Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rovi (NASDAQ:ROVI)

Q3 2013 Earnings Call

October 30, 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

Ralph Schackart - William Blair & Company L.L.C., Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

James Medvedeff - Cowen and Company, LLC, Research Division

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

Todd T. Mitchell - Brean Capital LLC, Research Division

San Phan

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

Shateel Alam - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon. My name is Ariel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rovi Corporation 2013 Q3 Results Conference Call. [Operator Instructions] Thank you. Ms. Lori Barker, Vice President of Investor Relations, you may begin your conference.

Lori Barker

Good afternoon, and thank you for joining us today. I'm joined by Tom Carson, our President and CEO; and Peter Halt, our Chief Financial Officer.

Before we discuss our third 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, share buybacks and debt pay downs, as well as possible outcomes and timings of contract negotiations, litigation reviews, strategic alternative, 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 September 30, 2013, and other SEC reports and filings made from time to time. And we encourage you to review the discussion of those factors in those reports and filings.

All of our statements are made as of today, October 30, 2013, based on information available to us as of today. And except as required by law, we assume no obligation to update any such statements.

Second, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial results 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 measures included in our earnings release. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are included in our Q3 2013 earnings press release, which has been furnished to the SEC in Form 8-K and is available on 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. Good afternoon, everyone, and thanks for joining our call. Hopefully, everyone has had a chance to see the earnings release we issued today with our results for the third quarter.

On today's call, I'll give you our financial highlights and some context around our results and our revised expectations. Then Tom will discuss some of the key events in the quarter, as well as provide some insight into our current contract negotiation process. Tom will also address the actions we are taking to drive growth and improve profitability. Finally, he will cover a few points relative to our capital allocation.

As for the results for the quarter, revenues were $143 million, down $20.7 million or 13% from the third quarter of 2012. The decline was driven by a reduction in revenues from our CE verticals, most notably by the continuing and anticipated decline in our CE video delivery and display sales vertical.

That said, we had expected to do better. The quarter was also impacted by the lack of significant new licensing agreements. It continues to take longer than anticipated to close certain deals, particularly overseas and with the over-the-top video providers. While we are still actively negotiating the deals we mentioned slipping out last quarter and we still believe we will ultimately reach agreement on commercially-reasonable terms, we are disappointed that none closed during quarter 3. Tom will speak in greater detail about the status of these deals.

Even without a significant license agreement in the quarter, our service provider vertical grew 7%, fueled by growth in both our licensing and guide product revenues. Our core service provider business is strong and continues to be the key to our growth in the future.

The growth in our service provider vertical was, however, offset by declines in our CE verticals, most notably, CE video delivery and display revenues were down $24.8 million or 55% from the third quarter of 2012. This decline was largely the result of continued ACP and DivX headwinds.

Additionally, the prior year benefited from approximately $5 million onetime connect-to-platform revenues in conjunction with our retiring this product last year.

Additionally, CE discovery and advertising revenues were down $1.3 million or 5%. Contributing to this decrease was lower reporting from smaller CE companies who pay us on a per-unit basis.

Finally, our other revenue vertical grew approximately $200,000 year-over-year as the community [ph] expansion or our metadata licensing business was mostly offset by the continued decline of ACP for entertainment revenue.

Like our service provider vertical, we continue to believe our data business offers us an excellent opportunity for future growth.

With respect to cost structure, APF costs of goods sold plus operating expenses were down 4% or $3.6 million from the comparable period one year ago. This was primarily due to the timing of IP-related litigation expenses and our continuing focus on cost reductions.

For the full year, we still anticipate the aggregate spend on cost of goods sold on operating expenses will be flat to slightly down year-on-year as we fund our new initiatives out of our continuing cost reduction efforts.

We also completed the divestitures of both the Rovi Entertainment Store and our Consumer Web properties this past quarter, both of which were key steps in continuing to lower our cost structure.

Additionally, as we announced earlier today, our board has authorized us to explore strategic alternatives for the DivX business. We've engaged Wells Fargo Securities to help us with this process.

Turning to our capital structure. We continue to produce significant cash flow, generating $48 million in cash from operations this quarter. Our cash and investments at the end of the quarter were approximately $860 million. We also continue to take a very thoughtful approach to our balance sheet, focusing both on near-term returns to stockholders and investments for growth in strategic areas like our discovery and our data and analytics businesses.

In that regard, our Board of Directors has increased our share buyback authorization to $250 million. We previously had approximately $116 million remaining under our prior share buyback authorization. In Q4, under this authorization, we anticipate repurchasing some additional shares.

Additionally, we'll be making a debt payment of at least $150 million during the fourth quarter. This accelerated payment will eliminate the need to make an excess cash flow payment, otherwise required in Q1 2014 and will lower our cash interest expense. We are also looking at our cash needs and may make a larger paydown this quarter.

Finally, strategic M&A remains a part of our growth strategy. We will be very disciplined with respect to future acquisition opportunities, applying rigorous strategic and financial criteria to any opportunities we evaluate.

As Tom will discuss in more detail, we are very focused on our core business operations and ensuring that each of our assets has a clear strategic fit.

Acquisitions, if any, will be closely tied to our strategic plan, such as accelerating product delivery to the cloud or expanding our data and analytics operations. And we will be disciplined as we evaluate the returns on any investments we make.

Turning to our full year 2013 expectations. We believe it is prudent to reduce expectations for 2013. This is largely due to the difficulty in predicting the timing of new licensing agreements. We are in the midst of negotiations with several over-the-top providers and international companies, and while we firmly believe we will ultimately close these deals, the timing of closing these deals is difficult to forecast.

Additionally, given the pace of negotiations, we don't believe it is likely we'll exceed $615 million in revenues this year, which was the midpoint of the estimates we provided last quarter. As such, we are revising our full year 2013 revenue expectations to a range of $585 million to $615 million.

Lastly, as a result of our revised revenue expectations, we now expect APF, income per our common share, of between $1.70 and $2 for 2013.

I would note that our EPS projection at $615 million in revenue is $0.05 a share better than it was last quarter. This is a function of our continuing focus on cost and investing wisely.

With that, I'll turn it over to Tom.

Thomas Carson

Thanks, Peter, and thank you to everyone joining us on this call today.

I would like to expand upon some of Peter's comments and also take some time to talk about a few additional matters.

First, I will discuss our Q3 results and the decision to adjust our estimates for 2013. Next, I will talk about actions we are taking to improve performance as we continue to realign the business to drive future growth. And I will talk about our product direction and the status of key programs and deployments. Finally, I will cover a few points relative to our capital allocation.

First, I'm not happy with our Q3 or the fact that we have adjusted our full year expectations for the second time in as many quarters. While our goal was to be as transparent as possible about our expectations in any given quarter, we clearly do not like being in the position of revising our forecast again. I take full responsibility for this. That said, I want to take some time to make sure everyone understands the composition of our revenue, particularly, how catch-up revenues from new patent licensing deals can significantly impact our revenue stream.

As we have shared with you in the past, more than half of our revenue comes from the products and solutions we offer. Given the structure of our agreements and the nature of the solutions, a high proportion of our revenue is run rate, which is, by its nature, very stable and predictable. Also, our products and solutions tend to have limited catch-up revenue, which is primarily related to underreporting.

Versus our year-to-date budget, product and solution revenue has come in as expected. This revenue is running at plan as misses in advertising and DivX have been offset by better-than-expected performance of our discovery, data and other products.

We are aggressively addressing the issues in advertising and DivX. While there's more work to do in other product areas too, I am pleased that the progress we have made in areas like service provider products and data, which are a large part of our future focus, where we have seen solid, low double-digit year-to-date growth versus the same period last year.

Our intellectual property licensing revenue, on the other hand, can drive more accelerated growth, but it is also much more volatile. While run rate revenue comprises the vast majority of our licensing revenue, licensing deals can also include a onetime or catch-up component, which accounts for prior periods not under license. Depending upon the licensee, its sales volume and the period out of license, the amount can be significant. These catch-up payments are ongoing recurring part of our business as we expand our licensing to new customers.

However, the amounts can vary widely and the anticipated catch-up payments grow as the completion of deals are taking longer. It is difficult to predict with precision the amounts we'll recover. Our expectations at the beginning of this year assumes several deals would be closed involving meaningful catch-up payments.

In order to set expectations today and going forward, we will err on the side of a more conservative estimate about licensing revenue catch-ups and we will then guide up when they occur. This should help avoid future unpleasant surprises. I understand the need of our investors to have more certainty around the estimates we provide, so taking a more conservative approach is the prudent thing to do. This may mean we will communicate lower growth expectation, but don't take that to mean we don't believe we can achieve more and aren't focused on doing just that.

With regard to the significant deals currently being negotiated, yes, they are taking longer than anticipated, but we have made significant progress over the past 3 months. We have wrapped up patent validity and infringement discussions and moved into the very meaningful phase of negotiating business terms.

More importantly, one of the international service provider deals has moved into detailed discussions around potentially utilizing our discovery products in the areas of set-top box guides, cloud-based guides and metadata. While this elongates the time to complete a deal, we consider this a very positive development. I still fully expect these deals to get completed despite the frustrating delays we had seen so far. We will also not rush to close deals at the end of a quarter if we don't believe the value is appropriate for Rovi.

Next, I want to talk to some of the actions we are taking as we continue to realign the business in order to best position Rovi for future growth. Our efforts include a number of actions to improve our focus as a company, as well as targeted cost reduction to both prevent cost creep and fund the strategic initiatives we think are important for our future.

On the focus front, as we had previously discussed, we have been evaluating all our business areas and investing only in those that fit our strategic mission and have a good opportunity for future growth. As a result of this assessment, we divested a number of businesses, including the Rovi Entertainment Store and our Consumer Web businesses, this past quarter. We are now looking at strategic alternatives, which could include a sale for the DivX and MainConcept businesses. I believe all these actions are a very necessary part of getting this company much more focused than it was previously.

I also feel that once we have finished our evaluation of DivX, we'll be at a point where these types of major actions are essentially completed and we need to focus singularly on initiatives to drive future growth.

We have also focused aggressively on cost reductions in order to eliminate cost creep and allow us to invest in important strategic area. To put it in context, in the last 2 years, we have eliminated approximately $15 million in costs and planned expenditures and are reinvesting those funds in areas like data, search, recommendations and our web-based platform for Internet-connected guides like xD. Going into 2014, we have already identified a similar cost reduction plan and will execute it accordingly.

To give one example of this focus, let me address our Advertising business. We believe in our core guide advertising business. We plan to continue focusing on this business and are in discussions to expand our in-guide advertising footprint by representing MSOs not using a Rovi guide. However, we are eliminating our efforts related to the web and in-application advertising initiatives for third parties. This will allow us to stay focused on our core advertising business, while removing approximately $4 million in annual costs. Managing our cost base and continuing to focus on these types of actions over the next 12 months is a main priority for me and my staff.

Now moving on to products. On the TotalGuide front, on last quarter's call, I mentioned that we will be commercially deploying TotalGuide for set-top box for the first time in Q2. While this deployment slipped a bit, I am pleased to announce that BendBroadband commercially deployed its first tranche of TotalGuide for set-top box earlier this month. We anticipate they will widely deploy this solution in Q1 after their year-end network lockdown ends. We believe this first commercial installation, while small, will drive momentum with respect to the pace of adding new TotalGuide customers and commercial deployments with existing customers.

With regard to the metrics surrounding TotalGuide for set-top box, I am pleased to report the following: 5 contracts signed; 1 customer deployed; 2 more in trials; and another 10 prospective customers are evaluating TotalGuide for set-top box. As such, we believe we are building a promising pipeline.

As I had mentioned on previous calls, our xD application, which provides an Internet-connected guidance experience, has seen a high level of traction with our customers. It is this type of cloud-based guidance experience that we believe will drive the future of guidance growth. It is an area we are investing in and will continue to invest in for the future.

As a result of customer feedback, we are making a number of product enhancements to xD to allow for things like video viewing on xD and for xD to be integrated on products beyond just iPad, so including iPhones and Android mobile devices.

In terms of metrics for xD, here's the current status: 10 contract signed; 3 customers deployed, 4 more customers in trial and another 14 prospective customers are currently evaluating xD.

While there continues to be some slippage on the product and deployment front, I am pleased with the prospects of both TotalGuide for set-top box and xD for connecting mobile devices.

We also had some good news this quarter with the other service provider products, our guide products with DTAs, or Digital Terminal Adapters, which are also referred to as Digital Television Adopters. DTAs are a basic digital cable device that allows you to watch all the limited basic and some expanded service channels, which were migrated from analog to digital on a legacy analog television. DTAs not only addressed to the millions of households in North America that haven't migrated from analog to digital, but they also provide an inexpensive alternative for an additional set-top box in the home.

This past quarter, our DTA solution was accepted for commercial deployment with a Tier 1 service provider. We expect commercial deployments to begin in early 2014.

DTAs are even more important in certain international markets, such as Latin America where a DTA product has particular appeal as a low-cost solution. Last week we announced that Cablevision Argentina is now deploying our DTA product. They will be joined by several other Latin American service providers in deploying our DTA product in 2014.

At our next Investor and Analyst Day in January, we will talk more about our longer-term corporate and product strategy, but I did want to foreshadow a few important things resulting from our strategy process that will become a core focus for Rovi in the future.

In the area of guides, set-top box guide products like iGuide, Passport and TotalGuide will remain an important staple of our discovery offering. However, we will be expanding beyond those set-top box to include Internet-connected navigation devices for digital entertainment.

In data, as you may be aware, we are a leading global provider of metadata. We are also investing to be a similar type of leader in the areas of search, recommendations and personalization. These areas of data form the core technology bricks for guidance on Internet-connected devices. When we meet in January, I look forward to talking much more about all the initiatives we have in this area as we believe the prospects are very promising.

Finally, I would like to follow up on Peter's earlier comments regarding capital allocation. We are very focused on maximizing value for our stockholders. This means fixing the problems that still need attention, appropriately prioritizing resources, ensuring we have an effective and efficient cost and capital structure and deploying our capital to maximize the return to our shareholders, not just in the short-term, but over the long-term. The debt paydown and share buybacks Peter mentioned are examples of such actions.

We believe strategic M&A is also a part of a wise capital allocation strategy. Our focus is on deals that expand our core businesses, such as acquisitions, which enable expansion of our data and analytics business, complement our existing discovery offering, get our products to market sooner or provide opportunity for higher product return based upon more or advanced feature sets. The latter 2 categories include attributes for our TV Everywhere for cloud-based offerings.

We are also mindful of investor criticism of the Sonic acquisition and concerns about very large deals or deals outside our strategic focus and core competencies. Any M&A activity we undertake will be well thought out, well diligence and highly strategic with a focus on return on invested capital.

In terms of return on invested capital, we have looked at and passed on several opportunities over the past year as we did not see either the appropriate return or strategic fit.

In summary, we continue to work hard on refocusing the business back to its core competencies and we'll continue prudently investing to position ourself for future growth.

With that, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Ralph Schackart with William Blair.

Ralph Schackart - William Blair & Company L.L.C., Research Division

A couple of questions. First, Tom, maybe you could just give a little color if you could, please, on what's sort of the major drivers of these delays getting pushed. Maybe a little color just on -- is it price, the length of contract? Sort of help us out a little bit there.

Thomas Carson

There's actually a couple of things that are happening with the agreements. They have a tendency to be fairly complicated. And depending on which one, can involve both an intellectual property licensing component or product. And to give a very clear example, one of the international deals that we were working on was originally just going to be based on patent licensing and it's actually morphed into a potentially a pretty significant deal for Rovi on the product side. So the length and time has just gotten elongated. So that's the types of things that we are encountering. I think from my perspective, all these deals are very much still in play and will get done. They're just taking a little bit longer than we would like, primarily because they get into things like products or because we have to take a little bit more time getting through the explanation of the patent infringement.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Great. Maybe one for Peter. Peter, at the Analyst Day, I know you talked about 7%, 12% growth for 2014. Is that still sort of a relevant range or something that maybe addressed again at CES next year?

Peter C. Halt

Yes, we'll address 2014 at CES. As Tom said in his prepared remarks, we're going to take a more conservative approach to the timing of any new licensing deals. So I'd say that at the moment, for 2014, wait and listen to us in January talk about 2014.

Operator

And your next question comes from the line of Mike Olson with Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

So the international deals you were just talking about that have taken longer, is it primarily then on the CE side for integration of your technology into TVs? Or is some of it on the service provider side as well?

Peter C. Halt

Actually, a heavy component of it is on the service provider side. And again, just to hit some of the complexities, it's not just 1 country, it's multiple countries that are involved with multiple different products of ours.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then, is it possible to single out specifically where DivX-related revenue landed in the quarter versus what you were expecting?

Peter C. Halt

DivX in the quarter was slightly less than we were anticipating, largely offset by a little bit of an increase in ACP. So you'll see that we're looking at a relatively consistent number for the year. On the year, we're anticipating the combination of DivX and MainConcept, which is the businesses that we're taking a look at right now between -- to be between $70 million and $75 million for the year.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then lastly, it seems -- obviously the primary issues that have tripped up the numbers are OTT deals that you've anticipated in some of these international deals and stuff like that. So it goes without saying, it may make sense, as you've talked about, to remove some of these deals that don't have extremely high certainty of getting done kind of out of the guidance. When you look at, you've kind of mentioned that for 2014, would you say Q4 includes any deals that have less than kind of extremely high chance of getting done?

Peter C. Halt

What -- given where we are on deals that are coming, that are in Q4 right now, we've only included deals closing that we believe, based upon where we are, will close. We were trying to be conservative on that. That's not to say there isn't some new licensing deals in Q4, but we are very, very substantially down the road in negotiations with those.

Thomas Carson

Okay, maybe, just to put it in context too. I think the -- one of the things that I made in my prepared remarks was, when you look at our product business overall, the product business has a tendency to be very predictable because the agreements were done a while back in previous years and are effectively what we would describe as run rate. When you look at the intellectual property at licensing businesses, there's really 2 components. There's a component that's run rate, which is pretty stable, pretty predictable, we know that what that is. The thing that's little more challenging for us to try to forecast are these one-time components. So as we looked at it and as we decide how we want to do guidance in the future, what, basically, we want to do is try to take out some of the lumpiness and just be more conservative on those onetime components of licensing deals.

Peter C. Halt

And Michael, I just had one thing -- I mean [indiscernible] as you look at how we look to land the year, the midpoint of our expectations now for the full year of $600 million, we're looking at about $334 million for service providers, about $132 million in the CE discovery and advertising vertical, about $75 million in CE, video delivery and display and about $59 million in the other category.

Operator

And your next question comes from Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

I apologize, I've been bouncing between calls, so some of this is repetitious. But with the delays on some of these larger deals, obviously, I would expect some of the catch-up revenue playing [ph]. Is there a sense of exactly how much revenue you're really talking about here that's moving around? I know you don't want to put it into guide, but -- so we can at least come to some judgment as to where we might think that chunk might fall.

Peter C. Halt

Yes, Sterling. We prefer not to talk about deals and what we're expecting of them in advance because it just can open up a can of worms for us in terms of pricing on deals.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then you're talking about strategic acquisition as well. Are there a number of targets that you feel -- I'm not asking you to pass judgment on whether you think they're good or bad yet, because I understand the criteria you're setting forth, but are there obvious holes in the portfolio that you would want to fill? Is there -- is it actually a target-rich environment for you to look at on the M&A side? Or is it maybe just a handful companies that may fit kind of what the new more streamlined Rovi looks like?

Thomas Carson

Yes, I mean it's a great question, right. I know there's a lot of sensitivity externally about M&A and what Rovi does potentially in this area. Just a couple of comments I think are important to reiterate. First, we have looked at deals already and a number of those deals we passed on because they didn't just -- they didn't fit strategically or they didn't get to the financial hurdle rate we wanted to. And as we looked at it, a lot of what Rovi is about and kind of competencies that we have are in the area of discovery, and that includes everything from what we do in guides, whether it's set-top box or cloud-based, metadata, analytics and intellectual property licensing. And we certainly want to ensure that we continue to add those types of technologies and skills into the organization. So things that we look at fit much more in line with discovery, whether they're data opportunities potentially, whether it's search and recommendation opportunities, whether it's cloud-based guidance opportunities. So those kind of things are really in the core of what we do and are the predominant products that we offer that we'll take a look in.

Operator

And your next question comes from the line of James Medvedeff with Cowen and Company.

James Medvedeff - Cowen and Company, LLC, Research Division

A couple of questions on the capital allocation side. You have a -- almost $700 million of cash and short-term investments. And I think you said the debt reduction acceleration is $150 million in the quarter, was that right?

Peter C. Halt

It's about $860 million in cash and investments. And what we said was that we would look at paying down at least $150 million in debt.

James Medvedeff - Cowen and Company, LLC, Research Division

So that would still leave $700 million, give or take. And -- so the question that I'm getting to is, what is the level of cash that you need to run the rest of the business?

Peter C. Halt

The other thing that we commented, James, in our prepared remarks is, the board did increase our authorization also for share buybacks and that we would be in the market in the quarter buying shares back. We have a belief in the amount of cash that we need as a business to keep running. We haven't disclosed what that amount is, and then we have the remaining amount that we would look at as being potentially available for strategic M&A or for other needs that we have, which could, in the future, be additional debt buybacks or share repurchases. We'll look at things every quarter in terms of where we think best to deploy our capital.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And then on the accelerated debt paydown, is there any penalty or prepayment penalty of any kind? Or are there any limits or constraints on you in terms of how quickly you can repay that debt, or no?

Peter C. Halt

There are basically timing mechanisms that we can exercise in order to make payments on certain dates to certain notices to avoid any penalties.

Operator

And your next question comes from Andy Hargreaves with Pacific Crest.

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

Can you give us any sense for what DivX and MainConcept profitability is?

Peter C. Halt

We haven't spoken to what their profitability is, but they are profitable. They have a basically fixed base of cost. In total, there's about 270 employees at DivX. They represent just under 20% of our R&D and they were much more profitable last year at a higher revenue base, but they can either [ph] be profitable this year.

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

Okay. And then on the discovery and advertising side, did I hear it right? You said $132 million for the year at the midpoint. Is that accurate?

Peter C. Halt

That is accurate.

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

So that would seem to imply a pretty significant 50%-ish sequential increase in Q4. Is there a large deal out there that you guys are anticipating being closed to cover that gap?

Peter C. Halt

That would be correct.

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

Okay. And then just on the service provider business, can you just walk through why it's down sequentially? It's not a big number, but...

Peter C. Halt

No, it's not a big number. We've had -- if you'll look at the base of subs in North America, a slight shift in terms of the number of subs we have, the number of subs that are nonpaying, up nicely year-on-year.

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

Okay. And then this is may be something for the Analyst Day as well, but you talked about a lot of kind of cost-cutting efforts heading into next year similar to what you talked about the beginning of this year. Can you give us any sense of what you anticipate the OpEx run rate will be in early '14 or headed into '14?

Peter C. Halt

We'll cover that at the Analyst Day.

Operator

Your next question comes from the line of Todd Mitchell with Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

Just a couple of questions kind of going on to the -- back to the acquisition and divestitures. If you're looking for an acquisition in a -- basically a discovery field, do you have a bias towards a -- buying a company that is a technology company or buying a company that -- technology company that actually has a book of business and an embedded to customer base? And...

Peter C. Halt

I think given our preference, we'd always have a bias to the latter, Todd.

Todd T. Mitchell - Brean Capital LLC, Research Division

But I mean, is the thought that you have some technologies that are underdeployed and that if you could grab onto a technology that's deployed, you could sell-through deeper?

Thomas Carson

I mean, I think from a technology perspective, there clearly are certain things that we would look at. I think when you look at service provider as an example, we have already a pretty strong set-top box guide business and do those well. With our xD product, we actually have a pretty good backlog of business with cloud-based guidance, but we certainly like the possibility of having companies that could certainly offer technology and/or people skills in the area of cloud-based guidance.

Todd T. Mitchell - Brean Capital LLC, Research Division

And is there a -- in terms of where you would like to build that business out, is there a geographical preference?

Thomas Carson

No. We're still sorting through that.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And then another question on this -- going to the IPG licensing. My understanding is that your arrangement with the NDS for -- basically guidance in their products was that it was largely structured like your CE business and that some of those deals were not reoccurring. Does -- if a large customer moves away from NDS, does that present an opportunity to go to them for reoccurring revenue streams?

Peter C. Halt

Yes. I mean, if someone is licensed under NDS and ceases to take a guide for NDS, but receives the guide from another party, then they wouldn't be licensed unless they came to us for a license.

Todd T. Mitchell - Brean Capital LLC, Research Division

For the new guide, that was not from NDS?

Peter C. Halt

Correct, for the guide that they deployed, that weren't deployed by NDS.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And then lastly, just on the divestiture side. Two questions, basically. First of all, just a clarification. In terms of selling RES, was there any proceeds received for that? Or was that a net outflow for you to get rid of it?

Peter C. Halt

Net outflow.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And then in terms of looking at DivX, it seems to me that there's been a fair amount of, should we say, signings of deals with DivX. Can you talk about where it's getting traction geographically and your sort of thoughts there?

Thomas Carson

Yes. So DivX has always been an international business, but it always had a very heavy presence in Europe and pretty high use in Europe. So, that's certainly been an area of concentration, but really, when it boils -- when it comes down to consumer electronics devices, which is where DivX belonged on the licensing model, even though the distribution may be heavily centered in places like Europe because of a high-use case, the deals are effectively Asia-based in terms of what we're negotiating, just because it's where the CE manufacturers are.

Peter C. Halt

The other thing I would add on top of that is that as we move to also licensing DivX Plus Streaming above and beyond the current DivX profile, the movement so far in terms of getting DivX Plus Streaming into over-the-top players, which is important for the ecosystem player for DivX Plus Streaming, has been with, primarily with European and Asian over-the-top video providers.

Todd T. Mitchell - Brean Capital LLC, Research Division

And if your -- is the -- I mean, DivX Plus Streaming going into Asia seems to be incremental to DivX's businesses. What's the use-case application? Is it straight over-the-top or is it in some kind of managed network? And who is the content originating with that's getting treated in the format?

Peter C. Halt

Well, so an example I would use, for instance with a service like Mei Ah. I mean, it is ostensibly served up from their website or applications. However, we're the people who help provide that video through what we call DivX video services.

Operator

And, sir, your next question comes from Edward Williams with BMO Capital Research.

San Phan

This is San Phan in for Edward Williams. Just a quick follow up on the sequential decline in paid subs. Was that mainly driven by someone that possibly fell off of contract? Or was that like a decline in the sub-base for MSOs under contract?

Peter C. Halt

I'm sorry, I missed the beginning of the question, Ed. Could you repeat that?

San Phan

Sure. Was that an...

Peter C. Halt

I got the end of the question. It was the beginning I missed.

San Phan

Oh, it was the same question. It was just related to the decline, if it was either someone falling off contract or just a decline in the installed base of MSOs under contract.

Peter C. Halt

What we're seeing is just the standard shift within service providers that are under license from us as to how many customers do they have.

Operator

And your last question comes from the line of Jim Goss with Barrington Research.

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

A couple of things. First, related to RES, UltraViolet has actually been getting some pretty good reviews lately in terms of some of the usage. I'm wondering if you are totally out of your exposure in that area or you still have some IP that might be related or if there is some other exposure that you have.

Peter C. Halt

Yes. We are out of operating that business. Now that was -- it was an asset sale, so, I mean -- but all the assets operations, it's done, it's not with us.

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

Okay. As you try to create a better focus and definition of your businesses and communicate that with greater transparency, you do have a lot of activities between metadata and discovery and search and guide in user interface. Are there -- when you're trying to create these deals, is the whole menu of opportunity being offered to whatever target you're seeking to do a deal with? Or are you trying to focus on certain areas more than others, either geographically or by type of service? Just wondering if you might...

Thomas Carson

No, it was great question. I think on the service provider side, which is the heavy focus, obviously, for us, in areas like North America, it's generally a wider array of products, North America and South America, because we can offer set-top box products in addition to other things like data or search and recommendation or even things like our TotalGuide xD, which is the tablet application, because we have products that work in all those environments. When you get into places like Europe, we certainly see the opportunity for things like metadata sales and longer-term for some of the stuff we're doing with cloud-based guidance. So generally, if we have the product availability to work in territory, it's an opportunity to sell all the technologies. In certain geos, we're more limited, particularly in things like set-top box guide where we don't do them in every geo.

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

Okay. And finally, is there any certain cloud versus device space mix that you think will develop over time? Or is that just a function of just how things are going to roll out?

Thomas Carson

Well, what we are seeing, it's hard to kind of predict what the mix is going to be. What we're absolutely seeing from a lot of our customers, certainly based on the uptake of products like xD, again, a cloud-based guide solution and kind of the RFPs we're seeing from customers that they clearly want to have an ability to have a common user experience on their set-top box and other devices that are connected to the Internet and there's a lot of activity in that space. The reason we want to focus on it is we see that as a very nice opportunity, even with our installed base, forget about new opportunities outside of current geos, to be able to replicate our business model of trying to get a fee on a per-sub basis. So that's why there's a lot of push on our side in terms of trying to take a very hard look at getting more and more subs under a connected model that allows us to have that same kind of per-sub per-month revenue stream.

Operator

And you do have a follow-up question from the line of Heather Bellini with Goldman Sachs.

Shateel Alam - Goldman Sachs Group Inc., Research Division

This is Shateel Alam filling in for Heather. I just have one question on TotalGuide deployments and what's going on there. You mentioned you've got one MSO deployed. I'm just curious, in terms of your expectations, how should we think of MSOs ramping as they come on? Does it take a few quarters for them to start ramping meaningfully, like a year to get 50% penetration or 75% penetration? Any thoughts there would be helpful.

Peter C. Halt

Yes, I think there's 2 phases of this and both are time-challenged, right? I mean, the first thing you go through typically with any kind of a deployment, whether it's TotalGuide or Passport or i-Guide is, there is a pretty heavy internal process to go through, lab trials, then limited field trials, then they go to a deployment approach, which is small at the beginning and longer at the end. So they take their time to do that and then they have certain restrictions at certain times of the year where they won't do any deployments. Fourth quarter is typically a great example of that. Not a lot of service providers put themselves in a position to do deployments in the fourth quarter because they don't want any disruption with the consumers over the holidays. So you have to work around those kinds of things. So the process, depending on the complexity of integration with all the other vendors, trials, et cetera, can take 1 year to 18 months, depending on the complexity of the operation and the number of subs they have.

Shateel Alam - Goldman Sachs Group Inc., Research Division

Okay, great. And then one follow-up on that. I think you've said in the past that the pricing for the new TotalGuide is 2x the economics, so maybe $1 versus $0.50. How has the pricing been on these new contracts you're selling? And as you're starting out, are you selling it at a discount at all?

Peter C. Halt

No. The pricing on TotalGuide for set-top boxes has been consistent with our expectations.

Operator

[Operator Instructions] And there are no further questions, sir.

Thomas Carson

Okay. Thank you very much. Listen, I just want to wrap up here quickly and say thank you to everyone for joining us on the call today. Certainly, it was a more challenged quarter than we would have liked. But saying that, I'm still very, very optimistic about the progress we've made in trying to get our organization much more refocused. There's been a lot done to dispose of underperforming assets, a lot done for cost reduction and we have a great blueprint for the future, which I look forward to sharing with everybody at the Analyst and Investor Day at CES.

So thanks, again. I look forward to seeing everybody over the next couple of months.

Operator

And this does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rovi Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts