ROVI

Rovi Corporation (ROVI)

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Rovi (ROVI)

Q2 2013 Earnings Call

July 31, 2013 5:00 pm ET

Executives

Peter C. Halt - Chief Financial Officer and Chief Accounting Officer

Lori Barker

Thomas Carson - Chief Executive Officer, President and Director

Analysts

John F. Bright - Avondale Partners, LLC, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Todd T. Mitchell - Brean Capital LLC, Research Division

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

James Medvedeff

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rovi Second Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 31, 2013. I would now like to turn the conference over to Lori Barker, Vice President, Investor Relations. Please go ahead, Lori.

Lori Barker

Good afternoon, and thank you for joining us today. I'm joined byjjalotjot@spcapitaliq.com Tom Carson, our President and CEO; and Peter Halt, our Chief Financial Officer.

Before we discuss our second quarter results, which were released earlier today, I would like to start with some housekeeping items. First, during our conference call, we will be making forward-looking statements, including statements regarding Rovi's forecast of future revenues, expenses and earnings, the sales of its Rovi Entertainment Store and Consumer Website business, possible outcomes of litigation, as well as business strategies and product plans. These forward-looking statements are subject to risks and uncertainties that may cause actual results to vary materially from today's forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements are described in our Form 10-Q for the quarter ended June 30, 2013 and other SEC reports and filings made from time to time. And we encourage you to review the discussion of those factors in those reports and filings. All of our statements are made as of today, July 31, 2013, based on information available to us as of today. And except as required by law, we assume no obligation to update any such statements.

Second, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial results, presented in conformity with Generally Accepted Accounting Principles in the United States. And investors and potential investors are encouraged to review the reconciliation of adjusted pro forma financial measures included in our earnings release. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are included in our Q2 2013 earnings press release, which has been furnished to the SEC on Form 8-K and is available on the Investor Relations section of our web page at www.rovicorp.com.

Finally, the live webcast of this conference call is available in the Investor Relations section of our web page, and a replay of the audio webcast will be available on the website shortly after this webcast ends and will remain on the website until our next quarterly earnings call.

Now I would like to turn the call over to Peter.

Peter C. Halt

Thank you, Lori. Good afternoon, everyone, and thanks for joining our call. Hopefully, everyone has had a chance to see the earnings release we issued today with our results for the second quarter. On today's call, I'll give you the financial highlights and some context around our results and our revised expectations, then Tom will discuss some of the key drivers for the quarter, including growth in our service provider vertical, product updates in the NCTA cable show and the continuing expansion of our data business. Tom will also address the recent litigation news, including clarifying some aspects of the recent Netflix ruling, and discuss our revised expectations. Finally, we'll open the call up for Q&A.

In regard to this quarter, we continue to make good progress in our realignment around our core businesses by entering into an agreement to sell 2 non-core operations. Additionally as Tom will speak to in greater detail, revenue growth in our core service provider vertical was strong. All of this positions us for second half growth when compared to the first half of 2013.

With that said, while we expect improved performance from the first half of 2013, we are reducing our fiscal year 2013 estimate to take into account uncertainties about how quickly we can close certain deals we are currently negotiating on appropriate terms. I'll talk more about that in a couple minutes.

Before we get into specifics on the quarter, I'd like to provide you with an update on our efforts to shed non-core businesses. In July, we entered into an agreement to sell both the Rovi Entertainment Store and our Consumer Website businesses. Both of these businesses will be the key businesses that did not fit into the business model we are building for the future. As you all know, we put the Rovi Entertainment Store for sale at the beginning of the year. As for our Consumer Web properties, it includes the SideReel business and certain other consumer-facing websites. As we discussed this past quarter, the SideReel business is a headwind to revenue. These websites are also not core to our go-forward strategy, and accordingly, we put them up for sale and entered into a sales transaction, all within a 3-month period. We expect both transactions to close in Q3 2013. Both of these businesses are classified as discontinued operations and are not included in adjusted pro forma or APF results we'll discuss today.

Now turning to our results for the quarter. Revenues were $146.4 million, down $8.3 million or 5% from the second quarter of 2012. The decline was driven by declines in our CE verticals, most notably, our CE video delivery and display sales verticals. The declines in our 2 CE verticals were partially offset by strong growth in our service provider vertical. Our service provider vertical grew 10%, fueled by growth in our product revenues, plus 2 new IP licenses. Our licensee, or AT&T, expanded their relationship with us to include the TV Everywhere offering and the VUDU-branded over-the-top video service. Tom will provide greater color on these 2 deals later in our call.

In our CE vertical, CE discovery and advertising revenue was down $5.8 million or 18%. Contributing to this decrease was lower reporting from CE companies who pay us on a per-unit basis and a lack of new deals in the quarter. While we were working on a couple of new agreements in this vertical, we did not close any within the quarter. CE video delivery and display revenues were down $11.7 million or 36% from the second quarter in 2012. This anticipated decline was largely the result of continued DivX headwinds. DivX continues to suffer from lower per-unit reporting from device manufacturers who pay us on a per-unit basis. However, there was good news in the quarter for DivX as we signed our second major renewal of the year with Philips, Samsung for their mobile devices.

Finally, our other revenue vertical grew $1.5 million or 11% year-over-year, driven by the continued expansion of our metadata licensing business. Like with our service provider vertical, we continue to believe our data business offers us an excellent opportunity for growth. Tom will speak more about our focus on growing this business.

With respect to the cost of our continuing operations, APF cost of goods sold, plus operating expenses, were down 4% or $3.1 million from the comparable period 1 year ago. This is primarily due to a reduction in IP-related litigation expenses, last year's product rationalization efforts and our continuing focus on cost reductions. For the full year, we still anticipate the aggregate spend on cost of goods sold and operating expenses will be relatively flat year-on-year as we fund our new initiatives out of our continuing cost reduction efforts. In that regard, we stated during our Investor Day that we were targeting an additional $14 million in cost reductions in 2013 from our existing business to provide us the funds to reinvest in such initiatives. We have already achieved or in the process of acting on cost reductions in excess of $14 million, which allows us to invest in our sales force, as Tom will talk about later today, and increase our focus in some of our organic initiatives that drive growth in the future.

We continue to have significant cash flow and generated $47 million in net cash from operations this quarter. Our cash and investments at the end of the quarter were approximately $835 million. We continue to take a very thoughtful approach to our balance sheet. On that front, we repurchased 2.8 million shares for $65 million during this quarter. That brings total stock bought back in 2013 to 5 million shares for approximately $107 million. We now have approximately $116 million remaining under our existing share buyback authorization.

Turning to our full year 2013 expectations. Adjusting our estimates to reflect the sale of our Consumer Website business will result in full year expectations of between $623 million and $651 million. Additionally, although it is still our goal to reach the midpoint of this range, we believe it is prudent to further reduce expectations for 2013, in part due to the continued softness in our DivX business. We have lowered our expectations on the DivX front and are now looking to fill the gap primarily from OTT licensing opportunities. However, while we are in the midst of negotiations with several OTT and international companies, the timing of closing these deals is difficult to forecast. The soft international economy and the fact that most OTT providers are new to licensing means these deals are taking longer to close. While we firmly believe we will close these deals, given the timing uncertainty associated with [indiscernible] we get the appropriate pricing, we think it's best to lower expectations for 2013. That said, the midpoint of our revised expectations for the back half of the year represented 5% increase in revenue over the first half of the year. When comparing the first half to the second half of each year over the past 3 fiscal years, this 5% growth will be the best first half and second half growth in over 3 years. We believe this places us on a good trajectory to increase growth in 2014.

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