Rovi's (ROVI) CEO Tom Carson on Q4 2015 Results - Earnings Call Transcript

| About: Rovi Corporation (ROVI)

Rovi Corporation (NASDAQ:ROVI)

Q4 2015 Earnings Conference Call

February 11, 2016 5:00 PM ET

Executives

Peter Ausnit – Vice President-Investor Relations

Tom Carson – President and Chief Executive Officer

Peter Halt – Chief Financial Officer

Analysts

Michael Olson – Piper Jaffray

Eric Wold – B. Riley

Operator

Good afternoon. My name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rovi Corporation 2015 Fourth Quarter and Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. At the end of the call, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn call over to Peter Ausnit, Vice President of Investor Relations.

Peter Ausnit

Operator, thank you. Good afternoon, everyone and thank you for joining our call. I’m Peter Ausnit, Rovi's Vice President of Investor Relations. Today I am joined by Tom Carson, our President and CEO and Peter Halt, our Chief Financial Officer. Additionally John Burke, our COO and EVP and Samir Armaly, our EVP of Intellectual Property and Licensing will be available during Q&A.

During this conference call, we will be making forward-looking statements, including statements regarding Rovi's future and its estimates of future revenues, expenses, and earnings, as well as possible outcomes in timing of contract negotiations, litigation, business strategies, deployment plans, and product plans. These forward-looking statements are subject to risks and uncertainties that may cause actual results to vary materially from today's forward-looking statements.

Some of the factors that could cause actual results to differ materially from these forward-looking statements are described in Rovi's Form 10-K for the year ended December 31, 2015, and other SEC reports and filings made from time to time. And we encourage you to review the discussion of these factors in those reports and filings. All statements are made as of today, February 11, 2016 based upon information available to us as of today. And except as required by law we assume no obligation to update any such statements.

This presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for Rovi’s financial results presented in conformity with generally accepted accounting principles in the United States. And investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures included in our earnings release.

The most directly comparable GAAP information and reconciliation between non-GAAP and GAAP figures are included in the Q4 and full year 2015 earnings press release, which has been furnished to the SEC on Form 8-K and is available on the Investor Relations section of Rovi’s webpage, at www.rovicorp.com. The live webcast of this conference call is available in the Investor Relations section of Rovi’s webpage, and a replay of the audio webcast will be available on the website shortly after this webcast ends, and will remain on the website until our next quarterly earnings call.

Now, I would like to turn the call over to our CEO, Tom Carson.

Tom Carson

Thank you, Peter. Good afternoon everyone and thank you for joining our Q4 earnings call. I will start the call by discussing Rovi’s accomplishments in the fourth quarter and the year. Then Peter Halt will review our results, I will then discuss our estimates and goals for 2016, then we will open up the call for questions.

In terms of Q4, we had a strong quarter led by licensing. In December, we renewed our IP License agreement with AT&T, the world’s largest Pay-TV service provider with more than 25 million U.S. video subscribers. We also announced the Sony was back under license.

In October, we announced that a long-term IP license renewal with SKY, Europe's largest pay-TV operator with 21 million subscribers. We signed a license agreement with Shaw, a major Canadian cable and satellite service provider, serving millions of video customers across Canada. Our agreement with Shaw covers their new internet connected mobile application free range TV. And we signed an agreement with Videotron, another leading Canadian Pay-TV operator.

Earlier in the year, we signed a multi-year IP license renewal with Charter, which we expect will be the number three U.S. service provider once they acquire. Time Warner Cable. Assuming the Time Warner Cable acquisition closes, we will have two of the big four U.S. service providers under new contracts.

We also signed deals with leading CE manufacturer Sharp and Vizio, and signed four of the top ten Korean service providers to TV Everywhere licenses on top of their traditional TV use case licenses. These deals demonstrate the value and relevance of our IP portfolio, and secure strong and long-term cash flows for Rovi.

Also on the IP front, we recently announced an innovative partnership with Intellectual Ventures focused on licensing to the over-the-top market. While Rovi already has an established licensing program with many leading, over-the-top providers, including the likes of Apple, Google, and Hulu, we believe this partnership will help us accelerate this strategic and growing opportunity. By working together, we bring two of the world's leading media and entertainment patent portfolios under a single comprehensive licensing program run by Rovi for the over-the-top market. The portfolios are quite complementary, resulting in extensive and expansive coverage for all aspects of the over-the-top value chain, from content management and delivery, streaming, and consumer features and functionality. Under the new partnership, Rovi will be the exclusive over-the-top licensing partner for the combined patent portfolios of the companies into the next decade.

We have already begun efforts to license the combined portfolio. But given the timeframes involved in these types of discussions, we believe this deal will be accretive to earnings beginning in 2017. In addition to the partnership, we also acquired additional patents from Intellectual Ventures that we will use in our broader licensing program. The Intellectual Ventures deal was not the only way we expanded our patent licensing program. 2015 was another year of strong innovation at Rovi that expanded our portfolio, thanks to record new invention disclosures, employee participation, and record newly issued US discovery patents.

Our product business also reached a number of milestones in Q4, starting with discovery. We recognized our goal of a device agnostic fan TV solution with the launch in January at CES of our new Fan TV platform. An advanced and modular suite of software that brings together our industry-leading entertainment metadata, semantic search and recommendations, and natural language conversation services. The Fan TV platform can be delivered as component-based APIs as applications for the television set and other CE mobile devices, or as a complete end-to-end experience on a set top box.

Having a complete solution as well as best-of-breed point products is important to our customers. Recently a large European service provider agreed to use the Fan TV platform, and we look forward to sharing more after they announce their product and service plans. Finally, we introduced new versions of our set top box guides, Passport and iGuide, which provide a high-resolution widescreen design for a full HD experience. Thanks to better quality from continuous process improvements, the first Passport 7 deployment customer Summit Broadband, was able to roll out this new HD guide to their consumers in a matter of weeks, instead of months.

Turning to our Metadata business. We launched a number of dynamic Metadata products in 2015, including trending and popularity services for video and music. We also announced the availability of Rovi Sports at CES. Rovi Sports is a dynamic sports metadata offering, delivering descriptive information about sports, leagues, games, teams, standings, as well as detailed player bios and stats. We will provide metadata for 60,000 of the world's most popular sporting events, including the 2016 Olympics.

These services generated strong interest at CES, and we look forward to discussing further plans for this sports service as well as other exciting metadata services in the future. Regarding analytics, in 2015, analytics revenues nearly doubled. We expect continuing growth and are continuing to invest in analytics, most recently by expanding the team to support our commercial and pay trial customers. In October, I mentioned that we signed our first agreement with a national cable network to use Ad Optimizer to support an upcoming ad campaign. Now that same cable network has over a half-dozen major advertisers using Rovi Ad Optimizer.

Rovi's Ad Optimizer and Promo Optimizer are also in pay trials with additional cable networks. In terms of full-year milestones, our Discovery group partnered with Nuance to deliver an end-to-end conversational search and discovery solution for both English and Spanish speakers. And we signed advanced search deals with Dish, Epistar and Verizon. We took costs out of our metadata business, while expanding coverage to over 7 million programs. We increased the frequency of metadata updates to address real-time programming changes. We also signed another significant metadata deal with Comcast. And, post year end, we also signed a metadata deal with Shaw for their content Discovery platforms, including a free range TV.

These deals demonstrate the value of our richer and deeper metadata content in an internet connected discovery experience. Lastly, we launched the Rovi Knowledge Graph in North America, which makes Discovery more dynamic and relevant by drawing on training data. We also achieved several important operating and leadership goals during 2015. We reorganized our salesforce to give each account a single point of contact for all of Rovi's products and services, and brought on new sales leadership and talent to drive these changes. With these changes, we expect improved sales performance in 2016.

We continued to exercise careful cost management throughout 2015, which contributed to EPS at the midpoint of our original January estimates. Despite lower than initially estimated revenues. In terms of leadership, we enhanced and enlarged our Board, adding new members with industry and financial expertise. Specifically, Eddy Hartenstein has remarkable media industry experience. Steve Lucas brings strong analytics expertise. Raghav Rau has deep technology experience. And Glenn Welling brings us his extensive financial expertise. The Board and management team are working well together, and I am grateful for their counsel.

Now Peter will discuss our results in detail.

Peter Halt

Thank you, Tom. Fourth quarter revenues were $149.5 million up $15.3 million or 11% when compared to fourth quarter of 2014. Catch-up payments from AT&T and Sony contributed to revenues partially offset by lower ACP revenues and the end of our commercial relationship with the set top box licensee. As the company has elected to license their service provider customers directly, consistent with our preferred approach to the market. In this regard, there's a short-term delay in revenues. As IP revenues for set-top boxes were recognized upfront, where direct license agreements with the service provider customers are based on a monthly per subscriber fee. However, we believe turning this into a recurring license stream will benefit us over the longer term.

Service provider revenues of $124 million were up 18% when compared to $105.1 million in fourth quarter, one year ago. Primarily due to a one-time catch-up payment from AT&T, partially offset by the loss of the aforementioned set-top box licensee. Consumer electronics revenues of $22.3 million were down $2 million or 8% from Q4, 2014 primarily due to continuing challenges in the CE industry. Other revenues of $3.2 million were down 32% or $1.6 million with the expected decline in our legacy analog content protection revenues continues.

In terms of our business segments, IP licensing revenues of $89.6 million were up $17.9 million or 25% year-over-year, primarily due as mentioned earlier to a one-time catch-up revenues. Product revenues of $60 million were down 4% versus $62.5 million in the fourth quarter of 2014, largely due to lower ACP revenues, which were down as mentioned earlier by $1.6 million.

Turning to cost, we can either focus on operating efficiently and keeping this disciplined and prudent cost structure. Examples include facilities rationalization, optimization of our metadata operations, and consolidation of our cloud platform solutions. As a result, our total employee headcount is down 8% year on year. While revenues for Q4 were up 11% non-GAAP total COGS and operating expenses including depreciation were $82.3 million up only 2% from Q4 2014. The increase in cost were largely due to a catch-up in our bonus accrual related to Q4 revenues, and some one-time spend around assessing our cost structure.

Non-GAAP EPS for Q4 was up almost 50% to $0.65 versus $0.44 in Q4 2014. For the full year, revenues were $526.3 million down 3% from $542.3 million in 2014, and near the high end of our revised July estimates. Service provider revenues for the year increased $12.1 million or 3%. This was offset by a decrease in consumer electronics revenues of $19.9 million or 19%, primarily due to a general softness in the CE industry, a lack of new licensees and the associated catch-up payments, and having Toshiba out of license for the full year. Other revenues largely ACP were down $8.3 million or 28% as expected.

On the cost front, total COGS and operating expenses including depreciation were $328.4 million, a reduction of over $21 million from the midpoint of our original full year estimates. Due to our continuing focus on cost controls non-GAAP EPS for the year was $1.71, just above the midpoint of our initial estimate. On the cash front, we can either produce significant cash flow. Operating cash flow from continuing operations was $42 million in the fourth quarter, and $143 million for the year.

In terms of cash usage, while we did not repurchase any stock in the quarter, we ended the year having repurchased 9.5 shares for $150 million. In addition, in the third quarter we paid off and retired our $125 million term loan A. As we discussed last quarter, this strengthens our balance sheet by removing our financial covenants, and gives us flexibility to focus on getting the appropriate license fees for the upcoming renewals, even if that means going out of contract for a period of time. Cash and investments at the end of 2015, after taking these outflows into account, was approximately $325 million.

With that, I will hand it back over to Tom to discuss our estimates for 2016.

Tom Carson

Thanks Peter. Our 2016 estimates exclude two potentially large revenue drivers, the upcoming Comcast and DISH renewals. We’re working to get these deals done on terms that are value creating for Rovi stockholders. We are striving to close these deals timely or if not timely, shortly thereafter. However, we do not wish to negotiate these deals in public. We also want to make sure the estimates we provide allow for all possible outcomes. As such, we are excluding any revenue associated with renewing these two deals from our estimates, including any advertising or TV Everywhere revenues from Comcast after Q1. We are well prepared for these negotiations as we have discussed on prior calls, we've been working up to this point for almost two years. We have also strengthened our balance sheet, and planned extensively so that if the renewals do not happen timely, we can pursue all of our options.

Our estimates also include a significant increase for litigation expenses to cover us in the event we need to pursue legal action against one or both of these companies. On that basis, for 2016, we estimate full-year revenues of $419 million to $520 million and EPS of $1.35 to $1.65. I would like to note that, even with these assumptions, our 2016 midpoint estimates are basically flat year-on-year excluding the one-time benefit from catch-up revenues in Q4 of 2015. Our estimates also assume that ACP revenues decline by over 50%, and that our total revenues are split approximately 55% licensing and 45% products including ACP.

Our visibility defined as revenues from existing contracts and renewals, included in our estimates, is approximately 94%. In any given quarter, we have several agreements up for renewal. Some licensees may be out of contract for a quarter or two before the renewal agreement is finalized. Unless the licensee is of size, this is generally not noticed in our quarterly results. In Q1 2016, we have a top 10 service provider in the U.S. out of license. We are in active discussions on this renewal and these discussions are now about the appropriate go-forward pricing.

We fully expect this party to be licensed in 2016, and believe that the progress made last year on our tier one renewals with AT&T, Time Warner Cable and Charter, position us well to do so. As such, we have included them in our visibility calculation, which is similar to last year when we included an extension with Time Warner Cable and a renewal with Sony in our estimates.

In terms of timing, we anticipate our new revenues to be back-end loaded. Additionally, we are modeling the renewal of this out of license service provider as a second half of that. This allows us to focus on obtaining the right pricing with the service provider and removes the potential leverage they might get if the focus is on having this deal renewed in Q1. Based on this, we are modeling the timing of revenues in 2016 as 45% in the first half and 55% in the second half of the year.

In summary, we have greater visibility into our revenue estimates than we have had in the past. Our estimates exclude the two renewals and/or after excluding the one-time benefit in 2015 from the AT&T deal, still effectively flat year-on-year despite including the possibility of increased litigation spend.

In terms of 2016’s focus, in addition to the Comcast and DISH renewals, we are focused on rolling out Fan TV as a platform in the U.S. and internationally. On that front, we expect to announce new customers and deployments for the Fan TV platform. Both as a full solution, and as a platform enhancing other's discovery services during the course of the year. Supporting our current advanced search customers, including Dish, Verizon, and Cablevision as they drive deployments and consumer usage, which ultimately leads to increased revenue for Rovi.

Helping our classic guide customers deliver modern guide experiences to their subscribers. Increasing our Metadata sales, including for our new sports metadata service, driving growth in analytics by supporting more cable network families, serving the larger numbers of advertisers and increasing sales of Promo Optimizer for network families. Continuing to innovate, both to drive new product growth and to keep our IP portfolio relevant in the future. We also see continued IP licensing opportunities, not only in the over-the-top market building on our partnership with Intellectual Ventures but also in various markets around the world.

And as always, Rovi plans to remain diligent about costs. This is an exciting time for Rovi. We had a strong fourth quarter and accomplished a lot in 2015. We look forward to success in 2016, and creating long-term earnings growth and stockholder value.

Operator, we will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Olson with Piper Jaffray. Your line is open.

Michael Olson

Hey, good afternoon. I just had a couple of quick questions. So, just on the core renewals, what’s your confidence level and renewals based on the other major renewals that you just signed in the last six months? And would you reiterate that for those deals you are at economic negotiation stage versus [indiscernible] stage? And then secondly, on the other renewal with the other top 10 service provider. Was that a Q1 situation now that service providers out of contract because they passed the renewal point? Or what is kind of the timing around that? Thanks.

Tom Carson

Yes, sure, Mike. Let me address that. So look, I think on the main renewals that we have, the best deal I want to make sure everybody get to that – we are not going to try to negotiate these things in public. But let me just say a couple of things around them. First and foremost, I’m very confident in our position as we mentioned before on these calls, we have incredibly strong intellectual property portfolio that we continue to augment through either acquisitions of intellectual property or more heavily through our own employees.

When we look at the main renewals, we have dozens of patents that apply to this renewals. So I think that is important to point out. More importantly, I think what gives us confidence is we have market proof points, and significant ones. The deal with AT&T was the largest provider in North America I think the key one as is sky. And you know certainly you talk about Charter, Time Warner, Shaw, Videotron some of the others. So I think we’re in a very, very strong position in these negotiations. As Peter mentioned, we have a very strong balance sheet, we have restructured our debt. We have pushed out the maturities to the end of the decade, we don’t have any covenants to worry about – we have significant cash flow as a company last year and projected for this year as well.

And we built in significant dollars into our budget for litigation if it’s necessary. So, the way to think about them is we are engaged in discussions and yes they are at an economic stage. Certainly they could go out of license, so that is not an abnormal part of what we see in the licensing business. And a lot of times it’s to put pressure on us to concede and get a better deal. But what we’re really trying to do is get the best and a fair deal and get fully compensated for our intellectual property. So, I’m confident the deal will get done and it’s been – unlikely event, they don’t, frankly we’re very well prepared to do what is necessary to protect our IP.

Peter Halt

And Mike, to the last part of your question. Yes, that the party was under license in Q4 and their contract expires this quarter Q1.

Michael Olson

Okay. And, so that one you’re saying you are expecting, it probably doesn’t kick back until second half or at least you’re trying to be somewhat conservative with the revenue linearity for the year by pointing us to include that more in second half.

Tom Carson

That’s a good way to describe it.

Michael Olson

Okay. Thank you.

Tom Carson

Thanks, Mike.

Operator

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

Eric Wold

Thank you and good afternoon. A couple of questions on the two remaining renewals and there was a limited amount of information is that you could really say about them, just try to get a handle on a couple of things. One, knowing that you excluded any contribution from them in your guidance on the revenue line. How should we think about how that guidance can change fund side and you’re going to be handcuffed you think in terms of changing guidance to it, or give away too much of, the terms of those deals if that is done?

Tom Carson

Well, what we will do is post they’re being renewed next call we will update our guidance to include them candidly, just like the AT&T deal, if you’re of a certain size, and these does become transparent kind of what the terms – these are very big players.

Eric Wold

Okay. And then secondly, how should we think about impact to the cost structure upon renewals. Obviously, if you get them signed and get them signed prior to having – go to litigation. The litigation assumption in your guidance would be either removed or lessened. But besides that, any impacts to the existing cost structure personnel support et cetera that would need to go in place upon getting those deals renewed or they pretty much being supported as it is right now?

Peter Halt

I think the way to think about on – one, we have gone actually pretty aggressive at the core cost structure within Rovi. And that just kind of a normal process that we’ve had, really starting in last year and going into this year. So we continually are – pretty vigilant on our cost. That cost, and we haven’t said what those numbers are, certainly being offset by the significant increase in litigation spend if we don’t have to spend that litigation that will become a positive for us.

Tom Carson

And in terms of the deals themselves, you shouldn’t assume any incremental expenses needed to support them, fairly when we have the additional revenues coming in and we’ll look at what the best allocation of capital is for our shareholders.

Eric Wold

Perfect. Thank you both.

Tom Carson

Thank you.

Operator

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

James Medvedeff

Good afternoon, folks. How are you?

Tom Carson

Good. How are you doing James?

James Medvedeff

Great. Good quarter.

Tom Carson

Thank you.

James Medvedeff

I had a question about the – but I think you may have just answered it. I’d like to understand that share repurchases are on the hold pending the contract renewals?

Peter Halt

We do not have any share buybacks contemplated in our guidance. We’ll need to evaluate things going forward in terms of what’s the best allocation of our capital for our shareholders. Our belief is for this quarter, the best thing to do is Tom spoke earlier, to have a very strong balance sheet that means cash on the balance sheet, all that kind of stuff as we come up on this renewal date. I’m going to make it very apparent but if need to be to get the right terms, we can, we will go out of contract. Again, we will continue to evaluate on the quarter-by-quarter basis.

James Medvedeff

Yes, understood. Then I’m sorry, could you refresh, have you disclosed the amount of the renewal catch up with AT&T from last year?

Peter Halt

We didn’t exclude – we didn’t disclose the exact amount. But if you do, if you did catch in Tom’s comments, as the end, we are basically flat year-on-year, after you exclude the one-time benefit from AT&T and [indiscernible] the revenue line and EPS.

James Medvedeff

And then, let’s see, I noticed that in the slide decks that was provided this time, you did not provide the subs breakdown, the subscribers breakdown, U.S. versus overseas, paid versus not paid. I'm wondering if you're going to make that available?

Peter Halt

In the earnings release we gave the current sub information.

James Medvedeff

That's in there? Okay, I guess I missed it, I apologize. Okay, I will get back in the queue. Thank you.

Peter Halt

Thanks a lot.

Operator

There are no further questions at this time. I will turn the call back over to Rovi President and CEO, Tom Carson.

Tom Carson

Okay everybody, well, listen thank you very much. I appreciate everybody taking the time and certainly things progress with the various negotiation, we will keep everybody apprised of the situation. So just want to thank everybody for their time and look forward to talking to everybody soon. Thanks again.

Operator

This concludes today's conference call, you may now disconnect.

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