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Rovi Corp. Lowers Expectations

18 Jul, 2012 By: Erik Gruenwedel and Chris Tribbey

Rovi Corp. has lowered its expectations ahead of its Aug. 2 second-quarter earnings release, due to fewer deals with consumer electronics manufacturers and a reduction in royalties.

The Burbank, Calif.-based digital entertainment technology is anticipating revenue of $158 million, compared with $179 million during the second quarter of 2011, and a loss per share of between 15 cents and 18 cents. Sales from Rovi’s consumer electronics division are expected to decline by $21 million.

For the year, Rovi is expecting revenue between $650 million and $680 million and earnings per share between $1.60 and $1.90.

Tom Carson, president and CEO of Rovi, said there have been delays in adding new patent licenses for TV Everywhere products and service providers in Europe. Litigation could be an option, he said. Rovi already has patent disputes with LG and Vizio.

“We don’t anticipate ultimately losing revenues as a result of these delays, and we continue to anticipate significant growth in our licensing business from 2011 to 2013,” he said. “However, in order to ensure the long-term protection of our key intellectual property, we did not sign certain new patent licensing agreements during the second quarter, as some expected licensees would not agree to acceptable terms. 

“In addition, certain other deals with first time licensees are simply taking longer to close than anticipated. We expect to come to acceptable terms with these parties later this year or in 2013, and we expect these deals will include catch-up payments to make Rovi whole for the pre-license period.”

Rovi has also experienced delays in the launch of the Rovi Entertainment Store, DivX Plus Streaming and other products.

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said that the lowered expectations aren’t surprising, but also suggested that Rovi was erring on the side of caution.

“We believe it was inevitable expectations would need to be reset,” he wrote in a note to investors. “However, given Rovi’s lock on guide/search technology, we remain comfortable with its IP positioning when the economic outlook finally improves.”

The news underscores analyst concerns the company overpaid on its $720 million purchase of Sonic Solutions in late 2010.

The purchase price at the time valued Novato, Calif.-based Sonic at 40 times its 2011 fiscal earnings guidance and represented a 30% premium on the company’s share price.

Rovi acquired Sonic for its DivX operating system software unit as well as RoxioNow streaming technology — the latter enabling third-party vendors such as Best Buy and Blockbuster to offer consumers transactional video-on-demand rental movies on street date.

Thus was born the Rovi Entertainment Store, which present retailers, service providers, CE manufacturers, content owners and online, mobile and application developers the tools to launch streaming storefronts. Available as a one-stop solution or as a customizable suite of cloud-based applications, the store supports a wide range of devices, including connected TVs, set-top boxes, game consoles, Blu-ray Disc players, PCs, tablets, smartphones, and other mobile devices.

With the growth of subscription VOD — spearheaded by Netflix — and the promise of cloud-based storage of digital entertainment, Rovi CFO Peter Halt at a recent investor event said rollout of RES was taking longer than expected, as additional capital resources were required to attain “enterprise class” compatibility. Typically, enterprise functionality enables technology to operate seamlessly across a corporation’s network of connected devices.

Indeed, Rovi in May raised $500 million in debt capital — a move analysts portend could lead to additional pricey mergers and acquisitions.

“After the [Sonic] acquisition, the legacy Roxio software division fell apart and was just sold a few months ago,” Wold said. “The DivX division has been cranking above expectations. Now we need to see if the Rovi Entertainment Store can ramp without too much additional capital. But it probably won't as consumers aren’t there yet.”

Specifically, Wold believes it will be some time before consumers are completely comfortable owning/accessing entertainment content in the cloud. Indeed, the most successful application of cloud-based storage to date is UltraViolet, which had more than 3 million registered accounts and 6,000 titles through May, according to the Digital Entertainment Content Ecosystem, the cross-industry consortium behind UltraViolet.

“The jury is still out, but I believe they overpaid [for Sonic] at the wrong time and not knowing what would be required to spend to get things going,” he said. “Concerns are they will take the capital they just raised and make another acquisition like [Sonic]. I don't think they will, but that is the concern until they prove otherwise.”

About the Author: Erik Gruenwedel and Chris Tribbey

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