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Rovi Corporation (NASDAQ:ROVI)

Q2 2009 Earnings Call

August 6, 2009, 4:30 pm ET

Executives

Lauren Landfield - Vice President of Corporate Finance and Investor Relations

Alfred J. Amoroso - President, Chief Executive Officer, Director

James Budge - CFO

Analysts

Richard Davis - Needham & Company

John Vin - Colin Stewart

Brian Thackray - Deutsche Bank

Mike Olson - Piper Jaffray

Rob Stone - Cowen and Company

Todd Mitchell - Kaufman Bros.

Andy Hargreaves - Pacific Crest

Ralph Schackart - William Blair

Sacket (ph) - JPMorgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Rovi second quarter 2009 earnings release conference call. During today’s presentation, all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator’s Instructions) This conference is being recorded today, Thursday, August 6, 2009. And at this time I would like to turn the conference over to Mr. Lauren Landfield, Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.

Lauren Landfield

Thank you, McKella. Welcome ladies and gentlemen to Rovi Corporation's second quarter 2009 earnings conference call. I’m Lauren Landfield and I’m joined today by Fred Amoroso, our CEO and James Budge, our CFO. Before we discuss our results and estimates released earlier today, I’d like to start with some housekeeping items.

First, I’d like to remind you that all statements made during our conference call that are not statements of historical fact, including but not limited to, statements regarding the company’s forecast of future revenues and earnings, business strategies and product plans, as well as statements regarding the expected results of an IRS pre-filing agreement revue of our operating laws, and a litigation matter in United Kingdom, constitute forward-looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-Q for the quarter ended June 30, 2009 and other filings with the SEC that are filed from time to time.

Second, our results and estimates released earlier today, as well as our information on this call include non-GAAP or adjusted pro forma information, which exclude as applicable non-cash items or items that impact comparability such as amortization, equity based compensation, transaction, transition, and integration costs, restructuring an asset impairment charges, insurance settlements, gains or losses on strategic investments, non-cash intrinsic expense such as debt amortizations and interest expense required under FSP APB 14-1, under the three tax items and the tax effects of all non-GAAP adjustments.

Appreciation expense while a non-cash item is included in adjusted pro forma operating results as a proxy for capital expenditures to demonstrate recurring cash based earnings result. Adjusted pro forma combine company information assumes all acquisitions occurring prior to March 31, 2009 were effective on January 1, 2007 and exclude all previously divested businesses, including the software, games, TV Guide Magazine, TVG Network, TV Guide Network and TV Guide Online and eMeta businesses, which are classified as discontinued operations.

We have presented and are discussing adjusted pro forma combined company information because this is how we evaluate our business. We believe that this presentation maybe meaningful to our investors in analyzing the company’s results of operation.

This presentation is not intended to be a substitute for our financial results presented in conformity with generally accepting 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.

And as a final piece of housekeeping, the replay of this conference call will be available on the investor relations webpage until our next quarterly earnings call. I’d now like to turn the call over to Fred.

Alfred J. Amoroso

Well, thank you Lauren. And thanks to everyone for joining us today for our second quarter 2009 conference call. As you may have seen in our earnings release, we posted excellent financial results in Q2. I’m pleased we grew adjusted pro forma revenue 18% year-over-year to $119.5 million dollars in the quarter. And as in previous quarters our growth in Q2 was driven largely by new licensees, the continued conversion of analog TV subscribers to digital, increases in device shipments that incorporate our products or are licensed under our patents, as well as increases in data licensing.

These revenue trends when combined with the execution of our Gemstar’s synergy actions enable us to increase our adjusted pro forma EPS by 171% year-over-year to $0.38 in Q2. I’ll discuss our progress and I’ll update our outlook shortly, but first I’d like to turn the call over to James to review some of the financial metrics in more detail. James?

James Budge

Thank you, Fred. And to start I’d like to point out that some of my comments will focus on adjusted pro forma results, which among other things assumes the Gemstar acquisition was consummated January 1, 2007. Details used in calculating our adjusted pro forma results along with their reconciliation to GAAP measures can be found in today’s earnings release.

As Fred mentioned, the adjusted pro forma revenue was $119.5 million in the second quarter, up 18% from a year ago. Growth was due to gains in both our CE and service provider verticals as well as data licensing. Adjusted pro forma revenues for our service provider vertical, which is primarily comprised of IPG products and patents, license to cable, satellite and telecom companies, grew 18% year-over-year to $58.6 million in the second quarter, driven by the continued conversion of analog to digital as well as the addition of new licensees, namely Canal Plus

Subscribers worldwide receiving a license or Rovi provided IPG grew 16% from Q2 2008 to 109.5 million by the end of Q2 2009. Excluding prepaid licensees, primarily Comcast and Equistar, subscribers were approximately 74.5 million, up 21% year-over-year. Our CE vertical includes a guidance products and patent licensed to device manufactures plus ACP for hardware. CE adjusted pro forma revenue grew 20% to $47.9 million in Q2 2009, compared to Q2 2008.

In Q2 2009, we benefited from growth and IPG patented product licensing, both of which got double digit percentage growth and shipments of IPG enabled devices. The CE IPG growth also benefited from additional licenses not in place a year ago. CE growth was partially offset by the expected decline of legacy VCR plus sales.

adjusted pro forma revenue for our other vertical, which includes data licensing and entertainment grew 6% of the quarter to finish at $13 million. Within this vertical, growth and data licensing where we supply our metadata to online content distributors such as Pandora and Sony was offset by the anticipated decline in copy protection revenue from studios.

I’ll now turn to adjusted pro forma profit measures. For the quarter, cost of goods sold totaled $14.8 million or 12% of revenue, down from 14% in the year ago period. ST&A totaled $27.5 million or 23% of revenue, a 19% reduction from a year ago due to our synergy actions and even down slightly sequentially from Q1.

R&D totaled $22 million or 18% of revenue, adjusted pro forma EPS grew 171% year-over-year from $0.14 in Q2 2008 to $0.38 in Q2 2009. Much higher than the corresponding revenue growth due to the Gemstar’s synergy’s reduced interest expense and our lower 2009 cash-tax rate of 11%.

I would like to briefly comment on our GAAP results. Generally we don’t focus on our GAAP results when discussing our performance, as we believe excluded Gemstar’s operating results for the period prior to May 2, 2008 diminishes the comparative value of results from the prior year. However, for reference, the primary variances included not only the usual amortization and stock compensation expenses, but also in conjunction with the name change and associated rebranding we took on non-cash trademark impairment charges of approximately $45 million related to our legacy brand.

As to the balance sheet, our cash and investment balances at the end of June were $331 million, debt was $575 million, leaving us with net-debt of $244 million at the end of the quarter. These figures exclude $37 million of the proceeds from the sale of TV Guide Network, placed in escrow and classified as restricted cash, which we expect to be released in Q2 of 2010.

Now, subsequent to quarter end with our debt trading above par in order to reduce our cost of capital we amended our term loan enabling us to repay the 11% coupon high-yield note in advance of the 6% term loan. And now I’m pleased to announce we repaid in full the $100 million high-yield note. This pay down was funded through cash on the balance sheet, leaving $257 million now in Gemstar related acquisition financing.

Regarding taxes by way of reminder, we previously submitted an application with the IRS to be accepted for what is known as a pre-filing agreement review. This process is to confirm the characterization of the magazine divestiture tax loss as ordinary. As I mentioned last quarter, according to the IRS' at 2008 PSA program statistic, the average review lasts 11 months. We will likely not be providing any other updates until the review is completed. But to reiterate, we believe there is clear precedent and tax law that support treating the magazine loss as an ordinary loss and we look forward to its successful review process.

Looking forward, having just completed a strong quarter with many key wins that we believe bode well for future results, we are once again increasing our revenue and earnings estimates for 2009 as well as shrinking the range of expected outcomes.

We are raising our 2009 revenue estimates from a range of between $450-$480 million to a range of between $465-$485 million. And we are raising our 2009 adjusted pro forma EPS from a range of between $1.25-$1.45 to a range of between $1.40-$1.50.

Regarding our quarterly expectations, while we don’t provide quarterly estimates, I’d like to briefly comment on the linearity of our business relative to comments I made last quarter. We would expect continued year-over-year growth in Q3 and Q4. Fred will update the outlook for the drivers shortly, but in terms of revenue trends by vertical for the remainder of the year, on the CE side having grown by 20% in the second quarter we continue to benefit from the growth trends and guide enabled flat-panel TVs. Estimates for flat-panel TV shipments continue to increase and we expect our penetration to also rise as new product launch. These factors should lead to growth heading into the holiday season.

While we continue to expect linear growth in our multi-channel television service related revenues through the conversion of analog to digital, Q2 benefited from a seven figure catch-up payment from a large European service provider. We don’t anticipate a similar transaction in the third quarter and therefore expect Q3 service provider revenues to be slightly below Q2. We would expect sequential growth to resume again in Q4 driven by a subscriber gain.

In our other category we continue to expect linear growth as data licensing benefits from customer additions in the Muse acquisition.

Turning to costs, in the second half we expect total costs to remain consistent with the first half as a percentage of revenue. Even though we estimate revenue will rise in the second half, total costs are expected to be slightly elevated due to duplicative Muse related expenses which were present for only two months in the first half but as scheduled to remain in the business until completion of synergy actions late in the year, thereby partially suppressing further operating margin improvement until we enter 2010.

Interest expense however will be less in the second half repaying the high yield ahead of the term loan will yield $5 million in annualized interest expense saving versus repaying an equivalent amount of the term loan. And our updated 2009 estimates reflect this saving.

With that, I’d now like to turn the call back over to Fred.

Alfred J. Amoroso

Thank you, James. This was another excellent quarter and I’d now like to update our progress with customers and products since our last call. First regarding service provider, as James mentioned, Rovi IPG license subscriber growth of 16% demonstrates this business remains predictable. We’ve been executing by expanding our international licensing, a critical strategic initiative for us in 2009. The NDS agreement was a cornerstone to that end and the additional of Canal Plus under the NDS agreement demonstrates our continued execution.

Recall that prior to the NDS agreement we believed NDS’s customers had about 15 million IPG enabled digital subscribers worldwide that were not already covered by a Rovi IPG patent license. With approximately 5 million digital subscribers, we believe Canal Plus has the third largest digital paid TV subscriber base in Europe. We now have the majority of NDS IPG enabled subs under agreement with primarily smaller operators remaining unlicensed.

Taken as a whole, we now have a subscriber base representing some of the largest European operators including UPC in multiple countries; Sky Italian, Italy; BSkyB in the UK; Premier and KPW and KDG in Germany, ONO in Spain and Portugal Telecom. With key licenses in place in countries that represent the majority of digital subscribers in Western Europe we believe our ability to license the remaining operators is significantly enhanced and we view this incremental growth opportunity for 2010.

We expect the Canal Plus deal will expedite our licensing efforts beyond the NDS IPG companies allowing for deeper European penetration. For example, we believe France has more than 5 million digital paid TV subscribers that remain unlicensed. And in the UK we are in litigation with Virgin Media who we believe has almost 4 million digital IPG enabled subscribers.

On the UK litigation, we are confident in the merits of the case that have been presented and we expect to have a ruling by the year end. At this point when considering these new wins and analog to digital conversion proceeding as expected we believe we are well positioned to exceed the midpoint of our previous estimates of revenue growth for the service provider verticals, which is a driver of the increase in our overall estimates.

Turning to IPG advertising, we continue to make progress in the area of guide measurement. This measurement data provides our customers with insights into how consumers use their IPG, which enables them to optimize the programming and services they provide. Of particular interest to us is how and when consumers view and interact with advertising. That information is critical to measuring the delivery and performance of IPG advertising campaigns.

To this end, we recently expanded our measurement footprint. We now have Click Screen contracts in place with cable operators in a dozen markets, including over five top-25 media markets in the United States. Major markets are a key factor in advertise and budgeting decisions. We’re now posting the impression that delivered results to our clients and while it’s still very early to see ramping revenues, we expect improved retention and penetration among our existing clientele.

To further enhance the value of our IPG advertising I’m pleased we were able to recently strike an agreement with a leading provider of audience measurement services and tools for advertisers, programmers and service providers across TV, online and other media. The company’s tracking technologies can collect advertising spending and occurrence data as well as select campaign data across major media markets in the US. Our relationship will provide us valuable analysis of our IPG ad metrics and together we will be able to deliver enhanced measurement capabilities to our service provider customers. We believe having third party reporting and measurement analysis will enhance the value of the measurement statistics and enable greater penetration of the conventional and international IPG ad opportunities.

Turning now to the CE verticals, this area also has outperformed our earlier expectations. Driven partially by continued analog to digital conversion, reduced HD TV ASPs and a trend towards relatively inexpensive home entertainment, our business has been relatively resilient to the economy.

According to retail sales data from the Consumer Electronics Association, US flat-panel sales to dealers were up 31% year-over-year through the first 26 weeks of the year. The supply chain is also growing rapidly as June 2009 shipments of large area thin filmed transistor LCD panels reached 46.7 million units, up 8% month-over-month and 24% year-over-year according to display search.

This sets a new record for the highest monthly large area TFT LCD shipments. With the pace of decline in the economy appearing to moderate, we currently expect shipments to continue to remain resilient when taken in context of the growth trend. In its July 3, 2009 report, display search revised upward as flat panel TV shipment forecast for 2009 from 13%-18%.

To further capitalize upon these trends our next generation CE guide has been a key focus area for our engineering and business development functions. Last month we officially announced the Total Guide Solution, formerly code named Liquid. This guide is designed to offer a complete new consumer experience by combining the breadth of content found in a web experience with the ease and aesthetics of a CE experience.

Key goals of this solution include the following. Well, first to deliver an elegant user interface supported by our extensive collection of rich entertainment data which includes, not only, text-based information, such as reviews and recommendations, but also images and video downloads. Second, to provide integrated search capability so consumers can use a single search to find content from numerous sources. And third, to enable consumers to recommend content through community sites.

The Total Guide Solution enables these objectives through and three-in-one guide concept. First an enhanced interactive television guide; second, a broadband content guide for content delivered over the web; and third, a personal content guide for media stored within the home. The television guide provides a high performance TV listings experience with a personalized customizable and image rich home menu of programming options as well as recommendations. The guide features access to our more than 2.5 million program descriptions, 120,000 celebrity profiles, and searchable data on virtually every TV show in the US since 1960.

Through integration with our connected platform we’re enabling access to home movies, photos and music stored on other devices throughout the home, such as the PC. This personal content guide not only helps consumers navigate their media collections, but it also gives them the ability to share their content through the television.

We’re also enabling access to Internet content. The broadband content guide helps connects users to full length television shows and movies from both free and paid services, as well as additional content including Internet video, popular music, social networking and other Internet destinations.

We are working to interoperate with Flixster, for example, for user generated movie reviews and ratings, and with YouTube to integrate access to their content directly through the Guide.

We’re also working with movie services, such as Blockbuster and Cinema Now and music services such as Slacker Radio. We believe content relationships are compelling draws even where paid TV provided guides are prevalent, such as here in the United States. Internationally, on the other hand, where free-to-air terrestrial broadcast television is more prevalent, we believe this guide can be the primary source, of not only broadband and personal media content, but also television content. We anticipate more content relationships both in North America and India.

The Total Guide Solution also features significant advancements in the advertising platform, providing advertisers with the opportunity to deliver not only targeted graphically rich messages but also video enabled ads to an engaged audience. It also provides advertisers new tools to measure the effectiveness of their ad campaigns through its connective features. And through ad sharing opportunities, CE manufacturers are now able to participate in ongoing revenue opportunities with consumers.

To reiterate, as the Total Guide Solution is effective three guides in one, it is designed to extend across the various distribution channels and return what the consumer is searching for regardless of where the content resides thereby overcoming the problem of disparate islands of content which is often a consumer frustration.

We believe we are uniquely positioned to offer unified search functionality given our broad data footprint, which not only includes TV movies and music metadata, but also the relational database and profiling technologies necessary to return relevant search results which we believe would be quite difficult for anyone else to accomplish on their own.

When combining the elements on the Total Guide Solution, we believe we are positioning it to be the starting point for consumers to discover and enjoy digital entertainment on their television. And our name changed to Rovi embodied the ability to be that homepage for consumer search through the TV.

Media response to the introduction of the Total Guide Solution from press, entertainment device websites and bloggers has been positive and customer interest is global. The Total Guide Solution is designed to serve the North American and European markets with a single product thereby streamlining our customers’ development process. I think we’ll also see CE manufacturers adopt this guide across product lines in an attempt to create common user interface and branding and maximize inter operability between their own as well as other’s devices.

We’re seeing demand for embedding the Total Guide Solution in not only flat-panel TVs but also in Blu-ray players and recorders, which with their high processing power, embedded memory and networking capabilities are platforms that are well suited to support the fully featured Total Guide Solution.

We believe that the Total Guide Solution can become the enhanced homepage of home entertainment in the future. We expect to release this guide to CE manufactures in the first half of 2010 so that it can be in retail outlets for the holiday season.

I’d now like to touch on a few key recent IPG wins. In June we announced we extended and expanded our Sony IPG agreement. By renewing it and expanding our relationship in Japan, it further validates the strength of our IP. This is a key agreement to expanding our patent licensing penetration of Japan.

Additionally, we recently renewed and expanded our IPG agreement with another major Asian CE manufacture. The expanded agreement enables them to move from patent licensing to product licensing as well and expands the geographic reach.

I'll highlight these two deals as they are large multi-year agreements which adds visibility to our long-term revenue picture. And we’re hopeful that catalysts to future licensing in the Asian Pacific region.

Also in Japan on the product front, Panasonic will include a couple of key new features from G Guide in its latest model Blu-ray recorder scheduled for release later in the year. This guide goes beyond the eight days of listing data usually found in G Guide by being the first to provide one month of program information via the Internet. Additionally, the data includes not only text but also program pictures, enabling users to search TV listings with great ease and gain access to in-depth program information. I view this as a precursor to what we’ll see domestically as the Total Guide Solution is deployed. It’s also an example of the breadth of devices that our next generation guides will cover.

Domestically, I’m pleased we not only renewed our IPG licensing agreement with TiVo, but the agreement now also enables the company to incorporate our music, movie, and TV listing data into its service. We continue to believe selling data to service providers in North America, is a significant opportunity and are pleased with the TiVo relationship.

Turning now to data, this business continues to grow nicely and early results to the Muse acquisition are positive. With our worldwide reach improved by the Muse acquisition, I would expect this business to continue to ramp and we should start to see margin improvement next year as the synergies are realized.

To recap, we’re seeing favorable business trends and are increasingly confident in the opportunities that are before us. Based on a resilient trend towards digital and additional licensing opportunities, we think low double-digit growth in our service provider vertical, which is approximately 50% of our revenue, is likely. When combined with mid-to-high single digit growth for the balance of our business, we are comfortable with increasing and narrowing our 2009 estimates. And as we look to the product in the customer traction we’ve been making, I’m increasingly confident in our ability to execute against our business opportunities.

I’d now like to turn the call back over to McKella so that we can respond to any of the questions that you might have. McKella?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator’s Instruction) Our first question comes from the line of Richard Davis with Needham & Company. Please go ahead.

Richard Davis - Needham & Company

So, two quick questions, one, how much integration work do you have left with this platform, kind of, in terms of technology? And also maybe more importantly in terms of employee staffing, I mean, you’ve assembled it all and you’ve executed well. But I just – that’s one of the questions we get from time to time.

Alfred J. Amoroso

So, platform, if you talk about platform being total guide, which incorporates the data services infrastructure a long with the guide, the CE guide plus the connected platform — I mean, architecturally it’s pretty much done. The requirements are finished and completed at a product management. We are in development with the product and are actually into, I think, the third milestone of a multi-milestone program coming out of R&D that has initial display of the product to be as you would expect at CES next year, and then released to manufacturers in Q2 of next year. So staffing is in place, product requirements are established and the team is in development.

Richard Davis - Needham & Company

Okay.

Lauren Landfield

I might add to that Richard that, what Fred just talked about is primarily the guide side on the Muse acquisition, just as we said when we purchased Muse. As we said in our prepared remarks today, those synergy actions on the Muse side will be complete by the end of the year and we’ll see a bunch of margin expansion as we move into 2010. There’s still a little bit left to do there, but on the Gemstar related acquisition that’s more or less done.

Richard Davis - Needham & Company

Got it. And then the only other kind of semi, not really technical question is, is the fact that the interface that you have – if I’m doing an interaction with a guide on a TV more often than not the input query just, kind of, almost single digit or single letter and you have to scroll up and down. Is there a way to make that interface easier and faster either through, you know, anticipatory text or speech recognition or what’s kind of the next generation there to help make it not scanning down.

Alfred J. Amoroso

If you down out into the future, Richard, you know, certainly speech recognition is one of the things that we could incorporate it, you know, just really needs to be brought into the devices. It’s not technically challenging. It’s just a question of getting there. But to the first question of making it easier, actually in our search algorithms that we have now, we do have the ability – in what will come out in the product to preselect based upon the stream of letters that you put in narrowed down what the entertainment shows are that you might be looking for, so some of that ease of use is already built into the product.

Richard Davis - Needham & Company

Got it. Thank you very much.

Alfred J. Amoroso

Thank you, Richard.

Operator

Thank you. And our next question comes from the line of John Vin with Colin Stewart. Please go ahead.

John Vin - Colin Stewart

Congratulations, gentleman on the quarter and on the guidance. First question is, on your own guidance can you, maybe, talk a little bit more about what your assumptions are in the back half of the year? If I look at service providers, NDS was a pretty big deal. Are you assuming that you pretty much can get to that for your guidance through organic growth? Are you assuming any other, kind of customer wins there? And then similar question on the CE side.

James Budge

I think on the service provider side we’re very comfortable, in fact, the pretty predictable revenue stream as we did comment in the prepared remarks. We did have a deal that we thought was going to be more of a third quarter deal that ended up getting done in the second quarter, which is always great, but it brought a little bit of revenue forward into the second. But we’re fine with the rest of the year, as far as the expectations we have as service provider.

On CE we’ve had great trends in the first half — the year isn’t over. Some things could come in the general ecosystem, but we feel pretty good right now with half the year down and trends like what we saw from display search looking pretty good right now. It looks like a much better year for CE than we expected when we came into the year.

John Vin - Colin Stewart

And just to clarify, I think last quarter, James, you were kind of assuming, kind of, TVs would be down 10% for the year. And obviously we’re tracking ahead of that. And I think you guys throughout a number of, kind of, plus mid-teens growth. What are your assumptions for TV growth for the year now that’s kind of built into your model and forecast?

James Budge

The down number that you cited was actually our number as we first gave guidance back in November. We actually kicked up guidance, you know, the first quarter after a pretty good CE quarter there as well. So we were already up to more flattish or up three to five percentage points.. We’re incrementally up over that now at this point. So I think based on the agreements we have in place you can assume we’re probably in the five to 10, you know, high single digit growth expectation.

John Vin - Colin Stewart

Okay. And, then also on litigations that you’re currently in, are you assuming either eMeta or Toshiba come through in any part of our guidance would that be upside at this point?

James Budge

Both of those would be upside at this point.

John Vin - Colin Stewart

Okay. And then last question on Liquid. I know we’re probably still a little far out, but any sense of, you know, what’s your sense of attach rates on those, you know, when liquid sets launching with CE providers next year in terms of tax rates on TVs? And then, can you give me a sense of, you know, what the economics are in relative terms of turning the ASPs or kind of your thought process there?

James Budge

Well, we’re not going to go through the ASP discussion right now, but the feedback — what I put in the prepared remarks was that the feedback from the customers have been very, very positive and very strong. So our expectation is that as customers look at putting this across their series of devices, certainly TVs, it’ll have very good attach rates.

The second thing, I tried to highlight, so in my comments, John, just to further underscore it, is that more and more of all of the devices, certainly Blu-ray players among others, is – along with mass storage devices for that matter, are connected devices and would similarly need some form of a user interface and it’s clear that Liquid can play that user interface role, especially because if it is a multi-guide, multi-search opportunity where we can find things not only from linear television but also for things that are found within the home and things that are available through the web. So in fact, one of the customers has specially looked at Liquid as that unifying theme.

John Vin - Colin Stewart

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Brian Thackray with Deutsche Bank. Please go ahead.

Brian Thackray - Deutsche Bank

As you look at the first half, you guys had a great first half of the year, particularly in terms of new deals in both the CE and service provider side. As you look at the back half, do you see it continuing to snowball in terms of the deals that are out there, the ability to sign them in the back half? Or should we think about it more, kind of they’re going to be coming in waves, first half was good, the others will come over time?

Lauren Landfield

I think on the service provider’s side, certainly there’s nothing in the second half that would be the size of an NDS and affiliated entities. But we do expect continued analog to digital conversions will continue to keep that up and to the right like we’ve seen over the last several quarters.

On the CE side we’ve had a – like Fred commented as well, we’ve had a great first half. I’m not sure we’re ready to declare victory for the year for high teens growth for the entire year. But it certainly looks a lot better than it did six months ago.

Alfred J. Amoroso

I also think the increasing of our guidance for the full year of 2009 along with the comments that James made on the quarter to quarter seasonality provides some pretty good insight that you guys can use in your models as to how we think the second half of the year will shape up.

Brian Thackray - Deutsche Bank

If I think about the increase and the guidance, is that more to do with the overall environment in terms of CE units or the deals that you guys have signed? Can you just give a sense for how much –

Alfred J. Amoroso

As you would expect, Brian, it’s an aggregation of all of the factors that we see out there including devices and where they’re going, including subscriber growth, including, you know, honestly what’s in our forecast of what we see as deals that are out there as opportunities. And some of those deals are in most likely and some deals you would expect are in best case and, you know, we could have upside over our own estimates if best case comes into most likely, and vice versa. So, I mean, we take a holistic view and we come up with the forecast.

Alfred J. Amoroso

I think that’s exactly right, but I think it’s both. Obviously the ecosystem is a little better than we expected at the beginning of the year, but at least to my own mind we’ve clearly executed extremely well against our opportunities with NDS and related entities on the service provider side. And on CE with wins we’ve announced this year with Visio and Sony and the other Asian major manufacture and other wins that we’ve announced. We’ve had a tremendous first half and since most of those, if not all of them, are all unit or subscriber based that’s going to bode well for us as we move forward.

Brian Thackray - Deutsche Bank

And finally, Fred, you talked a lot about this, the patent license to product opportunity as you saw your incremental product. Economically as you think longer term, you know, can you help us frame that in terms of, you know, for a particular customer, what that incremental economic opportunities as they move from patent to product?

Alfred J. Amoroso

So it varies, it’s a good question, Brian. And it varies by customer. If you look at some of the service providers, for example in early I Guide implementation, the licensing was more handled as a service and it included patent product. There was no differentiation. And as we go through renewals there’s an opportunity to make some increasing differentiation. We don’t have the TV Guide network carriage, et cetera, et cetera.

On the CE side, some of the licensees have struck an arrangement with us where they get the benefit of the patent plus have the right to use the product in some number of their devices based upon parameters of the deal. And in some other ones the license just the patent and a product use would be an upside over the patent. So they really are unique on a customer by customer basis depending upon how the customers looking at their business.

Brian Thackray - Deutsche Bank

Thanks guys, good quarter.

Operator

Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please go ahead.

Mike Olson - Piper Jaffray

Good afternoon, well done. Couple of quick ones here. I’m beating a dead horse on this one, but now that you have the NDS deal UPC and some of the other critical operator deals, I think you have around of third of Europe digital subs. Does that sound like it’s in the ballpark? And then how do you go about, kind of, attacking the remaining Europe opportunity? Where do you focus your efforts?

Lauren Landfield

I’ll take the first one. Yeah, you’re in the ballpark, it’s about a third. And I think if you listen to the names that Fred rattled off in the various countries that we’re in we pretty much have the number one or number two service provider pay TV operator in each of those countries. It makes it a lot easier now to go to the number two, three, four and five guys in each of those countries when you get the number one person in your camp.

Alfred J. Amoroso

I’m not trying to be facetious or anything, Mike, but it’s hand-to-hand combat. You know, we engage with each customer on an individual basis and lay out the merits of the discussion.

Mike Olson - Piper Jaffray

Okay. That makes sense. And then, it sounds like metadata was pretty strong in the quarter offsetting DVD copy protection. Would you be willing to give us just the approximate split of, kind of, the other category between metadata and copy protection?

Alfred J. Amoroso

You know, it’s moving towards metadata for sure. If you ask me six months, a year ago it would have been 60-40 content protection. Now it’s certainly flipped the other way. And with data growing and content protection pursuit as shrinking it’s going to continue to more and more data license.

Lauren Landfield

Let me give you a little more color on that, Mike. Without giving you the percentage, the actual percentage growth at the underlying components of each of the verticals, we believe that data has a huge multi-hundred million dollar opportunity down the road as we could, for example, displace Tribune in certain service providers. So the enormity of just television listings data, as well as more and more people are looking for rich images, so the ability to extend our existing relationships or other relationships that they have had from a TV textual listings basis to including cover art and screen images. So, you know, down the road over time, we think that the data licensing part of our business could be a very, very significant part of the business.

Mike Olson - Piper Jaffray

All right. Thanks very much.

Operator

Thank you. Our next question comes from the line of Kerry Rice with Wedbush Morgan. Please go ahead. Your line is open at this time.

Lauren Landfield

Okay, McKella, I guess we have a problem on Kerry’s phone. Could you go to the next question?

Operator

Yes. Our next question is from the line of Rob Stone with Cowen and Company. Please go ahead.

Rob Stone - Cowen and Company

Hi, guys. Nice job. Now, do you want to do that again in the second half (laughter)? We won't make you promise that today.

Lauren Landfield

Thank you very much. I appreciate your latitude.

Rob Stone - Cowen and Company

On the Total Guide, it sounds like, you know, broad interest. Do you have sense from the customers about the launch strategy? Is this something that’s likely to come out on both sides of the Atlantic at the same time? You designed it to be one product, or do you think they’ll be taking it out, you know, in some specific location?

Lauren Landfield

Good question, Rob. I actually think that’s going to be subject to the individual manufacturers as to whether they will do a North American roll out before EMEA or they would do them the same.

But I would just anecdotally tell you that having a single platform that the manufactures can design this in while there are some architectural and technical differences between Europe and North America for them, at least having the middle wear, the guide to connect the platform and other features around it, being a common platform that can be deployed across both of the environments reduces their costs and make their lives easier in terms of implementation. So, whether they introduce it that way or not, it does provide a value to them to do it on a worldwide basis, at least Europe and EMEA.

Rob Stone - Cowen and Company

Okay. In terms of the metadata opportunity, do you see the opportunity to provide this to portals – I’m not so clean on what the technical parameters are. I can think of an example just to point out, which would be on a streaming service, like Amazon videos through a Roku player. They have extraordinary limited information about possible titles. You basically just scroll through a list of stuff and see a one screen summary. Is there a way to provide a richer backend to something like that or does it have to reside on a device with a little more horsepower?

Lauren Landfield

First of all, to your generic comment, can data be used to support the portals? Actually it already supports many, many portals that are out there across the board. And in some segments of Amazon’s business they actually use our metadata. So, the data is already on the top-10 music sites, music portals that are out there. Now whether it gets integrated into, you know, the breadth of a portal’s business is really subject to them. But that capability does exist.

Rob Stone - Cowen and Company

Now I was actually thinking more of video on demand download, where you’re not mediating through a PC.

Lauren Landfield

So, yeah, the point is it can. Once they have the data they have the availability and the use of the data depending upon your licensing agreement across not just the PC but other environments. And obviously what we’re doing with Total Guide it makes that data available outside of a PC environment. So the answer to your question is yes, whether the customer would implement it that way or not is really subject to them.

Rob Stone - Cowen and Company

In terms of litigation, as you start to pick up at least a cornerstone account in most of the major markets as you mentioned, do you expect that, you know, litigation is going to continue to be ordinary course in this business or do you think that that will become less necessary as your footprint gets wider?

Lauren Landfield

So let me comment two ways on litigation. So, if you follow the North American experience to your specific question, yes, over time as more and more people realize that we’ve prevailed in litigation, the preponderance of customers are licensed, the likelihood that customers may take litigation as a root to negotiate decreases over time. So our belief is yes, as more and more licensees come on the likelihood of litigation decreases over time.

I also want to just highlight, as we’ve said in the past, that the various lawsuits we have going on the expectation is that two things occur. One is – especially for Virgin Media, we’re not expecting to hear of anything until towards the end of year on that. And then realize on all litigation, you know, we put a couple of patents up there to argue with the courts and with the clients. And we get into a situation where if one of them were to lose we’d go back and re-file, you know, one of or several of the other hundreds or thousands of patents that we have available to us. So in some cases the litigation route can take a little bit longer depending upon the numbers of appears, et cetera, et cetera.

But, the prevalent question that you asked of, over time does litigation decrease, yes. I just don’t want to set an expectation that it’s going to decrease in the next three months.

Rob Stone - Cowen and Company

Okay. Finally more of a housekeeping question for James. As you continue to generate cash and pay down debt, how should we think about the process there? Is there some sort of a minimum cash cushion that you want to maintain or to what level would we expect you to use available cash to reduce debt?

James Budge

There is a minimum cash cushion. It’s probably a few hundred million dollars. No magic to it, but a few couple, two, three quarters of expenses just in case the world imploded, which we don’t expect to happen. But we do expect to have that and we would probably take as you saw in Q1, we took a quarter’s worth of cash-flow and put that to the debt. That was about $50 million. We had a great opportunity here over the last two to three weeks to take out the expensive high yield note. And so we took advantage of that while our debt was trading at a premium. That was a $100 million, so we may or may not resume the $50 million per quarter again, as we move to the third quarter. But you can generally expect that something in that, pick a little bit here and a little bit there approach is probably how we’ll continue, $50 million or so.

Rob Stone - Cowen and Company

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Todd Mitchell with Kaufman Bros. Please go ahead.

Todd Mitchell - Kaufman Bros.

Hi. Thank you for taking my question. I have a multi-part question on licensing. First of all, I think I remember from the Gemstar days that when the Comcast deal was done, as sort of a all-you-can-eat cash up front, there was a ceiling on the number of subs involved. I’m wondering if you could speak to, you know — are you hitting it, are you coming close to it? And I wanted to sort of transition that also to a question on the TiVo licensing deal. Does the TiVo licensing deal apply to just their hardware offering or does it also apply to their hardware and software offering? And if it does apply to the software offering how do you deal with the, sort of, double counting on that platform? And finally, in regards to the TiVo relationship, if it isn’t a device relationship but an ongoing meta deal how is it structured? Is it an ASP or is it an ongoing per unit, per time period deal?

Alfred J. Amoroso

So there are three questions. First of all on Comcast there is a cap on the — I should say a maximum number of subscribers. They have not pierced through the maximum number, but it is getting close and we will leave it at that — not forecast when it will pick up again, but yes over a certain number of subscribers they start paying again.

On TiVo the data is provided basically on their platform for their data to be used as part of the ability to search with the availability of our data as opposed to Tribune data that I believe they were using before. And they pay us on a per sub basis.

Todd Mitchell - Kaufman Bros.

And that is ongoing?

Alfred J. Amoroso

And that is ongoing, correct. It is not a single one-time payment. It is an ongoing payment.

Todd Mitchell - Kaufman Bros.

Okay. And in general, how do you deal with sort of when you have this multiple service providers crossing with one another so that there is not duplication? If TiVo does a deal with RCN and you have a deal with RCN and TiVo's DVR is in that household, are you billing TiVo or are you billing RCN or is there a double bill made?

Alfred J. Amoroso

So, yes and yes and yes (laughs). So it is a good question. Some of you may have seen that RCN is using TiVo to provide some DVR capability and just to provide a little bit more color on that, we have recently renewed our passport relationship with RCN as well so we, in that case, are getting paid from multiple sources across the same subscriber base.

Todd Mitchell - Kaufman Bros.

Thank you very much.

Operator

Thank you. Our next question comes from the line of Andy Hargreaves, Pacific Crest. Please go ahead.

Andy Hargreaves - Pacific Crest

Just to clarify that last question, would you be getting paid twice for the same sub, or if a sub chooses TiVo you are going to get paid by TiVo and if the sub chooses passport then you get paid by RCN?

Alfred J. Amoroso

No. We get paid for the same sub twice. So TiVo pays us on a per sub basis and RCN pays us on a per-sub basis and it depends on devices that are deployed so it is based on penetration.

Andy Hargreaves - Pacific Crest

Okay. And then just sticking on the subs really quick, is that 109.5 number that you gave us, does that include Canal Plus?

Alfred J. Amoroso

Which number?

Andy Hargreaves - Pacific Crest

The total sub number that you gave us.

James Budge

Yeah, that includes Canal.

Andy Hargreaves - Pacific Crest

Okay. Can you give us just what the international sub number is at this point?

James Budge

Well, 24-25 in Europe. We have got another 1 or 2 million in Latin America and there is 2-3 million in Asia Pacific.

Andy Hargreaves - Pacific Crest

Thank you. And then the catch-up payment, you said seven figs, is that like 1 million seven figs or 9 million seven figs (laughter)?

Alfred J. Amoroso

Between the two.

James Budge

Somewhere in there, towards the lower end.

Andy Hargreaves - Pacific Crest

Okay. And then lastly, Muse was fairly unique — the balance sheet is definitely getting better, you have had a couple of quarters that are pretty darn clear here so it seems like about time to make an acquisition, what is your guys' — (laughter)?

Alfred J. Amoroso

You got any good ones in mind (laughter). It would have to be accretive. We have a company policy that we do not comment on rumors in the marketplace.

Andy Hargreaves - Pacific Crest

In all seriousness —

Alfred J. Amoroso

In all seriousness, we will not comment on what acquisition might be out there and whether we are planning to do one or not.

Andy Hargreaves - Pacific Crest

Okay.

Alfred J. Amoroso

I will tell you though, Andy, what we have said is that when I have been asked about this and James has been asked about this, there is nothing that we see that is requiring a large transformative acquisition. There is no gaping holes in our technology. There are opportunities that are always out there obviously to extend or further penetrate, but I just want to characterize how we look at our own position in the landscape, right?

Andy Hargreaves - Pacific Crest

Right. I appreciate it.

Operator

Thank you. (Operator's Instructions) We have a question from the line of Ralph Schackart ,William Blair.

Ralph Schackart - William Blair

Hey, guys. No more large transformational acquisitions — this one has worked out really well.

Alfred J. Amoroso

Thank you (laughter). Was that a tell Fred as opposed to an ask Fred?

Ralph Schackart - William Blair

You know it is just a statement, Fred (laughter). A couple of questions and since I am the last one will you give us the economics on Liquid? Just kidding (laughter).

James Budge

They are really good.

Ralph Schackart - William Blair

Yeah? Good to hear. James and Fred, I think you have talked on the TV opportunity, I think a scenario that people have not focused on as much as large, as high margin — you have talked about sort of 25%-35% market share have you put any timelines around that market share penetration, and if not can you sort of give us a sense on the ramp of that?

Alfred J. Amoroso

So let me comment just a little bit on where this market is. Ralph, the manufacturers right now are really focused at 2009 — end 2009 products, Christmas 2009 products in the marketplace and early planning for first half of 2010. When you look at the amount of effort it takes to integrate liquid, our total guide is not going to be available for either of those design cycles. So the ramping that we are talking about for liquid being the next generation — for total guide being the next generation guide that we really believe can create the user interface for devices is really going to start coming out towards the end of 2010. That is just the lead time of the planning cycles for the CE manufacturers.

Ralph Schackart - William Blair

That makes sense, Fred. Is it fair to assume or should we assume that somewhere within that range could potentially be sort of an exit penetration rate, not for the full year, but sort of exiting 2010?

Alfred J. Amoroso

It certainly could be to some level, but huge ramp up is going to — I think when you talk about penetration across many multiple device manufacturers across multiple devices, you are probably more in the 2011 timeframe starting end of 2010.

Ralph Schackart - William Blair

Okay. And then just last question if I could, could you give a sense on the traction levels with your varying new initiatives, it sounds like the metadata is doing pretty well. Sort of maybe speak a little bit to the connected platform, media recognition, and maybe the ad business a little bit?

Alfred J. Amoroso

That is fair. So look, the connected platform by itself is one of the major components of middle wear for true 2AO cap environments for most of the — not all, but many of the set top box manufacturers in the world creating O-cap environments, true two-way environments. But the real value that we always envisioned with a connected platform is integrating it into a broad-based technology such as Total Guide where the connected platform enables a DRM, it enables search and discovery across any wired or wireless devices — within the home-storage devices within the home, and really fulfills one of the key tenants of that three-tiered search. So we do not look at the connected platform, to be frank, as a separate and standalone product. It is an integrated product with others today.

I honestly cannot say that any of the initiatives that we have is proving out to be less opportune for us or is a failure. When we look at, for example LASSO, which is embedded data search recognition in devices, we are pleased with the progress across multiple major device manufacturers when we look at the integration of our technologies and the integration of data with our technologies to fulfill search. It makes us truly unique. Muse, as an addition gives us some great capability — an enormous capability to reduce overall costs and improve margins.

So as we are looking at it along the way, so far we are quite pleased with how the different architectures, technologies, and opportunities are coming to pass. Some taking a little bit longer than others, and if you read into some of the comments that I had today on advertising, you will see that now having an affiliation with a major data analysis firm on a cooperative basis to not only validate our measurement data for advertising, but to provide a higher level of service that will be available to the service providers for the use of their own information through an outside source, a third party to validate that data plus the now being in over 25 different markets across the US — five of the major markets or for click-stream measurement is really starting to put in place a lot of the fundamentals for us to drive the advertising business as it occurs.

But like I said and like James has said, that is not going to happen in 2009 and we will show progress in 2010, but it is really in 2011 and beyond as guides and technology get into devices that will see it ramp more significantly.

Ralph Schackart - William Blair

Alright. That is a nice transformation. Well done, guys.

Operator

Thank you. And our next question comes from the line of Sterling Auty, JPMorgan. Please go ahead.

Sacket (ph) - JPMorgan

Hey, guys. It is Sacket.

Alfred J. Amoroso

No imposters there, Sacket.

Sacket - JPMorgan

Just a few questions from my side, mostly modeling. Looking at service provider for the next quarter, should that still grow double digits even after excluding the one-time catchup payment this quarter?

James Budge

Well, whatever it grows after dipping slightly. We gave the sixth quarter rolling breakout by vertical last quarter so it will go down just slightly from Q2 to Q3 so whatever that growth rate is after you punch that into your model, that is what it will be.

Sacket - JPMorgan

Okay. On the CE side, I think last quarter we talked about Q2 for CE being sort of the low point for the year and obviously this quarter's results were much better than we expected, but do you still look at Q2 being the bottom or being the low point for the CE business?

James Budge

Well it was better than Q1 so it was not the bottom of the year. So you are right, we did say that ,we did expect it as it has been historically, but it ended up having a great quarter, obviously, by the results.

Yeah, generally we would expect the holiday season and the holiday back off to be better than the first half and better than the second quarter, so yeah, sure.

Sacket - JPMorgan

Got it. Last question, just on expenses it seems like it has been pretty steady on a pro forma basis around $69-$70 million in expenses. Looking at the back half, is that a fair level to think about or do you have any specific investments that you plan that would make that spike in any way?

James Budge

Yeah. I think the comment I made was that margin itself would be roughly consistent with the first half which if you play that out with the revenue increase in the second half it means the expenses go up slightly in the second half. The reason for that being we only have two months of expenses of Muse in the first half and we are going to have six months of expenses of duplicative expenses of Muse in the second half until we work through all the synergies as we move into 2010.

So while that was a great deal for us and a huge homerun from an accretion perspective in '10, we do have to work for the duplicative costs for the back half of the year. So expenses overall will be slightly higher in the second half than the first half.

Sacket - JPMorgan

Got it. Thanks, guys.

Operator

Thank you. And at this time I would like to turn the call back over to management. Please continue.

Alfred J. Amoroso

Thank you, McKella, and thank you all for joining us on the call today. We appreciate your questions and your thoughts on the business. We take your comments to heart, Ralph, about acquisitions. We look forward to your next earnings call at Q3 in November, so thank you all.

James Budge

Thanks, everybody.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for the day. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with the access code of 4116686#. We would like to thank you for your participation and at this time you may now disconnect.

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