunities for our compliance monitoring solution some of which are added to our licensing opportunities. As we analyze our software business, we have identified that there is opportunity to assist software providers and streamlining their back-office systems as it relates to how they provide end users entitlement information. Some software providers have up to 50 different systems serving their customers with one of them well integrated into existing ERP or CRM systems.

To address this, we will be launching in Q4 a solution called Entitlement Relationship Management ERM if you will, which combines the best of our existing products with expanding capability to allow software provider to streamline serving entitlements to end users.

We are excited about this new solution the overall software business pipeline looks solid going in the Q4 and we are optimistic about achieving our seasonal strength in our Q4 results within software. Latter this month, we will be hosting our annual SoftSummit event handed by many of the leading software publishers and enterprises. This is typically a key event for us. This is an opportunity to move deals along the sales cycle.

And finally, Distribution and Commerce strategy in business units in June of this year has started a payoff as we are getting more management focus on a number of the areas of our business. During Q3 the Distribution in Commerce Business unit took several steps to improve its performance. We see total development efforts on a new commerce platform resulting in significant spending reduction.

Further, the games operations were reorganized to streamline packaging and merchandising operations and we expect the reorganization to provide substantially greater increase in the throughput for adding new games into our distribution network. Canceling the new commerce platform project was in response to a refine in our core strategy to focus our attention on Commerce and Distribution of entertainment media. And we know longer intent to expand into software commerce as a future opportunity.

Fundamentally, one of the reasons why we acquiring AMG is to strengthen our commerce efforts. As it relates to expansion in the games business we signed 30 new agreements, 6 publishers, 21 new distributors and 2 new SafeDisc agreements and establish new agreement with DoubleClick for serving ads on our distribution network.

While advertising revenue increased quarter-over-quarter and it still a very small part of our revenue stream. Further with the redirection of our efforts away from the new platform, we released a new version of our existing ActiveSTORE platform that delivers new features to our games distribution partners.

Back to the Rights products, we will please to close two seven figure deals with key customers in Q3 and we are seeing steady improvements in the operating results for the solution. Earlier I mentioned that we have signed a definitive agreement to acquire All Media Guide. AMG is the leading provider of entertainment descriptive content and content management technology.

You may recall the all music guide that was permanently featured at major music retailers. And consumers have migrated more towards digitally distributed content, AMG has leveraged this opportunity to take their wealth of media metadata including not only artists and track info, but also editorial can move it online.

AMG's metadata encompasses information for more than 11 million song tracks, 1 million unique albums millions of compact disks more than 500,000 cover images, 8 million streaming sound files and tens of millions of relational links. This is to our knowledge the largest database of its kind, and we believe that AMG is the preeminent supplier of metadata in the field.

For each media type, they offer rich deep data that includes relationships between the artists and other works such as this actor was also in this movie and this artist was in this band. As well as original content in the form of reviews by providing these contextual relationships between media, AMG enables its customers, who include many major e-tailers to drive incremental sales.

AMG has secured the ability to participate in subside opportunity and some of its contracts. AMG's customer list is a “who’s who” of online movie, music and game distribution and it has generated meaningful profitable revenue right from the start and also plays a role in our strategy to provide better solutions to CE manufacturers to drive into digital living room.

Not only this metadata readily doable, across many popular media sites; AMG has become licensing its media recognition technology and music discovery software to CD manufacturers on devices such as set-top boxes, media extenders, car stereos, home audio receivers as well as mobile. Some very well known devices including next generation games consoles already include AMG’s recognition technology, which allow for consumers to not only identify the artist track and title information of songs for example, but it will also generate play list of a lady content and as mentioned on the internet side to purchase additional content.

Perhaps you have experienced the situation, where you filling your hard drive with downloaded content, but since the identification text are missing; you don’t know what you have. This technology solves that problem. Where as Mediabolic enable users to move rich media from room to room or device to device, AMG informs consumers of the descriptive information behind the data to enhance the discovery process.

It is no wonder there, where that our Mediabolic customers are readily beginning to adopt both of these technologies at a similar point in their development cycles. As such, we believe there are significant opportunities to generate revenue synergies by integrating the two technologies, initially the sales level and later on at the product level.

Finally, AMG has well known websites such as www.allmusic.com and www.allmovies.com. That our end user destination sites offering us an opportunity to generate advertising revenues as well.

So, on an overall basis as you could see from the changes we have made in our business over the last quarter, with increased focus on the business units. We are finding our strategy to fundamentally drive our position and transformation of the emerging digital living room and expanding our strategy, protecting content, enabling the new platform and participating in the services around Distribution and Commerce.

As part of the strategy, we are increasingly becoming a B2B2C company, with value being increasingly driven to enhancing the end user consumer experience to discover, to acquire, to manage, and to enjoy digital content through of a number of distribution channels and new devices.

Well, at the same time protecting the content of the publishers looking to monetize that content through these new opportunities. We are becoming more focused in the solutions we are developing and capabilities we are looking to acquire and now the efficiencies, we expect as we operate our various business units.

So now I would like to turn the call back over to the operator, so we can respond to any of the questions that you may have. Eric?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Ralph Schackart with William Blair. Please go ahead.

Fred Amoroso

Hey, Ralph.

Ralph Schackart - William Blair & Company

Hi, Fred, how are you?

Fred Amoroso

Thank you.

Ralph Schackart - William Blair & Company

Good, thanks. I give the shot here, Fred, on the Motorola, and I know you said you were not going to answer any questions on it. But can you give us a sense for the order of magnitude of Motorola in the quarter and also to can you sort of let us know what the 10% customer in the quarter?

Fred Amoroso

No.

Ralph Schackart - William Blair & Company

All right.

Fred Amoroso

Good shot though.

Ralph Schackart - William Blair & Company

It’s a try. Can you frame a little bit more for us if you could please on the AMG business just more of an embedded solutions is it licensing model per unit or per quick business model? Can you give us a little bit more color there?

Fred Amoroso

Actually, have a number of different arrangements by subscriber could be by click that revenue there is participation in rep share on some sale a lot it is increasingly started to be embedded as part of devices, so this per unit royalties very typical to what we do with our other CE contract holders.

They have websites, as I mentioned, that have ad revenue opportunities. And then for the e-tailers and retailers, a lot of it based upon the size of those distribution groups and how big they are. So, they actually have Ralph, quite a broad array of licensing mechanisms.

Ralph Schackart - William Blair & Company

Then on the per unit royalty side at this point, what percent sort of high level is that of the business today and is that sort of the disproportionate amount of growth for the business going forward?

Fred Amoroso

Definitely a significant portion going forward. Today, it’s about 20% or 25%, about 20%.

James Budge

And obviously, with what we are doing with Mediabolic, we think the strategic synergies of linking that and adding more value to the Mediabolic platform is the key part of synergies we expect to drive in the future?

Ralph Schackart - William Blair & Company

At present, it’s longer-term strategic question. If I look at your current four lines of business today, three of which really are not growing, although the profitability is getting better and the distribution business, how are you thinking about the portfolio of assets today on a longer-term basis, and sort of, I guess, in the near and medium term, do you expect those businesses return back to growth?

James Budge

We do, and we expect all of the businesses to return back to growth. The one thing I do want to highlight, Ralph, is that obviously, as part of our long-term plan, where we have different components of how we expect to provide increase value to our customers within each one of those business units right.

So, just for example, we are leveraging our position with ACP and extending it into the entertainment unit, while, we are really enjoying significant growth in hardware licensing. If you would look at ACP across both sides of our business ACP overall is growing, and growing very nicely.

So, we are efficiently separated our business by entertainment and embedded solutions, but if you combine them ACP is not as embed as a whole. That said, we recognized, where analog is going to digital and we’ve plans for a role that we could play in the transformation of analog to digital going forward just not ready to describe those.

Ralph Schackart - William Blair & Company

Okay. One last, and I will turn it over. James, you beat this quarter by about $0.16 in the high-end and the EPS guidance was now pushed up by the same order of magnitude just curious if there is something rolling in Q3 or is this reflecting conservatism on your part; I just want a little bit more color, if you please?

James Budge

Ralph, some of the Q4 business was expedited into Q3 and that’s rolling now into Q4.

Ralph Schackart - William Blair & Company

Okay, great. Thanks guys.

James Budge

Yep.

Operator

Our next question comes from Sterling Auty with JP Morgan. Please go ahead.

James Budge

Hi, Auty.

Fred Amoroso

Hi, Auty.

Sterling Auty - JP Morgan

Hi, guys, thanks. Sorry about the background noise. I mean, in their part. But two questions: number one, now that Motorola has done, how should we think about the run rate business in the embedded unit, and what types of growth from here not only in the fourth quarter, but going into ’08?

James Budge

Yes. I mean, as you see, it’s growing pretty phenomenally this year, just over 100% over nine months basis. That’s probably not sustainable, as you go forward, to have 100% growth rate going forward. But certainly, still a vibrant business is something we would expect at least 25% to 30% on going forward.

Sterling Auty - JP Morgan

Okay. And then just on the Motorola, I don’t look at receivables, I’m assuming that you did not collect on the settlement, where collection coming maybe in the fourth quarter?

James Budge

You are right. That we did not collect on that in the third quarter that would be a big payment in the fourth quarter most of that will be paid in the fourth quarter.

Sterling Auty - JP Morgan

Okay. So, cash from operations in the fourth quarter could be up sequentially?

James Budge

It will definitely be up sequentially. Fourth quarter’s traditionally our biggest cash quarter of the year, and I’d expected to be the same this year.

Sterling Auty - JP Morgan

Okay.

Fred Amoroso

Q3 is traditionally the lowest cash.

James Budge

Yeah, Q3 has been the lowest, since the beginning of time. We have our semiannual bonus payments and we have tax payments in the third quarter.

Sterling Auty - JP Morgan

Hi, great. I will take the best of one. Thanks you guys.

James Budge

Fair enough.

Operator

Our next question comes from Brian Thackray with Deutsche Bank. Please go ahead.

Fred Amoroso

Hi, Brian.

Brian Thackray - Deutsche Bank

Hi, guys, how are you?

Fred Amoroso

Good.

Brian Thackray - Deutsche Bank

So, Fred, on the bundle studio deal, it might just we need, but indication [friction] level is little bit high, seems to have one or two done by the end of the year. Can you give us some further insight in terms of what makes strategic confidence such we able to closes as it has been an ongoing issue here for the while?

Fred Amoroso

Brian, I guess I’m closer to the conversation than you are. So, I said, to reactive, we are making progress.

Brian Thackray - Deutsche Bank

Can you talk about the potential economics around the bundle deal on an aggregate basis in terms of could you said before, that you could always get it done at a certain price level? You changing maybe the amount of money or the economics you’re thinking out, when you think about these bundle business that helping accelerate the process?

Fred Amoroso

So, look, I have not been shy at talking about the changing landscape within the studio industry and how my expectation has been for a consistent period of time. That the price points of the royalty to the studios come down and we leverage that for substantial increase in licensing technologies. And I’d think that’s not any difference in the way we would do it in the future.

The other opportunity that we have is also to gain new customers that create new sources of revenue that we had before, as the potential source of additional revenue growth going forward.

Brian Thackray - Deutsche Bank

Okay. And if I look at the embedded solution side, if I strip out Motorola, you mentioned you had some other onetime hardware licensing agreements this quarter. If I kind of strip out, I try to normalize for what it’s getting a little bit of Sterling’s question, strip out kind of all the one time yields in the hardware licensing side just grow, would you be going to kind of characterize or quantify that?

Fred Amoroso

No, we won’t quantify that and I guess a point of clarification is these are not one time events. We do these kinds of arrangements and have been doing them for years. This is a very vibrant piece of the embedded solution business.

So, not good to characterize it, has…these are just a couple of things we did in the third quarter. We have the same type of deals for this kind of sizes in the fourth quarter, as we are looking forward to our pipeline and this is a very key part of our embedded solutions business.

Brian Thackray - Deutsche Bank

Okay. And final question, if I think about the stock buyback the opportunity, can you guys just update us on your thoughts there with the stock at these levels and with this acquisition, will you guys going to acquire B2B because of this acquisition of blackout periods?

Fred Amoroso

During the blackout periods, because of the time between at the end of the quarter and the earning release, that period will come off three days after this call--that doesn’t necessarily mean we are going to be out buying our stock, we will buy at opportune times and to the extent we see value in the stocks and we would certainly, we would expect to executing at that plan.

Brian Thackray - Deutsche Bank

Okay, thank you.

Fred Amoroso

So, just as a point of clarification, Brian I didn’t say that they were one-time charges. I said that they were other large hardware licensing agreements relating to ACP embedded devices. And to underscore James' point, this is a very natural part of the way that we audit and drive additional fees with the vast distribution of our technology through 100s and 100s of avenues of manufactures.

Brian Thackray - Deutsche Bank

Understood--just trying to figure out on a going forward basis, what to expect.

Fred Amoroso

Understand, yeah, okay.

James Budge

Operator?

Operator

Yes, sir. Our next question comes from Michael Olsen with Piper Jaffray.

Fred Amoroso

Hi, Mike.

James Budge

Hi, Mike.

Michael Olsen - Piper Jaffray

Hey, just a quick question and follow-up from an earlier one. Looking at the segments and looking at the software segment essentially flat year-over-year and can you just talk about specifically in that segment, why we should expecting to see growth there and specially kind of what some of the catalysts, we should be looking for audit to see renewed growth there?

Fred Amoroso

So, Q3 is typically a seasonally weaker, seasonally weak quarter across all our software business. As it’s the peak vacation period, lots of things don’t get done. And so that certainly true for us as well as everybody else, and we experienced some of that. As we look in Q4, the pipeline does look strong, we see a number of seven figure deals that are out there in a pipeline.

We are in active discussions with customers and the Q4 more than anything Mike, is in fact the lot of companies, enterprises will flush out their budge and make significant purchasing decision as they ramp up their business operations for next year. So all of that those factors are helping us in Q4.

Michael Olsen - Piper Jaffray

Okay. That’s helpful. And then you mentioned that you’re not going to adding the e-commerce software delivery platform and can you just talk about why the change on that front.

Fred Amoroso

Two reasons to the question: number one is as we evaluated the platform and what we were doing for investing in the broadest part of that platform for not just games, but other content types we realized that the investment wasn’t going to materially drive results in the timeframe that we wanted. So, there was a very tactical equation to that.

On a strategic equation as we looked at Distribution and Commerce, as we looked at our middleware, as we looked at penetrating the evolving transformation of entertainment in the home. The software commerce no longer fit into the ability for us to drive synergy across Distribution and Commerce in that area.

And so, we refined our focus to be part of the enablement of the evolving entertainment development in the home to be leveraging our middleware, as part of the both OCAP and DCR plus processes with the cable operators as well as with the CE device manufacturers and to enable more of a consumer value proposition driven north of for example metadata, which is the reason why, we bought AMG.

Michael Olsen - Piper Jaffray

Okay. And then just kind of on that topic regarding middleware any help you can give us as far as timing of Scientific Atlanta or just any updates on that front?

Fred Amoroso

Well, Scientific Atlanta's introduction there they are continuing to develop the capability as part of their next generation solution. I’m not clearly know, what we possibly offer, what we think their rollout plan is for that, that is the Scientific Atlanta decision. The other comment so it's perhaps that you were asking is where are we, with other set-top box manufacturers and we are in good conversations, a number of them are in evaluation periods with the technology.

Michael Olsen - Piper Jaffray

Okay. And then just one another quick one here, as far as seasonality is pretty clear for entertainment and software segments, it’s been consistent there, but we don’t have much history on the Embedded Solutions segment. Could we get a flavor for what seasonality is there and I guess what you expect as far as, is there specific seasonal trend is going to emerge?

James Budge

No, unfortunately, no. It bounces around a little bit with when some of these large transactions yet. We do expect a very strong fourth quarter again from Embedded Solutions, but it’s not going to be at the magnitude of $33 million you just saw here in the third quarter.

Fred Amoroso

And honest, as we get into devices that come to market and these are consumer devices, whether you are seeing TV sense or whatever, you can argue at some point that we might see holiday shopping increases in Q4, but we are several years away from that likely.

Michael Olsen - Piper Jaffray

Okay. And, James, one last one -- is Embedded Solutions going to, as AMG, is going to fit with the Embedded Solutions?

James Budge

No. AMG will go into the Distribution and Commerce group.

Fred Amoroso

But there is a part of the AMG team that deals with some of the technologies that are in fact embedded know how close linkage with our Embedded Solutions team, so we can drive synergy through those products.

James Budge

That’s right.

Michael Olsen - Piper Jaffray

Right, thanks.

Operator

Our next question comes from Richard Davis with Needham & Company. Please go ahead.

Fred Amoroso

Hi, Richard.

Richard Davis - Needham & Company

Hey, thanks. With regard to kind of the whole concept is enabling consumers to view content that they paid for in three screens. Steve Jobs calls Apple TV a hobby. So, is—one, that help or hurt to your effort; two, technology piecewise--do you feel that you have the pieces put together or do you need a few more things to make this thing get to a tipping and three could you assemble this process without doing a bundle deal with studio? In other words. Is there just be so much brain damage to do, that is just not worth it do it that way?

James Budge

Let me take your questions and I think we struggle remembering the three…

Richard Davis - Needham & Company

I know, this is.

James Budge

Let’s say, the Apple, you are testing my brain here.

Richard Davis - Needham & Company

Okay.

James Budge

Don’t get those in the script.

Richard Davis - Needham & Company

Okay.

James Budge

The Apple TV thing, look Apple TV note but the big issue for Apple is people like them [Max] people love the iPhones, the iPod, the Apple TV was really an extension of above and people I think don’t particularly like closed architectures. So, one of the most important differences between what Apple is doing, what we are doing is to provide an enablement across the distribution of the content and the enabling of the content in open environments that’s a big, big issue.

Do we lead the bundle deals with the studios they are absolutely not connected in anyway? The issue around fundamental and broad distribution of content to the home through middleware is going to be enabled through a DRM of some sort. The DRM is not part of the bundle deals. So, they are completely disconnected. There is no relationship to what we do with the bundle deals and any of the progress that we would be making on our middleware platform.

As to the point that we have all of the components of our offering I think, we’ve got a lot of the good fundamentals and the lot of the foundation. I think there are a few other things that if we had available to us could give us that much more capability and that much more end user value to our offering.

Our thought process is the more valuable, we make this to the end consumers, the more sort after our platform will be for the CE device manufacturers, who will struggle to bundle that value that we add into our middleware platform.

Richard Davis - Needham & Company

Well, good job answering all three without forgetting one. So, thanks a lot.

Fred Amoroso

No, Steve wrote them on the board.

Richard Davis - Needham & Company

Hey, you guys you cheated. All right thanks a lot.

Fred Amoroso

Okay.

Operator

Our next question comes from Alan Davis with D.A. Davidson. Please go ahead.

Fred Amoroso

Hi, Alan

James Budge

Hi, Alan.

Alan Davis - D.A. Davidson

Hi, guys. Just apologize if I missed this. Can you give us update on independent studio bundling deals in the quarter?

Fred Amoroso

We didn’t have any additional ones in Q3, Alan.

Alan Davis - D.A. Davidson

Okay. And then can you give us a sense for AMG's current run rate organic growth rate? And then. Perhaps. Maybe kind of the low hanging fruit in terms of what devices we may pursue that technology as you expand what they are doing?

James Budge

I will touch the first one. Fred wants to touch the second I can get that as well, but. So we said that we would expect $20 million from AMG in 2008 is coming off of about $16 million a year, so in 2007. So it's we think it's nicely attainable in 2008. As far as devices Fred mentioned that they are in next generation game console, we will leave that to you to guess, which one that might be if I won’t specific devices that they are in.

Fred Amoroso

They’re also coming out with new products that are currently called [Laso] in path history that provide additional value, for example been able to recognize tunes from audio tracks etcetera. We will talk more about the plans for AMG as we get into the next earnings call.

Alan Davis - D.A. Davidson

Okay. Are there any businesses, there enough significance that perhaps you might not be entered or you cancelled?

Fred Amoroso

No.

Alan Davis - D.A. Davidson

And then, lastly, that as you get out of the software distribution business, are not going to enter that market. Does that change in anyway your plans for what you are doing in game distribution?

Fred Amoroso

Right now, we’re looking at, the one thing, I’d say is, we look at all of our business units, as we do on a continual basis for a strategic and operational fits and that always [we say].

Alan Davis - D.A. Davidson

Okay, great. Thanks guys.

Fred Amoroso

Thank you.

Operator

Our next question comes from Ross MacMillan with Jefferies & Company

James Budge

Hi, Ross

Horatio Zambrano - Jefferies & Company

Hi, thanks this is Horatio for Ross. So, I just wanted a clarification on the asset impairment charge for Distribution and Commerce business and the losses that you had in the prior quarters and going forward?

Fred Amoroso

Yeah. Another question, you just want me to give you some more color around that.

Horatio Zambrano - Jefferies & Company

I just, I actually didn’t catch all the numbers. I wanted to get just a clarification on that?

Fred Amoroso

Sure. So, we had lost about $40 million in our Distribution and Commerce group in the first half of 2007; a lot of that came from the next generation platform that we are building that, as we were building it, and thinking consulting dollars into buying software for that. We were capitalizing that on to our balance sheet.

When we decided to abandon the project, we wrote that asset off of the balance sheet and that was a total charge of about $8 million in the quarter. And writing off that charge, and no longer expanding any energy or resources on that, allowed us to reduce our losses in Distribution and Commerce to below $4 million for the quarter as compared to the $14 million in the first half.

Horatio Zambrano - Jefferies & Company

Okay, got it.

Fred Amoroso

Enough color for you?

Horatio Zambrano - Jefferies & Company

Yeah, that's what I need. The other question was just on AMG’s competition. I know there used to be a company called Muze in New York that did sort of similar content for aggregation and complexion for digital music, and then Apple also have the tagging tech, the music discovery feature. So, is Apple customer and who else are the major competitors for AMG just a curiosity?

Fred Amoroso

You hit…the two big players were Muze and AMG. And I guess there is a series of blogs, or individuals, who might aggregate some information for more of a social networking environment and we don’t really certainly not now the deal is not closed yet and liberty to talk about specific customers of AMG.

Horatio Zambrano - Jefferies & Company

Okay. And then just last question the design wins you mentioned for that you expect by the end of the year with those specific to Mediabolic or just generally you work with us set-top box manufacturers?

Fred Amoroso

That is relating to our middleware.

Horatio Zambrano - Jefferies & Company

Okay, thanks.

Fred Amoroso

Thank you.

Operator

Our next question comes from Andrew Hargreaves with Pacific Crest Securities. Please go ahead.

Fred Amoroso

Hey, Andrew.

James Budge

Hi, Andrew.

Andrew Hargreaves - Pacific Crest Securities

Hi, just a wrap all the Mediabolic question. Are you guys still on the run rate kind of that you expected couple of quarters ago?

Fred Amoroso

We are. The business is doing what we expected it to do financially in 2007, and there is a nice pipeline and good prospects for meaningful revenue in 2008.

Andrew Hargreaves - Pacific Crest Securities

Okay. And then on the Distribution and Commerce side how much without this, how much ongoing investment and expenses are you expecting without software piece?

Fred Amoroso

Well, there always some level of investment across all of the business units through R&D or whatever efforts. We do still expect to spend money in the Distribution and Commerce group. We would expect to be profitable and fairly short order.

Andrew Hargreaves - Pacific Crest Securities

And then to AMG actually generate revenue from the content providers or is it all through on the CE guys and through end markets around the content?

Fred Amoroso

To the best of my knowledge, not the content guys. It’s all around e-tailers, portals, retailers, physical retailers and CE device manufacturers.

Andrew Hargreaves - Pacific Crest Securities

Okay. Do you guys and may be you are not front up along on the process here, but you know how much operational improvement or how much change you will affect once the acquisition is done?

Fred Amoroso

So, it’s a great team and now that AMG is a potentially in the future would be a public company. I would expect we may have some of their employees listening into this call with some interest. And I would share that one of the things that we were most impressed with was the skills and capabilities that they have put together in the business that they've developed.

So, we’ll be if for us to screw something that they've generated so well themselves. We look forward to them to be part of the team. Their editorial staff and content is great in terms of enriching the information as well and making it more meaningful. So, to be very frank expect for probably creating some efficiencies in overall operations, accounting and finance and legal and the natural things. We actually, we’ll be investing in the AMG team to fuel even faster growth.

Andrew Hargreaves - Pacific Crest Securities

Okay, thank you.

Fred Amoroso

Yep.

Operator

The next question comes from [Robert Stone] with Cowen and Company. Please go ahead.

Robert Stone - Cowen and Company

Thanks. Good evening guys. Just, I think continuing with AMG, can you comment on the growth profile what you have seen historically from the business and what you think that it can do was a part of Macrovision now?

Fred Amoroso

So, let me just characterize it. It’s just pretty quick, if you realize we announced it today. So, we signed a definitive agreement within four days just because of the disclosure requirement. So, this is all pretty fresh.

As we did the due diligence one of the things that we saw is that the company, as we said started over 15 years ago they have got a physical catalogue of information that probably rivals as matter of fact somebody was telling me that they have some linkage with this [Sony] and for putting some of old content and cover audit et cetera, it goes back, so far.

They started out predominantly as a metadata company accumulating the information and licensing the information. As of late they have started to develop more technology solutions leveraging that metadata.

And obviously that's what we really thought highly of is that the ability to unleash the value of the metadata and bring it to life to the end consumer through the transformation of what’s going with the shift from physical to electronic and penetration of video and music into the home is a big plus that links strategically with what we are doing with our middleware platform. So, the technical competency coupled with the metadata, are two of the key assets that we really saw.

Robert Stone - Cowen and Company

Okay, great. Thanks very much.

James Budge

Yep

Operator

(Operator Instructions). Our next question is a follow-up from Ralph Schackart. Please go ahead.

Fred Amoroso

Hi, Ralph

Ralph Schackart - William Blair & Company

Hi, Fred. One quick follow-up on AMG, just to understand that the 20% to 25% of the business that CE licensing business, is the technology actually sit on the silicon or is it in the box. I guess, it is on the game side or is there also sort of service component, where some of the data might come in through the Internet, I just want to sort of clarify that point?

Fred Amoroso

So, yes, I mean, obviously if it’s in devices, it’s sitting on silicon somewhere, it’s an application that sitting with APIs that links to the other components whatever that particular device is whether it’s set-top box or either it’s a player and when obviously you get into the Internet from an e-tailer, retailer perspective it’s the discovery of the information and relational aspects of the information that is very much in the software application embedded in the distribution side or available to the distribution side.

Ralph Schackart - William Blair & Company

So, it’s an enablement technology that will sit side by side on the telecom with others in [this phase]?

Fred Amoroso

Yes.

Ralph Schackart - William Blair & Company

Okay, great. And is there anyway, you can sort of give us a sense of the royalty, per unit royalties at this point or that something do you want to wait until?

Fred Amoroso

No again. I think we’d wait until after the transactions closed and we will provide color maybe the next call.

Ralph Schackart - William Blair & Company

Okay, that’s fair. Thanks Fred.

Fred Amoroso

Thank you.

Operator

At this time, I’m showing no additional questions in the queue. I’d like to turn the call back over to management for their concluding remarks.

Fred Amoroso

So, thank you everyone for joining us in the call. We are quite pleased certainly after the follow-up of Q2 that we have reestablished our full year guidance. And we look forward to getting together in the next call, when we will go through the full year 2007 and Q4. Thank you.

Operator

Ladies and gentlemen, this does conclude the Macrovision third quarter of 2007 earnings release conference call. If you would like to listen to a replay of this call one will be available by dialing 800-405-2236 or internationally at 303-590-3000 and entering pass code 11099203 followed by the # sign.

Once again, those numbers are 800-405-2236 or internationally at 303-590-3000 and entering pass code 11096203 followed by the # sign. We would like to thank you for using AT&T teleconference. You may now disconnect. And have a pleasant day.

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