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Rovi (NASDAQ:ROVI)

Q3 2012 Earnings Call

November 01, 2012 5:00 pm ET

Executives

Chris Keller

Peter C. Halt - Chief Financial Officer and Chief Accounting Officer

Thomas Carson - Chief Executive Officer, President and Director

Analysts

Ralph Schackart - William Blair & Company L.L.C., Research Division

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

Perry Huang - Goldman Sachs Group Inc., Research Division

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

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

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

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rovi Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, November 1, 2012. And I would now like to turn conference over to Chris Keller of Rovi Investor Relations. Please go ahead.

Chris Keller

Good afternoon, and thank you for joining us today. I'm joined by Tom Carson, our President and CEO; and Peter Halt, our Chief Financial Officer.

Before we discuss our third quarter results, which were released earlier today, I would like to start with some housekeeping items. First, during our conference call, we'll be making forward-looking statements, including statements regarding Rovi's forecasts of future revenues, expenses and earnings, as well as business strategies and product plans. These forward-looking statements are subject to risks and uncertainties that may cause actual results to vary materially from these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements are described in our Form 10-Q for the period ended September 30, 2012, and other SEC reports and filings made from time to time. And we encourage you to review the discussion of those factors in those reports and filings. All our statements are made as of today, November 1, 2012, based on the information available to us as of today, and except as required by law, we assume no obligation to update any such statements.

Second, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial results presented in conformity with Generally Accepted Accounting Principles in the United States, and investors and potential investors are encouraged to review the reconciliation of adjusted pro forma of the financial measures included in our earnings release. The most directly comparable GAAP information and the conciliation between the non-GAAP and GAAP figures are included in our Q3 2012 earnings press release, which has been furnished to the SEC on Form 8-K and is available in the Investor Relations section of our web page at www.rovicorp.com.

Finally, the live broadcast of this conference call is available in the Investor Relations section of our web page, 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 Peter.

Peter C. Halt

Thanks, Chris. Good afternoon, everyone. Hopefully you've had a chance to see the earnings release we issued today with our results for the third quarter. I'd also like to be sure everyone noticed the additional information we included in the release, listing a number of the quarter's business operating highlights. In the past, we provided much of the detail on the conference call. But in response to feedback from many of you, we're including this information in our earnings release so that we can focus the call on key events in the quarter and have plenty of time for Q&A.

Today, I'll give you the financial highlights with some context around our results, then Tom will address some of the larger trends we are seeing in our business and discuss the progress we've made on operational initiatives during the quarter. We hope you'll like the new format of the call and look forward to your feedback.

With that, let me get on to the results. Third quarter revenues were $169.6 million, down $12.3 million or 7% from the third quarter of 2011. The year-over-year change was driven by a decline in revenue from CE manufacturers, which were down $15.1 million or 17% in the third quarter of 2011. Our Other category, which includes data, the Rovi Entertainment Store and ACP for entertainment was down 7% year-over-year. The year-over-year decline was partially offset by increased revenues from service providers, which were up 6% year-over-year. However, sequentially, the quarter was up $11.3 million or 7%. The quarter benefited from the timing of certain nonrecurring CE revenue. While these revenues are nonrecurring with individual customers, these revenues are part of our regular recurring CE revenue model. Last quarter, we mentioned the likelihood of lumpiness in this revenue stream. Q3 benefited from more such revenues than Q2 or we expect in Q4. Additionally, the Rovi Entertainment Store revenues were up 26% from Q3 of 2011.

The key theme this quarter was our efforts around product rationalization and cost cutting. While Tom will speak about this in greater detail, I would like to point out the benefits to current earnings. SG&A costs were $32 million in the quarter, down 5% from last quarter and down 6% from the same quarter one year ago. R&D expenses also declined 2%, both sequentially and year-over-year to $34.4 million. As a result, operating income from continuing operations less depreciation expense represented 42% of revenue for the quarter, up from 38% last quarter.

One more note on the cost side. Cost of goods sold was up $4.5 million from the same quarter last year. This increase was in part function of higher patent litigation and prosecution costs, which were anticipated in our budget for 2012. Cost of goods associated to Rovi Entertainment were also increased, as expected, as the Rovi Entertainment Store takes on more customers and processes more transactions.

Based on our performance this quarter, we've made 2 changes to our outlook for fiscal 2012. First, we have narrowed our estimated revenue range. We now anticipate full year revenues for 2012 of between $660 million and $670 million. Second, we have narrowed the range and raised the midpoint for our adjusted pro forma EPS estimate to between $1.80 and $1.90 per share.

Looking forward, we continue to look for our growth to come from our IP licensing business, our service provider product and the Rovi Entertainment Store. We continue to anticipate headwinds in our CE verticals, the market climbing analog ACP business, as well as continued softness in the consumer electronics marketplace.

Additionally, in the near term, we expect greater softness from previously anticipated DivX revenues while we are actually driving an increase in devices incorporating our DivX solutions, we are impacted by the product mix. We are seeing less incorporations in home theater products, automobiles and DVD players. This is being more than offset by increases in incorporations in mobile and tablet devices. While this is ultimately the direction we want to go, we are negatively impacted during this transition as our new platforms have an ARPU of approximately 1.5 the ARPU for the declining traditional product categories. We will speak about our outlook in greater detail at our Annual Analyst and Investor Day at CES on Wednesday, January 9.

Finally, we repurchased approximately 6 million shares of common stocks in the third quarter for approximately $90 million. As a result, we have approximately $223 million remaining under our existing share repurchase authorization.

Now I'll turn it over to Tom.

Thomas Carson

Thanks, Peter, and thank you to everyone joining us today. As you know, we have been working the past several months to make the organizational and operational improvement necessary to return Rovi to sustainable growth with solid margins. There is still a lot of hard work ahead of us, but I am pleased to say that we have made a great deal of progress this quarter towards improved execution and operational efficiency, both as result of organizational restructuring we have done so far across the business and a laser focus on execution and efficiency. This is most evident in our efforts around product rationalization and cost reductions.

Before I go into more detail around these initiatives, I'd like to briefly discuss some of our businesses and the trends we are seeing. As Peter stated earlier, we won't speak in as much detail as we have in the past about all of our various business operations since much of this detail is now provided along with our earnings release. That said, there are a few key items I would like to highlight.

Last quarter, we talked at length about our IP licensing business. We reported that we have not yet reached agreements with certain anticipated licensees and as a result, we decided to remove these licenses from our full year 2012 guidance. While none of those agreements were completed this quarter, this was not a surprise to us. We continue to pursue these licenses, and I'm encouraged by the dialogue we are having with potential licensees outside of the litigation proceedings. I fully expect that we will ultimately come to terms acceptable to Rovi. We also continue to expect that the deals, once signed, will include catch-up payments to make Rovi whole for the pre-license period of use.

I still believe very strongly in our IP licensing business and in the more than 5,300 patents and pending applications in our portfolio. In addition to working the deals I've just discussed, we engaged in discussions with several other new prospective licensees this quarter, expanded some of our existing licensing agreements to include new fields of use and extended the terms of other existing agreements further into the future. Of particular note is the extension of our BSkyB agreement this quarter.

I would also like to point out that we filed more invention disclosures already this year versus all of last year, and that will increase our patent applications by over 100 from the end of last year.

Finally, I would like to point everyone to the overview of our IP portfolio in the investor presentation on our website. It highlights the depth and breadth of our patent portfolio. As a result of these trends, I have great confidence in the future of our licensing business.

We have also included some updates about our service provider business in our earnings release, including information on customer renewals and our continued progress on deploying TotalGuide. I would like to note that we remain on track to deploy TotalGuide for set-top boxes and TotalGuide XP for tablets and are on track to begin recognizing the associated revenue in the first half of 2013. Our TotalGuide solution for both set-top boxes and tablets offers a compelling navigation experience for consumers and provides Rovi increased monthly subscriber fees. We are excited about the forthcoming deployment.

With respect to our consumer electronics category, macroeconomic headwinds continue to affect many companies in or involved with the CE business, and we have not been spared either. Overall softness in consumer electronics continues to impact our incorporation and activation rate, which impacts both our products and advertising revenues as well. These headwinds certainly impacted our DivX products as had execution issues. As I mentioned last quarter, we have not released a new version of our DivX content creation software for many months. I'm pleased to report that we fixed that issue and will release our newest DivX product in November.

Additionally, we are committed to getting the next DivX update to the market within less than one year. We've also been slower than planned in getting our DivX Plus Streaming technology out to the market. We are driving hard on this front and we have made good progress with IP vendors, OEMs and RES store front partners to position DivX Plus Streaming as a solid revenue source for Rovi. That said, while we are now focused on execution and are correcting course for our DivX business, it will take some time for our corrective efforts to be fully felt in DivX revenues.

Our failure to update the DivX product in a timely fashion has impacted certain product categories, such as home theaters, where updates play a large role in determining whether your product continues to be included. Additionally, as Peter noted, we are being impacted by our product mix ARPU as we transition DivX into more mobile and tablet products.

While we continue to have high expectations for our DivX products and are very pleased with the demand for DivX in more and more tablets and mobile devices, we are lowering our short-term expectations for DivX. We now expect DivX revenue will be lower in Q4 than we had originally anticipated, and that this will be a headwind for much of 2013. That said, we also believe DivX Plus Streaming will ultimately drive revenue growth to our DivX line of products. However, we anticipate that accretional benefit from DivX Plus Streaming will not be realized until late 2013.

The highlight section of our release also includes a number of recent developments related to our advertising business. We were pleased with the number of repeat advertisers this quarter. While advertising remains soft, we believe in the opportunity here and think our continued investment in interactive television advertising will pay good dividends. Our footprint includes service provider guide, CE devices and web properties, and it will continue to grow with the recently announced Sony deal, which we have highlighted in our earnings release. Repeat customers, stronger CPMs and a growing footprint make me believe we're heading in the right direction with our advertising business.

We are also pleased to see a number of Rovi Entertainment Store-powered sites go live this quarter. While we are not totally out of the woods yet, we have made measurable improvements and will continue our efforts to improve the economics of this business. Last quarter, I told you we had put the Rovi Entertainment Store into its own business unit in order to align priorities and ensure accountability. The volume of store front releases this past quarter, the number of new devices supported, as well as our improved uptime versus last quarter, showed that the action we took to increase accountability and put the Rovi Entertainment Store into its own business unit was the right move.

I'd like to shift focus now and talk a bit more about the organizational and operational improvement initiatives we executed on this quarter. As you know, this was our primary focus coming out of the second quarter. We are very pleased with the progress we have made as we begin to implement various initiatives this quarter focused on product rationalization, cost reductions, streamlining operations and increasing accountability.

Last quarter, we stated our goal of reducing cost by $20 million. This quarter, we have taken or in the process of taking actions, which will eliminate approximately $31 million of annual operating expenses. Additionally, we have canceled plans to spend an additional $5 million annually. We did this through product rationalization, headcount eliminations, reducing third-party and discretionary spending, consolidating our site locations and better optimizing the Rovi Entertainment Store economics.

I spoke last quarter about increasing individual accountability. A large portion of the cost reductions we achieved this quarter were made possible by business managers taking individual responsibility for reducing their budgets and running their areas of business more efficiently. In addition, we're seeing the benefit of our recent realignment of sales with product management, which has increased accountability and helped to ensure that our resources are focused on the product and service offerings our customers want and will pay an acceptable price for.

As a result, we are eliminating 127 positions within Rovi, which will reduce our employee base to approximately 1,700 employees. Additionally, we have closed approximately 30 open headcount requisitions. These reductions will produce annual savings of around $24 million. Of this amount, approximately $20 million relates to our product rationalization efforts.

On the product rationalization front, we reviewed our existing products, as well as programs in development. This meant end of life in certain products, reducing investment associated with the mature products and canceling certain projects that we did not believe would meet our contribution goals.

Notably, we are shutting down our embedded CE guide products and focusing exclusively on lighter discovery and guidance application and providing services and functionality to support our CE customers' guide products. So TotalGuide for CE as an embedded product will be stopped, but we will continue to offer the technology components of TotalGuide to CE manufacturers in the form of light applications, rich metadata and our advertising platform.

Additionally, we are shutting down our Connected Platform business and its Pro Tool [ph] products that we acquired in the Sonic acquisition. These are both very small businesses whose revenues did not warrant the required ongoing spend. We will also be reducing our investment and moving into a maintenance support mode with our stand-alone personal media manager products. This will allow us to reduce staffing and costs associated with this product and scale back to a team that provides these features only in other products we produce. These cost savings are meaningful, not only for their margin benefit, but importantly, because they allow us to invest in other areas of the business that will return the most value to stockholders. These areas include discovery and delivery related products that help service providers to keep up with the shift to IT delivery of content and products that drive monetization of content and services for our partners.

Our work is by no means done, but we are pleased with the organizational progress we have made since we last met with you. We look forward to making further progress as we continue to execute on various initiatives and keeping you up-to-date.

With that, let's open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Ralph Schackart with William Blair.

Ralph Schackart - William Blair & Company L.L.C., Research Division

A couple of questions, and thanks for the extra disclosure. First off, Tom, can give us a sense of the renewed MSO guide contracts? I think it was 39, you broke out North America for the quarter. What was your sort of ASP list, if there was any?

Thomas Carson

Generally speaking, we have a number of service provider contracts that are up every quarter. It's just kind of our normal business. There's modest uplift in all the contracts, generally speaking, as we go into those negotiations. It's probably been a couple of years since we've renegotiated plus, generally speaking, there's increased potentially in applications of things like metadata, so there was some uplift.

Peter C. Halt

Ralph, the 39, they were all smaller ones too again this quarter. So we had a great renewals in terms of the number renewing. But in terms of the lift per revenue, they were smaller MSOs.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Great. And then, I guess Peter while you're on, it's been a long time I guess now, or it's been a lot of time digesting the varying components in Rovi Entertainment Store, and it was one that was sort of kicked around, sort of keep it, or not sure what to do with it. So how are you feeling about the business today and can you give us some metrics in terms of transactions or growth trends that you're seeing in the business?

Peter C. Halt

Well, we can either watch the business closely as Tom was pointing out in the prepared remarks, a lot of progress by the team in terms of the quarter. So putting them into an operating unit and actually getting more stores rolled out, onto devices, the timeliness in going for the announcement of Toys "R" Us to get it launched. Great progress there, Ralph, but we continue to monitor that business closely. So we talked about last quarter, one of the focuses we have to have, and it was one of the areas where we did achieve. Some of the savings that we're acting on right now is related to the Rovi Entertainment Store and its cost of goods sold. We are looking to take advantage of the position we play in terms of supporting initiatives, such as Ultraviolet and ensure their economics make it worthwhile for us to participate. And right now the notion of the studio support so hopefully, we'll continue to be able to correct some of the economics around the business and drive it to success.

Thomas Carson

I think, just to add on that, I think Rovi Entertainment Store in my mind is a business that we still see very strong demand, which I think is good. A lot of the focus, admittedly, has really been about how do we get the operational performance better, and the positive here is that we've been able to deliver a significant number of storefronts during the quarter more so than we've done in previous quarters. We've been able to improve system uptime and things like customer tickets are down. So a lot of what we've been focused on is trying to optimize the business. And then as Peter said, we'll just continue to watch it closely. But right now, it's kind of heading down trying to run the business.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Great. One more, and I'll turn it over. Tom, the obvious question that we get a lot from investors on the IP front, it sounds like from this call that you still feel pretty confident in the business. Is there anymore color you can give us, what's making you feel encouraged by the dialogue? Maybe some extra color on kind of what are some of the sticking points? I know it's a tough question for the call but, anything else you can add?

Thomas Carson

No, it's not a tough question. For me, one, I mean, before coming to this company, have had a lot of licensing experience. So I understand kind of the nature of the business. And I look at what we do and the deals we've been able to do over the last couple of years, and I don't see that going forward being tremendously different in the sense of if you guys remember, some of the deals that we did last year, particularly in the consumer electronics space, were deals that took a number of years to get done and required litigation. So we're not any different than what we've been. And what I'm excited about is we have a strong portfolio that continues to grow. And frankly, the invention disclosures this year is almost 2x what they were all of last year at this point, and we haven't even finished the year. So that makes me positive. And the other thing is just generally, we always, in these businesses, even though you might be involved with litigation, we keep the lines of dialogue open and we are having communication with some of the companies that we're involved in litigation with. So I don't see this being any different than where we've been in the past. Some of the deals are a little bit longer, a little bit more visible, but I still think we have a real good foundation with the licensing business.

Operator

Our next question is from line of Sterling Auty with JPMorgan.

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

I wanted to go into more detail around, Tom, towards the end of your prepared remarks, you talked about the products are being rationalized. I want to make sure that we're very clear around TotalGuide in terms of what's being canceled and what's going forward and how that might impact things like the providers that are rolling out in 2013, as well as any future plans to offer TotalGuide outside North America.

Thomas Carson

Yes. So let me just make sure we're clear. We have 2 totally different TotalGuide products. We have one for service provider and we have one for CE. We are going full steam ahead in the service provider space with TotalGuide. That has not changed. Pretty significant deployments coming up in the first half of 2013 for both the set-top box application and the tablet companion application. So no real change in service provider at all. So I just wanted to clarify that. Basically, what we're changing our approach on TotalGuide is really in the CE space. And historically, our company has been mostly involved in some very heavy embedded guides that we have ported the CE devices. The reality is most of the CE manufacturers don't want that kind of experience, but they want some of the technology bricks associated with TotalGuide, which are things like the metadata and our ad platform. So those are the things that we're going to continue to offer as opposed to spending a lot of time and effort and money on the heavy embedded products that people don't want. So the bricks of technology that make up our cloud services, the TotalGuide, are still very much in demand by the CE manufacturers, and that's what we're going to continue to provide. We're not going to do a separate guide that frankly not a lot of people want.

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

You've touched on right there at the end in terms of when we think about Samsung or some of the ones that went with the cloud version, if the cloud version of the Guide is still going to be intact to continue to develop as well.

Thomas Carson

Yes, absolutely. And accounts like Sony and Samsung continue to use the key elements of cloud services for TotalGuide.

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

Okay. And then I also just want to clarify on your comments around DivX in terms of the versions. You weren't saying that this DivX Plus Streaming was coming out second half of 2013, were you? You were saying that was the next version of just DivX? You lost me a little bit through that.

Thomas Carson

Yes. There's 2 pieces of what we're doing here. One is the next generation of kind of the pure DivX player, right? We have DivX 8 and we have DivX 9, which is the new release that's happening in November. And basically, what the new version of DivX allows you to do is have more flexibility with using content on devices like Apple and also to use it on a DLNA type of network. DivX Plus Streaming is something that is actively being worked out, but it's a little bit broader in terms of there's a bunch of different parts of the ecosystem that have to be able to be enabled in order to be able to use it. So for DivX Plus Streaming, it's progressing well in terms of the part of the ecosystem we have to get engaged but we really don't see meaningful revenue coming until late 2013 and into 2014. And basically, there's just different parts of ecosystem being the CE manufacturers, IT vendors, content creators, to be able to make that whole thing work. So it just takes a little bit longer.

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

And last question, you mentioned the progress with the CE guys on the patent licensing, but I didn't hear any commentary about the TV anywhere, some of the companies that you're in litigation with, any progress on discussions with or the litigation process there?

Thomas Carson

We really don't talk about the litigation proceedings. We just don't like to comment on those kinds of things. Suffice it to say whether they're CE manufacturers or the TV Everywhere companies that were targeting for licenses, both the litigation proceedings are proceeding as we have planned and with a number of key potential target licensees, we have kind of separate dialogues going as well.

Operator

Our next question is from line of Perry Huang with Goldman Sachs.

Perry Huang - Goldman Sachs Group Inc., Research Division

Just wanted to ask a question around cost-cutting. You've executed nicely on the rationalization. I just wanted to clarify the, I guess, remark about reducing the OpEx by I guess a total of $36 million on an annualized run-rate basis. We should you think about that in terms of 3Q year-to-date run-rate basis?

Peter C. Halt

So a couple of things. As we mentioned, we've taken out $36 million in costs. We commented on that as $31 million of it is eliminating -- we've taken actions or taking actions to eliminate $31 million of costs incurring to date. Another $5 million of anticipated spend has been eliminated. So then when you look at the $31 million that we're taking out kind of a spend to date, that's the area kind of focused on -- half of the cost reduction is tied to product rationalization and the vast majority of that cost related to headcount. So as we're end-of-life in these and all that kinds of stuff and shutting them down, we're phasing those people out. We also mentioned the Rovi Entertainment Store, about 1/4 of the costs that we're taking out on a go-forward basis are in the cost of goods sold area. Where as we focused on improving the economics of the Rovi Entertainment Store, those costs are going down. Now that said, the Rovi Entertainment Store's transaction volume goes up, there'll be an increase in COGS offset related to the volume of transactions they're doing. And then the remaining 25% comes out of cost of goods sold and out of the sales -- I'm sorry, the SG&A and sales area and of that 25%, a little over half is head count, the other half has to do with some improvement in some contract areas and also candidly, some site consolidations that we're in the process of executing on.

Perry Huang - Goldman Sachs Group Inc., Research Division

Got it, okay, that's helpful. And I guess just a quick follow-up. You mentioned that this frees up some trends. I mean, you talked some of the product initiatives that you're thinking about. Should we think about some of that a percentage of that $36 million is being reinvested back in the business over the next, say, 12 months?

Peter C. Halt

Absolutely. So one of the things that we wanted to make sure we're doing is that where we do spend our money in terms of product. We're spending it on product that is focused candidly on the service provider community where we have a business model that they can afford next-generation guidance -- discovery guidance and discovery tools, where the product offerings we have are both desired and they have the capacity to pay. So we've taken a lot of the costs out of the areas that are associated around either the CE area or around products that just weren't going to grow. So yes, we do want to make sure that we're continuing to invest in areas and products that we do see growth from, and we look to expanding on that some at our Analyst Investor Day at CES.

Operator

Our next question is from line of Todd Mitchell with Brean Capital.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

I have a couple of quick questions. First of all, on that CE side, now that you've sort of terminated the integrated products, how do we think about pricing? And how you wish to price the product going forward? And particularly, it seems like you're going to do core licensing plus sort of parts components. Can you sort of address how you're thinking about that, please?

Thomas Carson

Yes. I think in the last call, we said that more and more of the deals that we're doing in the CE space, we're going to flat fee kinds of deals. Obviously, based on what kind of volume we think we're ultimately going to get out of them and it was done so because we wanted to make sure that we had as broad of the deployment, give the CE manufacturers incentive, they have as broad of the deployment of our technology, including our ad platform. So certainly, a number of the larger deals have gone more towards the flat fee kind of structure. But then it also depends on what exactly the CE manufacturer would want. If they're looking for our metadata, a lot of times, it's very dependent on how much data they are taking and then we'll price it accordingly. So the less data they take, they pay less for it. The more they take, they pay more for that.

Peter C. Halt

If I could just add on one thing. As we said last quarter, as we've looked to have these deals where people are paying for the IP and getting our products or elements of our products, such as the ad platform. We also talked about the need to execute and that while we did that, first, you still need to go in and work with the product teams and communicate to them what we have and the advantage we're getting in that. So the deal that Tom mentioned shows that we're making progress executing on that in getting into the ad platform into the Sony BRAVIA television sets and the connected Blu-ray players in Europe. So good focus there.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

So should we think of it as sort of a flat licensing business with an upsell into some of these components? And then also an advertising revenue stream? Or is it...

Peter C. Halt

Yes, that's a good way to look at it.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Okay. And real quick also, could you tell us on the BSkyB renewal, is that a TV Everywhere renewal?

Peter C. Halt

BSkyB includes television and the TV Everywhere use case.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Also, just to clarify a comment you made in the beginning on the -- in the CE segment, I didn't quite catch this, was there a onetime DivX payment that also was positive for the quarter in CE?

Peter C. Halt

On the CE side, what we've talked about was the compares. So quarter-on-quarter, this year's third quarter versus last year's third quarter, very comparable in terms of kind of those onetime revenues from a customer, but a reoccurring flow that we have. Sequentially, when you look at our Q2 of this year versus Q3 of this year, part of the reason that we're up in CE category is because in terms of those onetime deals, we have a benefit in Q3 that we didn't have as a compare in Q2.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

And was that in the DivX? Or was that in the guide licensing in CE?

Peter C. Halt

We had a little bit in DivX and we had a little bit in some of the product categories that we are phasing out.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

So DivX was probably higher this quarter than it was?

Peter C. Halt

Yes, absolutely.

Todd T. Mitchell - Brean Murray, Carret & Co., LLC, Research Division

Got it. And last question, can give us some idea of what the advertising revenue was in the quarter?

Peter C. Halt

I don't know if we've communicated on a quarterly basis that we could -- we haven't -- advertising, we haven't given the dollar amount. I will say that advertising was slightly up again this quarter. So it is an area that's growing. It isn't, and as we've talked about this quarter, growing at the speed that we had entered the year anticipating. Good news on it, as Tom has talked about, we are actually improving our CPMs in the conventional and in the entertainment category. But it's a category that we're going to have to be patient in terms of the economy and people investing in ads in the interactive media, but we still continue to be enthused about it and we're investing ourselves and continuing to improve our -- the tool sets we offer people and the measurement around it.

Thomas Carson

And I think the key here for us in this particular business, we look at the footprint both in the CE segment and service provider, the CE segment continues to grow which is a positive. CPMs continue to grow, which is a positive as well. So it's trending in the right direction. But to Peter's point, it's a little softer than we certainly would have liked to see it.

Operator

Our next question is from the line of Andy Hargreaves with Pacific Crest Securities.

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

Can you give us an update on what your broad outlook is for growth next year, particularly in light of the comments around DivX and the change to -- or the elimination of the embedded TotalGuide products?

Thomas Carson

Yes. While we haven't talked about guidance for 2013 in any kind of detail, we're going to do that at our meeting in early January at the Consumer Electronics Show. But I think when we were on our call the last time, we basically said there's 3 areas of concentration for us. One is in the area of discovery, which I look at that as being a pretty key part of what we do in the area of guidance; metadata and intellectual property, so that remains certainly a pretty key focus for us. Particularly as it relates to the service provider segment, we'll continue to focus pretty heavily on discovery, particularly as it relates to service provider. Display and delivery has everything to do with DivX and RES. I'd say RES is certainly a business that has strong demand. It's a business that where you see a number of customers around the globe coming to us asking for the kinds of things we're doing. We have some operational challenges we're still working on, but I think the trend there is positive and certainly the growth is. DivX, certainly a little bit softer as we mentioned on this call. And then finally, the third area has to do with advertising. That still remains the focus for us in 2013 and certainly, I think that should be a growth opportunity for us in 2013. So a lot of what we're focused on are really those 3 areas that we've talked about in the past and we'll certainly get into a little bit more detail when we get to the meeting that we're going to have in January at the Consumer Electronics Show.

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

Okay. Maybe as you think about TotalGuide, I mean, were your expectations for that embedded product pretty low because of the way that the sales process had gone already? Or...

Thomas Carson

Yes. I think so. We had seen the kind of the change in the interest level probably over the last 12 to 18 months, some interest in certain accounts, but the most interest we got was really for the components and the technology for TotalGuide, that seems to be the most interest for the consumer electronics manufacturers particularly. As it relates to TotalGuide, again, for service provider, we're still very bullish on that both for set-top box and for tablet applications.

Peter C. Halt

Andy, if you look at the history of TotalGuide per CE, when we first rolled it out, it was the heavy code in embedded guide. And what we recognized from folks is that wasn't what they were looking for, and they were looking for lighter guidance applications and the toolsets we have. So that's how we came to evolve and create Rovi Cloud Services and deliver all that. So we've been now delivering for a while what the CE manufacturers are looking at. And so into the product rationalization, we appropriately asked why do we continue to support the heavy; embedded guide, our focus should really be on what our customers want.

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

Okay. And can you -- just going back to one of the previous questions, can you give us any thoughts on timing in terms of the recognition of the cost savings? Is it something you mentioned as projects kind of wind down, you would enact it. So should we expect that over, whatever, the next year or so?

Peter C. Halt

Yes, you can look for it, I would say, the preponderance coming in over the next 3 quarters.

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

Okay. And was there any portion in the current quarter that was recognized or capitalized on?

Peter C. Halt

Yes, there absolutely was some. Some of the benefit you saw in the quarter was from the actions we took in part as we moved into the quarter and started this focus. We put a freeze on hiring certain positions and as we looked at all that kind of stuff, and so some of that benefit in terms of anticipated hires that didn't occur was recognized in the quarter and you see some of it in the lift in the guidance, the midpoint we're giving in terms of our EPS, but the benefit also coming in Q4.

Operator

Ladies and gentlemen, we have time for one more question and that question comes from the line of John Bright with Avondale Partners.

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

Peter, I'm going to follow-up on a couple of questions. Let's stay with the cost questions so I understand it carefully. On an OpEx basis, what kind of run rate should we be thinking about? And then take us through what you're going to pull out of it, because a lot of numbers were thrown out there.

Peter C. Halt

So on the OpEx side, in terms of half the savings. So if you think about the $31 million of costs that we're taking out of costs already being incurred in a run rate, that benefit, half of that, goes to the R&D line and it's almost all headcount related. About 1/4 of the benefit is going through -- is going through cost of goods sold, relates savings, efficiencies, new negotiations around cost for the Rovi Entertainment Store. That will be a reduction in cost of goods sold, that will be offset by an increase in cost of goods sold, needless to say, as the volume of transactions the Rovi Entertainment Store processes increases. But the beauty is that on a per transaction basis, they're going to benefit. And then about a quarter of the costs are going through the sales and the G&A area. And you'll see those coming in. Now keep in mind that some of the savings will be offset by us continuing to invest in R&D with new projects that are focused around our service provider customers and some of the things that we'll look to talk to folks about at CES, at the Analyst Day. Also keep in mind, when you look at our first half of the year, first 3 quarters of the year, in terms of the run rate, John, the first half of the year, don't forget, we underperformed our budget in the guidance we've given people. So our bonus expenses for the first of the year were 1/2 of what they would be on a normal basis. For Tom, myself and for the executives, our bonuses are still tied to the original guidance. But to keep the team driven on performing in the second half of the year, for the employee base, they have a new target for the second half of the year. And you're seeing some of that benefit come through in cost in Q3. So there are some offsets to the reductions but $31 million of real spend has been eliminated.

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

So if you exclude success-based spending and then run-rate the basis for OpEx, it should be -- it should look like what?

Peter C. Halt

We're going to go into much more detail about that on January 9 at CES.

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

Okay. Let me move into some prepared comments you made on your guide products -- deployed TotalGuide Solution, 6 MSOs. First half, talk to us about, again, remind us the size those MSOs? And also, how other conversations going?

Thomas Carson

I think the basic flow with TotalGuide, I think, has been good. We have our first version of TotalGuide for service provider done. Next version is done this month in November. So we're pleased about that. Trials are moving along. Basically, what I would characterize as our current customer base, we have a focus predominantly on Tier 2 and Tier 3 type of service providers. So they're all in the various degrees and sizes but in and around our normal customer base. So we're pretty pleased where we've gone with TotalGuide and believe very strongly that the use case, the way we positioned it, allows a lot of our customers particularly those with i-Guide to have a pretty cost-effective next generation guide experience.

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

Two questions that seem to be recurring on this call to follow-up in, one on DivX regarding your CE business. Tom, when you're talking, I think you mentioned that the lowering of the DivX expectation for fourth quarter and the headwind in 2013, is there a way to quantify the impact in the fourth quarter or quantify what the headwind might be in '13? I know you mentioned ASP half-ing. Is that the best way to think about it?

Thomas Carson

Well, so we mentioned, John, was that for the mobile and tablet categories, that we have about half of the same ARPU. So we're actually deploying DivX on a greater volume than we have in the past. That's really good news. We're excited about the fact that we have been able to, as we talked about in last couple quarters, get DivX into mobile and tablets. That said, there are some traditional product categories such as DVDs which are challenged at retail for the CE manufacturers. There are some categories like home theater and then automobile we're not getting into as many product also. And those were higher-paying ARPUs. So what we're actually growing DivX and very excited that we're growing in the area where the CE business is growing, mobile and tablet, our ARPU is down. So it's going be kind of a transition period we look at we're going to be down for a few quarters in terms of year-on-year revenue. But growing the incorporations, and ultimately, we believe, growing the business.

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

Final question, also Tom, in your prepared text, you talked about the IP licensing. Brought up again the agreements that were backed out of guidance in the last quarter, remind us the size of those agreements, and what that might mean should you come given the encouragement of your discussions, should you come to an agreement?

Thomas Carson

Well, I don't think we talked about any of those in the context of specific size, but when you're talking with companies that we're involved with, particularly in the litigation front, there's significant companies that have significant subscriber bases potentially or users. So they are meaningful deals but obviously, we're not going to get in particulars of how big they are.

Operator

At this time, I'd like to turn the conference back over to management for closing remarks.

Thomas Carson

Yes. So listen, first, I want to thank everybody for joining us today, particularly those of you that are on the East Coast. We know it's been a terribly difficult week, particularly for those of you based in New Jersey and New York not only for your businesses but your families. So we wish you all the best as you try to recover from that. And again, I want to thank everybody for your time today, and we really do look forward to seeing you at the Consumer Electronics Show, and we'll be able to get into a lot more details on 2013 then. So thank you very much.

Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. We'd like to thank you for your participation, and you may now disconnect.

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