Rovi Corporation (ROVI, Financial) is primarily focused on content discovery and personalization. Apart from this Rovi provide other services like advertising and analytics services. It has 5,000+ issued or pending patents worldwide. Vast majority of licensing agreements are concluded without the need for litigation, however, litigation is a normal part of ROVI's business.
History
Rovi was established under the nameMacrovision Corporation in 1983. On July 16, 2009, Macrovision Solution Corporation announced the official change of its name to Rovi Corporation. It is a company based in the United States whose patents, products and technologies are involved in the navigation, discovery and search recommendations on millions of devices worldwide. Its origins are in video copy protection and rights management. Through a series of acquisitions, notably of Gemstar-TV Guide in 2008 and Sonic Solutions in 2011, ROVI transitioned from a legacy content protection business to a digital media solutions provider. (Source: Wikipedia)
Industry background
The entertainment media market is continuing its transformation. Content has moved from analog to digital, distribution has continued to shift from physical to online, and now access to content and the overall entertainment experience is becoming distributed across many screens such as televisions, computers, tablets and smartphones. This dramatic shift is impacting virtually every area of the entertainment value chain, from content creation and aggregation to discovery and monetization. The expansion of network bandwidth, explosion of connected devices and increased availability of digital content along with the increased mobility provided by tablets and smartphones are all helping to accelerate this market shift. As part of this change, consumers are demanding higher-quality personalized content and enjoy it when and where they want.
Additionally, many consumers are investing in new devices such as tablets and smartphones, which are shifting their entertainment experience across devices both inside and outside of the home. These new devices require the ability to provide information (guidance) identifying what is available to the viewer in broadcast television through VOD or delivered OTT by Internet Protocol. Guidance becomes more complex as more sources of entertainment become available to consumers. Beyond existing Pay-TV options, consumers can now download or stream Internet-based content to their media devices, accessed via subscription, pay-per-view or advertising-supported business models. In addition, the current home media device infrastructure can be very complex. Setting up such an environment generally requires integrating numerous devices, a deep understanding of the interoperability of media formats and creation of mechanisms for managing and enjoying content. Simplifying the consumer experience of this new ecosystem will be critical as the evolution of the market progresses.
Distribution channels, such as cable and satellite operators, web-based service providers, retailers and others are all seeking ways to best obtain or maintain a competitive advantage in a digital entertainment world. They require highly customizable solutions that personalize and simplify the consumer experience, such as additional data about the entertainment content, or additional guidance technology, while still allowing the distribution channel to retain its unique identity. They are also seeking to increase their interaction with the consumer and create new revenue opportunities. This includes having not just a physical and web presence, but also providing media digitally on just about any device the consumer may choose to use. This requires substantial investment in technology infrastructure to augment their current businesses. One area where this is most prevalent is in cable and satellite where a broad drive towards enabling subscribers to enjoy content wherever they are located on whatever device they desire, which we refer to as "TV Everywhere," is resulting in costly moves from legacy distribution technology to Internet Protocol-based infrastructure to deliver Pay TV services.
The markets for consumer electronics [CE] manufacturers are also in flux. Global economic trends and increased competition have challenged much of the traditional CE device market, driving lower margins while consumer requirements for features and services have increased. Consumers are demanding capabilities to interact with broad ranges of media, such as over-the-top video, not just viewing content that is broadcast to TV and set-top box devices. Increased functionality requires extensive software to be embedded into these devices and much higher costs to manufacturers to support and maintain devices for years after the initial sale to a consumer. These new requirements may not be a core competency for CE manufacturers, adding to the challenge of meeting consumer desires.
Interactive program guides
An IPG is an interactive listing of television or video program information that enables viewers to navigate through, sort and schedule video programming for viewing and recording. The IPG is evolving from a guide to linear television content, to a guide for all the digital content to which consumers have access to in and out of the home across all the devices they use.
Revenue generated from segments
Rovi’s market operations are in two segments:
- Intellectual Property Licensing (53%)
- Products (47%)
Customers may:
- License their patents and deploy their own IPG or a third-party IPG.
- They have patented many aspects of content discovery, Digital Video Recording (“DVR”), Video on Demand (“VOD”), Over-The-Top experiences (“OTT”) and multi-screen functionality, as well as interactive applications and advertising.
Rovi generates substantially all of its intellectual property licensing revenue from its discovery patent portfolio, which represents approximately 77% of our total patents. Traditional Pay TV service providers generally pay us a monthly per subscriber fee.
Service providers in the online and OTT space generally pay us a flat fee to license its patents for a specified time period. Rovi’s agreements with its Consumer Electronic licensees generally pay a fee based on the number of units utilizing ROVI's patents.
The product segment is further subdivided into: discovery (service provider IPGs, consumer electronics manufacture IPGs, advanced search and recommendation services), data solutions, analytics and advertising.
ROVI's service provider IPGs allow its customers to customize certain elements of the IPGs for their customers and also allow these providers to upgrade, over time, the features and services they can offer to their customers. ROVI's IPGs are compatible with service providers' subscription management, pay-per-view and VOD services. Its IPGs allow service providers to provide their viewers with current and future program information. ROVI also offers operational support, professional services and data. Its IPGs also have the ability to include advertising. When advertising is provided, ROVI typically shares a portion of the advertising revenue with the service provider. ROVI currently offers IPGs marketed to service providers under the i-Guide and Passport brands in the United States, Canada and Latin America. ROVI's xD guide is a discovery application that extends the cable video experience from set-top boxes to multiple mobile screens, including tablets and smartphones; xD guide makes extensive use of ROVI's cloud services. Service providers generally pay ROVI a monthly per subscriber fee.
ROVI's consumer electronics manufacturer IPGs are generally incorporated into mid- to high-end flat panel televisions and Blu-ray or DVR hard drive recorder-based products. These IPGs generally deliver continuously updated multi-day program listings to users. ROVI uses a variety of terrestrial, satellite and broadband Internet transmission means to deliver listings data to its IPGs. Consumer electronics manufacturers pay a fee based on the number of units produced or pay a flat fee allowing them to ship an unlimited number of units.
ROVI's advanced search and recommendation products are powered by its comprehensive, entertainment metadata. Its search services allow consumers to query program or movie titles, band or album names, track titles and actor or artist names to find and directly access desired content. Search results can be generated through traditional text entry or through voice recognition and natural language conversation for the ultimate discovery experience. Rovi Recommendations Services allows service providers, device manufacturers and others a way to offer their customers entertainment choices similar to a chosen program, movie, album, track, musician or band. In addition, with Rovi's knowledge graph technology, consumers can get personalized recommendations based on their habits and interests. User behaviour like social network activity and contextual factors, such as time of day, day of the week and location, can also be used to provide optimal suggestions.
ROVI offers Metadata pertaining to music, television, movie, book, video games and other entertainment content. In addition, it catalogs information on celebrities, awards, sports and other data necessary to provide a robust set of Metadata. Its database includes unique data on more than 6.5 million programs, including theatrical, DVD and Blu-ray releases, as well as thousands of celebrities. Its database also has information on approximately 3.4 million music albums, 31 million tracks, 10 million books and 79,000 video games. Its data services are operated with systematic processes that are designed for completeness and quality of the data as well as linking the relationships among the data elements. The data services are broken into levels of data: basic data (such as artist, album), navigational data (such as relationships between actor and other movies or television series), and editorial data (such as actor biographies, television, movie or music reviews). ROVI has continued to expand its data to include information from social networks, catalogues of digital providers and other sources. Additionally, ROVI licenses the Rovi Cloud Services to customers of its data. They can choose to gain real time access to the data via its Web Services or to incorporate additional functionality such as media search recommendations (social, editorial, personalized) or enhanced advertising. Customers typically pay ROVI a monthly or quarterly fee for the rights to use the Metadata, receive regular updates and integrate it into their own service.
ROVI's analytics offers the Rovi Audience Management Solution, which is a suite of products combining big data with predictive analytics to provide TV audience insights and advertising campaign management. Those products currently include Ad Optimizer and Promotion Optimizer. ROVI also offers applications that provide insight into the habits and preferences of end users so service providers can advance operational efficiency, improve the customer experience, drive profitability, support carriage and bundling decisions, and help mitigate churn. Using a data warehouse designed to handle TV viewership data, reference data and clickstream events, the analytics engine is able to process raw data from millions of set-top boxes, panels and third-party sources, as well as program, billing and CRM data to further support business goals.
In addition to selling advertising on Rovi-provided IPGs, it also works with some service providers to sell or help them market advertising on guides that they have developed which may include packaging their subscriber footprint inventory into the overall inventory that we offer advertisers. Historically, ROVI has primarily sold broadcasters, or their agencies, the opportunity to promote their products via advertisements inserted in IPGs.
Large U.S. big 4 pay-tv intellectual property licensing renewals
ROVI has current agreements with the four largest U.S. Pay-TV operators (Comcast, Time Warner Cable, Direct TV and Dish Network) that have ~70 million subscribers. These agreements were negotiated 10+ years ago and are up for renewal in end 2015 and 2016.
ROVI presently recognizes revenues from less than 50% of these subscribers. This is due to the terms of the contract entered by Gemstar (prior to its acquisition by ROVI) with some of its customers. Gemstar was in urgent need for cash and negotiated an up-front cash payment in return for a 12-year license. When ROVI acquired Gemstar, purchase accounting rules required it to write off the entire deferred revenue in connection with these agreements. As such, when ROVI renews these Gemstar contracts, its revenues and cash flow will jump significantly. Further, the company anticipates that it will be able to negotiate much better terms since (1) ROVI does not need cash up-front like Gemstar needed, (2) the Pay-TV businesses of the licensees has expanded significantly since the original agreement –Â number of digital subscribers, average revenue per user, digital video recorder penetration, second screen availability, (3) ROVI has a much stronger patent portfolio than Gemstar.
Analysts estimate that renewing all these licenses at a current market rate will increase ROVI's revenue by approximately 25%. This revenue will largely fall to the bottom line since the incremental annual cost associated with this revenue will be minimal.
Convertible senior notes offered in February 2015
On February 19, the company reported earnings that were better than analyst estimates and reiterated guidance it had provided at its analyst day in January. A few days later, on February 25, the company announced that it plans to offer $300 million in convertible senior notes ("new converts"). Proceeds from the new converts (0.50% coupon; due 2015; convertible at $28.90) will be used to replace older converts (2.625% coupon; due 2040; convertible at $47.35).
Since then, primarily due to normal short selling by convertible arbitrage funds (they buy convertible notes and sell short the embedded equity exposure), the stock is down 9.5% creating an attractive entry price for an attractive long-term investment.
Financial statements
The company has 37% operating margins, and management expects this to rise to expanded margin at 45% in 2016 and expects its product investment to sustain that growth in 2017. Further, free cash flow as a percentage of revenue is as high as 30% due to minimal tax liability for the next 6+ years (utilizing greater than $1.3 billion in net operating loss carry forwards).
In light of the strong free cash flow ($161 million in 2014 and rising), ROVI's net debt of $638 million is reasonable, especially since the next major debt maturity is $282 million in 2019.
Management has guided to double-digit revenue growth in the next two years, which will drive earnings per share [EPS] growth at rates even higher, given current and expected margins.
Stock performance graph*
The graph below shows a comparison of the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index (the “NASDAQ”), the S&P 500 Composite Index (the “S&P 500”) and the Russell 2000 Index (“Russell 2000”) from December 31, 2009 through December 31, 2014. The graph assumes an investment of $100 in our common stock and in each of the market indices, and further assumes the reinvestment of all dividends. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.
Shareholder focused management
ROVI repurchased 8.3 million shares in 2014 and plans to repurchase 5 million shares in 2015; currently, it has 91.9 million shares outstanding. Beyond that, ROVI is expected to continue actively buying back shares using its strong free cash flow. Management's bonus targets tied to high end of estimates which increases the probability that the company exceeds the mid-point of its revenue and EPS guidance.
Valuation
Variables:
- Current stock price: $21.77 (As of March 13)
- 2015 non-GAAP EPS guidance: $1.55 to $1.85 ($1.70 at the midpoint; management's bonus targets tied to high end of estimates).
- Price to 2015E earnings: 9.47x
- 2016 and 2017 guidance: double-digit revenue growth each year, with margin expansion in 2016. This will be largely driven by the big 4 renewals and also from new products.
- 30% of revenues are converted to free cash flow due to attractive operating margins and minimal tax liability over the next 6+ years. Net operating losses: as of December 31, 2014, ROVI had federal tax loss carry forwards of approximately $1.3 billion and state carry forwards of approximately $359 million. Federal carry forwards will expire from 2020-2030 and state carry forwards will expire from 2015-2033.
- Short interest/ float of 5.4% and a put call ratio of 0.7x indicate that there is no strong negative view about the company or its stock valuation.
Upside: $29.81 (+27%); based on a discounted cash flow analysis
- 10% discount rate.
- Revenue growth of 11% in each of the next 2 years (from big 4 renewals) and then 5% thereafter.
- Margins go up to 45% in 2 years.
Risks
The big 4 U.S. service provider renewals in end-2015 and 2016 are critical for the company to grow revenue over the next 1-3 years. These renewal discussions involve very large and aggressive companies (Comcast, Time Warner Cable, Dish Network and Direct TV) and the results are unpredictable. Further, the timing for the conclusion of the discussions is also unpredictable. If ROVI is unable to renew the licenses at attractive terms, the company's expected future free cash flow will be materially lower than anticipated by investors.
Patent litigation: ROVI is currently involved in litigation and is expected to continue to be involved in litigation as parts of its normal business operations. Patent litigation tends to be very unpredictable. If ROVI loses one or more critical litigation, it can have a material negative impact on its business.
Conclusion
There are multiple near-term factors that move the stock price up to fair value: renewal of licenses with four large U.S. service providers (revenues and cash flows currently do not reflect the value of these licenses), activist pressure, sizable ongoing share buyback from healthy free cash flow and abatement of short-term selling pressure from convertible arbitrage funds. The company is expected to have double-digit revenue growth, is expected to increase operating margins from 37% to 45% and converts 30% of revenues to free cash flow. 27% upside using conservative assumptions.
Disclosure:
I don't have any investment in the aforementioned stock, nor do I get paid from the aforementioned stock company to write, and I have no plans to invest in the stock for the next 72 hours.
The above details are taken from the company filings 10K, Wikipedia and some other writings are consider from seeking alpha, KL investment partners and guru focus.
And the above graph of comparison of stock with index is taken from 10K.
