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Rovi (NASDAQ:ROVI)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

Lori Barker

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

Thomas Carson - Chief Executive Officer, President and Director

Analysts

Michael J. Olson - Piper Jaffray Companies, Research Division

Robert W. Stone - Cowen and Company, LLC, Research Division

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

Todd T. Mitchell - Brean Capital LLC, Research Division

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

Perry Huang - Goldman Sachs Group Inc., Research Division

Francisco Ruiz - Exane BNP Paribas, Research Division

Saket Kalia - JP Morgan Chase & Co, Research Division

James C. Goss - Barrington Research Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rovi First Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, May 1, 2013. I would now like to turn the conference over to Lori Barker of Rovi Investor Relations. Please go ahead.

Lori Barker

Good afternoon, and thank you for joining us today. I'm joined today by Tom Carson, our President and CEO; and Peter Halt, our Chief Financial Officer. Before we discuss our first 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, 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 March 31, 2013, and other SEC reports and filings made from time to time. And we encourage you to review the discussion of these factors in those reports and filings.

All of our statements are made as of today, May 1, 2013, based on information available to us as of today. And except as required by law, we assume no obligation to update any such statement.

Second, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial release, 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 results, including in our earnings release. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are included in our Q1 2013 earnings release, which has been furnished to the SEC on Form 8-K and is available in 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, and welcome aboard. For everyone joining us today, good afternoon, and I would like to introduce you, all, to Lori Barker, who has recently joined us as the Head of Investor Relations. I would also like to say thank you to Chris Keller for all his help this past year.

Hopefully, everyone has had a chance to see the earnings release we issued today, with our results for the first quarter, which included a listing of the quarter's business and our operating highlights. On today's call, I'll give you the financial highlights and some context around our results, then Tom will discuss strategic significance of some of our recent wins, and our confidence in the importance of Rovi's technology and product offerings enabling digital entertainment. Finally, we'll open the call up for Q&A.

In regards to this quarter, I am pleased with how we started out in 2013. As Tom will speak in greater detail, we entered into several key IP licensing agreements and also had a very important customer renewal for DivX. We believe these deals demonstrate the continued strength of our IP and the relevance of our products in the rapidly evolving digital entertainment space. Our first quarter results were in line with our internal expectations. Revenues were $154.7 million, down $17 million or 10% from the first quarter of 2012, almost entirely driven by declines we had anticipated in revenue from our CE video delivery and display sales vertical. CE video delivery and display revenues were down $16.5 million or 44% from the first quarter of 2012. This anticipated decline was a result of the continued DivX headwinds and the ongoing decline in ACP revenues.

In terms of our other sales verticals, both service provider and CE discovery and advertising revenues were up approximately 1%. However, our other revenue was down $1.2 million or 7%, largely due also to continued decline in ACP for entertainment revenue. The quarter included several key deals, including IP licensing agreements with LG Electronics and Hulu, and a DivX renewal agreement with LG Electronics. While Tom will discuss the strategic importance of these 2 IP licensing deals, I would like to remind everyone of the importance of the DivX renewal. As we discussed during our Investor Day at CES, we entered into 2013 with significantly less visibility on the DivX front than in other areas of our business. We also said that we had 6 major DivX deals coming up for renewal in 2013, one each in the first 3 quarters and 3 in Q4. We are very pleased that we successfully renewed our agreement with LG Electronics, which was the Q1 renewal to which we referred. Additionally, given progress to date, we anticipate announcing our Q2 DivX renewal later this month.

We also stated that we anticipated relicensing our IP to LG Electronics in the second half of the year, and as this would be one of the contributors to an expected higher revenue split in the back half of 2013. However, now that we have resolved matters with LG, our first half, second half revenue split expectations for the balance of the year, remain unchanged. This is primarily because, when we saw that we could close both the LG and Hulu deals, we prioritized our efforts on closing these deals. As a result, other licensing deals in the pipeline that we would have otherwise have [indiscernible] closing in the quarter, slipped out to later in the year. There is, however, no change in our full year revenue outlook.

With respect to adjusted pro forma or APF cost, cost of goods sold plus operating expenses were up 3% or $2.8 million from the comparable period 1 year ago. This was primarily due to the timing of IP-related litigated expenses in cost of goods sold. Within costs, it is also worth noting that R&D expenses were down 14% or $4.6 million from the same quarter 1 year ago, as a result of last year's product rationalization and cost reduction efforts. For the full year, we still anticipate that the combination of cost of goods sold and operating expenses will be relatively flat year-on-year, as we reinvest our cost savings to finance new strategic initiatives.

In terms of cost reductions we targeted for 2013, we stated during our Investor Day that we were targeting an additional $14 million in cost reductions of our existing business to provide us the funds to reinvest in new initiatives. We have already achieved or have identified or are in the process of taking action on approximately $10 million of the required reductions. We feel comfortable that we will take the actions necessary to ensure that our organic strategic initiatives are self-funded. Cost savings in place that are underway include optimizing our IT spend, continued rationalization of spend on mature products, and creating engineering centers of excellence.

Moving to a few items of interest in the balance sheet. In April, we refinanced our $540 million Term Loan B. We reduced our interest rate spread by 25 basis points and reduced our LIBOR floor by an additional 25 basis points. As a result, while LIBOR stays below our new 75 basis-point floor which is projected until late 2015, we anticipate annualized interest expense savings of approximately $2.7 million.

On the share buyback front, in Q1, we repurchased 2.2 million shares for $42 million, at an average price of $18.76 per share. Additionally, under our current 10b5-1 Repurchase Plan, which continues through May 3, we purchased approximately 800,000 more shares at the end of the first quarter. Taking into account repurchases to today's date, we now approximate $164 million remaining under our existing share buyback authorization.

Turning to our full year expectations for 2013. As I mentioned earlier, there have been no change to our revenue expectations. We continue to anticipate fiscal year 2013 revenue between $630 million and $660 million. However, we are increasing the expected midpoint of the range for APF income per a common share by $0.05, and now expect APF income per a common share of between $1.95 and $2.25. APF income per a common share expectations benefited from our Term Loan B refinancing, as well as the volume and timing of share buybacks.

Finally, I would like to remind everyone that we are actively pursuing the sale of the Rovi Entertainment Store business. As such, the results of the Rovi Entertainment Store has been reclassified as discontinued operations and are excluded from our adjusted pro forma results. We took this action as part of our ongoing strategic efforts to focus the company on growth opportunities related to our core enabling technologies and services. The sales process continue to progress, and we can either expect to announce a buyer for the Rovi Entertainment Store by our next quarter's earnings call. With that, I'll turn it over to Tom.

Thomas Carson

Thanks, Peter, and thank you to everyone joining us on the call today. The first quarter was a good start to 2013 for Rovi. We continue to execute against the strategic goals we've set for ourselves last year, and we are very excited about our numerous accomplishments during the first quarter. Over the past few months, we have called out a number of proof points across Rovi's businesses, and we have talked about what will be important to deliver in 2013 in order to position ourselves for growth in 2014 and beyond. While it's early in 2013, and we still have plenty to do, I am proud of what we accomplished this past quarter.

As Peter mentioned, we had several important customer wins this quarter. The LG Electronics and Hulu licensing agreements are important proof points for Rovi, with respect to discovery patent licensing, and demonstrate the continuing strength of our patent portfolio. The LG Electronics deal resolves the patent disputes between the parties, and provides LG with a multiyear license for the use of Rovi's patent portfolio across all of LG's products, including its mobile products, further demonstrating the strength of our IP on the second screen. LG is the world's second largest ETV manufacturer, and they have some of the most advanced connected products available. We are excited to be re-engaging with them on the product front, as well as to see our technology extended to mobile devices. The agreement provides LG with the rights to utilize our comprehensive set of video and TV metadata in certain countries. We believe LG sees real value in our metadata to support discovery solutions and look forward to pursuing that relationship.

With the LG license resolved, we now have all but one of the major worldwide ETV manufacturers under license. TP Vision is the remaining out-of-license major CE manufacturer. As we discussed at our Investor Day, TP Vision, just like LG, is included in our 2013 full year guidance. We are scheduled to begin litigation proceedings with them in Germany this quarter and believe we'll end up with TP Vision as a licensee this year.

We also entered into an IP license with Hulu. While not individually significant deal in terms of revenue, this agreement represents an important proof point in our efforts to license the over-the-top [indiscernible]. As we said before, we've been successful historically in signing up over-the-top video providers with IP licensing experience, such as Apple, Comcast, Sony and others. However, we know that people have been watching to see what would happen with Hulu, and a couple other over-the-top providers who decided to litigate. In terms of reestablishing momentum in the over-the-top space, we believe having Hulu acknowledge the validity of our patent will help set the stage for further over-the-top video provider agreements.

And now turning to total guidance. We reached a significant milestone this quarter with the first commercial launch of our second screen product for service providers, TotalGuide xD. TotalGuide xD was launched by a Canadian service provider, Cogeco, and is off to a very good start. There were more than 1,000 downloads of the iPad apps before Cogeco even announced this availability, all from users who happen to discover it on iTunes or via word-of-mouth. We believe this is another indication of the relevance of TV Everywhere solution. Additionally, Cogeco licensed our remote record functionality to go with our xD solution, and all the Rovi applications Cogeco uses feature our metadata in our search and recommendation technologies. This successful launch demonstrate the many ways in which we can help our service provider customer develop and implement the kind of personalized and connected experience for their customers, that will help them stay competitive in a world where over-the-top content, functionality and information is prevalent. In fact, the initial demand for our xD application is exceeding our expectations. We anticipate at least 2 more service providers will submit our xD app to the Apple iTunes store in Q2. We also anticipate deploying our xD application with at least 3, and possibly as many as 7 other service providers this year.

As our xD solution does not require the service provider to implement TotalGuide for set-top boxes, we are getting strong interest in this application. In fact, we are in conversations with and expect to announce several more xD customers this year. This type of interest in our Internet connected guidance experience is a great example of both the transformation our guide products are undergoing, as far as become connected and revenue opportunity we see in the TVE space.

While our TotalGuide xD engagement and rollouts are moving faster than anticipated, the rollout of TotalGuide for set-top boxes is moving a little bit slower, mainly due to third-party dependencies. Despite the slower rollout by our customers, I am pleased that we had hit our internal release schedules with TotalGuide 1.0 and now TotalGuide 1.1. While we are currently working closely with Bend, Buckeye and Mediacom, to deploy TotalGuide for set-top boxes, we now believe our MSO clients are more likely to commercially deploy this offering to their consumers in the second half of the year. To be clear, between now and the end of July, we have 4 lab trials planned, and we still expect to field deployments by the end of the year with at least 3 MSOs. The revenue impact of this change is insignificant for us this year.

We're also pleased with the progress we made on the DivX front this quarter. As Peter mentioned earlier, LG Electronics was an important DivX renewal for us. LG renewed its worldwide DivX license while we were resolving our IP relationship with them. We believe the willingness of LG's product team to enter into a multiyear deal with us for DivX, at a time when we had ongoing patent dispute with them, speaks volumes about the relevancy of DivX to CE manufacturers. Additionally, we are very excited that LG expanded its relationship with us to include DivX Plus Streaming. In terms of our DivX product, as I discussed last quarter, we are committed to launching DivX 10 within less than 1 year of our DivX 9 release. DivX 10 will include high-efficiency video coding or HEVC, which we see as a potential game-changer for video distribution and consumption, as it supports incredibly high resolution and performance with significantly reduced storage and bandwidth costs. I am pleased that we are on schedule to meet this commitment.

Getting content distributed to use our DivX Plus Streaming DRM is also a key initiative. Recently, we expanded our DivX relationship with UV in France to include DivX Plus Streaming. This deal is worth mentioning as UV supplies its video-on-demand platform for service providers in France. We look forward to working with UV to demonstrate the value of DivX Plus Streaming to service providers.

These are critical steps in seeding the ecosystem in order to make DivX Plus Streaming a value-add for hardware manufacturers and over-the-top providers alike. While there's still a lot for us to do, we believe that DivX Plus Streaming should play a meaningful role in emerging TV Everywhere over-the-top markets, by providing the highest-quality video and consumer experience.

DivX is an area we have been focused on from an execution perspective. We are working hard to stabilize it this year and grow it in 2014. I look forward to updating you on our progress on this front.

We also have a number of developments to report on the advertising front. First, I am proud to announce the acquisition of analytics capabilities and the related launch of an advanced predictive analytics platform that enables broadcast networks, cable TV, service providers and others in the television distribution industry to leverage big data sets to optimize local ad placements and promotions. The new Rovi audience management platform was acquired as part of Rovi's recent acquisition of IntegralReach. The Rovi audience measurement platform uses proprietary algorithms to analyze massive amounts of split-screen viewership information and combine it with third-party demographics and purchase behavior data, in order to deliver an optimized plan for executing local ad buys, as well as programming and subscriber promotion. We are very excited about this tuck-in acquisition and the analytics capability it brings to Rovi. The IntegralReach acquisition allows us to take advantage of Rovi's extensive multiscreen viewing and navigation data. We are focused on capitalizing on the opportunities we are seeing as the amount of user data grows, as TV-viewing expands beyond the living room and as TV distributors evolves in mechanisms for tracking their audiences.

Second, I'm excited to announce that a North American, Tier 1 service provider, has signed up for custom analytics reporting using Rovi's Return Path Data. We have talked about the benefits of adding analytics to our offerings, and we believe that this is the start of an exciting business opportunity for Rovi. We will also use Rovi's Return Path Data in a related analysis to project guide usage and thus, better monetize our guides by increasing the CPMs we can deliver.

In terms of our advertising business, we had some headwinds with our web properties, primarily [indiscernible], but we were pleased with the performance of our core guide advertising business. In terms of our guide-based advertising business, we continue to get strong demand from programmers. We also had several notable, new conventional ad campaigns, including with Unilever for Dove in the United States, McDonald's, Miller Genuine Draft in Canada and with American Airlines and Procter & Gamble in Europe. We also launched repeat advertising campaigns for several existing conventional ad partners including Hellmann's, Red Bull and Volkswagen in Europe, and Bank of Montreal in Canada. We have taken several important steps this quarter to help us further our advertising business, and I look forward to providing updates in the future.

In terms of our data business, earlier this quarter, we extended our metadata license with Samsung to power all of their Smart TVs and tablets in several new geographies. We also announced that Facebook will be using our metadata on this platform. While the Facebook agreement is relatively small compared to our total revenues, it's an important milestone for our data group as we expand our reach to social networking platforms. Our extensive metadata, which covers more than 4 million TV shows, movies, celebrities and sporting events, will give Facebook new ways to create a more robust user experience. In addition, Facebook will make a small set of basic Rovi video and DVD elements available to third-party app developers who are on the Facebook platform, in order to create meaningful consumer apps and interaction with entertainment-related content. This will enable Facebook and those app developers to use Rovi data as the base foundation for movie or television apps that are made to connect in Facebook. We are excited to add Facebook to the list of portals using our data, including AOL and Microsoft.

Data, as I've said before, is an important asset for Rovi and is in much demand by many existing and potential customers. This is an area where we continue to invest and plan to extend our data depth and geographic coverage from 50 countries to 70 countries by the end of 2015.

There has been a lot of exciting developments this quarter, and I believe Rovi is beginning to realize the benefits of our products and services realignment. In particular, we believe our recent IP wins reaffirm the value of our patent portfolio, build excitement for the licensing opportunities ahead and demonstrate that Rovi is on the right path for long-term sustainable growth.

The progress with TotalGuide xD and the recent DivX Plus Streaming agreement in the over-the-top space speak to the significant opportunities related to TV Everywhere initiatives. We are devoting resources and strategic spend to the TV Everywhere opportunity. We continue to believe we have the strategic advantage in this space, and look for opportunities to move quickly and take advantage of the possibilities in this continually emerging space, including where appropriate, through acquisitions.

We continue to build on last year's improvements in accountability and execution. We still have some hard work in front of us, but we are keeping a close eye on delivering against our proof points and continuing to create operational efficiency. More than ever, I am confident Rovi's technology and product offerings uniquely position us for the significant market opportunities presented by the digital disruptions in entertainment content delivery. With that, let's open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Mike Olson with Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

You probably can't say much on the litigation situations, but for TP Vision which will -- as you said, go to trial later this quarter, would you be surprised if that went to trial? Or do you expect that it will settle in advance? And can you just say what portion of the $40 million from litigation revenue, that was in the guidance for the year, was attributed to LG and what portion was expected to come from TP Vision?

Thomas Carson

Yes, just on the litigation, it's -- I'll address that and then I'll hand it over to Peter. He can address some of the financial questions. Generally speaking, I mean, the approach that we absolutely always take is to try to have a path where we have a negotiation party engaging in litigation. And even when we're involved in litigation, we continue to have parallel discussions on the business side to try to come to a resolution. And that's what we try to do. So that's our hope in this particular case. I can't say with certainty what will happen in this particular case, but we have had ongoing dialogue with TP Vision on this particular topic.

Peter C. Halt

And Mike, what we've said in regards to the back half, the CE revenue, is about $40 million in the back half. So about 2/3 of that would relate to the parties that we're litigating with. And of course, a part of that would be revenues with LG. They're now being recognized in the first half of the year, that relate to quarters 1 and 2.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then, I missed part of the call so I think you may have mentioned this, but what's the status of the remaining 4 or 5 DivX deals that are incorporated in guidance for the year? And just, obviously, you got LG done with. What's your level of confidence in getting those other ones done in the remaining 3 quarters of the year?

Thomas Carson

I think with the deals we've already done in the DivX space, we remain pretty bullish on being able to get the rest of the deal done. A matter of fact, we said that we actually have -- we're pretty close to wrapping up the Q2 deal. So later this month, we hope to be able to announce that. So I think we're feeling pretty good. We like the dynamic that we've been getting, particularly with DivX Plus Streaming, to try to help us in this -- the kind of next generation of having DivX in the connected experience and the streaming experience. And it seems to be resonating pretty well with a lot of the major CE manufacturers. So we're pretty bullish on it.

Operator

Our next question is from the line of Rob Stone with Cowen and Company.

Robert W. Stone - Cowen and Company, LLC, Research Division

A couple of questions, if I may. First, continuing on the theme of over-the-top and other sort of portal-based revenues, how do you approach pricing, something like a social media relationship or a subscriber platform like Hulu, not asking specifics of these deals but just in general, how you think about the value proposition to those kind of customers?

Thomas Carson

And it is a relatively new space from a licensing perspective for us. But we do have some basis based on some of the deals we've already done in the space. But a lot of the approach that we take is really to look at the use of the -- of whatever the particular application is. And they all have different business models, some our subscriber-based, some are advertising-based. In a subscriber basis, you can look at the number of subscribers and try to put a licensing rate to that. When you have an advertising model, we'll often look at page views and uniques and try to determine a valuation based on that. So it really depends on a particular use case, but the combination of some of the precedent we already have in these deals, plus looking at the number of potential users has given us a framework to work from.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay, great. Housekeeping question for Peter, if I could, please? How should we think about the cash tax rate, the adjusted tax rate for this year?

Peter C. Halt

Look at our cash tax rate for this quarter, we anticipate that will be a full year cash tax rate. As we had said last year, the largest item for us in terms of the cash tax rate is withholding for some of the payments that we get coming on shore, and we anticipate that, that percentage of our taxes will be consistent this year.

Operator

Our next question is from the line of John Bright with Avondale Partners.

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

Tom, Peter, TotalGuide xD, you talked about that quite a bit. Is that still $1 per month per sub, or how should we be thinking about pricing?

Peter C. Halt

John, that's TotalGuide for set-top boxes. xD is the application for the tablets. And so we've talked about that having a lower pricing. We've said in the past that it averages about $0.25. And I'm here to say today, that our actual pricing is going better than what we've said in the past.

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

Okay. Next on, a licensing question. You've got the 2 big renewals in '15 and '16 coming up. What are the key patents involved in that, and how meaningful is that in revenue?

Thomas Carson

So a couple of things on that. So first, we are, as we speak, in the planning phase for getting prepared for those negotiations. So there actually is a fair amount of work going on there. Keep in mind, we don't look at 1 or 2 specific patents. Typically, the way we have the discussion, is there are multiple patents on a going-in basis that we will look at and go through an infringement analysis, and that's a kind of work that's going on now. So it's not 1 or 2 specific patents that we would use there. So it's a combination of multiple patents that we think are the main ones that we've looked at for infringement, and we'll propose those. And typically, you expect to see some of those get knocked off in discussions, but there's usually a backup plan with some additional patents that we are going to talk about, if some of the initial ones get knocked off. So it's kind of a multi-patent approach going into the discussion.

Peter C. Halt

One of these things, John, if you recall Samir speaking at our Investor Day at CES, the one point we tried to make is, when these licenses were entered into back in '03 and '04, there wasn't that many things that were applicable in our patent portfolio. I mean, it's basically just a grid guide. We're very happy with now that the volume of different features that are involved now, that come into our patent portfolio, because there weren't DVRs back then, and there wasn't a second screen. A lot of the functionality that's existed today wasn't in play then. It's because the boxes were -- didn't have the same computing or storage power.

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

And these service providers are using these additional patents today?

Peter C. Halt

Absolutely.

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

And I'll ask another, I don't know if you can break it out. The size, how meaningful are these 2 today, these 2 customers today?

Peter C. Halt

Well, Echo -- it's EchoStar and Comcast. You can look up there, they're sub-based, they're both very significant. They're 2 of the larger players in North America.

Operator

Our next question is from the line of Todd Mitchell with Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

Two questions. First of all, on the analytics acquisition, can you describe how you collect -- you collected data off of your own guides and when -- I guess is this a ratings product, or is this an analytical product for a specific service provider, to look only at their subs?

Thomas Carson

No. So let me go back and just talk a little bit about analytics. So first off, what Rovi historically has had is a return path coming in from service providers and connected devices. So we've been able, historically, to get Return Path Data from set-top boxes and from any connected device. And typically, we use them in terms of trying to help validate advertising campaigns. But we also recognize that there is a nice wealth of information that's coming back. And what we wanted to do is try to figure out a mechanism for somehow trying to monetize that Return Path Data. And what the IntegralReach acquisition brings is an ability to do more than just kind of basic analytics. This is now the ability to take our Return Path Data and merging it with other data sources to be able to give service providers and broadcasters more information about what their users are doing and also to help be a lot smarter about how they do advertising. So that's basically the use case.

Todd T. Mitchell - Brean Capital LLC, Research Division

And is it -- would it be a syndicated product for a broader audience? Or does -- or you collect data just from your service providers?

Thomas Carson

Well, right now it's -- we're kind of data-agnostic. I mean, the approach with IntegralReach, is it's not -- we will certainly, absolutely use our own metadata and that's one of the key things that actually goes into this particular platform. But we're able to take other data sources as well and merge them into the algorithms, and be able to take the various data sources and come up with reports and information for either service providers or broadcasters.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And then switching over to DivX Plus Streaming in a TV Everywhere application, how do we get visibility on how a service provider would use the DivX platform for TV Everywhere? I'm assuming that they would use it as a -- basically, like your TotalGuide xD is -- works on the iOS platform. Would the DivX Plus Streaming be kind of a similar application for non-Apple devices? Is that the right way to think of it? And how would we get visibility into you getting some traction in that front?

Peter C. Halt

What we would envision, Todd, is that DivX Plus Streaming gets used as a player or a live catch-up video or any kind of video that's shown through the second screen. The reason we believe this is a product that, that would be embraced in the service provider community is because it offers an experience that's much closer to a Blu-ray. If you use an existing DRM player right now and you -- if you ever had to deal with fast-forward, rewind, how it kind of clues [ph] you in, that is and then how difficult it is to find where you want to be. A very smooth rewind and fast-forward there, it also offers the ability to have multiple language tracks and closed captioning and other features that aren't available on the other players today, again making it more Blu-ray-like. So our belief is that when you think of the service providers, you think of their TV Everywhere offerings and you think about them extending video, that, that customer has a right to through their service provider subscription to that second screen, they're going to want that experience to be as good if not better than what an over-the-top provider offers. So we think that they would be willing to pay for a more premium experience [indiscernible]. That's how that's envisioned. And then what you need to do is to watch for our announcements in the future as we work in trying to get DivX Plus Streaming out there.

Thomas Carson

I mean, the thing that was interesting for us was in the importance of the [indiscernible] announcement that we made with the -- that's really one of the first opportunities for us to have it in a service provider environment. And that's an area for us, obviously, based on our strategic focus of playing more with the service providers that we wanted to do more of. So it's kind of early days for us in that regard, but it's a good -- certainly, a good first step. And we think that's an area where we really have a deeper opportunity with DivX Plus Streaming.

Todd T. Mitchell - Brean Capital LLC, Research Division

And does the service provider basically have to -- for the ingesting and serving of the content. Did that basically setup something that would be analogous to their own kind of RES platform?

Peter C. Halt

They could be using their own platform or they could be using a third-party content delivery network. I know what we do is we will provide them. And one of the new things about DivX and DivX Plus Streaming is we can provide them within the whole video system that they need all the way through.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And so they would -- basically, they would pull it down, they ingest it in the DPS format, they would serve it out either across their network or across somebody else's network. The -- and they would go into devices that would have to be DivX-certified by the CE OEM?

Peter C. Halt

Yes, right. Exactly.

Todd T. Mitchell - Brean Capital LLC, Research Division

And the player gets downloaded into the device, either at the OEM's factory or after the fact?

Peter C. Halt

Yes. It can either be embedded on a device with a -- on the device's purchase, or it can be downloaded after the fact through an application store.

Todd T. Mitchell - Brean Capital LLC, Research Division

And does that allow you to have a reoccurring revenue stream with the operator?

Peter C. Halt

We believe it does, but that's something that we're working on.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And one last question. You just had a business development appointment. I believe the gentlemen came from the group that built the UltraViolet. How do we -- should we read anything in that in terms of what you're doing or considering on the M&A front?

Thomas Carson

No. What I would read into it is that what we're trying to do, and what I'm trying to do on my staff is, to have a very strong department that does corporate strategy, M&A and business development. And Julian Lightning [ph] comes in with a great background in first, consulting, a nice background there, plus he's got very, very practical business experience with NewStar and companies like Cisco. So it just brings a great balance for the organization. And we certainly talked about a lot as a company, that strategy is important for us and this is really just a sign that we want to have a very healthy and strong organization with some talented people. So I won't read a lot into it other than I think it gives us a great, even a much better discipline now in the area of corporate strategy, M&A and business development.

Operator

Our next question is from the line of Andy Hargreaves with Pacific Crest Securities.

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

Just assuming the catch-up payments are fairly meaningful in the quarter, given the size of the customers, it looks like the core or whatever you want to call it, CE discovery and ad revenue -- excuse me, the core IP licensing and product revenue in CE was down pretty substantially. Can you just describe the factors that went into that, if that's accurate?

Peter C. Halt

So CE discovery and advertising was up 1% year-on-year. We did have the LG deal in there, and that did involve a catch-up. That catch-up in that was partially offset by a couple of smaller deals that we had last year. And we've talked about how every quarter we usually have a couple of small, we call it reoccurring, nonrecurring revenue in that area. So that was in there. So if you take the LG deal out, the catch-up, it's also to take out the comparable, the one before, and we're close to being flat. Now we're down a little then, and then that part is actually for the customers that we have who pay us on a per box basis still, and those manufacturers have been shipping with us primarily in Asia and most specifically in Japan, where last year, we had, in the same quarter, the last quarter of the -- Japan's push of analog-to-digital migration, where they're couponing people to buy TV sets [indiscernible] purchase ahead.

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

Okay. And then on the service provider business, the prepaid number seems to have grown quite a bit over the last couple of years. Is there new customers that you guys have brought on that have -- that are paying upfront, or what's driving that?

Peter C. Halt

No. It's just expansion within the footprint of the people who have those prepaid licenses.

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

Okay. I thought -- so Comcast and Dish are the big ones and those guys have lost subs over that -- well, I guess, they have grown digital subs, but not very much. Okay.

Peter C. Halt

They are the 2 largest, yes. But there are a couple of other players out there that came over from the Gemstar days.

Thomas Carson

But generally speaking, I mean, when you look at service provider segment, there's a couple of pieces that go in there. One is licensing, one is advertising. And we've talked about advertising being down a little bit, primarily because of some of the things going on in digital property. But the service provider product business, for us, still remains very strong with the core i-Guide and Passport products, and the rate increases we've been able to get there plus the digital footprint increases we've been able to get there. So we still remain very bullish on the service provider product footprint even though the overall service provider revenues look like they're relatively flat. Underneath of that, basically, the product business is actually pretty strong. And the area of TotalGuide xD, we did talk a lot about it on the call. And while we see a slowness in the way the service providers were rolling out the TotalGuide for a set-top box, because of a whole host of reasons that just make that much more difficult than xD, xD for us, I think, represents a great opportunity on a go-forward basis. There is a per-sub per-month fee that's available there. It's a much easier deployment. Once it gets developed, the development cycles are shorter. So I as I look at this -- in the service provider space, particularly, there's going to be a lot more emphasis on doing products like xD that are connected in the service provider space. We just think long-term, this is good revenue opportunity.

Operator

Our next question is from the line of Perry Huang with Goldman Sachs.

Perry Huang - Goldman Sachs Group Inc., Research Division

I also wanted to ask a question around TotalGuide. Tom, as a follow-up to your comments about sort of hitting a speed bump or TotalGuide for set-top boxes related to third-party dependencies, is there any more color you can provide on the side? And I guess what measures you can take to help address these hurdles?

Thomas Carson

Yes. It's historically any kind of an embedded guide, whether it's been our Passport Guide or whether it's been i-Guide. Generally speaking, they're just harder deployments because the testing criteria within the service provider is very high. And then also, typically within their cable head-in, you have to do a lot of integration with other third-parties. And it's no different, really, with TotalGuide. So I'm very happy that we've hit our own internal milestones on the development side, because frankly, that's the first hurdle. Where a lot of our time and attention is being put is to work with the service provider, so they can get through their lab trials. But then also, working pretty hard with some of the third-party guys that are the slow-up in the process. So a part of this is just trying to manage the ecosystem. There's a lot of people that are involved that you have to try to manage.

Francisco Ruiz - Exane BNP Paribas, Research Division

Got it. That's helpful. And if I could, for a quick follow-up, also a question on the service provider segment. It looks like sequentially, revenue declined 2%, which kind of compares to a typical increase, I think, quarter-over-quarter for March. Are there any, I guess, specific drivers here? Tom, I think you mentioned maybe advertising can be one? And then, I guess going forward, how should we think about seasonality?

Thomas Carson

Yes. I'll let Peter jump in here, too. But I think generally speaking, again, when we look at a service provider, you have a couple of different components that make that up. One is advertising, one is product, and the other one is licensing. Licensing, dependent on what's happened in the prior quarter to prior year, obviously, can be a little bit on the lumpy side just based on the nature of the deal. So I wouldn't read a lot into the any kind of change in the licensing side here. And advertising has been an issue for us, particularly, on our digital properties. When you look at kind of the core guide products, actually like I said earlier, we're pretty robust and bullish on that. So we've seen some pretty decent growth there.

Peter C. Halt

And then actually in looking sequentially, in the last quarter, we do have seasonality in the interactive ad space, so Q4 benefited from the higher ad sales than you see in Q1. And then as Tom mentioned earlier, in terms of our web properties, primarily, SideReel, we are facing headwinds in that area. So that comes into the service provider section and that's where you're looking at when you see that little downtick.

Operator

Our next question is from the line of Sterling Auty with JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

It's Saket sitting in here for Sterling. A few questions, if I can. You said in the press release that Rovi renewed 33 North American cable subs. Can you give us an idea of how much you were able to grow the per subscriber revenue there?

Thomas Carson

We continue to get healthy increases in there, but I got to offer the same caution I did last quarter on these 33 renewals. These are very, very small MSOs.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. And then I just wanted to confirm some of the commentary that you gave around modeling in your prepared remarks. I think you said -- should total non-GAAP expenses be roughly flat year-over-year? And then on the non-GAAP tax rate, is the 9% we saw this quarter a good rate to think about for the rest of the year?

Peter C. Halt

Yes. Let me take the tax one first, yes. 9% is a good rate to think of for the year. And then in regards to expenses, and if you go back and take also a look at the deck we provided to investors at Investor Day at CES, you'll see that when we talk about cost, which for us is the combination of cost of goods sold plus our operating expenses, we're looking it -- for it to be roughly flat year-on-year, as it was last year from the year before, too. And that's -- then we talked about in the prepared remarks how we've been working hard to take some costs out of the business, so we can actually invest in sound organic initiatives without increasing that cost basis.

Thomas Carson

Yes. A great example is our data business, we've talked about has really been a strategic asset for the company, and I absolutely believe it is. And we have a lot of interest in what we're doing in the area, in metadata. And frankly, some of the costs we paid out in other areas are really going into areas like data to try to expand our footprint in the depth of data. So we've said previously that we're roughly in 50 countries with our metadata business today and it's going to go up to 70 by the end of 2015, with deeper repository of data in every one of those territories. So they are the kinds of things we're going, so we're very focused on cost. We took a lot out last year. We've taken a lot more out this year, but a lot of the cost that we've taken out we're trying to reinvest in some of those strategic initiatives, whether it's in the area of data service providers or services gateway, those kinds of things.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. And then on TotalGuide, for the TotalGuide customers that you've ran through in your prepared remarks, can you just maybe outline how many total subscribers you expect to have access to TotalGuide for set-top box versus xD? And then I have a follow-up on that.

Thomas Carson

Well, we haven't given out numbers on that, Saket.

Peter C. Halt

I would expect just kind of directionally, though, as we look at the end of this year, that just with activity we see on the connected xD side, that's really where the majority of the subscribers are going to be by the end of the year. We still expect deployments on set-top box, but there's going to be a fairly significant number, we believe, on the connected side with xD.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay. And a follow-up on that, related to TotalGuide for set-top is, I think you said pricing is roughly $1 per sub per month. Have you gotten any pushback on that pricing because it is a fair bit more than kind of current pricing on Passport?

Peter C. Halt

It is more than the current pricing on Passport, but there's significantly greater feature sets. And I think that our customers to-date have all seen and appreciated the value there, so we haven't been getting pushback on it. It's a good market price.

Thomas Carson

And I mean, I think the benefit for the service providers, don't forget is that, obviously, all of our customers are competing to retain their customer base. And that navigation and discovery experience is the first thing that people see when they turn on the television set, right, with their operator. So trying to have a really good experience there and help do things like better navigation and discoveries so that they can sell more, is what they're trying to do, whether it's getting more subscribers or whether it's selling more video on-demand.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. And then last question from my end. You're 1 quarter into the year. It seems like you had some deals that came in earlier than you expected. At this point, as you kind of look at 2013 guidance, you've scrubbed your pipeline, do you feel you still need TP Vision to meet the range? Or at this point, would you view that as upside now that you had kind of another quarter in the year?

Peter C. Halt

I wouldn't look at it as upside. And although I'd agree there are other ways to make the year without TP Vision. As you know, when we enter the year we come in at about 75% visibility in our discovery areas. And so, when you look at it now we're 1 quarter down, we've got 3 to go. We still got a pipeline that we work on that's larger than the amount of deals that we need. And that's one of the deals out there.

Operator

[Operator Instructions] Our next question is from the line of Jim Goss, Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I was wondering if you could talk a little bit more about your R&D program. In terms of the overall platform, thrust, timing, sort of a rolling effort for the -- just how you see it, like how do you plan to extend to yourself? Because there was a comment in your press release about taking the technology footprint further into mobile and over-the-top delivery ecosystems. And I know some other companies sort of in a related space like Dolby tends to think in a 3-year rolling cycle where some things are closer, some things are a little further out, and then it sort of evolves. And it does not happen all at once. I'm just wondering if you could talk about just how you are going through this process.

Thomas Carson

Yes, it's a tough question just because there's a lot going on within our company. But maybe let me hit it in a couple of ways. First, from where we sit from an R&D perspective, there has been really an incredible amount of work by our engineering leads and team to do some basic operational improvements and process performance gains. Things like rolling out a common development methodology within the company has been a primary focus for our engineering team, and most of our programs now are under a consistent methodology, which is very important. There's been much more rigor around resource utilization in terms of understanding exactly where all the manpower goes and what products they happen to be working on. We also track pretty diligently all the major programs that we have with the product teams and the engineering teams, to make sure that things are being developed on time. That's why I think we can say, with a lot of confidence, that things like DivX 10 will be out on time in less than 1 year from the last product, and things like TotalGuide 1.0 and 1.1 are meeting the commitment. So there's been a fair amount of work on the operational side just to improve performance and even get ourselves in a position where we are getting much more focus on centers of excellence where we have teams developing products in greater numbers in a limited number of locations. Be it the acquisitions we have, we just have a lot of locations around the globe that we're trying to consolidate. So first on the operational side, I think there's just been a tremendous amount of work done to try to improve the efficiency in the organization. Saying that, I think there are absolutely, from the product organization and also from the engineering organization, is a tremendous amount of work being done in looking forward into the TV Everywhere space. And we've said that, for us, that is a pretty significant priority in terms of being able to move away, not move away necessarily, but move from being just a set-top box guide company to being a connected guide company with everything that goes with it. So a lot of work around what's the appropriate platform for us in the TV Everywhere space.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And then, in efforts like that, how -- what would be the basis of getting paid? Would it be relationships with providers, boxes sold, some combination?

Thomas Carson

There's a combination. I think if you kind of look at the vision that we have, ultimately, what we are trying to do is get the Rovi technologies embedded in as many connected devices as we can. And there's a couple of ways that gets monetized. First, those connected licenses, IP license, so there's a monetary value for that. Those connected devices will also need a guidance experience. And metadata, there's an opportunity for that. But there's also, because those devices are connected and there's a footprint there, it gives you an opportunity for 2 other things. One is advertising, which we do today, which would hope to monetize more, and we also hope to be able to get Return Path Data from those devices for analytics and trying to monetize the analytics. So there's a number of paths potentially for that.

James C. Goss - Barrington Research Associates, Inc., Research Division

And just one last thing. Is the effort, in turn, to be global rather than national?

Thomas Carson

Yes, absolutely, it's global, particularly in the service provider space. We have a global footprint today when we do our intellectual property licensing, particularly with the service provider space. So we do pretty well there. The product business has a tendency to be mostly North America, South America-centric. But the nice thing about the IP connected guide business is that, the barriers to entries in some of the other territories are less. So we think it's a great opportunity for us for international expansion.

Peter C. Halt

And DivX would be another example of a product that's worldwide.

James C. Goss - Barrington Research Associates, Inc., Research Division

Yes. And actually, DivX has pretty much always been worldwide and maybe more so outside the U.S., I think.

Peter C. Halt

Correct.

Operator

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Thomas Carson

So first, I want to thank everybody for joining us today. Hopefully, we gave you a little bit more color on what's going on in our business. The things I think are important to take away are first, we got the great success on the IP front with some of the deals that we have announced, and I think that gives us good validity around our intellectual property and the licensing business that goes around it. I think from the prepared remarks, you can see in areas like TotalGuide for xD, it's a great demonstration of what we're trying to do in the area of guidance on connected devices. So I'm really pleased with what's happening there. Also on the DivX front, in prior calls, we noted the headwinds that we're seeing in the DivX area, but the deals that we have done and have in the pipeline are resonating with the CE customers that we're talking to, particularly with things like DivX Plus Streaming, and we think there's a really good opportunity in the service provider space. Data, I think there's a lot more opportunities there. We have a very solid data business, really happy with the Facebook deal that we announced and those type of deals. I think there is more to come. And then just finally, the business and the team continues to be very, very operational-focused, right? We're trying to not only navigate to the future, but also manage out the resources that we have. So basically for Q1, I'm very, very happy with the results and look forward to talking to everybody in Q2. So again, thank you very much for your time and attention, and we'll talk to you, all, soon.

Operator

Ladies and gentlemen, this concludes the Rovi First Quarter 2013 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial, 1(800) 406-7325, or (303) 590-3030, with the access code of 461-2637. ACT would like to thank you for your participation. You may now disconnect.

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