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Rovi (NASDAQ:ROVI)

Q2 2014 Earnings Call

July 30, 2014 5:00 pm ET

Executives

Lori Barker -

Peter C. Halt - Chief Financial Officer

Thomas Carson - Chief Executive Officer, President and Director

Analysts

Todd T. Mitchell - Brean Capital LLC, Research Division

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

Eric C. Wold - B. Riley Caris, 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

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Rovi Second Quarter 2014 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 30, 2014. I would now like to turn the conference over to Lori Barker of Rovi Investor Relations. Please go ahead, Lori.

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 second 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 future and its forecast of future revenues, expenses and earnings, as well as possible outcomes and timings of contract negotiations, litigation, business strategies, 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. Some of the 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 June 30, 2014 and other SEC reports and filings made from time to time, and we encourage you to review the discussion of these factors in these reports and filings. All of our statements are made as of today, July 30, 2014, 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 reconciliation between the non-GAAP and GAAP figures are included in our Q2 2014 earnings press release, which has been furnished to the SEC on Form 8-K and is available in the Investor Relations section of our webpage at www.rovicorp.com.

Finally, the live webcast of this conference call is available in the Investor Relations section of our webpage. And a replay of the audio webcast will be available on the website shortly after this webcast ends, and it will remain on the website until our next quarterly earnings call.

Now I'd like to turn the call over to Peter.

Peter C. Halt

Thank you, Lori. Good afternoon, everyone, and thank you for joining our call. Hopefully everyone's had a chance to see the earnings release we issued today with our results for the second quarter.

We had a good second quarter with solid revenue growth in both our service provider and consumer electronics verticals. Importantly, we also made significant progress strengthening our position for future product growth and licensing renewals. I'll take you through one of these recent developments, our debt refinancing, and Tom will speak to several other advances, including our acquisition of a highly relevant patent portfolio, our steps to increase in-house employee expertise and, as always, our most recent product developments. Tom will also share our thoughts on why the latest news about service provider consolidation should largely be a positive development for Rovi.

Turning to the financial results. Second quarter revenues of $137.1 million were up $7.9 million, or 6%, in the second quarter of 2013. The quarter benefited from strong growth in our service provider and CE verticals. Our service provider vertical grew $9.9 million, or 11% when compared to the same quarter last year. The growth over prior year was primarily driven by the acceptance of our Passport product for deployment with América Móvil in Latin America; higher in-guide advertising revenues due in part of that addition of the Verizon guide footprint; and increased IP licensing revenue.

CE revenues grew $3.8 million, or 15% from the second quarter of 2013. Growth was driven by Samsung's second screen agreement, signed late last year, and the recognition of catch-up revenues related to the additional territories, included in the recent renewal of Samsung's television agreement, as well as getting TP Vision under license.

Additionally, the quarter benefited from increased data revenue as a result of our geographic expansion program.

Finally, other revenues declined $5.7 million year-over-year due to the continued and expected decline of our analogue content protection business.

With respect to our cost structure. Second quarter APF cost of goods sold, plus operating expenses, was $83.8 million, up $8.7 million from the comparable period last year. This increase was primarily due to the recent Veveo acquisition, costs related to the geographic expansion of our data business and the ongoing investment in our cloud-based guidance platform and analytics operations.

Also contributing to the year-on-year increase in spend was the timing of IP litigation and spending with third-party experts to assist us in preparing for the upcoming major service provider licensing renewals.

On a sequential basis, spending was $2.7 million lower than the prior quarter, primarily due to lower IP litigation spending.

In terms of cash, we continue to produce significant cash flow, generating $59 million in cash from continuing operations in the second quarter of 2014.

Our cash and investments at the end of this quarter totaled approximately $580 million.

Turning to capital structure. We continue to take a thoughtful approach to capital structure and capital allocation, balancing appropriate leverage, balance sheet flexibility, near-term returns to stockholders and longer-term returns through strategic investment in growth areas.

We also continue to take an opportunistic approach to debt financing. On this front, we recently refinanced our bank debt, pushing out the maturities to 2019 and beyond. We also put in place a revolver, which could be used to help fund the payoff of our convertible debentures, which, based upon their conversion price of approximately $47 per share, we anticipate will be put back to us in Q1 2015.

As a part of this refinancing, we reduced our Term Loan A bank debt by over 2/3, and we now have the vast majority of our bank debt in a covenant-lite Term Loan B.

While this means a slight increase in interest expense, we believe this greatly strengthens our balance sheet in advance of the upcoming major service provider renewals. These actions should allay concerns about out debt position that may have arisen in the event of less-than-timely renewals.

Additionally, the new bank debt resets our share repurchase bucket and provides us greater M&A flexibility. We believe the company is in a much stronger financial position as a result of this refinancing.

Additionally this month, we purchased a highly relevant patent portfolio containing approximately 500 issued patents and pending applications worldwide for $28 million. Tom will speak in greater detail about this acquisition later in the call.

In terms of our growth initiatives. We continue to invest in building a cloud-based guidance platform, advancing search and recommendation, expanding our data offering into additional countries and growing our analytics capabilities.

To fund these investments, we are committed to growing top line revenues, optimizing the cost structure of our mature businesses and driving efficiencies in our back office infrastructure.

Regarding our expectations for 2014. As a result of our performance during the first half of the year, we are revising our full year expectations as follows: First, we are again raising the lower end of our anticipated range and narrowing that range from $520 million to $550 million to a range of $525 million to $550 million. This increases the midpoint of our expectations to $537.5 million. Second, we are making similar adjustments to our current year adjusted pro forma income per common share expectations from a range of $1.50 to $1.80 to a range of $1.52 to $1.80. We do not expect our overall cost structures as percentage of revenue to increase over last year, other than for the impact of the Veveo acquisition that we discussed last quarter.

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

Thomas Carson

Thanks, Peter, and thank you to everyone joining us on the call today. I am pleased with this quarter's results and the steps we have taken to strengthen our position for future product growth and licensing renewals.

We continue to make significant progress driving our business forward with Discovery as the primary focus, complemented by longer-term opportunities in analytics and advertising.

Peter talked about our recent debt refinancing and how it strengthens our balance sheet in advance of the upcoming major service provider renewal negotiations. This is just one of the actions we have taken to enhance our long-term position.

We also acquired a highly relevant patent portfolio and continue to add key talent to help drive our transition to a cloud-based discovery platform. Today, I want to provide a little more detail about those initiatives and also share with you our thoughts on how the media industry consolidation is a net positive for Rovi.

As usual, I will also provide some highlights from our licensing and product businesses.

First let's discuss the patent portfolio we acquired earlier this month. As Peter mentioned, we acquired a highly relevant patent portfolio from a widely recognized technology company. The portfolio includes approximately 500 issued patents and pending applications worldwide, with just over half of the portfolio consisting of United States patents and applications. The acquired patents complement our existing portfolio and well-established licensing business, with additional coverage in guidance, search and recommendation, DVR, video-on-demand and second screen functionality.

The average length of protection provided by the acquired patents extends into the next decade.

We're very pleased to have been able to acquire this portfolio and believe this further cements our position as the source for licensable inventions in the discovery arena.

Second, we are continuing to be proactive on the talent front as part of our commitment to a strong product culture, focused on tight execution, meeting targeted milestones and delivering compelling product solutions.

As I mentioned last quarter, we brought John Burke onboard to oversee our Product and Services business groups. John has over 25 years of experience, transforming product development teams, including establishing new high-growth potential cloud-based solution businesses. John is helping drive our transformation from a development DNA focused on heavy code embedded in devices such as set-top boxes to a product culture that is equally weighted towards cloud-based solutions and over-the-top delivery of content.

John took a number of steps this quarter to support this transition, including hiring Omar Javaid to lead our connected and set-top box Discovery business groups. Omar joins us from HP, where he served as Vice President and General Manager of Commercial Mobility and led mobile computing efforts focused on enterprise software and services. Omar has extensive experience in managing large-scale cloud infrastructure initiatives and brings us industry-best practices and proven approaches and will help expedite our transition to Internet protocol-based solutions from multiscreen guidance and discovery.

In addition, this past quarter, we hired Andy Elder to lead our worldwide sales efforts. Andy has a unique and highly relevant background in both intellectual property and product sales. He joins us from Intellectual Ventures, where he served as Executive Vice President of Global Licensing, and was responsible for all aspects of monetization and go-to-market strategy. Prior to that, Andy spent 13 years at Cisco, where he instituted sales processes, systems and pipeline management. Andy will help us develop new sales strategies focused on driving revenue, productivity and profitability.

Strengthening our team with hires like John, Omar and Andy will greatly enhance our product transition and go-to-market efforts, especially in the midst of the evolving digital entertainment environment. We are extremely excited to have such a talented team in place to meet the opportunities ahead.

In terms of licensing and product highlights, I'd like to start with our intellectual property licensing business. We had a couple of particularly notable IP wins in the consumer electronics market, including a multiyear renewal with Samsung for its Television business, where, as Peter mentioned, we expanded the number of geographies covered under the agreement. The deal comes on top of the patent licensing agreement with Samsung for its mobile devices announced earlier this year. Samsung is the #1 manufacturer of consumer electronics product worldwide, and we are pleased to continue and expand our long-standing licensing and business relationship with them as they focus on driving next-generation entertainment discovery experiences.

I'm also pleased to announce that we've recently settled our litigation with TP Vision and entered into a multiyear licensing agreement. TP Vision primarily sells Philips-branded TV sets in Europe and although they have a relatively small share of the global market, the agreement underscores the continued relevance of our patents in Europe.

On the product front, we hit a key milestone in our agreement with América Móvil. This quarter, after extensive testing, América Móvil accepted Passport for deployment. Deployments have now begun or will begin shortly in Colombia, Ecuador, El Salvador and Guatemala.

We also continue do anticipate delivering xD to América Móvil for acceptance in the latter part of 2014. These are significant steps as we increase our product relevance in Latin America.

In terms of our cloud platform development. I am pleased to announce that we will have a beta-ready product later this quarter and anticipate having our first beta customers on board in the third quarter. We strongly believe that having a world-class, cloud-based discovery experience will help us grow our business both domestically and internationally in 2015 and beyond.

xD, our second-screen application, will be one of our first products or services to be offered through our cloud-based platform. Last quarter, I discussed hitting a key milestone with xD, making it available on Android and iOS platforms. While our service provider customers are enthusiastic about the increased availability, many are now holding off on deployments in anticipation of our adding streaming video in the next major release of xD, which should also be available early next year.

The next steps for xD with video are to release the updated version, as well as receive acceptance for deployment with América Móvil. We anticipate that this version update and cross-platform availability of xD with video will result in wider deployments and marketing support from the service provider community.

In terms of our search and recommendation product and the integration of technology from our acquisition of video, we launched Rovi Personalized Discovery solution this past quarter. This solution combines Veveo's best-in-class personalization, contextual search and recommendations and natural language understanding with Rovi's robust recommendation engine and metadata to provide unparalleled search, recommendation and conversation services.

I'm excited to announce our first customer to take advantage of this solution, Canal Digital Kabel of Norway. Canal Digital Kabel is also the first European customer to deploy a Veveo search product, further validating our hypothesis that a best-of-breed point solution for advanced search and recommendation will open up product revenue opportunities for us in Europe.

On the DTA front. We continue to see good demand for our DTA guides, particularly in Latin America. We now have 3 customers deploying our DTA Guide products, including Armstrong here in the states. We anticipate signing additional contracts in the second half of the year and continue to expect this product to contribute revenue growth in 2015, particularly after we make available our high-definition DTA Guide.

The geographic expansion of our data business continues, with the addition of 2 countries this past quarter. We anticipate adding up to 7 new countries in the third quarter and are on track to provide data for 70 countries by year end. The geographic growth of Tier 1 level metadata helped contribute to our revenue growth this quarter in our CE vertical.

Device manufacturers and online service providers appreciate being able to purchase metadata from many countries from a single, high-quality provider.

Finally, I'd like to talk about the potential consolidation among service providers and the likely impact on Rovi. There has been no shortage of news about Comcast's proposed acquisition of Time Warner Cable and the proposed AT&T and DIRECTV deal. While larger combined entities will naturally look for reasonable volume discounts from all of their content providers, whether it's studios for video-on-demand, cable channels for carriage fees or us for IP, we are pleased with the composition of the acquiring parties.

We believe these proposed acquisitions will be a net positive for Rovi. For example, our relationship with Comcast is much broader than our relationship with Time Warner Cable. Whereas Time Warner is primarily a licensee of our patents for the television use case, Comcast is much more familiar with the depth and breadth of our patent portfolio and its relevance to the second screen.

Comcast also uses our data. They provide advertising in their guides, for which we get a revenue share. They are using our analytics products, and they are in the process of evaluating certain of their discovery tools we provide. Additionally, Comcast was one of the first service providers to license our patents for the second screen for the TV Everywhere use case.

AT&T's proposed acquisition of DIRECTV should, in a similar fashion, benefit Rovi. DIRECTV, like Time Warner Cable, is a licensee for the television use case. AT&T, like Comcast, has recognized the relevance of our patent portfolio beyond the television set, as evidenced by the TV Everywhere agreement we announced last year for its U-verse offering.

So from a long-term standpoint, we believe these acquisitions will be a positive for Rovi and our relationships with the combined companies going forward. However, it is important to keep in mind that the timing of regulatory approvals for these deals is on certain and could, in the worst-case scenario, negatively impact the timing for when the Time Warner and DIRECTV subscriber bases are renewed.

As Peter explained earlier, we believe we have positioned Rovi extremely well to deal with any potential uncertainties ahead.

In summary, the future for Rovi is very promising. We have taken some thoughtful and important steps to focus and strengthen our future position for product growth and licensing renewals. The progress we have made in our core business during the last few quarters is proof to us that we are on the right track.

With that, I'll ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Todd Mitchell with Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

Yes. I guess my question goes to, basically, the service provider renewals that everybody is well aware of kind of who it is and when it is. More recently, you've been signaling, not stridently, but very pragmatically that these things could be pushed out. Can you just kind of elaborate on the scenario where they get pushed out and why they get pushed out? I mean, how long does it take you to -- if you're spending now to prepare for these negotiations, how long does it take you to get into negotiations with these people? And what, I guess, what's the pacing or how -- just could you give us some color on that, I guess?

Thomas Carson

Yes. Sure. Let me kind of give an overview. I think that thing to keep in mind with the major renewals that we have coming up in 2015 and 2016 is that we are actively engaged with all of them now. And generally, the process has 2 paths. And they generally run parallel. The paths are one to talk about all the different products that we have to offer, which were a number of these operators is a meaningful in terms of what they're trying to do. So areas like metadata is a really important topic of conversation. Areas like search, recommendation and personalization and the technologies that we acquired from Veveo are very important to them as well, as are things like analytics. So that piece of it does resonate more with some than others, but it's an important topic of conversation. As we've talked before, we've also gone through a pretty detailed analysis for well over 1 year now of looking at the use case in each one of these cases, and doing a very deep dive on infringement analysis. So that path has begun as well. Depending on the account, we're in various phases of both product and patent discussions, so I do want to characterize them as being very, very active at this point on all fronts, both from a product perspective and also from an intellectual property perspective. In terms of delays, obviously, when you look at what's happening with the consolidation in the industry, there are substantial things to get done in terms of regulatory approvals. So Time Warner, as an example, is not in a big rush to engage because they're going to become part of Comcast, similar with DIRECTV and AT&T. So the only, I guess, pause that we would have or concern we have is there is a chance, based on of these things play out but there could be some delays. That doesn't mean we're not bullish on what our case is for either product or intellectual property.

Todd T. Mitchell - Brean Capital LLC, Research Division

And so, I mean, I guess the idea is that everything would be pushed out of '15 for both of these guys into '16 if there was a delay, but then there would be a catch-up?

Peter C. Halt

There would absolutely be a catch-up for any delay that occurs.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And also just -- I know you have a deal with BSkyB. Can you talk about how consolidation of the satellite platforms in Europe might impact you?

Thomas Carson

Yes. It's hard to say without having the specific use case, but suffice it to say, if there was consolidation, the applicability of our intellectual property still holds. So pending the specific circumstance, we feel we still, obviously, would engage with whoever that -- whoever the consolidating parties would be that they'd have to take a patent license.

Peter C. Halt

And if they're you're talking about the Sky consolidation that has been discussed in terms of Fox possibly making a run at Warner Bros, as you know, I mean, our first 2 European licensees were BSkyB and Sky Italia in separate deals. So you're talking about licensed entities coming together at least in that situation. And the nice thing is that it doesn't necessarily line up like it is in the States with renewals.

Operator

And your next question comes from the line of John Bright with Avondale Partners.

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

Tom and Peter, I'm going to start with what I usually start with, server provider revenues. The strong bookings, solid this quarter. Maybe talk to some of the components in the subscriber side and also on the ASP side first.

Thomas Carson

Yes, I think kind of generally the things we saw in the service provider side was good i-Guide and Passport business in the quarter, certainly helped by the fact that we feel very good about the deployments that we did in the quarter with América Móvil in Latin America. We also had better performance in the ASP licensing area, and it included things just like better reporting in the quarter.

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

Strength on the revenue side, very solid. But the cost of revenue's a bit higher than what I was modeling. Anything unusual that's pushing the cost of revenues up?

Peter C. Halt

On the cost of revenue, a couple of things worth noting in the quarter, John. One, as we are continuing to litigate with Virgin, Q2 has a little bit higher litigation cost than the comparable period the year before. We're still staying with our guidance for the full year in terms of our investment and patent spend. So what you're seeing here is a heavier outlay on the litigation cost in the first half of the year as the second half of the year. Last year, if you look, most of the litigation cost was in Q1. Additionally, just in regards to some of the products for the Passport products being deployed in Latin America with América Móvil, it did require us to purchase and deploy servers and headends down there. So there's a little bit of COGS that wouldn't be reoccurring COGS associated with the acquisition of that hardware and deployment.

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

Got it. Tom, you mentioned xD maybe right now being put off to the streaming -- till it has streaming with video. What's the impact to the financials for Rovi?

Thomas Carson

I'll let Peter here on the financials. But we had pretty de minimis revenue for xD in this year, primarily because we are in a deployment mode, so it's not a significant impact. Saying that, there actually is still kind of nonvideo xD versions that we plan to have deployed to certain customers. But obviously, the big thing that everybody's looking for is the video capability on xD, and we're really actually trying to accelerate the schedule from early next year into the latter part of this year, so it's a challenge that the product and engineering teams have.

Peter C. Halt

In terms of the current year, John, we have a slide in our investor deck as we always do, where we kind of – as we have had, I should say, this year, where we break out the midpoint of our estimate range by our sales verticals. And if you look in there, you'll see actually the service provider bucket is up by $5 million. CE is actually down by $7.5 million, and the difference is made up in Other. The key there in the service provider side is even with some delays in xD, no impact to the service provider revenue targets for the current year. The real focus is how much drive -- growth can we drive from xD next year. We've always talked about xD as being a good contributor in 2015. We're very excited about the demand around having video in xD. I'm very excited that we're working with a customer in América Móvil to -- on our initial deployment there, and do hope that we'll continue to be able to have the anticipated growth from xD next year.

Thomas Carson

The other thing, John, just to think about it in the service provider space, and I mentioned some of this in the prepared remarks, but we also like very much the DTA business on a go-forward business. We have, actually, in our product development pipeline, 7 different DTA programs going. They have to obviously be matched top to different set-top box versions from Pace or Cisco or ARRIS or others. So that's a pretty active program. We actually have 3 customers now. So we like the DTA part of the business as well. Again, it's relatively small this year, but there is a pretty significant demand for that product. So we think next year that will actually be a good revenue stream for us as well.

Operator

And your next question comes from the line of Eric Wold with B. Riley.

Eric C. Wold - B. Riley Caris, Research Division

Two questions. One, I guess, for each of you. I guess, I'll start with Tom. On the patent portfolio, how would you characterize the goals around the acquired patent portfolio? Is it more of a defensible move? Or something you see you can start monetizing maybe in the next 12 to 18 months?

Thomas Carson

Look, I think the objective of the patent portfolio, historically, for Rovi has been to do organic development, right? So we push pretty hard internally for invention disclosures, which, by the way, this year are up significantly, and we anticipate roughly 1,200 internal disclosures this year. Not all of them turn into patents, but we have a pretty big pool internally that's developed on an organic basis. We've been active in the past, but I'd say in the last 12 months or so, looking at more inorganic types of things that we can do on the patent side. So when we look at the acquisition that we did, it's a very natural, strategic fit in terms of our overall patent portfolio. And so yes, in terms of things that we're actively engaged in negotiation on a number of those patents are, we believe, are readily suitable for using in our licensee discussions. So we think right now that it bolsters, really, the overall patent portfolio.

Eric C. Wold - B. Riley Caris, Research Division

And you're not disclosing who those were purchased from?

Thomas Carson

No, we're not allowed to.

Eric C. Wold - B. Riley Caris, Research Division

Okay. And then, Peter, for you. I guess thinking about the typical kind of quarterly and annual revenue flow. You know that Q1's inflated a little bit, with the perpetual ACP license, and I guess, typically, second half revenue's been greater than the first half. Kind of excluding that, given the trend that would place the year kind of near or above the high end of guidance. You're kind of -- least for my calculation, I'm just trying to figure out what's your level of visibility in the back half of the year that may keep the low end of guidance where it is and not coming higher?

Peter C. Halt

We're looking to be, as we talked about at our Investor Day in January, as we talked about at Q1, and I'll reiterate here, we're looking to be much more conservative in terms of our guidance. When we look out at the beginning of the year at our Investor Day, if you'll recall, we talked about having about 93% visibility into the full year. As we look at the second half of the year, we're in the mid-90s in terms of having visibility into that number. That said, we had some events, such as in the CE side getting TP Vision on board, getting some additional territories from Samsung in the first half of the year. Also, as we've moved to this product deal with América Móvil and have been recognizing revenues around -- except as a certain product and also have been stepping up some of our professional services work around some of our service provider product, you're seeing a little bit of cost -- revenue, I'm sorry, in the first half of the year that isn't necessarily repeatable in the second half of the year. So at the midpoint of the estimate range we've provided, we're actually showing a little bit less in the second half of the year than the first half of the year, and we believe that's prudent right now in terms of guiding people too.

Operator

And your next question comes from the line of Mike Olson with Piper and Jaffray (sic) [Piper Jaffray].

Michael J. Olson - Piper Jaffray Companies, Research Division

A couple more on the service provider renewals. You mentioned in the press release that agreements with 26 cable operators were renewed. I was wondering if you could just talk about what the trend has been as far as pricing in those renewals compared to the prior contracts. Like, is there are consistent trend of new contracts renewal pricing being above or below prior contracts, and what do you think that tells you anything about potential pricing for those renewals?

Peter C. Halt

The good news is that, on average, these renewals were all high-single-digit increases. However, you shouldn't, to be frank, carry that over at all to the big 4, because the 26 service providers that we renewed in the quarter were all very small operators.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then the second question. I guess, really, just to try to get at the heart of what you're saying for the 2015 renewals, if Comcast acquisition of Time Warner and AT&T's acquisition of DTV happens before when you would've kind of otherwise renewed those contracts in 2015, is there then still a reason to be concerned about any sort of push-out in revenue? Or said another way, even if those deals closed before you would have had to renew them, are you still seeing some risk that you wouldn't get paid from Time Warner and DTV subs next year?

Peter C. Halt

I wouldn't rule out the risk, Mike, just -- let's say that an acquisition by Comcast of Time Warner were to close mid next year, that would leave you just under a quarter to be getting a deal done on the Time Warner side. I'm sure the Comcast folks will be fairly busy up to the deal. Clearly, the Time Warner folks wouldn't be engaged, probably lame-duck. So if we look at a worst case scenario, we're saying, "Yes, you know what, it's going to a conversation that'll take some time to get finalized." We're making every effort, ask Tom had said to be engaged right now and moving it forward. But we could see a downside scenario where, because of all that's going on and the focus of attention, perhaps our deal gets pushed back in terms of being finalized. We go for some period, a brief period, albeit, but some period, out of contract, there would be a catch-up and everything would be made whole and life would go on after that. But we are foreshadowing that there is a risk because of the timing of these deals and just how complex they are and lengthy they can -- the negotiations on a deal like this routinely are, there could be some delays in getting them done.

Thomas Carson

Yes, I think the way we kind of looked at it and obviously, and Peter's right, there is always going to be a certain amount of risk. But the challenge for us, for me, my management team and the people we have dedicated on this is to try to mitigate that risk as much as possible. So the thing that you should be taking away from the internal activity and the activity with each one of the big 4 that we're trying to get renewed is that there is very active dialogue from our company to the other companies, and that's part of how we're trying to mitigate the risk. So part of what we have to do early on is just kind of educate them not only on our products, but, probably more importantly, educate them pretty heavily on the scope of the patent portfolio and the levels of infringement that we see. So not without its risk, obviously, but we're trying to manage that by early intervention, if you will.

Operator

And your next question comes from the line of Sterling Auty with JPMorgan.

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

A couple questions. Just to be clear, I want to make sure I heard that correctly. In terms of the -- when you're thinking about the possibility of delays, are you specifically limiting that possibility in terms of just the DIRECTV and the Time Warner deals, which are coming up sooner? Are you also talking about the possibility that this could be push the Comcast renewal out of its timeframe kind of in that first half 2016?

Thomas Carson

I think it's -- Sterling, it's really all of them. I mean, you have to put them in the big category. As Peter said, these are pretty big, complicated deals. The parties that we're negotiating with have other very big distractions going on within their new organizations. So I'd say it goes across all of them. Again, the point from our side is we're trying to do whatever we can to have those discussions and negotiations early so they have clarity around kind of our position on patent and product so that when you get further down the road here this year, there's no other questions surrounding either one of them.

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

But when we think about the impact to revenue and cash flow, specifically, around Time Warner and DIRECTV, how should we start thinking about incorporating that into our model to be on the safe side?

Peter C. Halt

I'd like to think about Time Warner being a deal done. It expires late in September of 2015, and DIRECTV is a deal that expires at the end of next year, a very minimal impact to next year. Comcast and EchoStar, as you know, are March and April of '16 deals. So, we'd like to believe we can get them tied up by then, but depending upon how long and drawn out, getting the approvals for these acquisitions pulled together and how distracted management is. As we're talking about, there is some risk, but if you look at it all being done in '16, you're all caught up at whatever time it gets done too.

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

Right. Right. The patent license purchase that you made, can you at least tell us the company you bought it from? Is that an existing Rovi customer?

Peter C. Halt

We're not supposed to -- it's part of the agreement. We're not supposed to disclose who the buyer -- who the seller of the patents was.

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

Okay. But can you please tell us whether there is something out to exchange other than the $28 million in cash? In other words, did you give them, I guess, a license?

Peter C. Halt

We purchased the patents for $28 million. No other consideration provided other than the cash that's paid them.

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

Okay. So you didn't get them a license for the rest of the Rovi patent portfolio?

Peter C. Halt

I'll go in a step further because I don't believe it'll give away who the company was. They were already a licensee.

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

Okay. All right. Perfect. The TP Vision agreement that you're able to get, did that close during the second quarter? And were there any catch-up payments for that?

Peter C. Halt

There was a catch-up element for it, and it closed in the quarter.

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

Okay. So was it a modest catch-up, then?

Peter C. Halt

A modest catch-up, yes, just given that their market share -- they're pretty small in terms of market share. Mostly some -- the Philips brand in Europe, but a catch-up, nonetheless. And I was about to say that while they have a very small market share, it's the full year for this past year.

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

Got it. And last question from my side. You kind of touched on parts of this, but you also had been mentioning last couple of quarters about the modularization of some of the guide technology in trying to be able to take parts of that and sell it into for usage in some of the Tier 1 carrier guides. Any update on where you are in the development of those products to be able to do that or discussions that you're having with some of the Tier 1s?

Thomas Carson

Yes, so we're very active on the development side. So as you step back and kind of think about what we're trying to do, effectively, what we're trying to do is be a guidance technology provider regardless of what kind of device it is. And you know better than anybody, we've historically been a classic set-top box guide over a QAM network, kind of guide provider. And really, what the platform, cloud platform, we're working on is really to enable us to extend to a wider range of Internet-connected products, which also allows you to have kind of a full-guide business or offer bits and pieces of your technology in a cloud kind of environment that somebody like Comcast or some of the big customers might want, whereas they might not want a full guide experience. The cloud platform has been under very active development. Obviously, a fair amount of money has been invested to allow us to expand what we can do from a guide perspective. As we said, we're actually moving into a beta phase this quarter. And effectively, our first services on there will be related to our metadata. So that is moving very well. I'm very happy and pleased with all the effort and work that's been done there. And it clearly has been in some of the major negotiations that we've been talking about earlier today on this call, basically, the availability of a couple of things is really resonating. One is having our metadata in a cloud-type environment for Internet-connected devices, whatever kind of devices, is very important and being very well received. Products like personalization, search and recommendation and our Knowledge Graph that came with the Veveo acquisition is also something that's resonating very, very well in all these negotiations. So we like where we're going with this, and it absolutely is resonating with the major providers. Longer term, I think for us, as a company, we haven't had a big product residence outside of the U.S. But certainly, the platform is going to be able to scale to other parts of the world. So where we have not had business, we think we'll have opportunity with the cloud platform, with things like metadata or search and recommendation.

Operator

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

James Medvedeff - Cowen and Company, LLC, Research Division

Let's see, I wanted to follow-up on the sort of linearity or seasonality question from earlier. How do you see -- I understand you're being necessary -- you're being conservative on the H2 outlook, but how would you handicap Q2, Q4 versus Q3 in that -- within that?

Peter C. Halt

I'd model them out roughly the same.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And it doesn't look like you bought back any shares in the quarter, correct?

Peter C. Halt

That is correct.

James Medvedeff - Cowen and Company, LLC, Research Division

So what's the -- there's quite a bit left on the authorization. A lot of cash on the balance sheet. I know you have to convert coming up. What's the thought on the share repurchase?

Peter C. Halt

Well, we'll continue to look at share repurchase as opportunistically as we've always said we will. We made a commitment at the beginning of the year, as you'll recall, to retire 5 million shares. We did that in Q1. We did it for a couple reasons. One is by retiring it at the beginning of the year, gave us most of the year for the EPS benefit. Also, our belief is under a conservative guidance scenario, if we can continue to meet or overperform expectations, hopefully the price would rise in our shares, and we'd have been wise to buy it then at a lower price. One thing I would point out in terms of the bank financing, the refinancing that we did, which was in July after the quarter was over, do keep in mind, as part of that, we reset the bucket for share buybacks. We did have a limitation under the debt agreement as to what could be bought back, and we had almost bought back all the stock we could under that. So this now gives us the capacity based upon whatever decisions we make to be acquiring more in line with our authorization. But no commitments from us to do so today.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And then just finally, I noticed about $60 million came out of -- there was a cash flow positive -- about $60 million of cash flow from short-term or long-term investments that were apparently net sold. Is there -- you loading up for something? Or is that just a timing issue?

Peter C. Halt

Just a timing issue.

Operator

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

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

This is a follow-up to the patent purchase. Are you guys planning on licensing that separately? Or just including it in the bucket as part of the overall?

Thomas Carson

Yes, basically the way we approach things is to license it as a bucket. So they will be included in the regular portfolio licenses that we do.

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

Okay. And can you just kind of walk me through a little bit. The key drivers of the changes to the guidance that the segment level didn't change a lot overall, but you came down a little bit, which was surprising, given the renewals.

Peter C. Halt

Yes. If you look at kind of what we've done for the first half of the year, you can see that we've done just over $59 million in the CE bucket, and that included bringing TP Vision in. So when we look at it for the rest of the year in order to come in at $122.5 million that you see in our investor deck online as kind of the midpoint of guidance in CE, we'll have to bring in another new customer. We're looking at a couple offshore companies that we're in deep conversations with. We didn't think it is prudent to keep the guidance on CE where it was. That said, we've been doing better than expectations on the service provider side. You see that we've brought the search provider estimate up at the midpoint of our estimate range, from $388 million to $393 million.

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

Okay. Okay. That helps. And then just finally, sorry, another clarification on sort of the renewals. But were you suggesting then that if the Comcast TWC deal gets done, that, that will still be 2 separate negotiations? Or am I right to think that it would collapse into one negotiation?

Peter C. Halt

We would anticipate that it would collapse into one. And so one of the comments that Tom was making in terms of the impact of the timing is if the approval of Comcast acquisition of Time Warner stretches out and it starts coming up close to the Time Warner date, our expectations, given the feedback to date from the folks at Time Warner, is they wouldn't be actively negotiating a new deal because it's not going to be them that's going to control the company. We'd look instead to see if it folded into the Comcast deal.

Operator

And you do have a follow-up question from the line of Eric Wold with B. Riley.

Eric C. Wold - B. Riley Caris, Research Division

Just a quick follow-up question on the patent, not to beat that. But I know you can't disclose who it was that you purchased it from. Was it -- were you paying to license any of that technology beforehand, such that with this purchase, you'll no longer be paying for those?

Peter C. Halt

No, we were not paying the license this. There was some technology in the discovery area that wasn't being monetized by the party holding it as patents. And so we were able to acquire the patents, which allowed them to monetize that, it increases our patent portfolio. We're very excited about up acquisition. As Tom said in his prepared remarks, we view this as positioning ourselves as the source for licenseable inventions in the discovery area.

Operator

And there are no further questions at this time.

Thomas Carson

Okay. Well, I want to thank everybody for their time, and look forward to talking to a number of you on follow-up calls. So thank you very much, everybody.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

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Source: Rovi's (ROVI) CEO Thomas Carson on Q2 2014 Results - Earnings Call Transcript
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