Rovi Boosts Service Provider Sales 13% In Q3, But Shares Nosedive

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Rovi, a supplier of interactive program guides and digital entertainment solutions, increased sales to pay-TV operators 13% in the third quarter of 2011, but the company's shares plummeted 38% Wednesday after it cited a weak outlook for its analog-copy protection and Roxio consumer software businesses.

Rovi's stock was trading at $28.37 per share in morning trading, down $17.65 from Tuesday's closing price of $46.02 per share.

The company's service provider revenue, primarily comprised of IPG products and patents licensed to cable, satellite and telco TV providers, was up 13% year-over-year to $74.5 million in the third quarter.

"In our service provider vertical, despite the slowdown in growth for basic video cable subscribers in North America, our fundamentals remain positive as digital subscribers continue to grow," Rovi CEO Fred Amoroso said on the company's earnings call Tuesday.

Moreover, Rovi's service provider product revenue climbed 36% sequentially, marking the fifth consecutive quarter of revenue growth of more than 20%. The growth in the third quarter was driven by improved pricing on contract renewals, ongoing conversion of Cisco Systems' legacy SARA guide to Passport, new applications and advertising, Rovi chief financial officer James Budge said.

Amoroso said Rovi is converting about 8 million to 9 million subscriber households from the SARA guide, and "we are probably about 60% to 65% of the way through it."

As of the end of the third quarter, 133 million subscribers worldwide received a license to a Rovi-provided set-top-based IPG, up from 126 million in Q3 2010. Excluding prepaid licensees -- primarily Comcast and Dish Network -- total Rovi licensed subscribers are now approximately 92 million versus 87 million in the year-ago period, Budge said. Cable subscribers with either a Passport or i-Guide IPG rose 22%, to 18 million households.

Overall, Rovi posted revenue of $196.5 million for the third quarter of 2011, up 7.7% on a pro-forma basis (including revenue from Sonic Solutions in the year-ago quarter). Net income was $1.8 million, compared with $36.4 million for the third quarter of 2010.

But for the full-year 2011, the company said declines in its Analog Copy Protection and Roxio businesses as well as "near-term CE industry weakness" will hurt results. Rovi now expects revenue and income for the full-year 2011 to be at the "low end" of its previous estimates of between $770 million and $810 million in revenue and earnings per share of $2.35 to $2.60.

In 2012, Rovi expects a "meaningful drop-off" in revenues from Analog Copy Protection, which is used in DVDs and consumer electronics, to only about one-third of 2011 revenue; ACP sales are forecast to be between $60 million and $80 million this year. As a result, the company expects CE revenues for the full year 2012 to be flat compared with this year.

In its service provider segment, Rovi expects services provider growth in the "low to mid-teens range" in 2012, Budge said.

For its next-generation TotalGuide IPG, Rovi expects to have deals with service providers representing about 10 million subs by the end of the year. However, Budge noted, "while we have made excellent progress to date in signing TotalGuide wins for the service provider market, we do not expect those solutions to roll out into market in any scale such that they will contribute meaningful revenue until late 2012 or early 2013."

Customers deploying TotalGuide for set-top boxes and TotalGuide xD for smartphones and tablets include Armstrong Communications and BendBroadband. Rovi also announced wins with Charter Communications, Suddenlink Communications and Cogeco in Canada. 

"For many operators the proof remains in the pudding, as they say, which means that they will likely reserve commitment until they see TotalGuide deployed in the field by other operators," Amoroso said.

Initially, to avoid having to deploy higher-powered set-tops to run the full TotalGuide, "we anticipate service providers opting for a low-cost solution," Amoroso said, by adding incremental functionality on top of legacy IPGs through the apps such as remote DVR recording, multiroom DVR, switched digital video support and EBIF user agents.

Rovi is in discussions with several cable operators about delivering a private-label VOD system, which uses the Rovi Entertainment Store platform to let cable subscribers access video through IP-connected devices, Amoroso said. That offering will first come to market as part of TotalGuide xD, which is currently in field trials and will be in production before the end of the year, he said.

On the advertising front, Amoroso said Rovi is on track to reach an advertising footprint of more than 50 million homes by year-end driven in large part by significant launches by Cox Communications in key markets. The number of conventional ad campaigns rose 120% in Q3 and the number of conventional advertisers grew 350% year-over-year, he added.

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