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Macrovision, Motorola Bury the Hatchet

The software maker could post an upside surprise.

SAN FRANCISCO - The news that Macrovision (MVSN) and its client Motorola (MOT) have kissed and made up could make the software developer a candidate for an earnings surprise next month.

The companies disclosed late Tuesday they had settled a suit filed by Macrovision in July to collect millions in back royalties payments. They also issued a joint statement indicating that Motorola would continue to use Macrovision software in its set-top boxes.

Using an arm-twisting contract renegotiation strategy, Motorola had withheld roughly $12 million in back royalty payments on Macrovision's analog copy protection technology shipped in set-top boxes, beginning in 2006. And Motorola was continuing to stonewall Macrovision to the tune of at least $2 million a quarter, the software vendor said in July upon filing suit. The hardball strategies appear to have worked for both parties.

Without disclosing terms of the settlement, Macrovision was trading up 16 cents, or 0.6%, to $25.62 Wednesday.

With settlement of the case comes the expectation that Macrovision will receive payment from its customer, although probably not the full amount.

Macrovision's stock fell precipitously in July when the company

issued an earnings warning over its receivables from Motorola and the failure to close a multimillion dollar deal in the June quarter. That deal finally came through, but the stock has generally been stuck below $25 since.

At Tuesday's closing price of $25.46, Macrovision is trading at 16 times 2008 earnings.

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"Given an 18 times multiple for the stock, we estimate shares could return to the $27 level on this news," Jefferies analyst Ross MacMillan wrote in a note to investors Tuesday. But he maintained his own pessimistic $25 price target, which he'd lowered in July from $31.

Unlike some analysts, however, MacMillan expects Macrovision to get full back payment from Motorola. Jefferies makes a market in Macrovision.

Motorola's stance with Macrovision is just the beginning of what is viewed as a difficult period for the software developer. The company is already struggling to renegotiate with independent movie studios on new content-protection contracts that would include a bundle of Macrovision technology.

And the major Hollywood studios are a much tougher sell than the independents. Macrovision had yet to sign one up for the bundled package, CEO Fred Amoroso said in July.

Needham analyst Richard Davis maintained his $34 price target, but lowered his 2008 earnings estimate to $1.69, from $1.74, taking into account a discount he thinks Motorola received. Davis owns Macrovision stock and the company is an investment banking client of Needham.

DA Davidson analyst L. Alan Davis suggested Macrovision's best bet in its negotiations with Motorola would have been to get the manufacturer to include Macrovision's Mediabolic technology in set-top boxes, "which would add long-term upside" for the software vendor.

Macrovision acquired Mediabolic in January. Its software extends content protection to electronics in the home, such as movie players.

Davis maintained his $31 price target, but raised his fourth-quarter EPS expectation, excluding items, by 5 cents, to 60 cents. The consensus estimate for Q4 is 56 cents, according to Thomson. Macrovision is an investment banking client of Davidson.