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TheStreet Open House

How Long Will Rovi Investors Suffer?

NEW YORK ( TheStreet) -- If you're a current Rovi (ROVI) investor, Tuesday's earnings warning was a frustrating spectacle filled with disappointment from start to finish. Rovi is expected to release actual earnings Aug. 2 for the quarter ended June 30.

Rovi is an entertainment technology company specializing in the management of entertainment content. ROVI Chart ROVI data by YCharts

Rovi lost about 23% of its marketcap in afterhours trading on Tuesday. The loss in market cap is the result of lower revenue, earnings and contracts for the quarter and for 2012. The analysts' consensus estimate is currently 42 cents a share, an improvement of 1 cent (2.4%) from 41 cents during the same period last year. Rovi missed in the last four out of four quarterly estimates. The next report will make it five for five. ROVI Revenue Growth Chart ROVI Revenue Growth data by YCharts

The company expects to miss revenue by $21 million for the second quarter to come in near $158 million vs. the previous guidance of $179 million. Continuing operation losses are now expected to be between 15 and 18 cents per share, compared to 6 cents for the same period last year. (Rovi's are not the only shares falling, read my Facebook and Zynga article -- Social Media's Valuation Creates Rush for Exits )

Rovi's CEO Tom Carson blames lower analog content protection and licensed consumer electronics royalty revenue.

Carson stated in an SEC filed letter to shareholders:

... We were negatively impacted by timing issues in our licensing business -- specifically, delays in signing certain guidance patent licenses. The majority of the second quarter revenue shortfall, and approximately half of the reduction in our expectations for fiscal 2012, are attributable to these timing delays. . . . In some instances, while not our preference, this may involve going to court against parties that we believe are in clear violation of our guidance patents. . . . Another key point is that we believe our delayed deals, once signed, will include catch-up payments to make Rovi whole for the pre-license period of use, so we do not anticipate ultimately losing revenue as a result of these delays -- it's just pushed out.

What this means to me is that Rovi and potential licensees are so far apart in intellectual property negotiations that Rovi may have to litigate. Litigation is always filled with peril and trials with juries are crapshoots at best. Rovi may indeed collect back royalties; however, payments not received should be heavily discounted (as the market is clearly doing).

Insiders sold over 110,000 shares, or about 80% of their holdings in the last six months. Some will say there are many reasons why insiders sell (stock options, etc..), but the bottom line is the motivation to sell or buy is nearly the same. You don't sell a stock you think is moving higher in price regardless of the source. Insiders own less than 1% of their compensation in stock. This may or may not indicate management believes in the company; you can make up your own mind.

Nuance Communications (NUAN) and Rovi have come together to produce Dragon TV and Magic Remote, a method of using voice commands instead of a remote to control a TV. TheStreet's Timothy Collins examines Rovi from a technical viewpoint (You need a Real Money Pro account to read, but Collins's alone analysis makes it worthwhile.) NUAN Chart NUAN data by YCharts

Nuance is the maker of Dragon Naturally Speaking, a voice-to-text program I use often and really like. If Nuance and Rovi can do for TV what Dragon Naturally Speaking has done for typing on a computer, the days of searching for a hopelessly lost remote may be over.

Plans for Nuance products include the ability for viewers to answer trivia questions and for the TV to answer questions about programming, for example, "who plays Jim on 'The Office'?" I look forward to the day of no longer needing remotes.

Nuance reports earnings on Aug. 9, after the closing bell. The technical chart pattern is bearish for Nuance with the major moving averages moving lower. Rovi has partnered with other technology companies.

Rovi technology powers video downloads for Best Buy (BBY), another company whose stock is under pressure lately. Best Buy is trading a little more than a dollar above the 52-week low of $17.53. BBY Chart BBY data by YCharts

If Best Buy can turn over a new leaf and move from such a large dependence on bricks and mortar, and increase online sales, it wouldn't hurt Rovi's ability to make a buck. Unfortunately for Rovi, Best Buy has its own problems right now.

Best Buy stores carry products with Rovi technology inside. Best Buy is also shrinking the size of their stores and closing others. (Read my Best Buy vs. Groupon: Deadliest Portfolio Killer article.)

Based on my experience with gap downs following reductions in guidance similar to Rovi, investors may not see the short-term low until Friday or more likely Monday. Thursday's will likely open higher than the closing price for Thursday.

A typical gap down price pattern will move higher early after the open followed by weakness as the day progresses. Rovi is already oversold based on technical analyst, lending a thought that shares could open near the low of the day, washing out the remainder of sellers still left.

Bargain hunters and short sellers covering positions could push the price up about 30% to 50% in relation to the gap down price this week. Looking at the chart, I expect short-term resistance near $15 and again near $16.50. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $13 a share, but also be prepared for bargain hunters entering near $12. Rovi doesn't have a lot of debt in relation to liquid assets, and the forward price-to-earnings multiple is under 10.

There is no hurry jumping on board with Rovi. Stocks dumping as a result of lowered guidance normally take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $20 as the one that "sticks".

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