Focus Article: Rovi Corporation (ROVI)

Rovi Corporation (ROVI) $14.51

The Company:

For well over a decade now, one of my best sources for information for music was a site called AllMusic.com. Most popular music services including iTunes, Pandora and Spotify also depend on AllMusic.com for information about artists, albums and songs. Rovi acquired AllMusic.com in late 2007 for $72 million. Given that one of Rovi’s key products is providing information about movies, music and other entertainment to various companies that integrate it with their set-top devices, game consoles and other media devices, this acquisition was a good fit.

Rovi Corporation, a Santa Clara, California based digital technology company, is in the business of providing entertainment guides and licenses to technologies that enable things like the whole home DVR where you pause a program in one room and resume watching from another. Formerly known as Macrovision Corporation, the company was founded in 1983. The company has 5,200 patents that are either approved or pending with 60% of these patents issued and 40% pending. The company is very aggressive in enforcing these patents and 5 out of the 7 major consumer electronics (CE) companies like Samsung, Sony and Panasonic are customers of Rovi’s services.

The company also has a large presence with service providers. Out of 113 million subscribers who pay for TV services in the United States, 98 million are Rovi subscribers through one of the service companies like Comcast, Dish Network, DIRECTV, Verizon and AT&T. The company has also partnered with Google as it rolls out its Google Fiber service with internet speeds that are 100 times faster that current broadband speeds.

Rovi’s revenue is broadly diversified across geographic regions with just 28% of revenue coming from the United States. Unfortunately this is also a problem for Rovi as nearly a third of its 2011 revenue was generated from the EMEA (Europe, Middle East and Africa) region and the slowdown in Europe is hurting the company. The other challenges Rovi faces are a slowdown in CE device sales, high R&D expenses and slower growth in their advertising segment. The company saw nearly 100% growth in its interactive TV advertising segment last year and expects that to slow down to growth of 25% to 30% going forward.

Business Statistics & Financials:

With declining revenue and a string of losses, the stock has been in free fall over the last year, losing more than 66% of its value and changing from a growth story to a value one. The company missed revenue and earnings estimates in Q2 2012 and reduced its full year 2012 revenue guidance to a range of $650 million to $680 million and adjusted earnings to a range of $1.60 to $1.90 per share. This compares with revenue of $690.81 million in 2011 and adjusted earnings of $2.40 per share (the company reported a GAAP net loss of 36 cents per share in 2011).

The company attributed its Q2 2012 miss to a licensing deal that did not come through before the end of the quarter and which they expect to capture either in the second half of 2012 or in 2013 by striking a deal or through litigation. Other factors that led to the Q2 miss included the aforementioned slowdown in CE devices, the softness in interactive TV advertisement, delays in launching the “Rovi Entertainment Store” (a white labeled digital entertainment store) with some partners, lower than anticipated revenue from DivX and high expenses. It looks like the company missed on every front from revenue to net margins.

For the six month period ended June 30, 2012, the company posted slightly higher revenue of $333.31 million when compared to $331.72 million in the first half of 2011. Given the company’s forecast of $650 million to $680 million for the full year 2012, it looks like the second half of 2012 is going to look very similar to the first half. Since the company generated $359.09 million in revenue in H2 2011, year-over-year comparisons are probably going to remain challenging.

On account of some of these challenges and the big drop in the stock price, the stock is trading below book value but not below tangible book value on account of $2.13 billion in goodwill and intangible assets on the balance sheet. The company has approximately $550 million in net debt on its balance sheet. While the company has been reporting net losses, free cash flow has been solidly positive on account of non-cash charges affecting GAAP earnings such as equity based compensation, amortization of intangible assets, depreciation and marking foreign currency collars to market. Rovi trades for a forward P/E of 7.52 and a trailing EV/EBITDA of 9.91.

The company repurchased more than $300 million worth of its stock last year and has spent $50 million on repurchasing shares in the first half of this year. Rovi still has $313 million remaining under their existing share repurchase program and $873 million in cash on the balance sheet to fund these repurchases.

Competitors:

It is challenging to find a public company that directly competes with Rovi and hence I am not including the table of competitors in this weekly focus article. Privately held Boxee and Roku could be considered competitors. Rovi filed a patent infringement lawsuit against a group of companies earlier this year that included Roku, Netflix, LG, Mitsubishi and Vizio.

Insider Buying:

One insider purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Rovi Corp here.

Owner Relationship Date Cost # Shares Value($) Total Shares
Tom Carson President & CEO 25-Sep $15.00 15,000 225,000 152,160

Risk Factors:

Some of the risk factors impacting the company such as slowdown in consumer electronic devices, a slowdown in advertising rates, softness in Europe, delayed licensing/product rollouts and high R&D expenses have already been discussed. The company plans to decrease its operating expenses by $20 million over the course of the next year but that might be easier said than done especially when your business relies on IP to generate most of your revenue.

Conclusion:

Rovi is a challenging business to understand for most investors. The company was very active with acquisition over the last few years. As is often the case, it looks like some of those acquisitions such as the Sonic Solutions acquisition have not done as well as management expected and the company appears to be have cooled off on acquisitions for the time being. While the company has $1.48 billion in debt, it also has $873 million in cash and generated $224 million in free cash flow last year.

The company appears to be cheap on a forward P/E basis but earnings have been volatile with the company posting GAAP losses in several quarters but positive earnings after “adjustments”. I would prefer to wait and watch how the company does for the rest of the year before starting a position in my long-term portfolio. I will sell the stock from my trading portfolio and will add the company to our ever growing watch list.

Leave A Comment

You must be logged in to post a comment.