By Jane Black
These days, it's pretty rare for any company, let alone a high-tech outfit, to raise its guidance for revenues and earnings per share. But that's just what Roxio (ROXI ), which makes popular CD-burning software, did on Feb. 25. Thanks to its acquisition of Toronto software company MGI and brisk holiday sales, revenues for fiscal 2002 (ending Mar. 30) are expected to total $142 million, up 5% from its original projection of $135 million. Earnings will come in at 91 cents per share, up from 89 cents forecast earlier.
The fact that the digital-media sector is littered with failures makes Roxio's performance all the more impressive. The company, which went public in May, 2001, has been profitable throughout its six-year history. And analysts expect Roxio to keep growing. Its products, which include software for CD and DVD burning, photo and video editing, and data recovery, dominate some of the high-tech sector's most explosive markets.
The number of CD burners will increase from 120 million in 2001 to 546 million in 2005, according to market research firm International Data Corp (IDC). DVD burning is also expected to take off. In 2001, IDC reports just 2.4 million DVD burners were sold. By 2005, that number will be higher than 72 million, a compound annual growth rate of 135%. Those trends could translate into big sales and even bigger profits for Roxio. With the stock trading at around $15, as of Feb. 22, analysts say now could be a good time to buy.
Roxio made its name as the king of CD burning. Its Easy CD Creator software for PCs cornered 63% of the market in 2001, according to market research firm NPD Intellect. Roxio earned its lead by aggressively bundling its software with virtually every PC that's shipped. It's a strategy that continues to work: On Feb. 25, Roxio said it will extend its relationship with Dell to package Easy CD Creator with all computers the company ships with CD-recordable drives. Roxio also announced that it will package its DVD-recording software, due out later this year, with several of Gateway's PC and notebook lines.
Going forward, though, stand-alone retail sales, which now account for 60% of revenue, will become increasingly important. The reason? As CD burning becomes more prevalent, consumers are upgrading from the relatively limited software that comes with their PCs to more sophisticated versions.
Roxio's retail version, called Easy CD Creator Platinum, allows consumers to modulate volume levels when creating CD compilations and add professional-sounding transitions between songs, with effects such as fade-in or fade-out. Already, the company is making headway: As of Feb. 22, Platinum is currently the No. 4 best seller in the software category on both Amazon.com and CompUSA Online, despite a comparatively steep $100 price.
SAMPLES AND SNAPSHOTS.
Roxio isn't resting on its laurels. "The good news is we own the market. The bad news is that there are 400 million new customers coming who don't know it," says CEO Chris Gorog. So, the company has launched a $20 million advertising campaign to establish itself as the "Nike of CD burning." The print and broadcast ads depict people -- mostly young men -- using Roxio software to improve their lives. One ad, titled "Scratch and Burn," shows a DJ burning vinyl records to CD. Another shows a happy father catching his kids in action with a digital camera.
Though some analysts disapprove of the company's splashy -- and expensive -- campaign, Gorog says marketing is critical. "Brand creates a huge barrier to entry for competitors," he insists. "If we have mind share as well as market share, it will be difficult to dislodge us."
Roxio is also diving into new, growing markets of digital-photo and video-editing software, as well as data recovery. Its $35 million acquisition of MGI brought in popular consumer products PhotoSuite and VideoWave. "Before MGI, they had a great niche but not much else," says Michael Kim, a digital-media analyst at Robertson Stephens. More important for investors, that deal also boosted the bottom line. Kim estimates that the MGI purchase will augment revenues by $23 million and add 5 cents to earnings per share in fiscal year 2003, which begins in April, 2002.
The company is aggressively pushing its data-recovery software, called GoBack. The program allows a consumer whose PC has crashed to virtually turn back the clock and restore files to the way they were at a particular time or day when the computer was functioning normally. Analysts say as multimedia software and computer viruses becomes more widespread, more consumers will want this sort of protection. Already, Roxio has a distribution deal with sector leader Symantec to bundle some of GoBack's features into its popular Norton Utilities products.
Until now, Roxio has avoided any substantive competition. But as it moves into these new markets, that could change. For one, there's Microsoft (MSFT ), which owns 24% of the PC photo-editing market, vs. Roxio's 40%. As digital photography continues to grow -- IDC projects that the number of digital cameras will almost triple in five years -- expect Gates & Co to get more aggressive on both product features and price.
Microsoft already is bundling its PictureIt software as part of Windows XP, its new operating system. XP also offers a similar, though more limited "go-back" service. "[The market] will get more competitive for them," says Phil Leigh, a digital-media analyst at Raymond James, who has a hold rating on the stock. Of particular concern is Roxio's reliance on Easy CD Creator, which analysts say accounts for more than half of revenues.
At the same time, Roxio's expensive marketing campaign and new emphasis on selling directly to consumers is eroding margins and cutting into earnings per share. Selling via computer makers keeps margins at around 80%. The new emphasis on retail is bringing that down to the mid-70s. Yes, the company increased its previous earnings forecast for fiscal 2002, to 91 cents per share on revenue of $142 million. But that compares to 2001 EPS of $1.45, on revenues of $122 million. The company is projecting EPS of $1 in 2003, on revenues of $178 million.
Still, Roxio is well positioned to ride the digital-media wave. At current levels, the stock is trading at 16 times 2003 earnings. That's cheap vs. digital-media peers, such as RealNetworks, which trades at about 30 times future earnings.
Two of the three analysts who cover Roxio have buy ratings on its stock. "Until now, Roxio has been overlooked. But it's building momentum in several booming sectors," says Robertson Stephen's Kim. In this tough economy, that's a great position to be in.
Black covers technology for BusinessWeek Online
Edited by Alex Salkever