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Rovi (NASDAQ:ROVI)

Q2 2011 Earnings Call

August 09, 2011 4:30 pm ET

Executives

Alfred Amoroso - Chief Executive Officer, President and Director

Lauren Landfield - Vice President of Corporate Finance and Investor Relations

James Budge - Chief Financial Officer

Analysts

James Goss - Barrington Research Associates, Inc.

Ingrid Chung - Goldman Sachs Group Inc.

Ryan Fiftal - Morgan Stanley

Corey Barrett

Edward Maguire - Credit Agricole Securities (NYSE:USA) Inc.

Jason Cheu

John Vinh - Collins Stewart LLC

Michael Olson - Piper Jaffray Companies

Robert Stone - Cowen and Company, LLC

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rovi's Q2 Earnings Release Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, August 9 of 2011. I would now like to turn the conference over to our host, Mr. Lauren Landfield, Senior Vice President of Corporate Finance. Please go ahead, sir.

Lauren Landfield

Thank you, and welcome, everybody, to Rovi Corporation's Second Quarter 2011 Earnings Conference Call. I'm Lauren Landfield, and I'm joined today by Fred Amoroso, our CEO; and James Budge, our CFO.

Before we discuss our results and estimates released earlier today, I'd like to start with some housekeeping items. First, I'd like to remind you that all statements made during our conference call that are not statements of historical fact, including, but not limited to, statements regarding the company's forecast of future revenues and earnings, the integration of the Sonic acquisition as well as business strategies and product plans constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-Q for the period ended June 30, 2011, and other filings with the SEC that are filed from time to time.

Second, our results and estimates released earlier today, as well as our discussion on this call, include non-GAAP adjusted pro forma information, which exclude, as applicable, non-cash items and items that impact comparability such as amortization, equity-based compensation and discrete tax items and the tax effect of all non-GAAP adjustments. Depreciation expense, while a non-cash item, is included in adjusted pro forma operating results as a proxy for capital expenditures to demonstrate recurring cash-based earnings results. Adjusted pro forma combined company information assumes the Sonic Solutions acquisition was effective on January 1, 2010. Adjusted pro forma reconciliations for historical results including Sonic Solutions are in our press release. We have presented and are discussing adjusted pro forma combined company information because this is how we have and will evaluate our business. We believe that this presentation may be meaningful to our investors in analyzing the company's results of operations.

This presentation is not intended to be a substitute for our financial results presented in conformity with the 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 press release.

And as the final piece of housekeeping, the webcast of this conference call will be available on our Investor Relations web page until our next quarterly earnings call. I'd now like to turn the call over to Fred.

Alfred Amoroso

Well, thank you, Lauren. And thanks, everyone, for joining us today for our quarterly conference call. As you may have seen in our earnings press release, we grew adjusted pro forma revenue to $193 million in Q2. Similar to previous quarters, our business continued to grow due to new license agreements, increases in device shipments that incorporate our products or are licensed under our patents, the continued conversion of analog TV subscribers to digital, as a well as advertising growth. When combined with operating efficiencies, this resulted in a 20% year-over-year increase in adjusted pro forma EPS to $0.61. I'm pleased with our successful financial results, as well as the significant progress we've made securing customer wins for our new solutions across our verticals. I'll discuss our progress in more depth shortly but first, James will review some of the financial metrics. James?

James Budge

Thank you, Fred, and hello, everyone. As Fred mentioned, we grew adjusted pro forma revenue to $193 million in Q2. Revenue in our service provider vertical, which is primarily comprised of IPG products and patents licensed to cable satellite and telecom companies, grew 17% year-over-year to $74 million in the second quarter. This growth was driven by the continued conversion of analog subscribers to digital, the addition of new international licensees and accelerating growth in our service provider product revenues.

It's worth noting that our service provider product revenues rose 39% year-over-year, marking the fourth consecutive quarter of 20-plus percent product growth. The strength in products was achieved by improved pricing on contract renewals, continued convergence of SARA guide to Passport, new applications and advertising.

Subscribers worldwide receiving a license to Rovi-provided set-top box based IPG rose to $133 million at the end of Q2 2011, up from $124 million in Q2 2010. Excluding prepaid licensees, primarily Comcast and Dish, total Rovi licensed subscribers are now approximately 91 million versus 85 million in the year-ago period. Subscribers receiving a Rovi-provided set-top box based IPG, either a Passport or i-Guide, rose 29% to 18 million at the end of Q2 2011.

Adjusted pro forma revenue in our CE vertical, which includes guidance products and patents licensed to device manufacturers DivX and ACP for hardware, was $86 million in Q2 2011, up 15% from $74 million in Q2 2010.

In Q2 2011, we continued to benefit from double-digit percentage growth in shipments of IPG-enabled devices, as well as very robust DivX growth. However, consistent with the trends from prior quarters, growth was partially offset by declines in our analog product line.

Adjusted pro forma revenue for our consumer software and other vertical, which includes RoxioNow, data licensing, entertainment and Roxio, was $33 million in Q2 2011. Data licensing continues to grow as we expand our agreements with existing customers and add new customers. However, entertainment and Roxio continued their declines.

Turning to adjusted pro forma profit measures. Cost of goods sold totaled $30.4 million or 16% of revenue. SG&A totaled $37.9 million or 20% of revenue, and R&D totaled $37.6 million or 19% of revenue. Our high operating and earnings margins were due primarily to operating efficiencies, including early synergies from the Sonic Solutions deal. Operating expenses declined 5% year-over-year, and we continue to find additional synergies, which we expect to be closer to $40 million annualized versus our initial expectations of around $30 million.

Turning to our balance sheet. The principal amount of debt at quarter end was $1.1 billion. Our 2011 converts stood at $28 million at the end of June, down from $46 million in March. In addition to this 1.4 million shares of common stock we repurchased in -- we purchased in Q1, we subsequently purchased an additional 3.3 million shares, bringing the total to almost 5 million shares year-to-date, consistent with our plans to significantly offset the issuance of the shares associated with the Sonic Solutions acquisition. Cash and investment balances at the end of June were $626 million.

In regards to our full year 2011 outlook, on the CE side, we expect mid-single digit percentage growth for the full year 2011 when compared to 2010 adjusted pro forma revenue of $290 million. The strong first half results give us the confidence to increase our previous 2011 CE expectations of flat to low single digit growth. But it still reflects weaker second half growth given recent industry trends. Trends which we've previously anticipated.

On the guide side of our CE business, we continue to benefit from flat panel TV industry growth and higher penetration of guide-enabled connected devices. However, this is tempered by recent earnings results and commentary from our customers, which indicate TV industry softness. And of course, we also have a downward trend in our analog business, which I expect will decline for the fifth consecutive year but at a greater rate than in years past.

Turning to our service provider vertical. We continue to expect growth in the high teens range this year. The positive trends remain intact. We're well positioned for subscriber gains from continued analog to digital conversion, extensions of customers from patent to product licenses at higher values, SARA to Passport conversions, international growth and expanded licenses to cover online and mobile fields of use like the Comcast, Cox, Cablevision, Rogers and Videotron deals, as well as the recently signed charter deal which Fred will discuss shortly.

Finally, in our consumer software and other category, data licensing continues to benefit from customer editions and expanding licenses with existing customers, although this has been offset by ACP and Roxio declines. Weakness in optical media sales, the shift away from laptops toward tablets and the lack of a PC refresh cycle weigh on our Roxio software offerings. Although our share of Roxio's product category remains steady, the overall product category is in decline.

When combined with our recent divestiture of BD+, we have reduced our expectations for the consumer software and other vertical to flat to low single digits year-over-year.

Altogether, the outperformance relative to our earlier expectations in CE is offset by the reduced expectations for consumer software and other, which now no longer include BD+. As such, we are maintaining our adjusted pro forma revenue estimates of between $770 million and $810 million for 2011 versus $720 million in 2010 or 10% growth at the midpoint.

In terms of quarterly skew, while we don't give quarterly guidance, I will say that we expect the majority of the second half revenue to hit in the fourth quarter, consistent with past year's results. I expect Q3 to be at a similar level as Q2.

On the bottom line, based on the improved synergy estimates and mix shift toward higher-margin CE revenues, we are raising and narrowing our 2011 adjusted pro forma EPS estimates to range between $2.35 and $2.60 versus our previous range of $2.25 to $2.55, the second consecutive quarterly increase since closing the Sonic acquisition.

And now I'll turn the call back over to Fred. Fred?

Alfred Amoroso

Thank you, James. At this point, I'll review the quarter and some recent business highlights. In CE, we continue to benefit from the digital TV upgrade cycle, as volumes rise fueled by reduced prices and increased functionality, most notably connectivity. Our strategy to take advantage of this connected trend over the long-term is of course through our TotalGuide embedded solution and Rovi Cloud Services, which includes our advertising, metadata and search and recommendation services. These offerings address the consumers' desire for search, discovery and browsing of content from both broadcast and on-demand sources.

In terms of wins, I'll update you on some significant customer progress. As previously disclosed, Samsung, which announced at CES that its Smart TV platform will utilize the Rovi Cloud Services, has been shipping these TVs at retail since the spring, and feedback has been positive. Sony, which went live with advertising from our Cloud Services on their BRAVIA TVs in May, is also working to add our enhanced data to their BRAVIA sets. And of course, we recently announced the Toshiba win for our embedded TotalGuide Solution. Although we continue with an outstanding licensing matter in Japan with Toshiba as the #2 supplier of flat panel TVs, I remain hopeful we can license them there as well. In the meantime, I'm pleased that we are able to secure a win with Toshiba in North America and Europe where they previously had not been a licensee.

Elsewhere, I'm happy to announce we've added another Japanese manufacturer to our growing list of TotalGuide customers, namely Panasonic, which is also licensed our embedded TotalGuide Solution. I would expect both Panasonic and Toshiba to begin shipments next year, perhaps as early as January 2012 at CES.

Overall, the traction for TotalGuide is strong, and I expect it to strengthen throughout the year.

Regarding DivX, the business is performing very well. Emerging device revenue grew 150% as digital television revenue and Blu-ray grew almost 100%. And mobile revenue, which benefited in particular from the Samsung Galaxy S, grew over 700%, all offsetting flat DVD revenue growth. Overall, DivX licensed hardware device shipments grew about 100% year-over-year, and approximately 525 million devices enabled by our DivX technology have shipped, further demonstrating the healthy upward trend.

The increased uptake of DivX HD is very encouraging for the future of the format, and customer renewals are progressing well. On last quarter's call, we announced we have renewed a large agreement with LG. More recently, we have renewed or extended agreements with Samsung, Toshiba and Sony, and as discussed, we've clearly been expanding our penetration, broadening our reach into emerging device categories.

On the IP licensing front, while we have encountered -- entered into a couple of litigation matters recently, we continue to see that most companies recognize the value of our patents and as a result, we're signing licensees globally. For example, in Japan, last quarter we signed an agreement licensing our IPG patents, covering subscribers of NTT Plala, an IPTV service provider with over 1.3 million subscribers. We signed a similar agreement covering IPGs deployed in an IPTV network in Korea. And in Latin America, we've agreed to a patent license with our first service provider in the region. With over 20 million digital television subscribers, we believe that there is an opportunity to monetize our IP in this region.

In terms of service provider as a whole, despite a slowdown in growth in basic video cable subscribers in the U.S., our fundamentals remain positive as digital subscribers continue to grow. Plus, we continue to benefit from the robust growth outside of cable, such as through telcos.

Our subscriber growth also includes international where we're benefiting from both lower relative digital penetration and our growing penetration through new licensees. In addition, we demonstrated progress across key initiatives including improving economics on contract renewals and furthering product deployment where, as James noted, we grew our service provider product revenues by 39% year-over-year in Q2.

This was attributable to subscriber growth of 29% as we completed more SARA to Passport conversions, as well as improved pricing as we renew agreements and deploy new applications with greater value to our customers, such as remote record and multi-room DVR, all of which we've discussed in recent quarters.

While I guided Passport growth drives results today, these solutions will also provide the platforms upon which to transition customers to future offerings. On this front, we have made significant progress with TotalGuide for service providers. At this time, I'd like to review our go-to-market strategy for service providers.

We're crafting versions of our TotalGuide Solution to work on both legacy devices as well as new and advanced boxes with varying levels of services based on the capabilities of the set-top box and network. This approach is resonating with customers who view us as being differentiated by several key elements.

Cost effectiveness. Our TotalGuide Solution can operate on a wide range of the installed base of legacy set-top boxes without requiring material changes to the underlying network. This enables our solution to be deployed efficiently, primarily through software upgrades rather than disruptive and costly truck rolls to replace or add set-top boxes in customer homes. By our estimates, each 1 million subscribers converted to another guide offering could cost perhaps as much as $500 million. This estimate includes new set-top boxes to replace existing boxes, plus custom engineering and other network investments to migrate from their walled garden infrastructure. This is simply prohibitive for many of our customers.

Our legacy North America guide footprint is substantially larger than other guide providers. As mentioned, our product subscriber count rose 29% to 18 million at the end of Q2. And with TotalGuide being backwards compatible to this installed base of legacy set-top boxes, we have a great installed base to target for upgrades.

In addition, we believe that our TotalGuide Solution can also be applied to the nearly 80 million North American household digital cable legacy set-top boxes even outside of our footprint.

Another key element, brand control. Our solution enables operators to retain their branding rather than essentially reselling another company's solution, which is less than ideal when they're trying to market bundled voice, video, data and mobile services and build customer loyalty.

Additionally, we offer cross-platform capability. TotalGuide xD, a white-label search and discovery application for tablets, connects to both set-top boxes enabled with our TotalGuide Solution and our legacy guide products, plus other non-Rovi guide enabled set-top boxes for that matter and capitalizes on the big shift towards tablets. Our strategy for xD ties in directly to our application strategy.

In order to change channels on legacy set-top boxes using a tablet, you currently need an EBIF User Agent deployed. And in order to remotely record the programs on the DVR through a tablet, you also need our DVR app. We are seeing success in getting our EBIF and DVR apps deployed atop our legacy guide and then using that to pull through xD for a "here-today" solution that bridges to next generation guidance.

At NCTA, the cable industry's main trade show, we made some key announcements demonstrating traction against this evolutionary strategy. In terms of features, we've previously demonstrated xD, which enables remote record. At the show, we also demonstrated xD together with TotalGuide for set-top boxes, a unique approach that we believe helps service providers leverage their existing infrastructure to launch next-generation services.

To improve our ability for a successful launch and customer adoption, rather than delivering a solution that is completely different than current platforms, we're able to build upon our industry-leading customer footprint to launch customers on our broadband guide relatively quickly.

As these new features roll out, our revenue opportunities naturally increase. As we have stated in the past, as customers move from a patent-only license to a combination patent and product license, we have seen our royalty rates approximately double with our latest application suites for legacy guides including EBIF, multi-room DVR and xD, our royalty rates are roughly doubling once again. Similar to how these apps help transition the customer to xD, xD is leading customers to our full-featured TotalGuide Solution.

Over time, we believe this should again provide us with a step-up in revenues as penetration increases for the higher-ASP TotalGuide Solution. A full xD plus TotalGuide Solution, plus web and mobile functionality, could run 4x to 6x a patent-only license at volume.

We continue to expect TotalGuide for service providers to enter the field next year, following the initial code release by the end of this year and trials through the first half of next year. All of that said, we are delighted with the early progress we've made with customers and believe we are ahead of schedule.

In terms of announced customer traction, BendBroadband and Armstrong signed total agreements early on. Bend plans to roll out both TotalGuide for set-top boxes and TotalGuide xD to their subscribers. Armstrong began trials of TotalGuide xD in April and they have progressed from lab trials to field trials. I expect them to commercially launch this year. These operators, while only having a couple of hundred thousand subs, are well respected in the industry for being on the leading edge of technology trends.

This is an industry where it's cliché that nobody wants to be first. Having these lighthouse customers allows bigger customers to know that this solution will be tested, and we believe it can be a strong endorsement. And of course, further to this point, at NCTA, we announced both Cogeco and Suddenlink have licensed our TotalGuide Solution. In addition, both Cogeco and Suddenlink renewed their i-Guide agreements, and we're quite pleased with the value of these deals. We're happy these customers have signed up, as we were able to demonstrate significant progress in terms of roadmap evolution, key feature support and working prototypes.

Subsequently, we announced our largest win yet, Charter, the nation's fourth-largest cable operator with over 4 million TV subscribers. As I mentioned, our TotalGuide Solution builds on our existing software and footprint, making ease of implementation attractive. We think this appeals to Charter where we expect to upgrade their digital subscribers who currently use our guides, both i-Guide and Passport, to TotalGuide over time.

Ultimately, I'm confident operators are increasingly viewing our solution as a long-term answer to retain customers, grow revenues, control branding and minimize cost and disruption while increasing speed to market. While today we're focused on small to midsized operators who don't have internally developed solutions, we're hopeful that over time, larger service providers will opt for our premium offering that provides not only IP but also a next-generation guide with outstanding platform, application, data and advertising support. I really think that it's important to emphasize, notwithstanding chatter in the marketplace about competitive offerings, but as we deliver in our development milestones, I believe confidence in our offering will only increase.

So we now announced deals with operators that reach approximately 7 million subscribers. These customers appreciate the relatively low cost of deployment, control over the branding and cross-platform capability that we offer, as well as the continuation of our IP relationship. Additionally, the IP continues to be a cornerstone of our business and customer discussions. For example, as part of this long-term agreement, Charter also licensed our patents for web and mobile, joining the ranks of Comcast, Cox, Cablevision, Rogers and Videotron, who have expanded their IP license field of use to include cross-platform capabilities.

Overall, I'm pleased with the progress we have made, and I would expect additional wins in sizable customers for next-generation guide platforms in the near future. Based on several RFPs outstanding, I think it's reasonable to expect us to have deals in place by year-end with operators that have approximately 10 million subscribers. This would create an installed base that, when fully deployed over time, could generate over $100 million of our incremental annual subscriber revenues. This excludes the incremental opportunity presented by advertising and RoxioNow, now known as the Rovi entertainment store. Hopefully, this puts into perspective where we sit in the industry versus other options and the potential for this business to add materially to our results.

Finally, on service provider, we demonstrated good traction with our data offerings in the quarter, signing up both DIRECTV and another major domestic telco. As our data offering is broad, including everything from TV listings, to images, to search and recommendation, I expect more progress on this front in the near future.

Speaking of data, we also signed renewal agreements recently with Target, Yahoo! and Google. The multi-year agreement with Google for entertainment data supports a wide range of Google services in multiple regions around the globe, extending and expanding our previous relationship. As part of this new agreement, Google will use our rich metadata to enhance its search and shopping services and allow its users to find rich media content about their favorite music, artist, movies and actors.

Additionally, the data will be used to expand information available around YouTube videos and YouTube rental offerings where, as we announced on the last call, Google uses our Rovi entertainment store movie service for film and television content.

We expect the data to also help power Google entertainment and retail initiatives including Android retail initiatives enabling users to discover new shows and movies, find accurate and timely information about their favorite TV programs and purchase content on Android devices.

Turning to the Rovi entertainment store, I'm pleased with the number of recent developments, including progress with studios, retailers and device manufacturers. On the studio front, we're seeing continued interest on a direct-to-consumer strategy as studios attempt to recapture profits lost to subscription video. For example, we recently agreed to power a major studio's video service inside a media-focused, user-generated social networking site, which I expect to be able to discuss in the future in further detail. We're also expanding our video distribution service beyond the U.S. For example, we're expanding in Canada.

In addition to Cineplex, the largest theater chain in the country, which we announced on the last call, we recently agreed to expand our agreement with Best Buy into Canada, which just recently went live. In Europe, a major Hollywood studio now uses us to distribute content online in Germany, and we recently were selected to power the stores of 2 major retailers in the U.K. With free-to-air TV so prevalent in Europe, and over-the-top offerings such as this, when combined with the large amount of content, could gain significant traction with consumers.

Now of course we need to have distribution on devices to make the Rovi entertainment store widely acceptable. Recent additions to the growing list of brands offering devices with our Rovi entertainment store service include HP, where we're enabling on-demand access to movies and TV shows via new HP MovieStore application for the HP TouchPad. HP's first webOS tablet adds to a range of HP notebooks and desktop PCs that are already powered by the Rovi entertainment store platform. Plus, we've gone live on Sony BRAVIA TVs and Blu-ray players here in the U.S. Overall, we've now launched stores on approximately 50 million devices, and this is set to expand.

For example, Sony announced that coming this fall, Best Buy CinemaNow video service, which is powered by Rovi, will be accessible to PS3 owners, providing consumers with access to their favorite movies and TV shows for purchase or rental. We continue to have a lot of work to do to get the service up to carrier-class performance and scalability, but I am pleased with the early traction.

Overall, while the Rovi entertainment store is a nice stand-alone offering, more importantly, however, it is also a part of our total customer solution fitting in now with our data and TotalGuide offerings. For example, in June, we began marketing it as a private label VOD system for the cable operators to enable cable subscribers to access TV and VOD entertainment virtually anywhere through IP-connected devices. The solution is a cost-effective, end-to-end platform that offers content preparation, cloud hosting and multi-format IP delivery, as well as support for subscriber authentication. In addition, the Rovi entertainment store will integrate with TotalGuide xD to provide a turnkey solution for both content delivery and consumption.

As for advertising, we continue to drive success in Q2 as revenue grew almost 100% year-over-year. We're also making progress building the foundations for future growth. This includes increased distribution and enhanced presentation, namely video-enabled ads delivered on advanced guides, as well as our improved ability to provide usage metrics to advertisers. As I said in the past, measurement is critical to demonstrating the appeal of the guide to advertisers, which drives distribution and ad dollars our way.

We have now turned on measurement in over 15 markets and on about 300,000 set-top boxes, and the data continues to register impressive results. For example, guide usage is averaging over 15 minutes per day; and visits to the guide, over 10x a day. This measurement data is helping generate wins. We were again boosted by expansion beyond our traditional program promotions for the entertainment vertical and into the large conventional advertising market. The number of conventional ad campaigns rose 500% in the first half of 2011, and a number of conventional advertisers grew over 200%.

Notable recent growth was evident in the automotive space, where Ford and Lincoln continue to expand their campaigns. And we also continued to grow the pharmaceutical category with advertisers such as Abreva, Nasonex and Plavix. Plus, we grew the restaurant category by adding PF Chang's. And we signed our largest deal ever on the entertainment side with NBC.

As I mentioned last quarter, we have begun running requests for information campaigns, which, as demonstrated at CES, will ultimately enable consumers to purchase goods directly through their TVs. This broadens our value to advertisers and increases our potential advertising revenue as we will receive a revenue share on commerce transactions. Recently, we ran one such campaign with WWE, the very popular professional wrestling organization, to enable the purchase of their pay-per-view events. In the near future, we plan to rollout an integrated commerce system so that viewers can launch into microsites to purchase merchandise directly on a TV through the remote control. We have a number of brands looking to deploy this feature later in the year for entertainment-related campaigns, which I expect will generate impulse click-through purchases.

As I mentioned last quarter, we're adding another advertising growth driver, international expansion. We recently closed our first deals in Europe as Twentieth Century FOX in the U.K. will be advertising theatrical and VOD content, and Channel 4 will be promoting television shows. While we traditionally have sold mainly against our service provider footprint, these customers are also interested in our CE footprint, which is beginning to benefit from the Samsung and Sony distribution. The CE footprint offers a more interactive environment, which is also beneficial to our ad sales efforts.

Now display and interactive advertising on TV is measurable to the rigor and completeness that advertisers have come to expect from the Internet, and we're adding this measurement capability internationally with some recent new partnerships which I expect will catalyze further growth in certain environments.

In addition to CE devices enabled with Rovi Cloud Services from providers such as Samsung and Sony, we continue to broaden our distribution with partners and on platforms. For example, our advertising-enabled version of Passport is now up and running commercially with Cox. Overall, I believe we'll have an advertising footprint of over 50 million homes by year-end.

When considering this meaningful footprint, which will include these 2-way capable, video-enabled platforms combined with additional improvement in measurement and RFI capabilities, I continue to believe that this business will more than double this year and, of course, be positioned to demonstrate even greater growth next year.

As you can see, the entirety of our business today remains quite strong. We believe the future is coming together nicely.

With that, I'll turn it back over to Patti for any questions you may have. Patty?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line up Rob Stone with Cowen & Company.

Robert Stone - Cowen and Company, LLC

Lots of good stuff going on. Just a little more detail on advertising, if you would, please? Can you give us a sense of how that's breaking down between the service provider and CE segments?

James Budge

Sure. It's probably no different than the past, which is about 75% to 80% on the service provider side and the remainder on the CE side. I think the difference will come that over time, with these connected devices through Sony, Samsung and others, as they get into the marketplace, we're going to be trending more towards 50-50 over time as opposed to where we are today.

Robert Stone - Cowen and Company, LLC

Okay. And in the past, you've talked a little bit about CPM trends and you had comments in a press release about increased impressions. I wonder if you could give us any color on sort of where the CPMs are on average and sell-through?

James Budge

Sure. On the conventional side, which is where all the growth in the future comes from, that's grown tremendously over the last few years. I think when we inherited Gemstar, there weren't really any conventional campaigns to speak of. And now we're regularly well up over $5 per CPM. In some cases, we've been up over $10. Now just temper that a little bit, because there's still a majority of the ads that run through our systems are on the entertainment side and the banner as it comes to entertainment. Those are still around $1, sub $1 CPMs. But where the good growth is in the future, the trends are going in the right direction on the CPMs.

Robert Stone - Cowen and Company, LLC

Any lift in the CPMs by interactivity, even on the program promotion side?

James Budge

Sure. that's [indiscernible]

Robert Stone - Cowen and Company, LLC

So you talked about sort of $0.60, $0.70 in the past. Is that looking up a little bit too?

Alfred Amoroso

Yes. We're probably around $0.50 or less early on.

James Budge

Yes.

Robert Stone - Cowen and Company, LLC

And then just a housekeeping question, James. It seems like the non-GAAP tax rate is running a little bit lower. Can you say what you're thinking embedded in your cash EPS guidance?

James Budge

Yes, it probably won't vary too much. But depending on the quarter, it will be somewhere between 8% and 9%.

Operator

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

Michael Olson - Piper Jaffray Companies

Just a couple of quick ones here. So Fred, you talked about 10 million subs that will be kind of shots on goal for TotalGuide for service provider by the end of the year. Do you kind of believe that the technology will take 12 to 24 months to roll out to implementation for those subs from those deals? Or do you think it will take longer or shorter than that?

Alfred Amoroso

The cable industry service providers don't move that fast, and they move through the varying regions. Remember that they've all grown through acquisition, and they don't have the exact same infrastructure throughout all of their offices or their locations. So the fact that we're doing a field trial is we'll wind up having to do multiple field trials in each of the different regions. So I think you're 12- to 24-month estimate is a good one in terms of how long it will take for them to engage and rollout.

Michael Olson - Piper Jaffray Companies

Okay, that make sense. And then just one other quick one. Can you, James, recap what your expectations are for ACP revenue this year versus last year and just maybe high-level thoughts on what kind of headwind decline in ACP will be in 2012?

James Budge

Sure. Last year, as a reminder, we did about $85 million in the CE side of our business. This year, we suggest it should generally be in the $50 million to $60 million range. And it will probably have a pretty meaningful drop off again in 2012. If not gravitating close to 0, then getting all the way to 0. Certainly, to 0 by 2013.

Operator

And our next question comes from the line of John Vinh with Collins Stewart.

John Vinh - Collins Stewart LLC

Just a follow-up on the TotalGuide service provider opportunity. You guys talked about that you have one of the largest guide footprints out there at 18 million subs. Can you give us a sense of who's second and how many subs do they have currently?

Alfred Amoroso

Well, so because of the lower large numbers, obviously, second is going to be Comcast or any of the tier 1 manufacturers who, for the most part that have actually have their own. So if you want to say Comcast predominantly has i-Guide, you could label that as an i-Guide distribution. But as we split off from Comcast, the joint venture with GuideWorks, they've maintained control over their version of i-Guide separately from ours. And so we just think it's appropriate for us not to include that in our footprint. But outside of ours, it's really the service -- the large service providers who have implemented some of their own. For example, ODM and Time Warner. Comcast, I mentioned. And I guess, Treo was just slightly being rolled out by Cox to the best we know. A lot of them actually use -- and a matter of fact, all of them use Passport and i-Guide as a mix in some of their locations.

John Vinh - Collins Stewart LLC

Got it. And then a follow-up to that is, many of your customers have kind of a mixed guide environment. The 10 million subs that you guys targeting, does it make sense that over the next 12 to 24 months, that you think you'll get most of the subs? Or does it make more sense that they'll likely target those subscribers that have i-Guide in places likely as a starting point? Or how do we think about kind of what your ultimate attach rate on that 10 million subs is over the next 24 months or so?

Alfred Amoroso

Well, a little bit will beginning part will naturally stem from i-Guide infrastructure that's already deployed, because it makes it very easy to implement it over their existing infrastructure. So I do think it will be primarily through existing i-Guide customers. But overall, once we -- our expectation is as we've seen customers use TotalGuide in different dimensions, tablets or whatever, they like it, and I expect that the uptake would be pretty strong once it gets -- starts to get deployed.

John Vinh - Collins Stewart LLC

Okay. And then last question for me on the Panasonic win, can you just comment on what you'd expect the scope of that in terms of geographies that also include Blu-Ray as well as TVs?

Alfred Amoroso

So most of these also include Blu-ray. There are few manufacturers that still operate independently, where their Blu-ray team operates separately from their flat panel TVs teams. More and more of them are coming together and using the same user interface. Panasonic, I think, is one of those that are going to use the same user interface, and I'm pretty sure, James, correct me, that is both North America and EMEA.

James Budge

Yes, that's right.

Operator

And our next question comes from the line of Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs Group Inc.

So I was wondering if you could first talk about the recently announced deal with Charter. What percentage of the 4 million subs are on i-Guide versus Passport? And why are you confident that they'll roll out TotalGuide versus any sort of competitors' solution? And would we expect to see a financial impact from that deal, I guess, late in 2012?

Alfred Amoroso

So all good questions. First, let me answer your last one. I don't think you're going to see -- okay, so you're not going to see anything in 2011. By the end of 2012, I do think you'll see some early deployment. My expectation is we'll be in field trials early next year. And probably, by mid next year, after field trials, I would expect them to start deploying on regional basis. So maybe the way we account for our revenue in Q3s call 2012, we'll start to see some benefit to Charter. As to your comment about i-Guide or Passport, they clearly have more i-Guide implementations than Passport. I don't know what the exact count is. So I think we'll be able to roll out easily and quickly on that basis. And then as to why do we think that they'll be successful or will be successful rolling it out compared to some other alternatives they have, realize that we don't need any additional hardware to roll out. It's not another box that has to be deployed. It allows their brand to be the Charter brand, along with some of the things that we're doing with the Rovi entertainment service. While not part of the deal yet, it enables them to establish a separate, over-the-top experience that'll extend and give them value for the 27,000 catalogs, for example -- I'm sorry, 27,000 titles that we have available in the Rovi entertainment store. So I just think, overtime, there's a lot more capability and value in addition to the user experience in integration of all our metadata that is a pretty rich experience.

James Budge

Yes. Let me just add a couple of numbers for you there, Ingrid. Charter has about 4.3 million total subscribing customers, up 3.4 million of those are digital and about 3 million out of the 3.4 million are seeing either i-Guide or Passport. And as Fred mentioned, the majority of that would be the i-Guide piece.

Ingrid Chung - Goldman Sachs Group Inc.

Okay, great. And just a quick follow-up if I could. I think, in the past, you've talked about long-term DivX growth of 10% to 20%. I was wondering what you saw in 2Q and whether you still expect that long-term growth to be 10% to 20%?

James Budge

We saw that same growth in Q2. And yes, we expect that to continue to be a 10% to 20% grower for us in the future.

Operator

And our next question comes from the line of Ed Maguire with CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc.

Could you just talk about the accounts receivable, DSOs, what was behind the quarter-over-quarter increase this quarter?

James Budge

Well, I did say there were several deals that got done in the last month or last couple of weeks of the quarter. I'm not sure it's anything magical to the second quarter. We usually get a lot of our deals done in the last month or so.

Edward Maguire - Credit Agricole Securities (USA) Inc.

Okay, great. And I wanted to ask more broadly on the CE TotalGuide enabled with Cloud Services deals what your expectation of timing of revenue contribution and uptake of Cloud Services would be for some of your initial deals there?

Alfred Amoroso

So the timing is actually no different than embedded. We would get paid when the device gets rolled out and sold.

James Budge

And I'd add that as far as far as timing, I think we're seeing some of the benefit already this year with some of the Samsung devices that are out there. We're seeing more devices with our capability in it, and some of that is flowing through our revenue streams already.

Edward Maguire - Credit Agricole Securities (USA) Inc.

And lastly, you did announce a big win in Latin America. Could you discuss a bit more color on your expectations and the resources you're focused on in growing that region?

Alfred Amoroso

Well, we do have a leader that has responsibility for all of Latin America and actually has been doing a great job selling our products, our solutions down there where I think, over the last year or so, you've heard us highlight different success stories where we're replacing Microsoft, for example, at Megacable in Mexico, or some of the other ones. As we're extending into the IP licensing, this one came about through one of the international -- I'm sorry, the domestic service providers that also has Latin American presence. And so it was a more straightforward opportunity to extend that Latin -- the relationship we have for IP into the Latin American market. But once we establish that as a baseline, as a footprint, we think it sets the pace for moving beyond there into the rest of the market.

Operator

And our next question comes from the line of Corey Barrett with Pacific Crest Securities.

Corey Barrett

First question, how much did the Samsung i-Guide shipments benefit this quarter on the CE side?

James Budge

Yes. So i-Guide is a service provider offering. Samsung is on the CE side of our business.

Alfred Amoroso

TotalGuide.

James Budge

So you're thinking more TotalGuide or guide-related revenues. And Samsung, as a general customer, contributes it’s -- it's probably our largest customer, tied for one of our largest customers on the CE side of our business. So let's leave it at it contributed a healthy amount to our revenues in the second quarter.

Corey Barrett

Okay, perfect. And then looking at sort of the elevated MSO investments in sort of differentiated technologies and services, are you continuing to see that? Or has there been a -- have they been taking sort their foot off the gas a bit given the weak TV demand and macro environment?

Alfred Amoroso

I'm not sure I understand your question. Are you saying the cable operators, the MSOs, are investing more? Or the CE guys are investing more?

Corey Barrett

The cable operators.

Alfred Amoroso

So the cable operators are recognizing the changes that are going on in the marketplace and how over-the-top is creating alternatives for the consumers. And so I think from where we were just a year and half or even 2 years ago, where their first reaction was, for example, "No, Netflix is the enemy and the competitor, we're not going to enable them in our environment," I think they recognize that the consumers want the ability to have over-the-top in addition to broadcast, and that's a primary focus of what we're enabling with the Rovi entertainment store as part of TotalGuide, and actually can extend that into their legacy infrastructure without any truck rollouts of new boxes.

Corey Barrett

And so are you seeing continued strength there driving your business?

Alfred Amoroso

Yes.

Corey Barrett

Okay, perfect. And then your cost controls have been impressive, but when I look ahead, you can't cut indefinitely without stunting growth. Have you looked at your cost structure and investments in growth going forward? And how much of the recent cost controls have come from synergies with the Sonic?

James Budge

Yes. So good, you hit the last point, which was the imported point. The reason we're down year-over-year is because of the synergies with Sonic, which you can certainly expect, any combination of businesses, you'd have some synergies out of that. And we believe we're pretty decent at that. So that's the sole reason why our costs are down on a year-over-year basis, because we've taken redundancies out of the equation.

Operator

And our next question comes from the line of Ben Swinburne with Morgan Stanley.

Ryan Fiftal - Morgan Stanley

This is Ryan Fiftal for Ben Swinburne. Wondering if you could provide an update on how you see the IPG markets evolving in Europe. First, wondering how many of the 18 million product subs are in Europe, or if they're mostly concentrated in the U.S.? And second, just -- I'm assuming your penetration in Europe is lower than the U.S., so obviously, a lot of opportunity there. So any color on your recent conversations with those operators and whether you see any increased willingness to pay for a guide upgrade so that they can differentiate their products?

Alfred Amoroso

So a good question. The 18 million is all in the U.S., all right? We actually do not have, on the service provider side, guide products in Europe today. That is an area that we look at very closely. It's a large opportunity obviously for us because of the size. We're taking advantage of the growth in Europe through our IP licensing. We just have not actually come out with specific plans for growth in European product yet.

James Budge

Yes, Ryan, if I can just add just to make sure you're clear on this. So the 18 million we referenced, that's people that actually see a guide or a product that we've produced, whether it's Passport or i-Guide. Those are all in the U.S. On a global basis, beyond the 18 million, we have 133 million subscribing households on a global basis that see a guide where the underlying IP is getting paid to us in that home environment, including 33 million homes in Europe that cover that. So yes, we have less penetration on the IP side in other regions beyond the U.S., but there's a huge opportunity when it comes to expanding our product set, which is only 18 million at this point.

Operator

[Operator Instructions] And our next question comes from the line of Jim Goss with Barrington Research.

James Goss - Barrington Research Associates, Inc.

Just to clarify, as you're looking at the domestic service provider landscape, are you basically drawing a line at Charter, with Comcast, Time Warner Cable, Cox doing their own thing? And Charter and below is probably basically the territory that you probably have the dominant potential share in?

Alfred Amoroso

No. Actually, in the prepared remarks, what I said was that we do think that at the tier 2 level, or Charter and below, it is a -- I don't want to say an easier opportunity because these are never easy where actually, customers are demanding all over, but it's a more straightforward opportunity as many of these entities do not have the breadth of resource to go and invest in their own guides on their own. And obviously, the top 4 guys Cablevision, Charter, Comcast and others, they do have that capability. Now what we're doing with this group is we're actually offering, for example, xD, which can interface with their existing products. We can also, as Comcast has done, offer them our data. Comcast has licensed our data across all their different environments, their web modal and set-top box environments. So we have solutions for them. It just might not be the breadth of a complete TotalGuide Solution yet. We do think that opportunity will exist, but we'll first start with that Charter and below group.

James Goss - Barrington Research Associates, Inc.

All right, that clarifies it. And in the international markets, is your metadata as robust as it is domestically, so that's not an issue?

Alfred Amoroso

It is very robust. I'll go down the list briefly. Certainly in North America, we are very good in all of Western Europe. And actually, as we're gaining traction in Eastern European opportunities. We're right now expanding into Eastern European data as well, for example, TV listings or things like that. And we're very strong in Japan and Korea and Australia. Some places, for example, China and India, we're not as strong.

James Goss - Barrington Research Associates, Inc.

Okay. And lastly, are you able to share at this point any metrics on what you're now planning Rovi entertainment store, in terms of like the usage or potential trend or trajectory of those trends?

James Budge

Not yet. I think the key metric was the one we shared in the prepared remarks, which is that we're on, we believe, a pretty good pace with the number of devices that it's on, with up to and over 50 million devices at this point.

Alfred Amoroso

I think probably at the next Analyst Day where we have more time with you will be a great time to go through some of the metrics and how roll out numbers of transactions and usage will build to a model. That would be the time to do it.

James Goss - Barrington Research Associates, Inc.

Okay, great. Are you doing that again at the CES?

James Budge

Most likely.

Alfred Amoroso

Without promising it now, most likely.

Operator

[Operator Instructions] And our next question comes from the line of Jason Cheu with ABR Investment Strategy.

Jason Cheu

I just wanted to -- I don't want to go into too much granularity, but Sony recently cut their TV forecast, basically the flat for their fiscal year. And I was wondering if you guys could just give us a little color on impacts to sort of big TotalGuide customers and sort of how that impact your guidance? Because I know you guys already said sort of the $10 million for the second half of the year in terms of recent [ph] expectations for CE, and you also have guarantees from a number of your OEMs. But if you can give us any color, that would be helpful.

James Budge

Yes, I think I just reiterated some comments I made in the prepared remarks, which is that we, frankly several months ago, anticipated some of the slowdown in the second half of the year. And as a result, we didn't take up our CE business for the year, and we're excited about what we've been able to do for the first half. We think there's good growth in the second half but as a result of Sony and those kind of trends that you commented on, we've only taken our CE expectations up to mid-single digits, up and above the flattish expectations we had earlier in the year. So I'd say we anticipated some of that slowdown coming towards the back half.

Operator

And there are no further questions in the queue at this time. I will like to turn the conference back over to management for any closing remarks.

Alfred Amoroso

Well, thank you, Patty, and thank you all for joining us today on our call. As I said in the remarks, I'm very pleased with the new product licensees that we have out there and the progress that we're making. I think we are ahead of plan, certainly on the service provider side and clearly on the CE side. We see more and more of the major manufacturers opting for TotalGuide, so we're pretty encouraged. Thank you all for joining us. We look forward to talking with you next quarter.

Operator

Ladies and gentlemen, this concludes the Rovi's Q2 Earnings Release Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or the toll-free number of 1 (800) 406-7325 and enter the access code of 4456313. ACT would like to thank you for your participation, and you may now disconnect.

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