The Baupost Group sells its shares in Rovi Corp. in 1Q 2014

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Must-know highlights of the Baupost Group’s 1Q 2014 positions (Part 6 of 7)

(Continued from Part 5)

The Baupost Group and Rovi Corp.

Seth Klarman’s Baupost Group initiated positions in Cheniere Energy Inc. (LNG), Keryx Biopharmaceuticals (KERX), and RF Micro Devices Inc. (RFMD), and the fund exited its positions in Fidelity National Financial (FNF) and Rovi Corp. (ROVI). The fund also pared its position in British oil company BP (BP).

The Baupost Group exited a position in Rovi Corp. (ROVI) that accounted for 1.21% of the fund’s total portfolio in 4Q 2013.

Rovi, formerly known as Macrovision Solutions, provides digital entertainment solutions, which drive program search and navigation on millions of devices globally. The company’s solutions include content discovery such as interactive program guides (or IPGs), search and recommendations, cloud data services, metadata, advertising, and analytics services. Its solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets. Its revenues are classified into service providers, consumer electronics or CE, and Other.

In January, Rovi signed new IP agreements with Google and Samsung, both of which expanded the scope of rights licensed from Rovi. It also renewed several key contracts, including two agreements that were renewed in advance of their 2014 expirations, and entered a multi-year product agreement with America Movil. Its CE IPG licensees include devices distributed under the Apple, Hitachi, LG, Panasonic, Samsung, Sharp, Sony, Toshiba, Vizio, and other brands.

Rovi sells DivX and MainConcept businesses and acquires Veveo in 1Q 2014

The video discovery specialist sold assets as part of its restructuring plan initiated in 3Q 2012 in order to “reduce costs and more efficiently manage its operating expenses.” In March, Rovi sold its DivX and MainConcept businesses to Parallax Capital Partners and StepStone Group for up to $75 million in a combination of cash and additional payments. This move was “part of Rovi’s strategic efforts to focus the company on growth opportunities related to its core entertainment discovery technologies and services.” In March 2014, it also sold its Nowtilus business, a provider of video-on-demand solutions in Germany.

In February, Rovi acquired Veveo, Inc., a provider of intuitive and personalized entertainment discovery solutions, for around $69 million. The release said the “transaction combines Veveo’s personalization and contextual search tools with Rovi’s search and recommendation engine and metadata to create a truly differentiated entertainment discovery solution. Veveo’s pioneering technologies include proprietary, Knowledge Graph driven semantic technologies and natural-language controls that enable the implementation of intuitive search and recommendation interfaces operated by voice-based commands.”

Stock falls on loss of patent infringement litigation

Shares fell in April after Rovi lost a patent infringement litigation against Amazon Inc. The company had sued the Amazon-owned IMDb in 2011 for infringing the two patents related to interactive television program guides. The company had also sued Netflix, Hulu, and Roku over similar patent infringements. Rovi said in a statement, “[Our] patent portfolio includes over 5000 issued patents and pending applications covering a wide range of fundamental digital entertainment capabilities related to guidance as well as DVR, video on demand, interactive applications, and multi-screen functionality. The portfolio supports Rovi’s deep product line including interactive guides, entertainment data, search and recommendations, advertising, and analytics that help enable entertainment personalization and monetization.”

Results top expectations but Consumer Electronics revenue declines

Rovi’s first-quarter fiscal 2014 results topped expectations. The company reported first quarter revenue of $142.5 million, an increase of 7.3% compared to $132.8 million in the first quarter of 2013. The year-over-year increase in revenue was attributable to growth in the Service Provider vertical along with an Analog Content Protection perpetual license in the Other sales vertical. Adjusted Pro Forma EPS was $0.45, compared to $0.37 in the first quarter of 2013.

Rovi said in its 10Q that the 12% rise in the Service Provider revenue to $98.0 million “was primarily due to IPG patent license revenue growth due to continued increase in the number of subscribers for which we receive a patent license fee and an increase in new IPG patent license agreements that included catch-up payments.” Rovi added, “We expect our service provider revenue to continue to grow in the future due to growth in product revenues driven by recent product deals and growth in revenue from products such as DTA guides, xD, in-guide advertising and analytics.”

Revenue from CE manufacturers decreased 23% to $29.5 million due to a decline in revenue from license agreements that included catch-up payments. Rovi said, “We expect our CE revenue to be flat in 2014 as increases in CE data revenue are offset by a decline in revenue from patent license agreements that included catch-up payments to make us whole for the pre-license period of use.” The Other segment saw an increase in revenue, as an analog content protection (ACP) perpetual license was signed during the quarter. Rovi said, “We expect other revenue to decline in the future as our customers continue to decrease their use of analog copy protection.”

Rovi expects fiscal year 2014 revenue of between $520 million and $550 million, and, after adjusting expectations for the Veveo acquisition, fiscal year 2014 adjusted pro forma income per common share of $1.50 to $1.80.

Rovi increases its buyback program to $200 million

Rovi drove shareholder value by repurchasing 5.0 million shares for $123.1 million in the first quarter. The company had approximately $51.9 million remaining under its prior stock repurchase authorization at the end of the quarter. In April, 2014, the board increased the stock repurchase authorization to $200 million. It bought back 9.1 million shares for $182.1 million during fiscal 2013.

Continue to Part 7

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