Rovi Corporation ( ROVI)

Q3 2011 Earnings Call

November 8, 2011 4:30 PM ET

Executives

Peter Halt – Chief Accounting Officer

Fred Amoroso – Chief Executive Officer

James Budge – Chief Financial Officer

Analysts

Ralph Schackart – William Blair & Company

Sterling Auty – JP Morgan

Ingrid Chung – Goldman Sachs

Rob Stone – Cowen and Company

Ben Swinburne – Morgan Stanley

John Vinh – Collins Stewart

Andy Hargreaves – Pacific Crest Securities

Jeff Rath – Canaccord Genuity

Mike Olson – Piper Jaffray

Jim Goss – Barrington Research

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rovi Corporation Third Quarter 2011 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Following the presentation, there will be a question and answer session, and instructions will be given at that time. (Operator Instructions)

And as a reminder, this call is being recorded today, Tuesday, November 8, 2011. I would now like to turn the call over Peter Halt. Please go ahead, sir.

Peter Halt

Welcome ladies and gentlemen to Rovi Corporation’s third quarter 2011 earnings conference call. I’m Peter Halt, and I’m joined today by Fred Amoroso, our CEO; and James Budge, our CFO.

Before we discuss our results, which were released earlier today, I would like to start with some housekeeping items. First, I would like to remind you that all statements made during our conference calls that are not statements of historical fact, including but not limited to statements regarding the company’s forecast of future revenues and earnings, the integration of the Sonic acquisition, as well as business strategies and product plans, constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-Q for the period ended September 30, 2011 and other filings with the SEC that are filed from time to time.

Second, our results released earlier today, as well as our discussion on this call, include non-GAAP adjusted pro forma information, which exclude as applicable non-cash items and items that impact comparability examples of such as items include amortization, equity-based compensation, and discrete tax items and the tax effect of all non-GAAP adjustments.

Depreciation expense, while a non-cash item, is included in adjusted pro forma operating results as a proxy for capital expenditures to demonstrate recurring cash-based earnings. Adjusted pro forma combined company information assumes the Sonic Solutions acquisition was effective on January 1, 2010.

Adjusted pro forma reconciliations for historical results, including Sonic Solutions, are in our press release. We have presented in our discussions, adjusted pro forma combined company information because this is how we have and will evaluate our business.

We believe that this presentation may be meaningful to our investors in analyzing the company’s results of operations. This presentation is not intended to be a substitute for our financial results presented in conformity with the Generally Accepted Accounting Principles in the United States, and investors and potential investors are encouraged to review the reconciliation of adjusted pro forma financial measures included in our earnings press release.

And as a final piece of housekeeping, the webcast of this conference call will be available on our Investor Relations webpage until our next quarterly earnings call.

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

Fred Amoroso

Thank you, Peter. And thanks everyone for joining us today for our quarterly conference call. As you may have seen in our earnings press release, we grew adjusted pro forma revenue to $196.5 million in Q3.

Similar to previous quarters, our business continued to grow due to new license agreements, increases in device shipments that incorporate our products or are licensed under our patents, the continued conversion of analog TV subscribers to digital and advertising growth. When combined with operating efficiencies, this resulted in a 19% year-over-year increase in adjusted pro forma EPS to $0.63.

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

James Budge

Thank you, Fred. As Fred mentioned, we grew adjusted pro forma revenue to $196.5 million in Q3. Revenue on our service provider vertical, which is primarily comprised of IPG products and patent licensed to cable satellite and telecom companies, grew 13% year-over-year to $74.5 million in the third quarter.

This growth was driven by the continued conversion of analog subscribers to digital, the addition of new international licensees and growth in our service provider product revenues.

It's worth noting that our service provider product revenues rose 36% quarter-on-quarter, marking the fifth consecutive quarter of 20-plus percent product growth. The strength in products was achieved by improved pricing on contract renewals, continued convergence of SARA guide to Passport, new applications and advertising.

Subscribers worldwide receiving a license to Rovi-provided set-top box based IPG rose to $133 million at the end of Q3 2011, up from $126 million in Q3 2010. Excluding prepaid licensees, primarily Comcast and Dish, total Rovi licensed subscribers are now approximately 92 million versus 87 million in the year ago period. Subscribers receiving a Rovi-provided set-top box based IPG either a Passport or i-Guide rose 22% to $18 million at the end of Q2 2011.

Adjusted pro forma revenue in our CE vertical, which includes guidance products and patents licensed to device manufacturers DivX and ACP for hardware was $88 million in Q3 2011, up 16% from $76 million in Q3 2010.

As we continued to benefit from growth in shipments of IPG-enabled devices, as well as robust DivX growth. However, consistent with the trends from prior quarters, growth was partially offset by declines in our analog product line such as ACP.

This decline has been a headwind that we have discussed for quite a while now. However, to put a final point on it, we expect the impact of ACPs decline going forward to be much more significant and we believe we are nearing the end of meaningful revenue contribution from ACP.

Adjusted pro forma revenue for our consumer software and other vertical, which includes the Rovi Entertainment Store, data licensing, entertainment and Roxio offering, with $34 million in Q3 2011, down 16% from $41 million comparable period last year.

The drop off is attributable to the decline in demand for analog ACP for entertainment product and the more rapid than anticipated decline of the Roxio consumer software business.

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