Tags: David N Frazier | Rovi | Veveo | Stock

David N. Frazier: Rovi's Veveo Deal Is Something to Talk About

By    |   Thursday, 27 February 2014 05:20 PM

After making some bad acquisition decisions and seeing its income from continuing operations decline by 91 percent during the past three years, Rovi Corp. (ROVI) said  it plans to make an acquisition later this year that could lead to a substantial turnaround in the company’s operations.

Specifically, the Santa Clara, California-based company said that it will acquire Veveo, Inc., a software developer that enables people to communicate with various types of handheld electronic devices, including TV remote controls and smartphones, in a natural, conversational way one can talk to their devices, and those devices can respond in a natural human language.

Using Veveo’s technology, a person can communicate with their devices in an ongoing dialog wherein those devices are aware of the context or change in context, and the user can respond accordingly.

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Veveo’s capabilities simplify the process of connecting people to the TV programming and movies that are most relevant to them at any given moment across a range of devices.

Although you might not know be familiar with the name Rovi Corp., you probably use the company’s products and services every day.

Rovi designs and develops interactive TV programming guides and descriptions that you see when press the “guide” button on your TV’s remote control. It also designs and develops similar guides for movies, videos, music, books, games and other entertainment content.

The company’s programming database includes information on more than 5 million TV programs, 600,000 movies, 3.2 million music albums, 9 million books and 70,000 video games.

Rovi sells its product to, or has licensing agreements and partnerships with, Samsung, Sharp, Sony, Toshiba, Apple, Google and Microsoft. Its customers include British Sky Broadcasting, Charter Communications, Comcast, Cox Communications, Cablevision, DirecTV, EchoStar, Hulu, Sky Deutschland, Sky Italia, Shaw Communications, Time Warner Cable, and Verizon.

The company’s products are used in cable, satellite, and consumer electronics markets in more than 55 countries around the world.

Rovi holds 3,269 patents and 1,809 patents pending while Veveo holds 50 patents and 30 patents pending.

By combining Veveo’s contextual, speech-based search tools with Rovi’s robust search engine and extensive database, I expect cable and satellite TV operators, as well as social media companies and manufacturers of various types of handheld electronic devices, to quickly adopt Rovi’s next generation of search and discovery technology.

Rovi’s management stated in a press release that it issued on Feb. 24 that it expects the Veveo acquisition to “contribute double digit revenue growth and be accretive in fiscal year 2015.”

Although the company’s management stated in that same press release that it expects the Veveo acquisition to reduce Rovi’s net income during 2014, I expect that acquisition to add substantially to the company’s income during 2015.

Separately, I expect a transition away from the way that media content is distributed currently by service providers delivering content over managed networks to a single class of device, such as a television   to the delivery of content over both managed and unmanaged networks, and to many types of devices, to bode well for Rovi over the next several years.

Hence, the outlook for Rovi’s revenues and earnings, as well as its stock, appears to be very favorable.

And, that positive outlook is amplified by the fact that licensing contracts for four of Rovi’s larger customers Comcast, DirecTV, EchoStar, and Time Warner Cable are scheduled for renewal during 2015.

In light of the fact that 71 percent of Rovi’s revenues are derived from licensing agreements with cable TV and satellite TV service providers, and that the four service providers mentioned above provide their services to approximately 75 percent of U.S. households, the contract renewals scheduled for the year ahead also bode well for Rovi.

Specifically, my research indicates that contract renewals with those service providers will enable Rovi to increase its revenues by at least 20 percent and to increase its net earnings by approximately 50 percent during 2015.

Yet, I’m not one of those so-called “gurus” who makes investment recommendations based on what “could” happen. Instead, I prefer for companies to prove themselves by demonstrating that their able to grow their revenues and earnings before advising investors to purchase their stocks.

With Rovi’s stock closing on Feb. 26 at a price-to-earnings multiple of approximately 119, in terms of the company’s income from continuing operations, and my research indicating that the company will incur a loss for the year ending Dec. 31, 2014, financial market participants seem to be overvaluing Rovi. Meanwhile, price-momentum indicators for Rovi suggest that Rovi is due for a pullback.

Therefore, instead of recommending for investors and speculators to buy Rovi at this time, I encourage those of you who invest and speculate in growth stocks to monitor Rovi on a regular basis during the next few months and to wait for the stock to pull back substantially before committing any of your money to Rovi.

Rovi stock rose 29 cents, or 1.2 percent, to close Thursday at $24.99 in Nasdaq trading.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the president and chief market strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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After making some bad acquisition decisions and seeing its income from continuing operations decline by 91 percent during the past three years, Rovi Corp. (ROVI) said it plans to make an acquisition later this year that could lead to a substantial turnaround in the...
David N Frazier,Rovi,Veveo,Stock
Thursday, 27 February 2014 05:20 PM
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