ROVI: Compelling Reward To Risk
Ravee Mehta | Apr 30, 2013 12:44AM ET
ROVI Corp. (ROVI) is a compelling long trading at about 11x forward EPS. This valuation is very attractive relative to management’s guidance for 20% long term operating profit growth. ROVI has dominant market positions and a relatively high mix of high margin, recurring revenue. The company’s growth is tied to several secular trends including growing media consumption on mobile devices such as tablets, smart-phones and laptops and the growth of Over-The-Top (“OTT”) video services such as those offered by Netflix (NFLX), Amazon (AMZN) and Hulu.
Business Description
ROVI is a technology company focused on the discovery, delivery, display and monetization of digital entertainment. It is best known for its discovery intellectual property which almost all North American pay TV service providers such as Comcast (CMCSA), DirecTV (DTV), EchoStar (DISH) and Time Warner Cable (TWC) license in order to offer their customers an interactive programming guide (“IPG”). Licensing agreements vary but several sell-side analysts estimate that ROVI receives at least about 20c per month per subscriber for their IPG patents. The company also sells advertising inventory within these guides and its “metadata” which allows its customers to include cover art and information such as a short blurb about what a specific show is about. ROVI also does business with consumer electronics companies. These customers also license ROVI’s IPGs as well as several other technologies such as DivX, a high quality video compression-decompression software library.
Investment Highlights:Increased number of use-cases will drive higher licensing revenue from new and existing customers. ROVI licenses its technology by use-case. Pay TV service providers have historically paid ROVI for the TV use-case. Now that consumers have a desire to be able to watch TV from any device that has a screen, service providers are being forced to pay ROVI more for the “TV Everywhere” use-case. The increased range of devices for video consumption has also increased the potential number of consumer electronics customers for ROVI. For example, Apple (AAPL) signed a licensing deal in 2010. Time Warner Cable has recently been advertising “In any room on any screen.” In case you missed their Superbowl advertisement, you can see it Disclaimer associated with this blog. The author owns shares of ROVI at the time of publishing this article. The author may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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