Macrovision Corporation Q4 2007 Earnings Call Transcript

Macrovision Corporation (MVSN)

Q4 2007 Earnings Call

February 21, 2008 5:00 pm ET

Executives

James Budge - Executive Vice President and Chief Financial Officer

Alfred J. Amoroso - President and Chief Executive Officer

Analysts

Mike Olson – Piper Jaffray

Sasa Zorovic – Goldman Sachs

Sterling Auty – JP Morgan

Richard Davis – Needham & Co.

Ralph Schackart – William Blair

Brian Thackray – Deutsche Bank

Alan Davis – D.A. Davidson.

Andy Hargreaves – Pacific Crest

April Horace – Janco Partners

Presentation

Operator

Welcome to Macrovision’s fourth quarter 2007 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to James Budge, CFO.

James Budge

Welcome ladies and gentlemen to Macrovision’s fourth quarter 2007 earnings conference 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 all statements made during our conference call that are not statements of historical fact, including but not limited to statements regarding the company’s forecast of future revenues and earnings, business strategies and product plans and acquisition divestiture plans, constitute forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-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 items, such as amortization of intangibles from acquisitions, asset impairment charges, equity-based compensation, and restructuring and other charges.

Our results also include non-GAAP measures for revenues from businesses considered to be discontinued operations for accounting purposes as of December 31, 2007. We have presented this collective non-GAAP information because this is how we report our business for our internal financial reporting and measurement. 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, Macrovision Solutions Corporation has filed with the SEC a registration statement on Form S-4 containing a preliminary joint proxy statement/prospectus and other documents regarding the proposed Gemstar-TV Guide transaction. Investors and stockholders are urged to read the definitive joint proxy statement/prospectus and such other documents because they contain important information about the proposed transaction.

A definitive joint proxy statement/prospectus will be sent to stockholders of each of Macrovision and Gemstar-TV Guide seeking their approval of matters in connection with the transaction. Stockholders may obtain a free copy of the joint proxy statement/prospectus when available, as well as other documents filed by Macrovision Solutions, Macrovision and Gemstar-TV Guide with the SEC at the SEC’s website, www.sec.gov.

Stockholders may also obtain a free copy of the joint proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the joint proxy statement/prospectus directly from Macrovision by directing a request to Macrovision internal Investor Relations at 408-969-5475 and directly from Gemstar-TV Guide by directing a request to Gemstar-TV Guide Investor Relations at 323-817-4600.

Each company’s directors and executive officers and other persons may be deemed under SEC rules to be a participant and the solicitation of proxies in connection with the proposed transaction. Information regarding Macrovision’s directors and officers can be found on its proxy statement filed with the SEC on March 20, 2007 and information regarding Gemstar-TV Guide directors and officers can be found in its annual report on Form-10K filed with the SEC on February 14, 2008.

Additional information regarding the participants in the proxy solicitation and the description of their direct and indirect interest in the transaction by security holders or otherwise will be contained in the joint proxy statement/prospectus and other related materials to be filed with the SEC when they become available.

And as the final piece of housekeeping today, the reconciliation and replay of this conference call will be available on the Investor Relations page of our website as soon as practicable after this call. I’d now like to turn the call over to Fred.

Alfred J. Amoroso

And thank you everyone for joining us today for our Q4 2007 earnings call. In Q4, we achieved non-GAAP revenues of $78.7 million, non-GAAP net income of $27.7 million, non-GAAP diluted earnings per share of $0.51, and cash flow from operations of $34 million. I’m pleased with our fourth quarter results, as they demonstrate excellent operational execution amidst a significant amount of acquisition and divestiture activities.

In the quarter, we both announced and closed the AMG and BD+ acquisitions, as well as on December 7 announced our agreement to acquire Gemstar-TV Guide.

Further, I am pleased to continue advancing our transformation by having now signed agreements to divest our software and games businesses. These actions enhance our focus and improve our ability to execute on the large digital media opportunity, which lies ahead of us. I will comment more about each of these items later in the call, but at this time, I’d like to turn the call back over to James to review the Q4 financial results in more depth.

James Budge

Thanks, Fred. We had a strong financial results for the fourth quarter including $78.7 million in non-GAAP revenue, non-GAAP net income of $27.7 million, and non-GAAP diluted earnings per share of $0.51. Non-GAAP revenue for the year grew 12% to $277.8 million. 2007 revenue from continuing operations, which excludes software and games, grew 28% to $155.7 million.

This is below the range of revenue guidance we gave of $280 to $285 million, during our Q3 earnings call. As disclosed last week in our 8-K SEC filing, and again in today’s release, software accounted for $112.9 million in revenue. For the fourth quarter, software accounted for $31.7 million in revenue. Both the full year and fourth quarter revenue for software were well below plan, resulting in a slight overall shortfall for the entire business.

At a business unit level, full-year performance for continuing operations was as follows. Embedded solutions revenue was $93.8 million, representing 103% growth over the prior year, and representing 60% of total continuing operations revenue. Entertainment revenues were $50.2 million, representing a 23% decline from the prior year, and representing 32% of total continuing operations revenue.

Distribution and commerce revenues were $11.6 million, representing a 16% increase over the prior year and representing 8% of total continuing operations revenue. Revenues from discontinued operations, software and games, were $122.1 million, representing a 3% decline from the prior year.

Our non-GAAP cost of goods sold and operating expenses from all operations in Q4 were $48.9 million, an increase of 2% from the $47.8 million in non-GAAP cost of goods sold and operating expenses from all operations in Q4 2006. The absolute increase in operating expense primarily resulted from Mediabolic-related expenses that were not present in the comparable quarter in 2006, offset by overall efforts throughout 2007 and in the fourth quarter to reduce expenses.

Non-GAAP operating income from all operations for the fourth quarter was $29.8 million, or 38% of non-GAAP revenues, up 14% from the $26.3 million in non-GAAP operating income in Q4 2006, which represented 35% of non-GAAP revenues in that period.

For the year, non-GAAP operating margin was 30%, higher than the high end of both the 24% to 26% range provided at the beginning of the year, and the 27% to 29% range we estimated in our Q3 call.

Our non-GAAP net income from all operations for the fourth quarter was $27.7 million, up 23% from the $22.6 million posted in the fourth quarter of 2006. Our non-GAAP earnings per share from all operations for the fourth quarter were $0.51, up 19% from the $0.43 posted in the fourth quarter of 2006.

For the year, non-GAAP earnings per share from all operations were $1.45, higher than the high end of the $1.25 to $1.35 range we provided at the beginning of the year, and near the high end of the range we estimated in our Q3 call.

I’ve compared and contrasted actual results against previous estimates to point out that in hindsight, notwithstanding the multiple transactions we were engaged in throughout the year, we were able to manage and operate the business to overachieve the targets we set for ourselves at the beginning of the year, and I’m very pleased with the end results.

At a business unit level, we measure 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.

In 2007, embedded solutions increased segment-operating income by 82% to $77.4 million, which represented a margin of 83%. Entertainment segment operating income decreased 8% to $33.2 million, which represented a margin of 66%, an improvement from a 56% margin in 2006.

And distribution and commerce continuing operation segment operating income generated $6 million in segment operating losses. Distribution and commerce, discontinued operations, generated $14.5 million in segment operating losses and software segment operating income increased 6% to $43.7 million.

Relative to the software divestiture that we announced last week, I’d like to make a few comments. Beginning in mid-2007, we conducted a competitive bid process to sell software. Presentations were given to over a dozen firms, and as you would expect, we narrowed the funnel of interested parties until we finally decided on selling to the firm of Thoma Cressey Bravo. The result was competitive throughout, and we are satisfied with the end result.

As you look at the software segment results provided in the press release today, you’ll see that our software business declined in revenue on a year-over-year basis, and generated segment operating income of $43.7 million in 2007. If you recall our definition of segment operating income, that is not to be confused with the profit or EBITDA that will be leaving Macrovision when the divestiture closes.

Remember that segment-operating income does not include shared corporate services such as marketing, infrastructure and administrative costs. And you should expect that certain of those shared costs will be leaving with the divestiture of the software group, which is allocated and built into the 2007 software segment operating income would have resulted in approximately $25 to $30 million in operating income for the software segment. We believe that approximately seven times trailing EBITDA is a fair price to expect for a business that experienced a revenue decline in 2007.

As for the balance sheet, our cash and liquid investments balance at the end of December was $422 million, down $71 million compared to the $493 million as of the end of September, primarily as a result of $127 million paid for the acquisitions of AMG and BD+ technology, offset by $56 million in cash flow including $34 million cash from operations, our highest quarter ever, $12 million cash released from restricted cash as a result of our exit from the Hawkeye business, and $10 million in proceeds from employee stock purchases.

I would also add that in Q4, we paid over $3.5 million in Gemstar-TV Guide acquisition-related costs such as banking, legal and accounting fees that had they not been included would have pushed our cash from operations amount to nearly $38 million for the quarter. Our DSO for all operations for Q4 was 85 days, which isn’t unusual for a fourth quarter for us, receivables aged greater than 90 days are at their lowest levels in two years. So we’re very comfortable with the quality of our ageing.

As to estimates going forward, consistent with the model, we provided in our SEC filing on January 7, 2008. We estimate that our 2008 revenue from continuing operations will be within a range of $180 to $190 million. This estimate of revenue from continuing operations excludes the software and games businesses for all of 2008 and excludes any impact from Gemstar-TV Guide. We’ll provide updated estimates subsequent to the completion of the Gemstar-TV Guide transaction.

Speaking of the transactions currently in progress, we signed a definitive agreement to sell our games business. At this time the name of the buyer will not be disclosed due the requirements for customer and employee communication, which has recently started and should be completed soon. The consideration for the transaction was $4 million. We expect the transaction to close at the end of March and we expect the software business transaction to close on or before April 1.

As for Gemstar-TV Guide, we are on course to close in early Q2 as originally expected. We’ve cleared our HSR review and filed our S-4. We anticipate comments on the S-4 back from the SEC by next week and expect to file and mail our proxy statements in March for an anticipated stockholder vote in April.

We will concurrently be preparing for marketing our debt offering in March and April to provide us the means to fund the acquisition. Given our expectation that the software sale will close and fund prior to the closing of the Gemstar transaction, we intend to lower the amount of debt financing to be raised down to just over $600 million from the previous expectation of $800 million, still in a mix of a term loan and a bridge facility. This reduction will require no change to our committed financing agreements with JPMorgan and Merrill Lynch.

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

Alfred J. Amoroso

And as James reviewed, we had a very good Q4 and full year. Regarding our ACP business, we previously disclosed that we signed our first bundle deal with an MPAA studio at the end of last year. For those not familiar, the bundle deal incorporates both ACP and RipGuard technologies for the studios on an annual basis rather than a per-unit DVD royalty fee.

Further after year-end, we signed an additional bundled deal with another MPAA studio. In this case, one that was not previously using ACP or RipGuard. We are pleased with our progress in this area. As it relates to our embedded solutions business that is predominantly driven by ACP revenues today, we continue to grow that business at a significant rate, 103% year-over-year in Q4.

Through a combination of continuous improvement in our execution and more devices in the marketplace, we were able to expand the use of ACP. We have now experienced over 50% year-over-year growth on average for the last eight quarters for this revenue line, which naturally causes the revenue basis to be significantly higher going into 2008. As a result I do not believe that this pace can continue, even though we do still expect continued solid double-digit growth in our embedded businesses.

With respect to BD+, the security protection for Blu-ray, I am also pleased that the High Def DVD format war is now over, with the recent announcement from Toshiba that they will discontinue the HD DVD. This makes our previous decision to acquire BD+ even more significant, as it provides the higher level of protection over AACS that has already been hacked by the various pirate communities.

BD+, having been in the market since September, still remains unhacked. We already have a contract with one of the major studios to use BD+, who is currently shipping BD+-protected titles, and we are trial-ing with another major studio.

Additionally our discussions with other studios have increased in light of the end of the format war. With respect to our connected platform, we announced in January that we signed a contract with Samsung to bring together our respective technologies to create next generation set-top boxes with the capability of downloading, finding and managing digital content seamlessly throughout the home.

When combined with our win at Scientific Atlanta, we have agreements with two of the top three worldwide cable TV set-top box vendors, and we are in evaluation phases with others.

We’ve also made significant inroads into global manufacturers of numerous CE devices, as the world of connected devices seems to be part of every CE manufacturers’ plants. As you all aware our connected platform is a reference implementation of the DLNA, the Digital Living Network Alliance and the UPnP, the Universal Plug and Play interoperability standards.

Over the course of last quarter, we have played an increasingly important role in the DLNA standards body, now chairing a committee and committing additional resources in assisting in development and direction of the standards put out by the DLNA.

As discussed in previous calls, while the connected platform enables users to access their rich media regardless of where it resides, content metadata informs consumers of the descriptive information behind the content. On this front, we are pleased with our acquisition of All Media Guide, AMG, a leader in the space. We have now integrated AMG into our distribution and commerce business unit and are pleased with the early results including a major win in the mobile market.

So, all in all the continuing operations business units performed very well in Q4. We’re happy to have solidified our mature cash flow streams and are pleased with our progress in the businesses we acquired in 2007, which formed the basis of our growth platform in digital media.

I can now turn your attention to the Gemstar-TV Guide acquisition. First a little background. As I mentioned in the conference call in early December when we announced the agreement to acquire Gemstar-TV Guide, this has been something that we have been working on for some time. It emanated from our core strategy that we first started developing and have been refining since the end of 2005.

As the world moves from analog to digital, one of the major activities we have been working on is a transformation from a company predominantly focused on protecting the analog hold to a company that is more relevant to the opportunities in the marketplace. Notwithstanding the declining price points for ACP paid by the studios, we have sharpened our execution processes and found more devices on which ACP can be deployed, and as a result we have achieved significant growth for ACP over the last few years.

This doesn’t change the fact that ACP will become less relevant as the world moves to digital. So we are transitioning to HD protection with BD+ to create new revenue streams and provide more important and effective protection technologies to the studios.

As defined in our core strategy of protection, enablement, and commerce, the second key to our transformation was creating solutions to enable content to move into the next generation of devices. This change has been developing slowly over the last 10 years and recently increased dramatically as more and more content producers have reached beyond the traditional subscription channels to reach directly to consumers through a myriad of websites.

Clearly this phenomenon of having significantly increasing amounts of what we call converged media, enjoyed through connected devices, will fundamentally change digital entertainment as we know it. This is not something that has just emerged as an opportunity for us.

Almost two years ago, we saw this opportunity develop, and so in early 2007 we acquired Mediabolic a critically important component of bringing this capability to the market. Recognizing that the availability of Internet downloaded or streamed content will increase across all geographic markets and all distribution channels underscore the shift from a physical world to an electronic world.

Rather than compete with the CE manufacturers by creating another home entertainment CE device. We wanted to empower our existing customers with an open interoperable solution that would allow them to compete with proprietary solutions now predominant in the market.

We believe that to maximize simplicity for the end consumers and to provide value to the CE manufacturers, our connected platform solution needed to be a software development kit, an SDK, source code that we provide to our customers for them to easily embed within their own products and take advantage of the DLNA and the UPnP interoperability standards that the industry is developing.

Our ability to generate per unit royalties for every device that embeds our technology can create a significant revenue stream and high margins. Enabling download services such as CinemaNow, as announced last month and improving the discovery of content not only within the home but also from the Internet, all led substantially to the value of our offering to our customers.

We recognize that one of the most important ingredients in this new world is the discovery of content from multiple sources, from what is stored in computers, external storage devices in the home, as well as from literally any website or subscription offering available to the consumer. In that regard, the value of metadata, information that makes it easier to find content and make it more meaningful to understand, is a significant value proposition to end consumers, enriching their search and discovery of content.

And so adding AMG metadata for movies, for music and games to our business and adding it to our solutions creates even more value to those companies that will need to create this capability, whether as a CE device manufacturer, a portal, a commerce site or an operator developing an interactive programming guide. As we looked at our strategy and what we believe would be critically important components to achieve our vision, we recognized that TV is an important, if you will, critically important component to this capability.

So while we had many of these assets required, an important asset we were missing is exactly what Gemstar-TV Guide had been developing within its guidance technology business: the technology platform for mobile and other environments; different approaches to an interactive programming guide relevant to different markets and geographies; the My TV Guide platform; and TV metadata to create the full capability for digital content.

Further at its core, Gemstar-TV Guide has a significant patent portfolio related to the static and interactive programming guides that can drive significant growth at very high margins. This is a business they have executed well and a business model with which we have a great deal of familiarity because of the similarity to our own licensing businesses.

One of the reactions that I’ve been most pleased with comes from our customers. Time after time at CES and in subsequent conversations, our customers absolutely get what we are doing and the capabilities that we are putting together. In many cases significant customer opportunities are emerging as they tell us that we are more important to their business strategy in assisting them and adding capability to their offerings to the marketplace. This gives me great comfort that we are executing our strategy very well.

The combination of Macrovision and Gemstar-TV Guide brings together enormously compelling capability to fulfill the changes developing in home entertainment, aggregate the collection of assets that are unique to the industry, and are all underscored by a very robust patent licensing business. In fact I am not sure that there is a better combination of assets of these two companies that could have materialized.

As we have spoken with both Macrovision and Gemstar major stockholders, many of you have categorized what we are doing as having a compelling vision and an enormous opportunity. Equally, it’s also been characterized as having a reasonable risk of execution. I take those comments to heart, and I agree that there is always a risk of execution.

I hope you agree that what we have operationally and financially accomplished in Q4, while at the same time acquiring and integrating the BD+ and AMG businesses, and working on a sizable acquisition of Gemstar-TV Guide, as well as most recently executing on a divestiture of software and games provides some confidence on the ability of our management to execute multiple actions simultaneously and successfully.

Finally let me comment on the integration planning activities relating to Gemstar-TV Guide that we’ve been working through since last December. We’re making great progress on our overall integration planning activities and nearing completion of the discovery phase. We conceptualizing organization structure and evaluating management from both organizations to take on significant management positions in the combined company.

Overall, we are pleased in that we are seeing more value than we originally expected from our earlier due diligence activities prior to execution of the purchase agreement. The progress that Gemstar-TV Guide has made in many of their technology areas complements the connected platform and can be integrated faster then we had previously expected. Further as we evaluated the various components of the business we maintain comfort in achieving our stated goals of greater than $50 million in cost synergies in the combination of the two businesses.

Lastly as we have reviewed the various business segments of Gemstar-TV Guide, we have decided to explore strategic alternatives for the TV Guide magazine, the horse racing channel and the network. We have received some interest already for these properties and we will be evaluating interest in these businesses on a go-forward basis.

So I trust you can see that our team has been quite busy. I am very proud of just how much we’ve been able to accomplish relating to operational execution of the different business units, as well as transforming ourselves through significant M&A and integration divestiture activities. I ask for all of your continued confidence as we position ourselves to be an important part of what we believe is perhaps the biggest digital media opportunity in recent history.

In summary, the proposed combination of Macrovision and Gemstar-TV Guide will create:

First, one of the largest and most profitable digital media IP-licensing and technology solutions providers in the world

Second, a unique opportunity, for an independent provider to become a leading enabler of digital home entertainment solutions with a better platform and capability than anyone else in the market today

Third, a company that enriches the end consumer experience through the value of metadata developed across movies, music, games and TV

Fourth, a combined customer footprint that extends across the entire ecosystem of content producers, distribution channels, and device manufacturers

And finally, a leader in patent licensing on a worldwide basis that produces very high margins that can fuel investment in our solution areas, a combination that yields meaningful synergies and a compelling financial model

I’d now like to turn the call back over to the operator so that we can respond to any other questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mike Olson – Piper Jaffray.

Mike Olson – Piper Jaffray

What were you anticipating for the revenue of the games business in ‘08? And also can you just remind us where was the games revenue being classified, that was in the distribution and commerce segment is that right?

James Budge

So, it was definitely going to be in distribution and commerce and it probably would have been anywhere from $10 to $15 million for 2008.

Alfred J. Amoroso

And what we announced in Q3, I think it was, is that there was a revenue decline principally associated with a loss of a major customer in the games business.

Mike Olson – Piper Jaffray

On the bundle deals, are the studios that are using ACP and RipGuard, are they doing it on a 100% basis or they using it selectively? And I guess the probably more important question, does it even matter how much they literally use it, now that you got them signed to bundle deals?

Alfred J. Amoroso

Right, so your last comment is the most pertinent which is by not getting paid anymore on a per DVD charge, they actually have the value to deploy it across all of their different channels and across 100% of their business, it doesn’t cost them anymore. We’ve priced it on a single point going forward to take away any of the vagaries that might happen in DVD volumes going forward, and to make it easier for them to deploy. So, it really doesn’t matter Mike.

Mike Olson – Piper Jaffray

Any sense as far as what their intentions are as far as using maybe from looking at it as a kind of what they perceive the value to be.

Alfred J. Amoroso

Well, my belief is that they’re going to, the ones that we have spoken to that have signed the bundle deals, they’re going to deploy it across all of the environments that they possibly can. One of the things we’re obviously pretty proud of is that we have not had any playability issues unlike others in the industry, and so there is less concern over potential consumer problems associated with the deployment of the technologies, so it’s a definitely safe bet for them to deploy it.

Operator

Our next question comes from Sasa Zorovic – Goldman Sachs.

Sasa Zorovic – Goldman Sachs

Regarding games furthermore, could you tell us about $10 to $15 million in revenue would come from it, this business has not been profitable, what kind of costs associated against that should we think about?

James Budge

So, when I talked about distribution losses from discontinued operations that is the games business, it lost over $14 million in 2007, growing slightly in 2008 to $10 to $15 million in revenue would have slimmed the losses, but still generally would have probably generated on a go-forward basis, anywhere from $10 to $15 million of losses in 2008.

Sasa Zorovic – Goldman Sachs

Could you provide us any kind of sort of detail as to how much you have sort of sold that to or anything of that nature for?

Alfred J. Amoroso

We announced that it was $4 million; James mentioned that.

James Budge

We said we wouldn’t give you the name of who bought it, but we said the amount was $4 million.

Operator

Your next question comes from Sterling Auty – JP Morgan.

Sterling Auty – JP Morgan

Even though it closed very late, can you talk about was there any contribution of revenue from AMG in the quarter?

James Budge

Very little like sub $0.5 million.

Sterling Auty – JP Morgan

On BD+ in terms of the first contract that you have here, can you talk as to what is the type of contract or economic arrangement, is it typical to the old ACP type of contracts or how are you working with your customers on this product line?

Alfred J. Amoroso

. First of all, BD+ is as you know is software; it’s renewable. So as it goes into the devices, we have the opportunity to establish the license keys. And then if for whatever reason ultimately it does get hacked, we have the ability to renew those keys, number one.

Number two, it’s an active protection from the standpoint that if BD+ is not on a device, the DVD should not play. It’s unlike copy protection, right; it’s more of an affirmative as opposed to a negative checkpoint.

Additionally with the studios, in order to protect the secrets of the assets, we’re actually right now doing all of the authoring and burning in BD+ into the DVDs as part of the authoring process, so that we can keep that information highly confidential within our own environment.

And then lastly there is actually three different levels. I’m not going to through it all now, but there is three different levels of the protection that we could deploy depending upon which the studio would like to take, and they have different price points. The BD+ price points are per disc, and they go back to, I’ve made the statement before, they go back to what ACP price points were like probably five or more years ago.

And so we did not intentionally include any of the BD+ types of activities in as part of these bundled deals because we think it has significant growth patterns in its own right.

Sterling Auty – JP Morgan

And how you are going to disclose the revenue segments, not thinking about Gemstar, just thinking about what’s in continuing operations here from Macrovision. What’s going to be included in entertainment if that’s still going to be the right bucket on a go-forward basis?

Alfred J. Amoroso

We are obviously in a point of transition. We have confidence the Gemstar-TV Guide deal will close. As part of the integration planning we’re now doing with Gemstar-TV Guide, we’re rethinking how we will run that business, how we will organize the management team, how we will go to market and there’s a very, very high likelihood that the structure that we have today will not be the structure that we come out with in a quarter or so.

Sterling Auty – JP Morgan

The lingering costs, whenever you dispose of an asset you talked about the shared cost, there is usually some lingering costs, I think that you described that you probably need to get rid of. Is there any sense; is that going to be a two-quarter phenomenon? How long do you think before you kind of clean up that aspect of it, especially with everything else that’s going on?

James Budge

I know, so the shared services costs I mentioned, you’re talking specifically about Software?

Sterling Auty – JP Morgan

That’s correct.

James Budge

Yes, so they’re actually part of the of the deal, TCB wanted a fully functioning staff and company, so they are actually taking bodies of our G&A and marketing people to service the business. Those are costs that will go away as soon as the deal closes.

Sterling Auty – JP Morgan

In terms of looking at the entertainment revenue here in the fourth quarter, how much of that result was, tough comps versus a year ago in terms of the DVD title pipeline, how much of it was just the flux of the bundled deals were done coming into the New Year and just maybe, not taking the eye off the ball, but just so many moving parts with everything that’s going on with all the transactions?

Alfred J. Amoroso

Oh, it’s actually, if I could add one more Sterling, it’s a combination of multiple factors as you suggest, so number one, it’s DVD volume differences between the different years. It’s the fact that some of the bundled deals, if you remember the Q4 has always been a significant DVD volume increase going into the holiday season, which made our Q4 number significantly higher.

With bundled deals it normalizes the revenues for ACP to the studios over the course of the year. That was a contributing factor and then just price point declines as we have naturally gone through the changes with each studio over a period of time.

So all of that is part of it, and then just to be completely transparent, we also announced in I think in Q2 that one of the major studios had dropped ACP over the course of the year. We feel good that we signed a bundled deal with a studio that had not previously been using ACP or RipGuard, but that was signed this year, so we got no Q4 revenue up tick from those.

Operator

Thank you. Our next question comes from Richard Davis – Needham & Co.

Richard Davis – Needham & Co.

So the question I had was just more in terms of after you get those things done, you are going to want to I’m sure apply some development effort to kind of knit some of your functions together and things like that and as well as potentially is there any place that you feel that you’ll either want to apply that development talent to add some additional features and functionalities or, heaven forbid, actually make some acquisitions as well.

So just thinking along those lines would be helpful to kind of just as we get through the storm of activity here?

Alfred J. Amoroso

So, it kind of underscores a little bit of the comment that I made that as we’ve gone through the due diligence since December and gotten more into understanding the different facets of what’s going on within Gemstar-TV Guide and the GTS part of the business.

And looking at where they’ve invested in MyTVGuide.com, the resultant cross platform services that they’ve created there, what they have done in their new guide, which is due to come out later this year, which is called V10, a new CE guide, the work that’s going on in active and the work that’s going on in support of GuideWorks and as well some of the different guides that are around different geographies because of uniqueness of those markets, the number one thing that we have found is actually there is more synergy.

And it will be easier to integrate the guides as part of our connected platform to begin with. So that was a very good result.

What we also believe is that as we focus attention specifically on the development of our technologies, that we should be able to get some efficiencies in working on a singular product management approach across all of these different guides and across all of our product areas, so we can be more targeted in our investments.

The third thing that we’ve found is actually in the dotcom environment, the online environment there are a number of capabilities that they’ve built into the dotcom. Which as we look to the future, if you go back to this notion of discovery of content from multiple sources, whether it’s subscription services or whether it’s content that resides in storage devices in the home, or it’s content that resides over the Internet.

The ability of aggregating all of those different environments, the guide, the things that we do in the connected platform for discovery, and some of the capability that exists within the online environment of TV Guide actually creates some very strong value in the next generation of discovery that when we add on the metadata provides a very compelling and rich user experience.

So I think the question you are asking is one of the value which I am trying to explain. The other one is one of, do we have enough money to invest in these different areas. And my comment there is, I think it’s going to take less than what we thought and I think there is enough money even with the $50 million of synergies that we talk about to be able to still drive development within our products.

Richard Davis – Needham & Co.

Do you currently have a search capability to drive that kind of data, that content discovery yet, or is that something that you are either working on or would partner for that?

Alfred J. Amoroso

The connected platform already has the discovery search capability for movies, for music, for photo albums, anything, any converged content that might be interesting in terms of managing through the connected platform. That is already part of our connected platform that’s embedded in there. These other things, subscription relationship through the guide and the ability to search the Internet are things that will come to us from Gemstar-TV Guide.

Operator

Our next question comes from Ralph Schackart – William Blair.

Ralph Schackart – William Blair

James, what is in the distribution and commerce going forward, is that eMeta?

James Budge

It is, yes the distribution and commerce was a combination of eMeta and the Trymedia. The Trymedia piece where games is going away, AMG comes into that, in 2008 that deal closed late December. So it had virtually no impact in 2007, other than the cash paid for it, but going forward 2008, it will be a combination of the acquisitions of AMG and eMeta.

Ralph Schackart – William Blair

The eMeta is that one of the assets you’ve identified to sell or is that something at least in today that you’re looking to still run?

Alfred J. Amoroso

Right now, we still have it.

Ralph Schackart – William Blair

Fred, prepared remarks you talk about having some really good feedback from the industry regarding the acquisition. Is this from the CE companies, operators, have you done any focus groups with consumers?

And maybe give us a little bit of understanding where the excitement is surrounding, is it running Gemstar better, is it layering on Mediabolic, is this a combination of sort of everything you are trying to put together? Maybe a little more color would be helpful. Thanks.

Alfred J. Amoroso

It’s actually a few sources. So, let me suggest that, I think from a cable and operator environment, this is not one that we at Macrovision have spent a tremendous amount of time on or have a tremendous amount of customer relationships except through the deployment of ACP. Most of those relationships are actually coming Gemstar, and from what I’ve heard from conversations with Gemstar team, I think they look at it as a value, in terms of some of the solutions that we could provide.

The preponderant amount of feedback that we’re getting are from CE device manufacturers, including the set-top box manufacturers. I will tell you that two of the top three set-top box manufacturers have come to us after we’ve announced Gemstar, and they saw what we did with AMG, and what we’ve built on with our connected platform, and expressed an interest that we are much more important to them.

Partially financially, because they’re paying collectively to us a lot more per device than they were paying either to Macrovision or to Gemstar, but more importantly in terms of all of the value that we could bring to them. And in fact some of them are interested in establishing strategic relationships, strategic partnerships to work cooperatively to further develop their marketplace for OCAP on the basis of the technologies that we’ve built. So I would say the CE including set-top boxes is a very, very strong component.

To the studios, look, they recognize some of the changes that are going on. It is a little bit more premature for them to see a significant amount of change because we are more into the deployment through devices.

And so the biggest part is they recognize our transformation. They recognize what we have done with BD+, which by the way was huge. That was a huge, huge thing in terms of creating value for the studios that we haven’t abandoned them, we are continuing to invest, they have confidence in how we managed the ecosystem for ACP. And so that’s been good, but little bit less so from the strategic platform.

And then the other thing is we look at our business differently than Gemstar-TV Guide. I think they have done a fabulous job. And then Rich and his team have an excellent job at driving their business and dealing with transition they have had within their business.

But as I mentioned in terms of our view on the different media properties, we are technology company and we are looking at driving the synergy of the technology as our core value proposition. And so that creates a little bit view as to how we would manage the business both economically and strategically going forward. So I think there is a view to that as well.

Operator

And our next question comes from Brian Thackray – Deutsche Bank.

Brian Thackray – Deutsche Bank

Clearly it looks like the cycle for BD+ deal with the studios is much shorter than the ACP bundled deals. If you look out, how quickly do you think you can sign up the rest of the studios to this BD+ deals. And then the second part of that question is if you look kind of 12 to 18 months out when the Blu-ray cycle is a little bit larger, can BD+ reignite growth in the entertainment business for you?

Alfred J. Amoroso

Can BD+ reinitiate growth? The answer to that is yes. Part of it is because it is the only format now. A lot of it is because it has been recognized as to being tremendously effective. I mean the notion that this technology came out and deployed in September and is still not hacked is something that is tremendously proud for our team.

And I give tremendous credit to Carter Lauren and all of the BD+ team that have been working on with CRI before and with us recently to create that standard. That’s literally unheard of in the industry. So, it can create growth.

The thing I am not going to get myself into commenting on is I put my head in the noose when I started to talk about the bundled deals last year and recognized how long it takes. So what I am going to suggest is that we’ll report on it retrospectively as opposed to prospectively and I will just state that we have on in contract, we are in trial with one, and we’re talking to all of the rest.

Brian Thackray – Deutsche Bank

And can you talk about the margin differences in that business given that you handle some of the production yourself and how quickly you can scale that, what costs go into that?

Alfred J. Amoroso

The margins for the authoring are actually a service business. So it’s not like we’re going to have a per unit royalty margin associated with it, but we’re not doing it at a loss, let me just put it that way. But that’s a very, very low amount of the revenues. Matter of fact from your financial models I would suggest that you not include that as part of the revenue streams, because it’s going to be low.

The biggest part of the growth is going to be in the per-unit DVD’s where I’ll just leave it to you in terms of what we said is it goes back to what the price points were for ACP probably 5 to 8 years ago. And again the studios have a choice to accept either a basic, an intermediate or an advanced level of protection that they want, that they can deploy depending upon how they look at either the movie, if it’s a blockbuster or not or how they look at protection overall.

James Budge

I’d just add to that, remind you that, we get about 66% margin on a segment basis for entertainment, the studio business, if you will, which is up over 56% in 2006, primarily because we got out of the Hawkeye business. I would expect that the kind of margins coming in from BD+ over time would fit very nicely into that type of margin structure.

Brian Thackray – Deutsche Bank

James did you mention in terms of headcount how many are going to be exiting with software and the games business?

James Budge

I didn’t, but it’s a significant amount.

Brian Thackray – Deutsche Bank

Fred you also mentioned in your commentary about that as you go through the integration process, you can get through it much more quickly than you previously had thought. As this deal closes can you just quantify that a little bit more in terms of when you think we’d be looking at a streamlined Macrovision Solutions?

Alfred J. Amoroso

Let me give you a little clarity to what I mean by integration. So for the comments I made on the different media properties, we are going to run the media properties separately, the TV Guide magazine, the horse racing channel, and the network. We’re not going to focus on integrating those into Macrovision. We’re actually, if you think about it, mostly going to move those to operate in somewhat of a standalone environment, because of our interest in looking at them from a strategic perspective.

So the ones that become tightly integrated is the Gemstar GTS business along with the Macrovision business, the technology components. We have a draft organizational chart that we have already developed.

I’ve got an idea of the different management that would go in the key positions. I will tell you that they are members of both of the Macrovision team as well as the Gemstar team. We’re starting to work on a cooperative basis between our team as well as the Gemstar team, the evolution of that organizational chart and taking it down to the next level.

So, I am hoping, and we are targeting that post-deal close day one, we start operating on a combined company future basis, as we look at running the business going forward.

Operator

Our next question comes from Alan Davis – D.A. Davidson.

Alan Davis – D.A. Davidson

James, I wonder if you can break down the growth in the embedded business. Maybe from a year-over-year perspective, how much of that came from one particular significant new set-up box customer you added during the year and then maybe was there a significant amount of catch-up payments?

James Budge

Yes, we talked a quarter ago, about the significant device manufacturer, but as a reminder for the business that we run in embedded solutions, we actually on an any quarter basis probably have anywhere from $2 to $5 multi-million transactions that happen from a combination of catch-ups as well as royalties from an ongoing basis.

So I’d say there was nothing particularly unusual in 2007. We just had a lot more of those large transactions to come in.

Alan Davis – D.A. Davidson

And then can you remind us of the expectations for revenues embedded in your guidance if you combined kind of the newly acquired companies AMG, BD+ and Mediabolic?

James Budge

We haven’t broken that out, just given out one-month sum for the entire company.

Alan Davis – D.A. Davidson

And then given kind of reasonable projections, would you say a similar decline in entertainment for 2008 would be a reasonable expectation? How would you characterize that?

James Budge

I actually would not assume that because we just purchased BD+ at the end of 2007. We do expect some revenues from that with a bigger ramp as we get into 2009. But certainly we expect revenues out of the BD+ deal and protection technology in 2008 that will stem some of the decline naturally coming from the ACP side for the content producers.

Alan Davis – D.A. Davidson

I guess I was excluding BD+ in the that?

James Budge

If you exclude BD+, it still shouldn’t be quite as big because as Fred mentioned in his prepared remarks, we added a customer that had not been paying us anything in past years. So it will likely decline somewhat again, but hopefully not as much as the 20% to 25%.

Alan Davis – D.A. Davidson

And are you going to break out on a quarterly basis the results for 2007 from continued operations?

James Budge

As we go forward if the business doesn’t change, we would certainly continue to report as it is today. But as Fred mentioned a quarter out, really when you get beyond the first quarter, we’ll have a different construct to how we report the business once Gemstar comes into the fold.

Operator

Our next question comes Andy Hargreaves – Pacific Crest.

Andy Hargreaves – Pacific Crest

Is the financing 100% secure or is there any way for the lenders to back out at this point?

James Budge

It’s very committed.

Andy Hargreaves – Pacific Crest

And then can you give us any sense of how you are progressing with Mediabolic versus where you thought you would, call it a year ago or the connected platform I should say? I mean, have things progressed as expected, better, worse?

Alfred J. Amoroso

So I think they progressed as or better than expected. So if you remember when we bought Mediabolic we closed January 1 or January 2, I think, of 2007. And it was early in terms of the market adoption and how we saw the world of connected devices developing. And so being able to sign Scientific-Atlanta, one of the most significant set-top box manufacturers, to incorporate our middleware as part of their OCAP environment and then follow that up with Samsung later in the year is significant.

As the marketplace has dramatically moved, all of the CE device manufacturers as I said in my comments are looking at incorporating connected devices. It has increased the amount of interactions and discussions that we’ve had with the industry broadly.

You got to remember that we are in early product development cycles though, so while we have a tremendous amount of activity going on, this doesn’t turn into next quarter revenues. So on that basis, I’m very pleased that one of the things we were betting on, which is how fast is this market going to develop and are we too early in the market, I’m comfortable that we are right at the knee in terms of how the CE manufacturers are going to bring these products and technologies to market. So I feel very, very good about that.

Andy Hargreaves – Pacific Crest

Am I right in thinking that ending the quarter with a little over $400 million, going to get a couple of hundred million from the software business and Gemstar has roughly $600 million I think. Is that all right, so you got about $1.2 to use and the debt would just be whatever excess above that you would need?

James Budge

That’s right.

Alfred J. Amoroso

Well plus working capital.

James Budge

We need to have a couple of hundred million for working cash, so it all boils down to about $600 million.

Operator

Our next question comes from April Horace – Janco Partners.

April Horace – Janco Partners

Just at Gemstar, because I am more familiar with Gemstar, they spent a tremendous amount of money and integration with respect to sharing content and capitalizing on interviews with the magazine and transferring that to the channel and then to the EPG. If you want to sell off those divisions, I am worried that those divisions are going to get devalued because that sharing of content can no longer be leveraged?

Alfred J. Amoroso

So first thing to know about data is that that data is actually different in each of the geographies. So I was in Luxembourg last week. There are 30 people in Luxembourg that are acquiring and getting data from multiple sources, providing editorial content, etc., for data that is incorporated across all of the European cable satellite environments. They operate over five languages. So that one is somewhat separate.

In Asia, I’ll be going there week after next, and in Asia we actually have a joint venture with Dentsu that does a lot of the combined data aggregation et cetera.

You got to realize that the media properties that we are talking about, the TV Guide magazine, the horse racing channel, and certainly the network and certainly the first and the third, are US-only properties, right.

So when we talk about licensing the data or providing the data to either the magazine or to the scroll or candidly to CE device manufacturers, etc,, that the strategic positions of each of those different entities, we’re assuming will come with a license requirement to continue to provide the data to them in order to support their ongoing relationships and commitments to their customers. And that is just a data-licensing component. So that’s not a problem for us at all. It’s just a part of the discussion and the deal.

Interestingly, the other part of what you might be looking at is the separation of the businesses. Is that each of the businesses, while there is a common content, so they have something called tent-pole events that may operate across both the magazine and the network? By and large, the editorial aspects and the media aspects actually operate differently between the magazine, the online environment and the network. So it’s actually, our first blush is that the separation of the businesses is not going to be that difficult at all.

There is a common ad sales group, although there are separate ad sales people devoted to each of the networks. That’s one of the areas that is going to require some level of work and review, and then the other is we recognize that in Tulsa they have tremendous capability to actually upload the data into the different environments and the different operators. And that one will require some work, and we’re currently evaluating that as well.

But the underscored or I should say the most important aspect to your question is that we don’t think that the separation of the different assets are going to be as problematic as perhaps we first thought. And in fact, at least in a couple of cases, outside unsolicited interest that we’ve gotten have been for more than one of the properties anyway. So we’ll see how it develops.

April Horace – Janco Partners

On the Mediabolic licensing to Scientific-Atlanta, I know that they are licensing some of your technology today and you talked about there was a tremendous amount of interest on the combined basis. Is there any way to try and gauge what that combined revenue opportunity would look like if we think we know what you are going to get from Mediabolic. We know what Gemstar is getting from Scientific-Atlanta and then on a combined basis adding AMG, how do we gauge that revenue opportunity?

Alfred J. Amoroso

So first of all let me describe that there’s actually two or three different relationships or products if you will that we could sell to the CE industry or to cable satellite set-top box manufacturers in terms of a server or just the basics of the connected platform. What I said is that the average royalty that we could aspire to is somewhere between $1 and $5. And I think that that is still the window that we would look for.

And obviously the more value we would add to the connected platform in terms of capability that we provide or data that we may provide would get us closer to the $5 than the $1, but I think we are still within that $1 to $5 window.

April Horace – Janco Partners

You said you are going to Asia, I know that Gemstar had more success over in Asia, specifically Japan about embedding their EPG into television sets. Do you have any gauge as to how they would view Mediabolic and the AMG content?

Alfred J. Amoroso

Since a lot of the manufacturing operations for devices are coming out of Asia, Macrovision by ourselves in the connected platform area has had a significant amount of conversation with companies like Sony and Samsung and LG and others. All who we’ve had previous relationships relating to ACP and now all of whom we are having discussions relating to the connected platform.

The Samsung announcement we made recently has obviously emanated out of Asia. So by now having increased headcount and capability specifically within Tokyo and in Seoul are going to be key components.

The other thing that we’re pleased at is Erwin Lau who runs their Gemstar’s Hong Kong development center has put together a very strong team developing a lot of the interactive programming guide for the CE industry in Hong Kong as a low cost area and that’s one other things that we think we can take advantage of as well.

Operator

Our next question is a follow-up question from Sterling Auty.

Sterling Auty – JP Morgan

James, so as I’m piecing this together down through the press release. Is there a way, can you give us a relative idea of what portion of the $14.3 million of unallocated costs is actually stock-based compensation for the continuing operations?

James Budge

You’re looking at the business unit segment information?

Sterling Auty – JP Morgan

Exactly, exactly.

James Budge

Yes, that sheet you are looking out from the press release doesn’t have any stock-based compensation in it. Just strip that out, that’s on a non-GAAP expense basis.

Sterling Auty – JP Morgan

So if we were to add back the $1.3 million and restructuring asset impairment charges to the $17,409 to $18.7 on the $45 million, that’s basically the non-GAAP operating margin for continuing operations?

James Budge

Correct.

Operator

And we have no further questions I’d like to turn the conference back over to the management for any closing statements.

Alfred J. Amoroso

So again I want to thank everyone for joining us. I think it is a compelling vision. I certainly think there is risk, as we acknowledge, but I hope that we’ve been able to show that as we have put together businesses, we’ve been able to execute across a myriad of activities to continue to streamline our business.

The other thing that’s important to try and convey is that this is not something, I hope and I hope that you appreciate this was not a bunch of knee-jerk just acquisitions that were done at the end of the year. Obviously, we have been working on many of these things as part of our core strategy that goes back to the end of 2005. It’s just that we were fortunate enough to see a lot of these things come to fruition all at one point in time.

Kind of stressed the management team, but I guess the underscore is my appreciation to all of the Macrovision management for a tremendous amount of effort, intensity, personal sacrifices over the last three or four or five months, and more importantly for the success that they have driven to the business and ultimately for us to be able to accomplish our objectives.

So I thank you for your confidence in the company. I ask for your continued confidence and I look forward to moving on with the Gemstar acquisition and achievement of our strategic vision. Thank you all.

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