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Rovi Corporation (NASDAQ:ROVI)

Q4 2013 Earnings Conference Call

February 12, 2014 5:00 p.m. ET

Executives

Lori Barker - Vice President, Investor Relations

Peter Halt - Chief Financial Officer and Chief Accounting Officer

Thomas Carson - Chief Executive Officer, President and Director

Analysts

John Bright - Avondale Partners

Shateel Alam - Goldman Sachs

Ralph Schackart - William Blair

Todd Mitchell - Brean Capital

Andy Hargreaves - Pacific Crest Securities

James Goss - Barrington Research

James Medvedeff - Cowen and Company

Eric Wold - B. Riley

Operator

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to Rovi Corporation 2013 Fourth Quarter and Year-End Results Conference Call. (Operator Instructions)

I'd now like to turn the call over to Ms. Lori Barker, Vice President of Investor Relations.

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 fourth 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 as well as possible outcomes and timing of contract negotiations, litigation, the future sale of DivX and MainConcept businesses, business strategy, deployment plans 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-K for the year ended December 31, 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, February 12, 2014, based on information available to us 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 reconciliation between the non-GAAP and GAAP figures are included in our Q4 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 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 fourth quarter and full year 2013.

On today's call, I'll give you our financial highlights, some context around our results and our 2014 financial expectation. Then, Tom will discuss some of the key events in the quarter, as well as his outlook on 2014. Tom will also speak in some detail about our product business.

Before we get into the specifics for the quarter, I'd like to remind everyone that we're actively engaged in the process of selling DivX and MainConcept businesses. As such, they are not classified into continuing operations and are not included in the adjusted pro-forma or APF results, we'll discuss today.

As I mentioned in our investor meeting at CES in January, we expect to complete the sale of these businesses by no later than the end of the second quarter. As a result of selling of these businesses, we have adjusted the revenue verticals that we reported. We're no longer reporting a CE delivery and display vertical. ACP sales with CE companies, which have previously been included with DivX and our CE delivery and display vertical are now reported along with ACP entertainment revenues and the other vertical.

Additionally, we're now reporting all data sales to service providers and virtual service providers in our service provider vertical. Previously, data sales to virtual service providers were included in the other vertical.

We believe with these reclassifications, reported revenue more meaningfully aligned with our sales verticals that will provide investors greater insight to the headwinds from ACP and other (subset) product.

Turning to our results, the fourth quarter benefited from new IP deals with Samsung and Google for the second-screen, and a substantial new product arrangement with America Movil. These three agreements were also notable as this means we successfully closed each of the deals that slipped out of Q3.

We also closed several renewals, including a couple of earlier renewals, which help position us well for the upcoming year. As a result, fourth quarter revenues were $152.4 million or up $19.8 million or 15% from the fourth quarter of 2012.

Closing these deals allowed us to come at the high-end of the expectations we provided on our third quarter earnings call as adjusted to exclude discontinued operation. For the full year, revenues were $538.1 million, up $12 million (from 2012).

Our service provider verticals were 21% in the fourth quarter when compared to the same quarter in the prior year. The quarter benefited from growth in both our licensing and guide product revenues. Both the America Movil and Google deals are included in our service provider vertical, and contributed meaningful year-on-year increase.

The quarter also benefited from the initial sales of our guides for Digital Terminal Adapters, which are also referred to as Digital Television Adapters or DTA, as well as increased data revenues.

CE revenues in the fourth quarter were also up, when compared to the same quarter in the prior year. CE revenues were $2.3 million or 7% from the fourth quarter of 2012.

The quarter benefited from catch-up revenues associated with the new licensing agreement with Samsung. Samsung is a longtime IP licensee for the Television Use Case, and this new IP license expands their rights to cover the second-screen use case

The benefit from the Samsung arrangement was partially offset by catch-up revenues in Q4 2012, which included the Philips and Vizio deal, and a reduction in revenues from licensees who pay us based upon unit shift.

Finally, other revenues were down $1.5 million year-over-year, and ACP revenues continued our expected decline.

With respect to the cost structure, our fourth quarter APF cost of goods sold for operating expenses were up 2 million from the comparable period in the prior year, primarily due to the timing of certain spending. These expenses were down almost $7 million for the full year. The decrease year-on-year reflect our ongoing efforts to rationalize the company's cost structure, while still investing in areas of growth.

This past year as a result of increasing revenues, while decrease in costs, we increased our operating margin by three points, 38% to 41%.

In 2014, we plan to continue cutting costs associated with matured products in order to fund important new growth initiative, some of which, Tom will discuss later today.

We remain sharply focused on evaluating our invested spending based on expected returns and the ability to drive growth and stockholder value, and funding future growth without changing our cost structure. This is a priority within Rovi as we manage to transition back to sustainable long-term growth.

Turning to our capital structure, we continue to produce significant cash flow, generating $62 million in cash from continuing operations in the fourth quarter of 2013, and $204 million for the full year. Our cash and investments at the end of the 2013 were approximately $641 million.

We also continue to take a very thoughtful approach to our balance sheet, focusing both on near-term returns to stockholders and longer term returns to the investments for growth in strategic areas like our discovery, data and analytics businesses.

In that regard, in Q4, we repurchased another 4.1 million shares. For the full year, we repurchased a total of 9.1 million shares. We now have approximately $175 million remaining under our authorization. And as we've discussed at our investor meeting, we plan to repurchase at least 5 million more shares in 2014.

Additionally, we made a voluntary debt prepayment of $200 million during the fourth quarter. This accelerated payment eliminates need to make the excess cash flow payment otherwise required in Q1 2014 and will lower our cash interest expense.

Finally, as we discussed last quarter and expanded upon at our investor meeting, strategic M&A remains a part of our growth strategy. In that regard, we continue to be very disciplined with respect to future acquisition opportunities, applying rigorous strategic and financial criteria to the opportunities we evaluate.

Areas we might consider growth through acquisition could include technology such as accelerating, delivering product and services in the Cloud or expanding our data analytics and search and recommendation operations.

In that regard, I would like to remind folks to come within very successful acquisitions within these categories, for instance, LASSO, AMG and Muze. Acquisitions, if any, will need to have a clear strategic fit and we will be disciplined as we evaluate returns for any investments we make.

Turning to our full year 2014 expectations, our expectations have not changed from what we shared in January at our investor meeting. We expect revenue of $510 million to $550 million, and APF income per common share between $1.55 and $1.85.

As we discussed at our investor meeting, we are taking a more conservative approach to estimates for 2014. We have visibility to approximately 90% of the revenue at the midrange of the estimates compared to the company's historical approach of 75% visibility.

We have also aligned manager's bonuses with the high-end of estimates to incentivize the team at Rovi to overachieve in 2014.

With that I'll turn it over to Tom.

Thomas Carson

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

Many of you likely heard my recent remarks at our CES investor meeting. Today, I'll expand on some of these comments including our excitement about our product strategies and our process for evaluating R&D investments. I'll also provide some product milestones for 2014.

First, I would like to start by pointing out some highlights from Q4 2013. I'm pleased to start the year with Rovi more sharply focused on our core strength and discovery. We closed a number of large products and licensing agreements in the fourth quarter, which we believe indicates that we are on the right track for 2014.

Last quarter, we signed new licensing deals with Samsung and Google to existing customers, expanding the rights, their license from us for the second-screen, suddenly going to expand the relationship with us, entering into a license agreement with us particularly everywhere.

In addition, we signed early renewals with Sony and Cox. Neither of these agreements was scheduled to expire on 2013. Cox is notable, not only because they are a large cable company and they renewed early, but because of the license term.

As Samir mentioned at our investor meeting, this agreement covers both the TV and TV Everywhere use-cases and extent out into the next decade. We believe that Cox renewable is well for negotiations with other large providers, whose contracts come due in late 2015 and early 2016. We believe this agreement is reflective of the number of appropriate patents we offer and their relevance to where the industry is evolving.

On the product side, we renewed -- got agreements for 26 cable operators in North and South America, all with increased rate. We are really pleased that the features we've been adding to our products are resonating with cable operators.

In 2013, iGuide and Passport Guide continued to be solid cash contributors, as we launched our first EPA product, analog household in Latin America.

We began deploying xD, our second-screen application, and we expanded the footprint of our metadata business to 55 countries.

We also decided to see some investing in TotalGuide for set-top boxes, a decision I will speak about in more detail shortly. And I will focus now on providing a Cloud-based UI supported by our world-class search and recommendation service and our rich and broad metadata.

We believe our fourth quarter deal with America Movil, a Tier 1 service provider in Latin America is particularly validating our product strategy, which is focused both on meeting current meanings with our existing assets and investing in solutions that major customer anticipate the need.

Our PassportGuides are an excellent fit for America Movil's current need and our planned Cloud-based guide offering aligns with our innovative product vision for the future.

2013 was the year of transition. As I described at our investor meeting, we are now merging in 2014 with a strong focus on our core discovery business and monetizing its footprint with advertising and analytics offerings.

We are staying within our B2B DNA. We are disposing the businesses that do not fit strategically in operations that do not have the financial profile that we want.

Last year, we developed the Rovi Entertainment Store and our consumer website businesses. We are now actively engaged in selling the DivX and MainConcept businesses.

Once we will up-sell DivX, we will no longer support or offer consumer facing businesses or products. This is significant. We know who we are and what we are good at, discovery products through businesses. That's where our focus will be.

We now have a more disciplined and focused investment process. A business group structure, which focuses on product profitability and a thorough process for evaluating R&D spending on current and new products.

We are financially disciplined, and we continue to fund innovation in new products by taking cost out of more mature product offerings and rationalizing those that we believe will not be a long-term commercial success.

TotalGuide is an example with this approach, while the product offered exciting functionality; our customers are now looking for a lighter product they can more easily integrate with other services such as those (vat) vendors.

We are pleased to invest in TotalGuide for set-top boxes and are redirecting these funds to developing a Cloud-based platform for delivery of guidance products.

It is also important to talk about how the company has changed from a company that sold TotalGuide to the company we are today. I understand there were some skepticism, given the amount of the pension the company once gave to TotalGuide. So let's talk about what has changed at Rovi.

In terms of what's different with Rovi now, a lot has changed in the last year. First, we are organized differently. Next, we adopted one company-wide engineering development approach. We are also now investing on a product portfolio basis. And finally, taking into account our product and IP strategies. We are actually hiring talent with the right skill and experience for where we are going. We believe these changes position us for efficiency and return on investment. So let me briefly touch on each.

As I highlighted at our investor meeting, we have changed the way we are organized and operate. We are no longer organized around functions, but around products, specifically. We now have business groups focused on products in the following areas.

Set-top boxes; which covers our iGuide, Passport and EPA products. Platform and services; which includes Cloud-based discovery services, we will launch later this year. Metadata, including all forms of television, movie and music metadata, as well as our products in search and recommendation. Analytic Services, a business that utilizes our return path data and other data sources to help our customers optimize their advertising dollars. Lifecycle Services, which covers professional services we provide to our customers. And finally, intellectual property which manages our IP licensing, patent portfolio and (inaudible) litigation activities.

In this structure, the business group leads are responsible for driving growth and innovation as well as accountable for the financial contribution of the respected groups. They now have the resources in place to do just that.

I also believe the common approach to product development is important for Rovi. So we adopted a common engineering methodology, Agile, which has made us far more nimble and able to be respond to the customer input and changes in market and demand.

We expect Agile to improve our accountability on the product side in helping ensure that we are able to innovate with evolving customer needs in mind. All of our engineering and product teams have been trained and required to use this methodology.

As it relates to products initiatives, we are now investing on a product portfolio basis with an ongoing focus on return on investment. We are focused on maximizing return from mature products, there are plenty of new initiatives with cost savings, not incremental spending.

We are no longer going all in on a single product. Investments are much more measured, and the customer support before we're getting into significant financing. Because we have several smaller investments going, we can methodically analyze them and quickly terminate any that are not developing as we anticipated, or not getting support from customers willing to pay us.

Shutting down new initiatives quickly is in a requisite customer demand or it appears they won't achieve the required internal rate of returns to the philosophical change in how Rovi approaches research and development as Peter and I are driving across the company.

Also, our focus is now much more narrow. We only want to do a few things, but we want to be great at that. We have lost the aspirations within these focused areas. We want to ultimately be number one or two in any categories we choose to compete in. We have Metadata, search and recommendation or any other facet of discovery we focus on.

Finally, as I mentioned, we are bringing in the talent with the critical skills we need to succeed going forward. We are transitioning the business and that requires us to bring in additional skill sets for our new products to succeed. We are actively recruiting for this specific skill sets we need. For instance, people with experience developing scalable, high available Cloud services or personalized content discovery experiences across IP connected devices. Equally important, we also rounded out our intellectual property organization too.

In terms of where we are currently investing our R&D dollars, this year we anticipate 25% to 30% of our R&D spend will be on our set-top box guides, excluding the investment we make in the data that empowers these guides. Our legacy guides include iGuide and Passport here in the Americas, G-Guide in Japan and our HTML guide for CE.

We are spending on these guides on two fronts. First, newer products in the field, we are adding attributes to lengthen their useful life, such as implementing FCC and Energy Department quarters such as close captioning, Power Management, also known as Energy Star and sight and hearing impairment, to name a few.

So I can then respond to customer demand. We are also investing in our iGuide and Passport products to support integrating their existing back office with our new Cloud services such as remote access services that will allow operators further control of the set-top box via (content application).

Our legacy set-top box guides are high margin products attributing for capital revenues against our SG&A cost. Additionally, we are now offering DTA guide. As I mentioned in the last quarter, DTA boxes are a basic digital cable device that allows you to watch all the limited basic and some extended service channels, which were migrated from analog to digital on the legacy analog television.

DTA not only address the millions of current analog households in North and Latin America, but they also provide an inexpensive alternative for an additional set-top box in the home. While our revenues are likely small for DTA guide for 2014, mid-single digits, we anticipate a contribution against SG&A cost of approximately 40% from these products.

We are also investing in connective products including xD, our second-screen application for which we have a lot of current customer demand. The next step for xD is making the application available on iPhone and the Android platform expected by the end of Q1 and moving xD onto Rovi's remote access service, which we demonstrated at CES.

This is plan for the second half of 2014 and will allow us to enhance our offering around channel tuning, PVR scheduling and management and user authentication. Approximately 5% to 10% of our R&D spend in 2014 will be for xD. We are targeting six to 10 xD customer deployments, including American Movile in 2014. Once deployment of the xD application skills, we expect we will also provide a 40 plus percent contribution.

Our metadata empowers all these guides, approximately 25% to 30% of our R&D spend will be on our data operations. We are able to fund all of our data businesses, R&D investments and cost of goods sold through sale to third-parties covering cost for a strategic asset.

In terms of new initiatives, this year we anticipate investment approximately $23 million to $27 million on new product initiatives. This spend will be spread out across several product initiatives including our data geo-expansion and our Cloud-based platform initiative.

We have implemented a rigorous process where proposed initiatives go through a careful strategic analysis, including an evaluation of customer demand, assessment of the competitive landscape and financial model. One of the first projects approved is our data geo-expansion into Asia.

As I mentioned earlier, we expanded our metadata business' geographic footprint to 55 countries in 2013. We've also upgrade the level of metadata provided in 28 countries.

In 2014, we are expanding our data operations in Asia and plan to add approximately 15 more countries worldwide. This expansion represents that one quarter of our planned new initiative spending. We anticipate a high rate of return on this expansion project with its full investment recouped in less than three years. This is possible because of the customer demand already lined up for this expansion.

In terms of our Cloud-based platform, which represents approximately half of our new initiative spending this year, we entered the year with a portion of these costs already covered by revenue under contract.

Related to this, on the American Movil front, we will be delivering Rovi technology and services throughout 2014 and multiple plan phases going from Passport to xD with video integration and ultimately to connect the guides on our Cloud platforms.

I trust you can see why we believe we have turned the corner, and why we are very excited about the possibilities ahead. As the year continues, we will spend more time discussing all our opportunities including our Cloud-based platform initiatives and provide reports on our progress as well as future proof points to measure us against.

Additionally, it is important to remember that our innovation in terms of innovation disclosure than patent applications and finally patent trends has attributed in our product development efforts. We don't have a think tank creating patent applications, instead we have created and fostered an environment where all our development resources are motivated to envision a world without technological constraints and provide us with the resulting innovations. We believe the new areas of discovery we are venturing into will serve us well in terms of our future patent portfolio growth.

We are excited about the foundation for growth we are building in 2014. 2014 is a new year, and we are hyper-focused on our core competencies and on execution. We believe we now have the appropriate organizational structure like strategy and necessary processes in place to build for long-term growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Bright with Avondale Partners. Your line is open.

John Bright - Avondale Partners

Thank you. Good afternoon. Peter, I'll start with you, again on the service provider side, particularly for the ASPs, a quick glance, and it would be on a consolidated basis around $0.21. Maybe you can talk to us, first of all, is that right; talk to us about the trends that are going on as far as ASP is concerned?

Peter Halt

For us, John, in terms of our ASPs, we got a couple of things that come into play. One, our patent licensing which we told people, on average it is about $0.25 per household per month, that's staying consistent. We got to about double that on our products. We did 26 renewals this past quarter, all open uptick, so in this going up a little bit. On the other side that we are also licensing, remember the use-case the second-screen as that's deployed, it's much more ASP. We talk to you by using about 25% of the ASP for an IP licensed on the TV use-case. Those are kind of the -- how the things play out.

John Bright - Avondale Partners

The contract you mentioned, we have gone over the past, the contract going into the next decade still in the traditional ten-year timeframe type contract?

Peter Halt

We haven't given any specific term for the contract, but it goes easily into the next decade.

John Bright - Avondale Partners

Next, on the DivX/MainConcept, maybe you can talk about the interest that you received for those two assets?

Peter Halt

We are pleased with the responses we got to-date, John. That process being managed by bankers. As we had mentioned before we hired Wells Cargo to help us with sort of on the assets and they are running a very robust process, talk to a quite a few different people out there and we are very encouraged by the process. And as we have said at CES, I believe that will all be wrapped up before the end of the second quarter.

John Bright - Avondale Partners

Tom, a question for you regarding the strategic M&A, you talked about -- Peter talked about the technology, the expanding data strategic fit. Are you looking at something more than singles and doubles versus something that's transformational?

Thomas Carson

Yes. I think the way we are looking at M&A right now is we -- I like the fact that as a company we are very focused now in the area of discovery. And for us, it's everything from intellectual property we have there to anything that's guide based and/or in the area of metadata and search and recommendations. And what we are trying to do is really supplement a lot of the assets we have in those areas. So we don't feel like we need to go by something before we want to try to do in certain areas is to try to supplement the technology that we currently have.

John Bright - Avondale Partners

Thank you.

Thomas Carson

Thank you.

Operator

The next question comes from Heather Bellini with Goldman Sachs. Your line is open.

Shateel Alam - Goldman Sachs

Hi, this is Shateel Alam joining in for Heather Bellini. Thanks for taking my call. I have a question on the metadata business versus service provider, against rather. Could you parse out metadata versus service provider for the fourth quarter, uptake a lot in some -- lot of it have to do with metadata? And could you also give the same for your 2014 guidance of $288 million for that unit? How much is service provider versus metadata?

Thomas Carson

I will let Peter maybe give a little color on the breakouts. But generally speaking I'm really pleased at where we end up in the service provider segment. And when you look at service provider, obviously it includes everything from our licensing business that is included in there to our core set-top box guides to metadata and even advertising. And when you look at the year-over-year growth, it was basically a double-digit growth in that particular segment. And actually it's fueled in all areas, we like the growth we had in licensing, we like the growth we had in the data area and also in the guide area. So pretty much all of the segments that we have in the service provider segment grew on a year-over-year basis, which is important for us because it's really where we are heading focuses that we have this company. So we are pleased with that.

Shateel Alam - Goldman Sachs

Any specific breakouts of your scheme and growth rates, service started growing more than 2% to 3%?

Thomas Carson

Both categories are growing in double-digit. Our growth in terms of the data, the largest percentage growth that is going at a lower rate of dollars is in CE, unless we expand around the world. We have a lot of demand on the CE front. We talked about the growth possibilities in consumer electronics as a sales vertical. We have mentioned that data is our biggest growth right in there.

Shateel Alam - Goldman Sachs

Okay. And then on the Cloud IPG offering -- I might have missed it, but when is that going to be general availability and specifically for American Movil, are they first deploying our set-top boxes and then once that's released they're going to redeploy on the Cloud IPG offering?

Thomas Carson

So relative to the American Movil deal, it's a pretty comprehensive deal for us as a company. It includes everything from our airport product in a number of locations in Latin America, as well as xD products and then longer term Cloud-based guides for IP connected devices. So it's pretty comprehensive agreement. What we communicate relative to the platform in terms of the Cloud-based platform values a product program for us for the second half of the year in terms of delivery, but what helping us get to market sooner rather later is we do have a customer in American Movil that's interested in using it.

Shateel Alam - Goldman Sachs

Okay. And just one last question on the margins, you did 46% this quarter. Could you say how much might be due to one-time deal with Google or Samsung? And then for your 2014 guidance, 40% to 42%, is there any additional cost cutting that you are doing on top of releasing TotalGuide, any color on what were your cutting costs on 2014 would be helpful.

Peter Halt

I'll take that in a reverse order. So, on the cost cutting side, yes, we absolutely continue to take cost out of our mature products. We actually continue to look at our infrastructure cost and we use those efforts to fund our investment in new products. So if you go back and look at the debts that we will approve at our Analyst and Investor Day at CES, you will notice that we are talking about a flat cost structure, all the while investing and creating this connected platform, Cloud-based guides and stuff like that. So we continue to take cost out of our mature product. We continue to look at our SG&A structure and use those savings to fund the investments we're making this current year on our new initiatives.

Shateel Alam - Goldman Sachs

Has there been any one-time margin boost on the fourth quarter?

Peter Halt

Absolutely. We had a couple of deals with catch-ups involved there. So there were -- probably the best thing to do is to look at our CES investor deck. Look at what we have for our run rate revenues, the combination of run rate and renewals. Divide that by four and compare it to the amount that we had for the quarter. We won't give specifics on our individual deals.

Shateel Alam - Goldman Sachs

Okay. Thank you.

Peter Halt

Okay.

Operator

The next question comes from Ralph Schackart with William Blair. Your line is open.

Ralph Schackart - William Blair

Good afternoon, maybe Tom on the first one. As you sort of turn the calendar heading to 2014 after all the work you had in 2013, does that give you any more sort of visibility or confidence into sort of meeting a product milestones or rollouts and maybe more specifically some of the xD rollouts to start development in the call?

Thomas Carson

Yes. I think one of the things that's fundamental for the company is, if you go back for a last few years, we had a pretty complicated business model where we have a lot of different businesses that we are trying to govern or manage and some of them had challenges. And I think with the disposition of the assets that we have done and we will do with DivX and MainConcept, it's really helped us get much more focused on that core area of discovery.

So as we manage the business now, we're dealing with on a very regular basis of things that we need to deal with as management team. So I like the way we are positioned out just because there is a lot less distraction, is much more focused and in areas like metadata and guidance, particularly in areas like Cloud-based guidance, which is a big initiative for us this year and a big part of our R&D spend. I kind of look at this as historically being very focused on set-top boxes in the discovery world. And the reality is guidance experiences are needed on a lot of connected devices and what we are trying to do is position ourselves there and include products like xD and it will include more products connected in the future for guidance.

Ralph Schackart - William Blair

All right, great. One more as a follow-up, if I could, please. Just on the Google deal, and I apologize I jumped in the call late, is there any color you could add in terms of -- is it in annualized terms, is it unit based or metered, sort of any color you could give on that?

Thomas Carson

We can't get in the specific terms of the Google deal.

Ralph Schackart - William Blair

Okay. Thank you.

Operator

Next question comes from Todd Mitchell with Brean Capital. Your line is open.

Todd Mitchell - Brean Capital

Yes, thank you. I would like to talk a little bit about American Movil deal. So you kind of referenced this as a IP and product deal and there is products that are existing, products that are being underdeveloped. Can you talk a little bit about kind of the scalability on the revenue side? You have components to this field which are going to be X amount per sub and we want you to future preface through the life of that sub, or do you have kind of a rate card that if it exists, they get this much. If they take this and this, you get this much. And you talked about potential for that scaling. Is it mainly in the number of subsets applied to or is it in the ASP for several -- or how should we think about that basically?

Peter Halt

It's a complex deal that we have with American Movil. I'm very excited with the product deal. And so we would be recognizing revenues. We deployed products. As Tom mentioned in the call, we will be starting out with deployments of Passport and various countries for them replacing the guides they have. We will then be moving to xD providing the second-screen of video integration with the video provider they use and then moving to a connected guide.

Additionally, there are opportunities in the contract for them to deploy additional facets from us as time goes by. So a very exciting deal for us. Its right line of the direction would like to take the company and that you will see the revenues coming in for as we deploy various products and look forward to you on future calls updating as what's being deployed.

Todd Mitchell - Brean Capital

So theoretically this is a deal that should not be a fixed rate for you, it should grow over time. Is that correct?

Peter Halt

Yes. That's what our hope is obviously. A lot of it follows our traditional pricing model, right? So the difficult model and things like Passports or what we have been doing with xD followed that. So we certainly hope, as we get more and more deployments, we have an opportunity for great revenue out of this deal for sure.

Todd Mitchell - Brean Capital

Okay. I'm assuming this is more or less a template for how you'd like to see the business going forward, and as you develop some of the Cloud service platforms, I guess the question here is due to combination of renewals and placing increases and rolling out more products over the sort of the horizon of your planning, do you see the mix between IP revenues and product revenues changing in anyway? And if so, which way directionally?

Peter Halt

Yes. I mean if you look at what we proceed with the opportunity with the Cloud-based guide offering, and as Tom spoke about and Mike (Bockheim) also in our investor presentation at CES, the Cloud-based services we offer not only give us the opportunity with Tier 2s and 3s, offer them a full suite of services, but also let us offer best-of-breed point solution to Tier 1s once they're able to put their own UI in control of their look and feel in the Cloud.

So, we do look for growth in the product side, accelerating all the way growth has been in the past. If you look at the slides that we had with CES, you saw that we had some growth in product this past year. We'll be looking to drive faster growth on the product side. With that said, do keep in mind, in 2016, as you look ahead we have a very, very significant pickup on the IP side.

Todd Mitchell - Brean Capital

Okay. And just some kind of one-off questions, so you talked about -- I believe you said six to 10 xD deployments in '14, have there been any -- what's the number of xD deployments to-date?

Thomas Carson

Yes, I think it's probably was about three to-date in terms of what we have as xD deployments.

Todd Mitchell - Brean Capital

Okay. And so, it's an incremental six to 10 next year. And then, on the xD, it's the same per months licensing fee as a regular product guide?

Peter Halt

Well, the difference between xD and a regular product guide is we get paid on a per month fee, once the application has been downloaded. So it's not based upon the number of households that someone has. Two things have to occur. One, once we enter into the agreement with the service provider and deploy it to them, then they need the customers to download it. So, when Tom talks about the fact that we're now getting xD available, not only on the iPads, but the iPhone and Andriod devices, we think that's going to help us tremendously in terms of the number of units that our customers will be able to deploy.

Todd Mitchell - Brean Capital

And so, when you give us kind of a pricing model for xD, that's for everyone that's activated?

Peter Halt

Correct.

Todd Mitchell - Brean Capital

Okay. And then lastly, in terms of the gross margin, can you talk a little bit about the components of the gross margin that goes into actually litigation, and what your thoughts are in your kind of debt as a percentage of gross margin this year, as a percent of gross margin in '14 and then going out forward?

Peter Halt

Yes, on that one what I'd do Todd, is I'll direct you again to the investor desk that we had at CES. We have our page on there on IP licensing and we show for 2012-2013, and our estimate for 2014 at the midpoint, how much we're going to spend on licensing cost of which a very large portion is our IP litigation. And you'll see that's a flat number over the three-year period.

When we look at litigations as we've talked in the past, we'd like to be able to control our litigation both in terms of spend, but also just in terms of number of cases that we are running at once, because we believe that we benefit by having that people who really know our patents involved with the outside counsel we hire in terms of looking at the in terms of looking at the product, identifying where it fringe is an specific patents that it implies.

Todd Mitchell - Brean Capital

Okay. Sorry, just to follow-up on that then. I mean your current guidance for the -- you talked about at CES, it doesn't really assume any sort of resolution of these over-the-top cases. Does it assume that you're going to be going to actual litigation or trial this year and it's not -- I mean, can we assume that those are going to go into trial next year that those expenses will go up next year?

Peter Halt

I'm not going to look ahead to the cost for 2015, but to the extent that we have at least on the big domestic matters, litigation spend, it would be late in 2014.

Todd Mitchell - Brean Capital

Okay. Thank you very much.

Operator

The next question comes from Andy Hargreaves with Pacific Crest Securities. Your line is open.

Andy Hargreaves - Pacific Crest Securities

Just a question on the OpEx started through 2014, is there any material change in depreciation levels, or is that all coming out of SG&A, R&D?

Peter Halt

Well, depreciation comes out of where we invest in success, which is a combination of SG&A, but also where we're making investments in our data infrastructure and stuff like that.

Andy Hargreaves - Pacific Crest Securities

Well, yes, I'm sorry. The question now more is on the 2014 target, I think the vendor (agency) is 220-ish. Is there a material change in the depreciation number that you guys report or should we expect the changes to be in any other categories?

Peter Halt

No. You shouldn't expect a material change in depreciation.

Andy Hargreaves - Pacific Crest Securities

Okay.

Peter Halt

But again, if you look at our target model slide, you will see that we have a depreciation percentage.

Andy Hargreaves - Pacific Crest Securities

Okay.

Peter Halt

For '12, '13 and '14, you'll see '13 and '14 are the same percent.

Andy Hargreaves - Pacific Crest Securities

Okay. Sorry about that then. And then just on the in-guide advertising. Is there any change to the treatment of in-guide advertising revenue share in the recent renewals and how important is that still for you guys in the service provider segment?

Thomas Carson

No, there really hasn't been any change. I think the material change we've had last year was we were doing lots of different advertising approaches in applications kind of outside of our core guide business. And basically what we does -- scale all of that back and do advertising on our own guide footprint. Predominantly you're with others that do similar kind of advertising like Verizon that we are working with now. So, a lot of what we're really doing is trying to say we have guide products out in marketplace where we will represent other people that have guide products. And it gives us an opportunity to monetize that footprint.

So, we did. It's relatively small revenue in the grand scheme of things, but we still like that revenue. And as we deploy the Cloud platform as a company, one of the things we potentially like longer term about it is that because it's obviously a bigger footprint to do things like advertising and modified advertising and potentially analytics too. So, we'd hope that as the footprint grows particularly in connected devices with our guide technology that gives us an opportunity to do more in the area of advertising and analytics.

Peter Halt

And Andy, to add on top of Tom's comments, is to refer you back to Tom's comment during the third quarter call. The one change we do think in the advertising was just getting out of the digital advertising on the web properties that we sold off and looking to sell off.

Andy Hargreaves - Pacific Crest Securities

Yes.

Peter Halt

Digital product for people's applications, it's really all about advertising in the guides.

Andy Hargreaves - Pacific Crest Securities

Okay. Thank you.

Operator

The next question comes from Jim Goss with Barrington Research. Your line is open.

James Goss - Barrington Research

Thank you. When you were just discussing the downloading of the apps to -- in order to relate to the Cloud-based applications, does that -- should I assume that the pricing on that revenue stream will all trace back to whatever service provider there is in area and that there might be enhanced opportunities if their product is consumed by consumers with the tablet or smartphone or whatever and it relates to how often those apps are downloaded rather than anything. I assume there can't be anything on a hardware basis because that would not be tied to the delivery system?

Thomas Carson

Yes. Like Peter said, the model for products like xD are basically download model, and when people use it, that's when we get paid. So, one of the things that we're working on now that xD is developed and starting to be deployed as working with the service providers on, how do you market that feature and that capabilities, so the consumer takes advantage of it? And if we can do a better marketing job with our service provider partners, obviously we hope to get more people download the app and actually use it.

So, it's kind of a phase, I would say, through this year, last year was about product development of xD, which will continue, but now we're in the deployment mode with a couple of accounts and more coming. Part of the efforts got to be around marketing those service.

James Goss - Barrington Research

Okay. And Thomas, is data your most defensible business line, and therefore does that create your best return profile, and that it's probably the least competitive, there are fewer participants in that market and that's why you're expanding and then do additional market?

Thomas Carson

I don't know if I'd say it's the most defensible. Certainly, the data business is key to what we do in guide. And so, the fact that we have data, we have guide capability and we have intellectual property, we think gives us kind of a nice package as we're trying to sell what we sell.

Data, we have a long history in, in terms of collecting and ingesting and dispersing the data. We look at data as kind of key to our guide products, but also importantly a separate sale. It is challenging for anybody to replicate what we have. A big chunk of the people we have in the organization, frankly are in the data business. So, it's not the easiest thing in the world to do.

We compete a lot with people that are maybe smaller, geographically limited to a few countries or even one country in some cases. We think we're one of the few companies that can do so many countries on a worldwide basis at a level of depth that we actually do. So, it's a good return in and of itself, but it's also really key for what we want to do with our guide strategy. Guides, whether it's set-top box or connected guide, (inaudible) data.

James Goss - Barrington Research

All right, now last question. I noticed you made a note in your press release about expanding into a number of other countries, a couple of which were in South America, where currency issues have been a challenge. I'm wondering if there are any currency issues we should be aware of and if you have a certain approach in terms of hedging or whatever else or -- if that's a factor for you?

Thomas Carson

It hasn't been a factor for us. And we don't perceive it to be a factor. And the currency generally; we are primarily dollar-denominated in our contracts. We have a very, very, very small amount of local currency contracts.

James Goss - Barrington Research

All right. Thanks very much.

Thomas Carson

Thank you.

Operator

The next question comes from James Medvedeff with Cowen and Company. Your line is open.

James Medvedeff - Cowen and Company

Good evening, guys.

Peter Halt

How are you?

James Medvedeff - Cowen and Company

I'm great. Let's see, most of mine have been answered, but can you tell us the take rate on the existing xD accounts?

Peter Halt

We haven't disclosed any deployment database, that's what you're talking about on xD, the rollout hasn't been significant, it only goes to the iPad.

James Medvedeff - Cowen and Company

All right.

Peter Halt

We strongly believe in is that and then it comes from our customer conversations, for them to market the service, which is what really drive deployment. They need to make sure they can get almost all their customers ability to download the app and use it. That's why it's really a big deal to us that we're expanding over to the iPhone and Android devices.

Now we'll have -- now, we go back to our customers and show them that we can deploy it throughout their base. And we anticipate that you'll see marketing as a result later in the year from our customers and start seeing a deployment rollup.

James Medvedeff - Cowen and Company

Okay. And so that your customer gets paid, you guys I think you said it was about 25% of a normal subscriber fee per month. Is there any sort of once you've downloaded it, do they automatically start being charged and how do you share that with the customer?

Peter Halt

Well, two things. And going back to the percent comment, the percent comment, 25% of an IP license refers to what we just do an IP license for the second-screen to our service provider. We've said in the past about xD is that we're getting north of $0.25 per household it deploys to. And that just comes straight to us.

James Medvedeff - Cowen and Company

So, how does the service provider get paid?

Peter Halt

Well, the service provider to-date is providing at as a pre-application to their customer, its part of what they are looking to do to prevent churn. Candidly, they know that as a Tier 2 or 3 provider, they want to offer a service that's compelling as what the Telecos or DBS providers can do. They need to offer the business (inaudible) for them.

James Medvedeff - Cowen and Company

I see. Are you able to breakdown the advertising revenue between the two sides of that business? How much came from -- first of all, how much advertising was, and how much came from CE, how much came from xD?

Peter Halt

What we've said in the past is that just look at our -- really when we think about our advertising revenues, just think service providers.

James Medvedeff - Cowen and Company

Okay.

Peter Halt

We do have a very good footprint on CE for advertising. But to be honest, it has limited value, because to-date, when customers bring home connected television or connected Blu-ray player and plug it in, they fall back into the path of (inaudible) experience. They're not exploring the various applications the CE Company puts on the device. And so, those areas where we are running advertising on behalf of the CE providers aren't getting eyeballs.

The opportunity there we think is very interesting, but it's completely depended upon the CE companies working with their retail partners to market those apps, and that people discover them.

James Medvedeff - Cowen and Company

Yes. All right, thanks.

Operator

The next question comes from Eric Wold with B. Riley. Your line is open.

Eric Wold - B. Riley

Thank you. Good afternoon. Just a kind of a quick kind of follow-up question on capital allocation in your balance sheet, I guess, you prepaid $200 million of debt in the fourth quarter. So, correct me if I'm wrong, there are no major debt payments required this year, you've got five million share repurchase plan for this year, it's just maybe around a $100 million of cash and you end it with more than a 600 million of cash at year end?

So, I guess the question is what's the comfortable level of cash you'd like to continue to have, and at what point would you be want to deploy more that towards buyback above the five million share level? And I guess the kind of the follow-up question is, Peter, you mentioned before you wouldn't be looking at anything huge in terms of acquisition, how would you quantify huge and I guess into the dollar amount and kind of be on back to that at one point, would you kind of be going to give more towards the buyback versus the amount you have on the balance sheet?

Peter Halt

Eric, I mean, as we try to communicate to folks when we look at share buybacks and look at other alternatives for deploying our capital, we're looking for what we get us in their shareholders the best return. We feel strongly about taking 55 million out and well as we say take at least 5 million shares out this year. We'll look at what our prices, after all that's done. And we'll evaluate the opportunity in terms of what is opportunistic for us.

In terms of specific amount that we'd deploy in M&A deal, really it's going to relate to the entity that we might acquire in terms of what it contribute to us. It's got to have a very healthy return process that to beat our internal rate of return we're looking for a deal. And it's got to -- in our minds, bring better return to shareholders than deploying it in the share buybacks. So, it'll be evaluated deal-by-deal. But needless to say, I mean, we will want to hold a certain amount of cash on the balance sheet at all times. We won't get into specific numbers there, but that with the share buyback, should temper people in terms of the size of deal we might do.

Eric Wold - B. Riley

Okay.

Peter Halt

Keep in mind, we also have converts that come to -- not come to, but it could be put to us in the beginning of next year. So, keep that in mind too as you think about capital deployment.

Eric Wold - B. Riley

Okay. Just lastly follow-up on this, I guess you're not going to stick yourself to a sizable deal, something attractive opportunity comes along that maybe larger than anticipated, you wouldn't have just because the size of it. If it's there, you can borrow the money or if you've got the assets or the capital, you'll take advantage of it?

Peter Halt

Yes, if they're not to be a very compelling deal, but absolutely.

Eric Wold - B. Riley

Okay.

Peter Halt

If they would get something that was worth the price, we will do the deal. We are trying to drive the best value we can for the shareholders to accompany.

Eric Wold - B. Riley

Perfect. Thank you, guys.

Operator

There are no further questions at this time. I'll turn the call back to our presenters.

Thomas Carson

Okay. Well, listen, I want to thank everybody for joining us on the call today. We look forward to some follow-up discussions I'm sure with a number of you in the next couple of days. I do appreciate everybody's time today. So, thanks again everybody.

Operator

This concludes today's conference call. You may now disconnect.

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