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Executives

Chris Keller – Vice President, Finance and Investor Relations

Tom Carson – President and CEO

James Budge – Chief Financial Officer

Analysts

Ralph Schackart – William Blair

Sterling Auty – JP Morgan

Rob Stone – Cowen and Company

John Vinh – Collins Stewart

Jeff Rath – Canaccord Genuity

Ed Maguire – CLSA

Ben Swinburne – Morgan Stanley

John Bright – Avondale Partners

Todd Mitchell – Brean Murray

Rovi Corporation (ROVI) Q4 2011 Earnings Call February 16, 2012 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Rovi Corporation Fourth Quarter Earnings Release Conference Call. During today’s presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for question. (Operator Instructions)

Today’s conference is being recorded, February 16, 2012. I would now like to turn the call over Chris Keller, Vice President of Finance and Investor Relations. Please go ahead.

Chris Keller

Welcome ladies and gentlemen to Rovi Corporation’s fourth quarter 2011 earnings conference call. I’m Chris Keller, and I’m joined today by Tom Carson, our President and CEO; and James Budge, our CFO.

Before we discuss our results, which were released earlier today, I would like to start with some housekeeping items. First, I would like to remind you that all statements made during our conference calls 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 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 September 30, 2011 and other filings with the SEC that are filed from time to time.

Second, our results 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 examples of such as items include 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. Adjusted pro forma combined company information assumes the Sonic Solutions acquisition and the Roxio consumer software disposition were both effective on January 1, 2010.

Adjusted pro forma reconciliations for historical results, including Sonic Solutions and excluding the Roxio consumer software business are in our press release. We have presented in our discussions, 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 a final piece of housekeeping, the webcast of this conference call will be available on our Investor Relations webpage until our next quarterly earnings call.

I would now like to turn the call over to Tom.

Tom Carson

Thank you, Chris. And thanks everyone for joining us today for our quarterly conference call. As you may have seen in today’s earnings press release, we grew 2011 adjusted pro forma revenue of 12% to $716 million. After taking into account the recent sales of Roxio software business and as resulting and reclassification into discontinued operations. These revenues are at the high-end of the updated estimates we provided on January 12.

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 and advertising growth. When combined with operating efficiencies, this resulted in a 30% year-over-year increase in adjusted pro forma EPS to $2.40. This too after taking into account the reclassification of the Roxio software business to discontinued operations was at the high end of our recently updated 2011 guidance.

I’m pleased with our financial results for the year, as well as the significant progress we made in 2011 securing customer wins for our new solutions across our verticals. I’ll discuss our progress in more detail shortly, but first James will review some of the financial metrics. James?

James Budge

Thank you, Tom. As Tom mentioned, we posted excellent double-digit percentage increases in revenue and earnings in 2011 which were consistent with the increases we anticipated and provided at our Investor Day in January just over a month ago.

Specific to Q4 we grew adjusted pro forma revenue to $177.2 million. Revenue on our service provider vertical, which is primarily comprised of Guide products and patent licensed to cable satellite and telecom companies, grew 11% year-over-year to $78.1 million in the fourth quarter. This growth was driven by the continued conversion of analog subscribers to digital, the addition of new international licensees and growth in our service provider product revenues.

It's worth noting that our service provider product revenues rose 32% versus the same quarter last year, marking the sixth consecutive quarter of 20% plus growth -- product growth year-on-year. The strength in service provider products was achieved by improved pricing on contract renewals, new applications and advertising.

Subscribers worldwide receiving a license to Rovi-provided set-top box based Guide rose to $137 million at the end of Q4 2011, up from $128 million in Q4 2010. Excluding prepaid licensees, primarily Comcast and Dish, total Rovi licensed subscribers are now approximately 95 million versus 88 million in the year ago period. Subscribers receiving a Rovi-provided set-top box based Guide rose 14% from a year ago to over 18 million at the end of 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 $80.4 million in Q4 2011, up 12% from $71.8 million in Q4 2010. As we continued to benefit from growth in shipments of IPG-enabled devices, as well as strong DivX growth. However, consistent with the trends from prior quarters, growth was partially offset by declines in our analog product line such as ACP.

With the disposition of the Roxio consumer software business, our other vertical now primarily includes the Rovi Entertainment Store and data licensing and entertainment technology offering.

Adjusted pro forma revenue for our other vertical was $18.7 million in Q4 2011, down 23% from $24.3 million in the comparable period last year. The drop off is attributable to the decline in demand for analog ACP for entertainment technology which more than offset growth in our Rovi Entertainment Store and data licensing offering.

While we continue to have high expectations and believe the end markets are significant for both the Rovi Entertainment Store and data licensing. We anticipate the growth from these businesses will largely be offset by the continued decline in our analog ACP for entertainment offerings during fiscal 2012.

Turning to adjusted pro forma profit measures. Cost of goods sold totaled $27.5 million or 16% of revenue. SG&A totaled $33.3 million or 19% of revenue and R&D totaled $35 million or 20% of revenue. Our high operating and earnings margins were due primarily to operating efficiencies, including synergies from the Sonic Solutions transaction, which we now – which have now risen to provide annual savings of over $50 million versus our initial expectation of around $30 million.

SG&A expenses declined 25% year-over-year and we continue to realize synergies in SG&A and other operating costs.

Turning to our balance sheet. The principal amount of debt at quarter end was $1 billion. We continue to opportunistically retire debt and repurchase our stock. During the quarter we paid $75.2 million and retire $75.7 million in par value of our 2040 convertible notes.

In addition, we purchased 835,000 shares of common stock, bringing the total shares repurchased to 6.8 million for 2011. We currently have $375 million and $210.1 million remaining on our stock and debt repurchase authorization respectively.

Cash and investment balances at the end of year were $486 million. In regards to our full year 2012 guidance we still see things as we described last month at our Investor Day. After taking into account the sale of the Roxio consumer business, we maintaining our adjusted pro forma revenue estimates of between $755 million and $785 million for 2012 and continue to expect 2012 adjusted pro forma EPS of between $2.35 and $2.65.

And finally a reminder on our seasonal revenue trends as we mentioned in our Investor Day, just as a years passed we expect stronger revenues in the second with approximately 53% to 54% of our revenues expected in the second half.

With that said, I would also like to highlight the Q1 2011 benefited from significant shipments of analog product relative to the remainder of the year. Due to the significant declines in analog revenues we would anticipate more of the first half 2012 revenues would come in Q2 versus Q1.

And now, I’d like to turn the call back over to Tom. Tom?

Tom Carson

Thank you, James. At this point I will review some recent business highlights including reiterating some key points we discussed at our Investor Day. In CE we performed very well despite all the market headwinds and our own declining analog product.

Patent and digital products continued to benefit from the digital TV upgrade cycle, device sales are fueled by price reduction and consumer desire or increase functionality most notably connectivity all contributed to our CE growth.

As strategy to take advantage of this connected trend over the long-term is as we have stated in the past for our global Guide solutions and Rovi Cloud Services, which include our advertising, metadata and search and recommendation services as well as our DivX Plus Streaming and Rovi Entertainment Store offering. These offerings will address the consumers’ desire to search, discover, acquire and playback content including with advanced streaming features from both broadcast and on-demand sources.

In terms of wins, we are pleased to have signed a multi-year license agreement with Toshiba for Rovi guidance solutions in Japan. Toshiba is the number two DTV brand in Japan and their addition brings our DTV market coverage in Japan to almost 100%. This agreement is also an important milestone as Toshiba joined Panasonic, Sharp, Sony and Samsung as license source of our guidance products and technologies in all of our major territories.

Additionally, we are pleased to have recently announced that we expanded our advertising relationship with Samsung to include inventory on the main screen of the connected digital television sets.

During the recent consumer electronic show we showcase our TotalGuide solution for CE and demonstrated how our customers can utilize its foundational capabilities to differentiate their products in the marketplace. To this end we are told by Toshiba and Panasonic that they are on track to begin shipping products powered by our TotalGuide offering later this year.

One of the more exciting consumer solutions from Rovi at the CES show was Rovi Digital Copy, the legalized DVD copy solution we announced in conjunction with Samsung and Warner Brothers' Flixster application. This solution enables a customer to put a legally purchased DVD into a connected Samsung Blu-ray player and as we authenticate it’s eligibility receive an offer to deposit a legal digital copy of the applicable film or television content in the Rovi powered digital locker in the cloud. This solution utilizes several Rovi capabilities including our media recognition technology, our metadata and Rovi Entertainment Store platform.

We now have multiple studios involve and expect to expand distribution with additional CE manufacturers. Rovi Digital Copy potentially opens up a global revenue stream for us. We’ll be paid by CE manufacturers on a per device model for our Rovi Digital Copy solution and we have the opportunity for our transactional revenue stream when the Rovi Entertainment Store power the digital locker service that consumer selects.

On the DivX front, demand continues to be strong. Adjusted pro forma revenue related to our DivX offering grew 52%, overall shipment of our devices, license for our DivX technology grew about 40% year-over-year and there are now over 600 million devices enabled by our DivX technology further demonstrating the continuing demand for our offering.

Last quarter we announced DivX Plus Streaming, a secure adaptive streaming solution which detects the user bandwidth and CPU capacity and real time and adjust the quality of the video stream accordingly. Unlike other streaming technologies on the market today, DivX Plus Streaming offers high quality video as well as enhanced user experience that consumers have come to expect from the physical media.

This is a significant improvement on the all too common consumer streaming video experience of long wait for digital deliver movie start plus and perfect HD quality and clumsy fast forward and rewind. DivX Plus Streaming solves this problem with its support of N80 T HD, fast video start, trick play features like smooth fast forward and rewind and the ability to support subtitles and multiple audio tracks.

It also provide content provider such as the Hollywood Studio the opportunity to offer advanced features such s directors commentary that could capture a premium price. DivX Plus Streaming has now been improved by almost every major Hollywood Studio and we anticipate having it implement it in our Rovi Entertainment Store by mid-year with device rollout following there after.

This technology when implemented in conjunction with our Rovi Entertainment Store they also provide the ability to resume playback across devices, enabling consumers to pause the movie in the leaving room and finishing watching at the local coffee shop on the tablet or laptop.

We believe these advanced features when demonstrated in the Rovi Entertainment Store that drive even greater interest in this technology. DivX Plus Streaming will be marketed as an enhanced profile of our DivX Certification Licensing Program.

As such we expect to generate incremental per devices fees from existing license fees in the [4AB] market. We also look to obtain additional revenue by offering the streaming solution in underpenetrated market segment such as mobile and in additional geographic markets.

Our service provide vertical fundamentals remain positive, while basic video cable subscriber growth is stagnant in North America, the conversion of analog to digital subscribers continues shift your any for additional set-box based guides.

Internationally we benefited from both lower relative digital penetration and our growing penetration for new license fees. Adjusted pro forma revenues also benefited from improved pricing when renew agreements. Additionally, we benefited from the up-sell incremental applications to our customers, including remote DVR, multi-room DVR, switch digital video support, EBIF User Agent as well as from the professional services associated with implementing new functionality. These new features and capabilities allowed us to renew 23 MSO agreements in Q4 with a resulting 20% plus average rate increase, based upon the value we’ve added to our offering.

While I got a passport deployment drive growth today, these solutions can also provide the platform on which to transition customers to our TotalGuide solution for service providers. At our Investor Day at CES, I discussed two of our early accounts for TotalGuide fee and TotalGuide for set-top boxes, Armstrong Communication, and BendBroadband.

I would like to briefly update everyone on our progress with these two accounts. Armstrong finally field trails for TotalGuide fee and successfully deployed remote report to our sites. Armstrong is now testing our latest TotalGuide functionality Remote Tune which will ultimately add the capability for subscribers to control not only the DVR but also tune channels from their smartphone or tablet in lieu of a remote.

Bend successfully installed and trailed our EBIF User Agent as well as our remote DVR application. Bend is now testing our integrated search feature upgrade which is at the heart of the TotalGuide or set-top box offering. For the first time without the truck rollout of a new set-top box and MSO provider it subscriber a visually rick integrated search experience displaying an MSO's entire VOG catalog enhanced with rich media such as images and other enhancement.

We expect both of these operators to deploy TotalGuide no later than early in the second half of 2012. These are small operators, so I’d reiterate point we made at our Investor Day which is that while we expect to see several customer success stories in 2012 it is still early days and we do not expect meaningful TotalGuide related revenue until 2013.

They are smaller size notwithstanding both Bend and Armstrong are widely respective within industry for being on the leading edge of technology trend and we know many MSOs who are simply awaiting the successful and timely implementation of TotalGuide with these two operators before making a decision about their own rollout.

In this regard, I would like to note that Mediacom recently renewed its agreement with us and as past of that renewal agree to deploy our TotalGuide for set-top box solution. Mediacom will join the growing list of service providers include Cogeco, Suddenlink, Buckeye and Blue Ridge Communications in trials and testing the underlying enablers that include the EBIT user agent and remote DVR application this year. We anticipate trails and testing will continue throughout 2012 and TotalGuide revenues from these operators will begin in 2013.

It is also important to bear in mind that while operators are keen to migrate for the next-generation guide there are still many low-end set-top boxes which will likely remain deployed with Rovi’s legacy Guide for years to come. While our TotalGuide solution will target some of these low-end devices others won’t be able to handle the advance capabilities.

To avoid the untenable cost to replace all of these boxes with new hardware in the short to mid-term we anticipate service providers opting for our low cost solution. We expect this will typically mean investing to our incremental functionality through app such as once I mentioned earlier, namely remote DVR recording, multi-room DVR, switch digital video support, EBIF User Agent and others.

When added on top of our legacy Guides, service providers gain additional mileage out of their existing investment in these low-end boxes. This has the potential to resolve in a widespread deployment of multiple incremental apps across the vast majority of these older set-top boxes, which equates to a steady incremental revenue source during the transition period next-generation Guide such as TotalGuide.

I’m confident that as we demonstrate success with our early adopting operators and through various field trails MSO will increasingly view our solution as a long-term answer to retain customers, grow revenue, control branding and minimize cost and disruption while achieving a rapid rollout.

I’m pleased with the progress we’ve made with service providers, addition of Mediacom mean we are the 10 largest MSOs in North America are engaged with TotalGuide and I expect additional wins with sizable customers for our next-generation Guide platform in the near future.

Moving on to our data business, we renewed several agreements in Q4 including with both Netflix and Lovefilm to supply data for use with online and over-the-top video products, as well as with the number of our traditional online retail partners FYE and HMV Canada.

We continued to make inroads into the world of connective products with a number of deals with app providers around both music and video services and look forward to building on this success with our search and recommendation technology which received a lot of interest at CES.

We expanded our relationships within the key broadcast and streaming radio segment and signed a new deal with Triton Digital to power a rich web discovery experience around the streaming radio station they power online and on mobile devices for such companies as Cox, CBS, and AOL.

We recognize the continuing challenge physical media companies face and a very pleased with the opportunity we can provide them through our rich media dataset to reach their transition to the digital space.

Turning to the Rovi Entertainment Store, I’m pleased with the continued positive developments on this front and the exciting opportunity ahead. As I mentioned in discussion in our CE vertical we are partnering with Warner Brothers and Samsung to provide consumers the depth of the digital capability to take their personal DVD library and added to their UV locker. This is a service we believe will be positively embrace by other Hollywood studios and CE device manufacturers as well as retailers whose white-label stores we power.

Speaking of retail partners, I’m happy to announce we will be powering a movie service for Dixons in the U.K. Dixons is the largest consumer electronic retailer in the United Kingdom and one of the largest consumer electronic retailers in Europe. Operating white-label store fronts for large consumer electronic retails is a key driver for the Rovi Entertainment Store success.

Consumer electronic retailers can offer gift cards, while other promotional incentives with the sale of connected devices which include Rovi Entertainment Store power branded front which can meaningfully increase store front activations. We believe retail with the size and marketing cloud of Dixons can not only deliver significant device distribution but also achieve much higher activation success in many other similar service offering.

In terms device distribution is worth pointing out that we only began powering the Flixster Store online in Q3 and are now supporting Flixster application in a number of operating environment including PC, Mac, IOS, Android, Samsung and Panasonic.

We also continue to add device functionality for our other existing retailers launching the Cineplex store on Samsung Blu-ray players and television in Canada and rolling Best Buy’s CinemaNow service out on the PS3 and XBOX platforms in the USA.

The latter is of particular note as we are experiencing higher active rate – activation rate on gain consoles than we have historically experienced on other connected devices. The result of this activity is that we are now enabling approximately 63 million store fronts on connected devices.

Speaking of devices we are in recognized and EBIT video distribution solution to make its tablet competitive, given the strategic importance to RIM of such a solution we are very pleased they selected the Rovi Entertainment Store, we will initially provide the store front a RIM play book devices in the USA with launches for Canada and U.K.

In regards to the Rovi Entertainment Store platform as has been mentioned on prior calls we acquired business that needed an investment in fortifying its offering and bringing it up to the standard required to scale beyond its bank or customer base.

We believe the success we are discussing today indicates our investment, our investment in the Rovi Entertainment Store platform is paying off. However, our ability to meet the demand for this platform and our existing customers expectations remain dependent on our continuing to increase the platforms functionality and bringing the service up to carrier class performance and scalability.

Overall, while the Rovi Entertainment Store is a nice standalone offering, more importantly, it is also part of our total customer solution fitting in now with our data and TotalGuide offering. As mentioned last quarter, we are actively discussion with many of our SP customers about providing them a private label VOD solution leveraging the Rovi Entertainment Store platform to enable our cable customers to access TV and broad 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. This offering will first come to market as part of TotalGuide XD.

TotalGuide XD will provide the SP customer a streaming video service which provides a consumer access to all the network they access as part of their cable subscription, as well as the Rovi Entertainment Store power VOD solution.

As for advertising, we achieved significant growth in both footprint and revenue in Q4 and anticipate this trend continuing throughout 2012. Our key advertising performance indicators continue to show sharp increases across the Board, including new advertiser growth and new campaign launches. We also continue to expand our advertising footprint within both Guide and on connected devices.

The Rovi Guide footprint has grown significantly year-over-year with the most notable launches in 2011 occurring in several of Cox Communication key markets. Sales of connected television that increase internet connectivity rate are also driving healthy distribution growth for our advertising platform.

More connectible units from our existing CE partners were shift and activated at higher rate thanks to improve content choices, consumer promotion and in-store education. We have now began the on-boarding process with Panasonic and Toshiba and as I mentioned earlier, we expanded this growth of our Samsung advertising partnership to allow the Rovi ad sales network to sale ads within application as well as to serve all Samsung house head on their behave.

As such, our advertising footprint continues to grow. In 2011, we targeted an advertising footprint of 50 million homes. We are now targeting 70 million homes by the end of 2012.

Distribution isn't the only foundation we are building to sustain continued accelerated growth moving forward, enhance functionality and measurement are also key elements for our future growth and we make great strides in these areas in 2011.

We continue to put to ensure that we deliver advanced functionality to our advertisers that allow them to engage with their customers on a deeper level than their traditional 30 second television ad buys. We provide advertisers advance functionality such as geographic targeting across our entire footprint, 40 multiple avenues to provide request for information and campaigns that include both video within a micro site and pre-roll video prior to an advertisers interactive experience.

It also underscores one of Rovi’s core value proportion, our extensive creative capability. Our creative team has build 1000s of advertisers campaign and in their active experiences across our entire distribution footprint.

The combination of detail measurement, additional scale and advance functionality continue to drive advertiser wins for us in nearly every category. We recently finalized the integration needed to enable commerce transactions across entire footprint and we can now execute contextual commerce campaign, it is not only toll-free number website but with QR or quick response codes, those printed square black and white with color boxes that look something like barcode.

Now television viewers can point their smartphone at the QR code on the television screen and they are linked to a rich advertising or commerce opportunity on their phone. In Q4 we provide a contextual commerce QR campaigns for both the Biggest Loser Cookbook and Showtime's Dexter campaign. Our commerce partner tells us that we had a 9% conversion rate which means at 9% of the people who visited the store front made a purchase for Dexter. They told us that this is one of the highest conversion rate out of any campaign they have ever done. We expect our commerce campaign will expand in further in Q1 when we launch remote control commerce, which is consumers making purchases using their television remote.

From a revenue standpoint, Q4 advertising again grew significantly on a global basis, propelled in part by strong performance from conventional advertisers. Due to increase demand our inventory sell-through increased sharply in Q4 allowing us to increase our rates based on demonstrated value.

Eventual categories that showed continued success included financial, automotive, pharmaceutical, consumer packaged goods and music. Q4 revenues came from both the new advertisers and a high percentage of return customers. Some notable advertisers domestically included, Liberty Mutual, Quicken Loans, Bank of Montreal, Ford, Lincoln, Abreva, Lantus Lovasa, Axe Body Spray, Purtoli, Cummins, Regu and the Universal music group.

Internationally, notable advertisers included, Lego, Mini, Redbull, Honda, British Telecom, and Ladbrokes.

I believe the advertising business is a tremendous opportunity for us and I anticipate we'll demonstrate even greater, growth in this area in 2012. As you can see and as we have discussed at our Investor Day last month, despite the long forecast we dropped off in our analog products and the short term headwinds for our CE vertical, we have many reasons to be optimistic about the future, our business today remains quite strong and I believe we are well-positioned to take advantage of the opportunities ahead of us.

And with that I'll turn it back over to Alisha for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Ralph Schackart with William Blair. Please go ahead.

Tom Carson

Hey, Ralph.

James Budge

Hey, Ralph.

Ralph Schackart – William Blair

Good afternoon, fellows. A couple of questions I've got, Tom maybe to start with you can you just clarify your statement please in the prepared remarks, I think you've said something about adding a sizable customer in the near future, sort of give us some more color on that?

Tom Carson

In which area the business, Ralph?

Ralph Schackart – William Blair

I believe you had said, MSO or cable customers for TotalGuide, if I'm not mistaken.

Tom Carson

Yeah. So it maybe you cut out a time but he had mentioned MediaCom on the service provider side, so we just renewed our agreement with them. And as a part of that they agreed to adopt some of the components of TotalGuide.

Ralph Schackart – William Blair

Okay, is there a further statement beyond that – James, about a new customer?

Tom Carson

No, we've basically talked about what we've done with, Bend and Armstrong in terms of deployment, basically what we said is we have agreed now but we've had – really I think pretty tremendous success in the service provider space with the – I'm sorry TotalGuide offering. We've found very clearly that what we're offering really does resonate very strongly with the service providers and for us, it's turning out to be very good.

We also deliver the first TotalGuide code to our operators on time and as we expected, so it seems so far very good in the sort of provider space so, I'm pretty optimistic about the prospects for more customer signing on with us.

Ralph Schackart – William Blair

Great. And just to clarify that Toshiba with their Japan rollout that would be – that's a new announcement is that correct.

Tom Carson

We had an agreement already with Toshiba that we announced previously, that was expanding it to including Japan, so basically this is how a worldwide agreement with Toshiba. And basically what we're doing with Toshiba is rollout of TotalGuide in places like United States.

Ralph Schackart – William Blair

Great. One more and I'll turn it over.

Tom Carson

Can you – maybe just give us some color what was driving the growth in DivX in the quarter and sort of what's your expectation is for 2012, within that category.

James Budge

Yeah. I think DivX has actually been a nice part of the acquisition that we've got from Sonic's solutions, I mean it ends up being a business that is heavily driven by unit shipment in a lot of different product categories and the overall unit shipment categories including areas like mobile has helped us.

Ralph Schackart – William Blair

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Sterling Auty with JP Morgan. Please go ahead.

Sterling Auty – JP Morgan

Tom Carson

Hey, Sterling.

Sterling Auty – JP Morgan

Yeah. Thanks. Hi, guys.

James Budge

Hey, Sterling.

Sterling Auty – JP Morgan

Just needed to clarify, James when you look at – so we get the apples to apples the Roxio that was put into discontinued ops, what would that have contributed to revenue and EPS for the quarter?

James Budge

Yeah. It was about $18 million to $20 million in revenue for the fourth quarter and about 3 to 5 to – but it would have been a – had it been in there which is pretty consistent with what we've said at our investor day where we – mentioned it did just over $60 million for the year and about $0.10 to $0.12 for the year on the earnings side.

Sterling Auty – JP Morgan

All right. Great. And then another point of clarification I just want to make sure I heard it right, you mentioned the five tier 1 OEMs, the Sony, Samsung, et cetera. I believe you said that you're agreement do not cover all major territories, is that correct and is that for product, or pattern, or mix?

Tom Carson

It depends on the account but yeah, it does cover all the territories that we plan and it covers both products and patterns.

Sterling Auty – JP Morgan

And last question and I'll turn it over. When you look at the investment that's necessary to power the Rovi Entertainment storefront to servers to stream and et cetera. I'm sure it's already in guidance but is there a sense of how capital intensive that business might be?

James Budge

Yeah. I mean we put a bunch into it last year, and we're still only on the CapEx only increased by about $5 million over our normal run rate of about 15% to 20%. So it probably puts us now the combined business on a $20 million to $25 million a year CapEx spend, so a little bit of higher but not too much higher.

Sterling Auty – JP Morgan

All right. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Rob Stone with Cowen and Company. Please go ahead.

Tom Carson

Hey, Rob.

James Budge

Hey, Rob.

Rob Stone – Cowen and Company

Hey, guys. I'd like to drill into advertising a little bit more if I can. You mentioned sell-through was up nicely and CPMs are improving, can you quantify at all what's your sell-through is relative to inventory exiting the year?

James Budge

It's still pretty low on a conventional side, I mean we have a lot more capacity that we could bring in that we're filling with the entertainment side. And the direct response side but as you've seen in some of the charges we've put out we increased our campaigns from on the conventional side from a about two campaigns, two to three campaigns in '10, to a close of 30 campaigns in '11. So that's a good trajectory for us to fill that inventory up with a lot more higher values – higher GPM type of inventory.

One thing it has been good at particularly in Q4, is just because of the fact that footprint it's getting to hear and we're becoming more meaningful to conventional advertisers, frankly we have utilized a lot more of the inventory so it's actually helped us from a pricing perspective to –

Rob Stone – Cowen and Company

I mean – the year-over-year growth was very big so I was trying to get a sense of sort of what the Q4 exit rate was, versus how many of the 27 conventional campaigns happened in the fourth quarter, if you're able to share that.

Tom Carson

Probably at least 10 of those.

Rob Stone – Cowen and Company

With respect to the digital copy platform, so far it's just the hardware partner Samsung, is that right, and when would that be shipping?

Tom Carson

Basically it is just with the one partner, we would expect shipments in probably in the next couple of months it was demonstrated at the consumer electronics show, there is very very active interest by the number of consumer electronics manufacturers that we're talking to. So we look at that as actually a pretty nice potential for us from a business perspective because there is an opportunity for us to license the hardware manufacturer, which is one part of it but it's also potentially transactional revenue stream there too for us. So really nice opportunity for us we think.

Rob Stone – Cowen and Company

Yeah. I'd like to get one of those myself actually. So far just Warner and I think you mentioned other studios who're in the work so is it conceivable that that would have several hardware partners in broad studio coverage by holiday season this year. I'm not trying to pin you down to a forecast just to get a–

Tom Carson

Yeah. It's conceivable, sure at least certainly more than the studios that we have more than the one and more than the one we have in the hardware side.

Rob Stone – Cowen and Company

Great. Thank you.

Rob Stone – Cowen and Company

You're welcome.

Operator

Thank you. Our next question comes from the line of John Vinh with Collins Stewart. Please go ahead.

Tom Carson

Hey, John.

John Vinh – Collins Stewart

Hey, guys. Just a quick follow-up and clarification on Toshiba, the expansion of that license agreement in Japan, was that product or a patent?

Tom Carson

It actually has a capability to be both.

John Vinh – Collins Stewart

Okay. When was that deal signed in and were there any sort of meaningful catch-ups that we should – be thinking about?

Tom Carson

Yeah. It was in December and like previous quarters for that they were definitely catch-ups related to that.

John Vinh – Collins Stewart

Great. Thanks. And then my follow-up is I just have a follow-up on TotalGuide, set top box. Can you clarify what the four or six kind of MSOs that you guys have talked about? Are those deployments going to be TotalGuide and i-Guide deployments, or do you use TotalGuide on – kind of new hardware deployments?

Tom Carson

Basically the way if you – or maybe understand how configure the TotalGide for a service provider, it is a platform that fits on top of i-Guide. So, if we have an i-Guide customer out there version 1.0 which is actually completed and actually in testing is how it will work and that's just on top of the i-Guide platform.

John Vinh – Collins Stewart

I see, and then you previously have talked about some larger MSOs like Cox on TotalGuide, do you have any updates there?

Tom Carson

I'd say there's still prospects, I mean they aren't signed yet and certainly Cox, many others we talk to on a regular basis and when we have something more to say then we'll bring it to you.

James Budge

And I think just generally speaking I think the whole concept of TotalGuide for service provider resonates pretty well, it's just because of all the dynamics that are going on in the market place so, if all the things that are happening in their particular business certainly gives them, whether big or small, a focus on trying to have an overall better guidance experience.

Tom Carson

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Rath with Canaccord Genuity. Please go ahead.

Tom Carson

Hey, Jeff.

Jeff Rath – Canaccord Genuity

Hey, guys thanks. Just a couple of – I guess this is more level questions, maybe James, you can take the first one here, looking out at – 2011, do you have any approximation of how many of the connected TV sales globally Rovi was paid for, like a rough percentage?

Tom Carson

Yeah. It'd probably be somewhere in the 40% to 50% range, would make sense.

Jeff Rath – Canaccord Genuity

Okay, and then does that – is there any reason to think that that should increase the call it in '012, given some of their renewals, it sounds like some of these renewals are expanding the breadth and reach – is that something we should just hold more constant and I'm just talking the IT portion for now?

James Budge

Yeah. I think that a minimum on the IT side the expend it's a reason that over was connected TV is with it – we'd be getting paid on at least on the IT side, obviously the grander goal is to have a lot of product and now that we can stay on it as well. But certainly on the IT side, you're right.

Jeff Rath – Canaccord Genuity

Okay, and then, second follow up – just expanding on a previous question around DivX, what exposure does DivX have to non-apple's tablets as those – as that market begins to expand?

James Budge

Well, that was a big part of the deal that we did earlier in the year, with LG and Samsung, if you go back and I was leaving the first – or second quarter we announced those deals, and those deals are largely around their tablets and mobile platforms that they have so, as Tom mentioned before some of the great strength in the year for DivX was around those incremental opportunities with mobile and tablets.

Jeff Rath – Canaccord Genuity

Do you see, potentially more OEMs in that category adding DivX?

James Budge

Yeah. Definitely.

Tom Carson

I think from a market perspective, one of the certainly one of the initiatives for us and in DivX is to definitely take advantage of the opportunity in mobility for sure.

Jeff Rath – Canaccord Genuity

Got you. And then just a last one and I'll pass it on. With regards to a your general category which ex ex-Roxio, you defined as you CE category, is there anything in that category now that has characteristics of a mature or declining business the way you know some of these legacy businesses are or would you say predominantly those are all growth segments if you will?

Tom Carson

I think Jeff, you're referring to – what you – we call it the consumer software and other categories, we have Roxio in there. Roxio was the consumer software part of category, so it's not called it's not called consumer software any more it's just other. And the three components there Rovi Entertainment for which is clearly high-growth, data licensing which is nice growth, I want to say it's a – I want to say a type of growth, but good growth. And then the third part of that is the analog copy protection, so the studios which is you know definitely in decline.

Jeff Rath – Canaccord Genuity

So, I lied there. I need to try and sneak one more in. You announced over a year ago a Sony TotalGuide sort of design win and it does – we haven't really seen a lot of activity, Sony seems to be going through its own challenges in that division. Can you share with us your thoughts around Sony and TotalGuide?

Tom Carson

Yeah. I mean actually one of the component of TotalGuide for us is – there's a couple of components there's the guidance component, there's the ad network component, and basically we are included in Sony bravia products and it's predominantly with our ad platform that's part of TotalGuide. So we are pretty well integrated with them and have a license agreement with them for that and we're doing the app track on their behalf as well.

James Budge

I think it's safe to say Jeff, we certainly expect more activity with Sony this year than we had last year.

Jeff Rath – Canaccord Genuity

Great. Thank you.

Tom Carson

Yeah.

Operator

Thank you. Our next question comes from the line of Ed Maguire with CLSA. Please go ahead.

Tom Carson

Ed?

Ed Maguire – CLSA

Yeah. Thank you. I was wondering if you could just walk us through the business model on DivX plus – it sounds like that's pretty promising but is there – is it – how different is that from the credentials of DivX of business?

Tom Carson

Well, the DivX product streaming I think actually is the – is a pretty interesting business for us – it's basically it's a capability whereby you can adjust to the available bandwidth, so you can have a much better experience for the consumer.

So for us it gives us an opportunity to go back to the – the manufacturers and given additional license fees for hat.

Ed Maguire – CLSA

Okay, and just on the product on the UltraViolet, you know, how do you see us being able to mark progress and Rovi's opportunity as you get more and more participants in around UltraViolet?

Tom Carson

Ed, I think our plan would be to that the Ultraviolet – expects that are out there that are a solutions it will be entertainment when it comes this close to meeting that as anybody else out there?

And certainly what you've seen in the first two or three movies that have come out that have – that are from Warner Brothers through the Flixter capability which is powered by us they have said that they are UltraViolet, enabled, I'd say we are – we believe it worth the leading edge of that and I think as Ultraviolet continues to proliferate then we will continue to benefit.

Ed Maguire – CLSA

Great. Thanks so much. I appreciate it.

Tom Carson

You're welcome.

Operator

Thank you. Our next question comes from the line Ben Swinburne with Morgan Stanley. Please go ahead.

Ben Swinburne – Morgan Stanley

Hey, guys.

Tom Carson

Hey, Ben.

Ben Swinburne – Morgan Stanley

Hi, how are you?

Tom Carson

Good.

Ben Swinburne – Morgan Stanley

Good, two I guess broader questions I would love to hear your comments and update us on Rovi's existing relationship with four of the big guys out there and then where you see that going over time and I'm talking about Apple, Google, Amazon and Netflix, I think you've heard of all the, Apple, obviously I think you have the deals in place, but I think it was relatively narrow and, so the effect in Summer but there's a lot of discussions, as they moving to an apple, television products later this year '13, there's now been a lot of press talking about Google launching a sort of an entertainment product, hardware product in the home, certainly revolving on video.

Amazon, problem is the video service, Netflix has a lot of stuff they do around search and discovery which touches – it leaves your pattern, can you sort of talk about those which are obviously are going to make a lot of noise in the next couple of years and how Rovi fits in with – you know it's a longer discussion, so maybe just a couple of minute on each would be helpful.

Tom Carson

They're very fair questions, I think I'll just take them each individually and just briefly ten seconds or less or – Apple are very pleased with our relationship with them. You're right, to the extent they come with an Apple branded TV that's an additional licensing opportunity for us. But we're pleased with the relationship we have with them already they're a good license customer.

Google, we'll probably not comment on that, we don't want to preempt anything that Google might want to announce or accomplish in the marketplace but certainly to the extent they came out with a hardware capability that would have tie into our hands. We would expect to be part of that solution.

And on Netflix and Amazon, they think it's probably known at this point we're engaged in license with both of them certainly we believe that – we should be getting paid for patents that are inherent in their Guide capabilities and their systems and we'll see how that goes over time.

Ben Swinburne – Morgan Stanley

And maybe just – a follow-up also related to Amazon, as a sort of potential store-front, I mean if they get involved on UltraViolet, as I'm sure the, Studio's would love to see have in – and for – how do you view that as it may or may not impact Rovi, do they – do they have to deal with you on a patent from a patent basis on the streaming front or is that all purely sonic and it's really just a they just represent a competitor on

Tom Carson

Yeah. I mean that's on the product side, and I'm sure given where we are in the IP side, they're probably not going to be rushing to user our storefront.

Ben Swinburne – Morgan Stanley

Exactly.

Tom Carson

So I won't account on too much there but certainly – we'd love to sell them more and they're interested we will have that discussion?

Ben Swinburne – Morgan Stanley

And then last question, in the prepared remarks I don't believe you mentioned, shorter, obviously a management change there I just wanted to hear if you had any update on your relationship with them or as a – I guess the largest of your TotalGuide partners?

James Budge

Yeah. We talked about the ones that we mentioned we're more on the XD front which is are the early roll outs of the TotalGuide, Charter to the extent they get there over time, we'd probably be more on the set top environment. I'll let speak – Tom speak as he's closer to it on kind of where we are the overall relationship.

Tom Carson

Yeah. Actually you know I think we've been working pretty hard to actually voice some of our existing guidance solutions like path with Charter and I think that continues to go well with them.

Certainly the management change as they have put things on a little bit slower pace in terms of them doing anything different. So we expect it is probably going to be a while as they go through their management change before they get engaged on some more advanced set top box type of capability.

Ben Swinburne – Morgan Stanley

Thank you.

Operator

Thank you. Our next question comes from the line of John Bright with Avondale Partners. Please go ahead.

John Bright – Avondale Partners

Hey, John. Hey, James hey Tom. Let me follow up on the final question, last question, management change it Charter does that impact your expectations for TotalGuide this year?

James Budge

You know, we didn't really have I think, consistent with what we said in November and again at the investor day, we don't have a high expectation for TotalGuide related revenue in 2012, so I'd say our expectations are exactly the same as they were, as you rolling to 2013 though, frankly I think we're optimistic that when things shake out with how Charter decides to go forward, I think we're probably in a little bit better position than we were before.

John Bright – Avondale Partners

On the other category that you talked about James, in your prepared text is saying I think the offset between analogue and Rovi entertainment store makes it probably a down category in calendar '12, when should we think about the inflection point, or growth in that segment.

Tom Carson

Definitely the end of 12, and just a mildly could your – directionally right on what you said but I actually said in 2012, they're largely be offset to – expect flat in that area for 2012, it's high growth in Rovi entertainment store modest growth in their ops that by analog the analog component inside the other category will be only about $5 million for 2012, so it's obviously not much left to go in 2013, so we should definitely expect growth beyond 2012.

John Bright – Avondale Partners

And Tom, in your prepared text you talked about Rovi's digital copy it seems that pretty so – does it, practically speaking, how is the content of indicated ?

Tom Carson

Basically we had a technology that's media recognition technology, and basically we utilize that technology that we have from one of our businesses, to go through an authentication process.

John Bright – Avondale Partners

So the – you received the content and you have to sign up your device – what happened on the consumer front?

Tom Carson

It's like a tagging or footprint technology that allows the device to recognize whether you’re licensing right

that you have in the store content and the cloud whether you can access that on the device.

John Bright – Avondale Partners

Okay. Final question, coming back to DivX, a lot of people asking number of questions there, you mentioned mobile as a driver of the success, what about connected TV?

Tom Carson

Yeah. I mean, that’s today a part of our business and an active part of our business for DivX, so that’s probably where we have one of the best penetration then we kind of look that is an opportunity and in terms of growth with DivX in the area of mobility.

John Bright – Avondale Partners

And what you say mobility certainly the top category connect TV really just the growing category right now?

Tom Carson

Well, growing it probably is mobile devices like tablets that certainly size wise, Blu-ray players and digital TVs would be still the bulk of the revenue stream there.

John Bright – Avondale Partners

Terrific. Thanks.

Tom Carson

Okay.

Operator

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

Tom Carson

Hi, Todd.

Todd Mitchell – Brean Murray

Hi.

James Budge

Hi.

Todd Mitchell – Brean Murray

Thanks for taking the question. I wanted to ask you about the Rovi Entertainment Store and the rollout of white-label stores for other retailers, can you give us some sort of milestones in terms of how many at some point what the backlog looks like and could you also flush out, how long that takes and roughly what the size of the economics are?

Tom Carson

Yeah. We haven’t historically given out numbers of store front because we like to concentrate our meaningful store front – like the Dixons one that we announced today. So those certainly will trump it but, if you just wanted to take a quantitative measure, we frankly, probably 10 to 20 in the queue wind up all of them varying in size from couple other pretty large to some that are not really all that much worth mentioning all that much.

Todd Mitchell – Brean Murray

And based on the size of the retailer is does that determine how much that the size of upfront payment, I mean, determines, how big that original, that initial contract is with the retailer?

Tom Carson

Yeah. I mean, certainly the size of the retailer, something like the Dixons would be paying a meaningful amount for the hosting of the store front as well as obviously you get attains more traffic but potential transactional base revenue, so we definitely give a lot more attention to the bigger one.

James Budge

Lot of.

Tom Carson

And then to, just on the services we are actually providing, it’s for providing and then services definitely the, monthly or quarterly base fees that we have are higher than somebody is saying we are not going to do the entire ecosystem.

Todd Mitchell – Brean Murray

Okay. And can you also explain in terms of your integration with UltraViolet and with (inaudible). Can – from a factoring purposes, can a customer have content that is delivered over a Rovi Entertainment Store that’s not DivX format?

Tom Carson

Yeah.

James Budge

Yeah.

Todd Mitchell – Brean Murray

And then it can be and so basically can your devices and guidance, I mean, could there be, can you handle more format through your infrastructure?

Tom Carson

Yeah. We can.

James Budge

Yeah. We can.

Tom Carson

We can, but, again, obviously we believe it’s the much better experience if you are using things like DivX Plus Streaming capability and there the DivX format, obviously we are somewhat be holding to our own technology but we can definitely recognize any format.

Todd Mitchell – Brean Murray

Right. And do you see reader or I mean, obviously you would like standardize on the DivX platform but it’s like DECE for reason it wanted to offer multiple format to ahead a broad footprint if possible?

Tom Carson

Yeah. I think so and as it relates to Rovi Entertainment Store, I mean, we’re going to score multiple format, so including DivX Plus Streaming but we’ll do as well it just kind of the nature of the business.

James Budge

It actually, if you get out of the weeds of the UltraViolet spec that sort of mandate the additional -- support for additional format.

Todd Mitchell – Brean Murray

Okay. Thank you very much.

James Budge

Yeah.

Operator

Thank you. At this time I would like to turn the conference back to Mr. Carson for any closing remarks.

Tom Carson

So I just want to thank everybody for their time and attention today and I certainly look forward to talking with everyone in the future. So thank you very much.

James Budge

Thanks everyone.

Operator

Ladies and gentlemen that does conclude our conference for today. If you would like to listen to a replay of today’s conference please dial 1800-406-7325 or 303-590-3030 and enter the access code of 4508428 followed by the pound sign. Thank you for your participation. You may now disconnect.

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Source: Rovi's CEO Discusses Q4 2011 Results - Earnings Call Transcript
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