Seeking Alpha
Recommended for you:
Long only, value
Profile| Send Message|
( followers)  

It's a classic story: A growth stock company fails to deliver on expected growth. Revenue misses, guidance is lowered, goosed earnings fail to hit the mark, and the growth story is suddenly cast in a dark, shadowy light, with the stock plummeting as a result. It's similar to a young band that comes out with a great debut album, starts touring worldwide, has doors, women and drugs open to them on those worldwide tours, and all of a sudden crash lands on a mediocre second album and a bloated third album, with the promising prospects turned into perilous prophecies of what could happen to the next hot new thing, as well as everybody who gets behind them.

Whether it's the band or the stock, though, the revival is often the most interesting part of the story. Just look at recent notable musical returns: There was Guns n' Roses' Chinese Democracy, which ... well, let's skip that one. Brian Wilson came out with Smile though, and the Beach Boys even made a song together. Turnarounds do happen, and sometimes they're even worthwhile.

Rovi Corporation (NASDAQ:ROVI) suffered from the sort of fall from grace that makes Sid Vicious' rapid descent seem almost orderly (almost). After hitting incredible heights off of a promising new growth strategy, the database company rocked and rolled through a shaky 2011 before crashing last November after a terrible performance. The stock has been stuck in the depths since then.

Rovi has new management, however: The new CEO is Thomas Carson, who came into the position last December in replacement of Fred Amoroso. Carson was promoted from within, having worked as Executive VP of Sales and Marketing prior to his promotion to the top seat. Similarly, Peter Halt stepped into the CFO position from his head of accounting position at ROVI, replacing James Budge. The transition has been orderly, which is always a relief for potential investors.

The essence of Rovi's business and story remain unchanged, meaning it might be worth a second look.

Rovi's Products and Business Model

New CFO Halt described Rovi's business as such in a recent investors' conference: "Rovi operates in the convergence between technology and entertainment." Rovi provides information to content-providers, mainly in the form of guide channels for cable TV packages and artist/album information for music stores. The company has a strong patent portfolio with over 5,100 patents that cover its programming and information services for an array of devices and in a number of countries. In supporting entertainment options through older media forms (e.g. cable TV) and via mobile phones, tablets and newer apps, the company exists in this so-called convergence, and is something of a derivative play on both areas.

The company earns its revenue from a strictly business-to-business model. Very much in the major labels' pocket when it comes to copy protection (think Disney (NYSE:DIS), Lionsgate (NYSE:LGF) or Sony (NYSE:SNE)), Rovi also works for service providers like Comcast (CCT), Verizon (NYSE:VZ), and DirecTV (NASDAQ:DTV); hardware manufacturers like the aforementioned Sony, Samsung (OTC:SSNLF) and TIVO (NASDAQ:TIVO), and online retailers or content providers such as Apple (NASDAQ:AAPL), Pandora (NYSE:P) and TicketMaster (NYSE:LYV). The company generally receives its payments on a monthly basis over 3-5 year contracts, attractive from a cash flow perspective, and also has a small advertising component of revenues through interactive ads on its program guides.

Rovi's key product is its data. "Rich media data" and "metadata" are the company's terms for the information it provides on what you watch or listen to. When a song comes up on Pandora, the album cover and artist background appearing on the screen are provided by Rovi. When one clicks through an endless array of cable channels, Rovi's info and patents help explain what garbage it is the viewer ends up watching. When you update album info on Windows Media, the album art, song title corrections and genre listing come from Rovi.

Much of the data comes from AllmusicGuide, a premier source of quality, encyclopedic knowledge and opinions on music. Rovi acquired the site five years ago as a big first step toward a new focus on providing this data - the company, formerly Macrovision, once focused on copy protection for analog items (e.g. VHS cassettes), and that left-over business remains a drag on Rovi's current results. Rovi also made a major acquisition last year, buying Sonic Solutions. This gave the company access to DivX technology, allowing the company to move beyond providing information about content viewers or listeners enjoy and into the actual provision of that content.

Valuation

Here's a rundown of Rovi's stats:

(Sources: TDAmeritrade, Yahoo Finance, WSJ, Rovi's investor presentations)

As of Q1 2012

ROVI

Market Cap

$2.8B

Quarterly Revenue Growth (Y-over-Y)

14.60%

Linked Quarterly Revenue Growth

-1.30%

Yearly Revenue Growth

12%

EPS Growth (Annual)

25.70%

Estimated Earnings Growth (next 3 years)

11.91%

Adjusted Gross Margin (2011)

85.00%

Adjusted Operating Margin (2011)

43.00%

Earnings 2011

2.4

Earnings 2012 (Est.)

2.52

Earnings 2013 (Est.)

3.01

Free Cash Flow/Share 2011

1.98

2011 P/E

10.5

2012 P/E

10.0

2013 P/E

8.37

PEG Ratio

0.88

2011 P/FCF

12.72

Price/Book Ratio

1.68

Price/Sales Ratio

3.99

Current Ratio

4

Cash Ratio

2.73

Long-term Debt to Equity Ratio

0.57

Price

25.19

(Note: Rovi adjusts both its revenues and its earnings, and as such its margins and other metrics accordingly. Analysts and reporters on the company generally use the adjusted figures.)

On a valuation basis, Rovi's stock shows much promise. Expensive on Price/Book and Price/Sales, the stock's other ratios are attractive. The company has done well with past earnings and revenue growth, and if this year seems less than promising from an earnings growth perspective, the longer-term prospects are more positive. The balance sheet is also clean considering the Sonic acquisition, and the company is repurchasing stock and debt and considering future small acquisitions. With strong margins and a company goal of growing revenues by 15-20% over the long term, Rovi would seem well positioned for future success.

(Source: TD Ameritrade)

The stock hasn't showed it, however. While the stock was a highly-valued growth stock at its peak of 69.50 in January 2011 (33x earnings at the time), it has performed terribly in the past year. The aforementioned Q3 2011 marked the biggest fall. On that conference call, the company forecast revenue for 2011 on the low end of its guidance range and lowered its guidance for 2012 revenue growth to mid-high single digits. This 1-2 hit took the wind out of the sails of "Rovi as a great growth story," and the stock subsequently suffered.

In the two quarters since, Rovi has hit on earnings and missed slightly on revenues, adding fuel to the fire. At the same time, the company has held firm on its guidance for this year which would mark 7.58% growth in revenue at the midpoint and 4.17% growth in earnings at the midpoint, certainly not great growth numbers. Rovi still believes it will hit its growth targets over the long term, and has mostly described the slowdown as a delay in the process.

Catalysts

For Rovi to turn around its story and regain investors' support in its stock, the new management team will have to execute successfully on a few key initiatives that might serve as catalysts for the stock. Those catalysts include:

TotalGuide - TotalGuide is the next step in fully interactive program guides for Rovi. A cohesive guide accessible from just about any device, TotalGuide will allow Rovi to capitalize on two key trends: cloud computing and Rovi's database becoming accessible from a growing number of outlets; and that growing number of outlets, leading to "TV Everywhere," the company's term for the idea that we will soon be able to watch TV from, well, everywhere.

A big part of the delayed revenues growth has been the delay in TotalGuide becoming a major source of revenue for the company. Since the investor day in January 2012, Rovi has been forecasting meaningful revenue from TotalGuide only by 2013. The company views this as a long-term growth driver as it increases the level of interaction between customers and Rovi's data, increasing Rovi's leverage and position in negotiating with service providers and others.

Rovi Entertainment Store - In incorporating DivX and the Sonic Solutions business into Rovi's operations, Rovi has grown its own entertainment store. In keeping with the business-to-business model, Rovi intends to grow into the "worldwide white label store of choice for the distribution of premium content on the Internet." A white label store means Rovi will sell the videos, backed with its data and connected to its cloud services, to other retailers and consumer electronics manufacturers, who will then sell the product to consumers.

Again, growth here has been slower than the company would hope. On the Q1 call, Halt said, " the growth at our Rovi Entertainment Store business has been slower than we anticipated, not resulting from a lack of demand for this offering, but because of the continued investment required to bring the service of the carrier class performance and scalability. This has delayed the launch of some storefronts." Rovi's patents, data and expertise, as well as the DivX acquisition, give them a strong position in developing this store, but the company has to prove it can execute in this new area.

International Growth - Currently, Rovi's programming guides serve 97% of digital TV households in the U.S. The company asserts that its growth opportunities in the U.S. in this area are tied to the increase in devices and the TV Everywhere idea with tablets and so on. Abroad, however, Rovi has miniscule portions of the Latin America and APAC regions, and only about 25% of the digital market in Europe. Rovi's career site includes a number of jobs focused on European language skills - Spanish, Danish, Norwegian, for example - or on sales in the other two regions. Near-term concerns about Europe aside, the room to grow in foreign markets is also promising for Rovi.

Technological Partnerships - Rovi has a number of partnerships that could increase its visibility. Recently, the company announced it was teaming up with Nuance (NASDAQ:NUAN) to allow voice activated-navigation through Rovi's programming guides. It also has partnered with Twitter to link feeds to Rovi's programming guides, with informational and advertising implications.

The elephant as ever is Apple, which might enter into the TV market. Apple's presumably interactive TV would demand interactive programming information. Currently, Apple pays Rovi a royalty fee, which might increase if Apple becomes a TV manufacturer. It would also increase Rovi's visibility and leverage in the space.

Summary

Analysts remain bullish on Rovi. According to Thomson/First Call data, seven analysts rate the company a strong buy, five a buy, two a hold, and only one a sell. Target prices range from $30 to $48 a share, with the mean and median target prices around $41/share, a 60% or so possible increase from the price as of May 25th close, though still well below the stock's highs of early last year.

One has to believe Rovi can get back to strong growth again to invest in the company, however. It's convenient that the company aims for long-term growth and has a lot of potential catalysts that will have an impact down the line, but it needs to start showing good growth in the nearer-term.

At the same time, the company is well-positioned and the stock near its 52-week low. Anybody interested in the company might consider either opening a position around 25 and then waiting to see how the company does in delivering on its aims, or waiting to see how the new management team does on its next quarter.

A stock or a band can burst onto a scene easily. Just as easily, that band or stock can flame out. For fans or investors on the sidelines, or those left holding the bag, the question is whether the gang can get it back together to make a comeback, to make us feel that it's worth our while. In the case of Rovi, the behind the music and video story remains a promising one. It might soon be a good time to buy tickets to the next phase of the show.

Source: Behind The Music (And TV, Video And Games): Rovi's Comeback Story

Additional disclosure: I may initiate a long position in ROVI over the next 72 hours.