Rovi Corp - FORM 10-Q - July 30, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 000-53413
_____________________________________________________________ 
Rovi Corporation
(Exact name of registrant as specified in its charter)_____________________________________________________________ 
Delaware
 
26-1739297
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2830 De La Cruz Boulevard, Santa Clara, CA
 
95050
(Address of principal executive offices)
 
(Zip Code)

(408) 562-8400
(Registrant's telephone number, including area code)
_____________________________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of July 24, 2015
Common Stock
 
86,916,023





ROVI CORPORATION AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 



1

PART I. Financial Information

Item 1. Financial Statements

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

June 30,
2015

December 31,
2014
ASSETS
(unaudited)


Current assets:



Cash and cash equivalents
$
115,940


$
154,568

Short-term marketable securities
100,896


183,074

Accounts receivable, net
83,847


83,514

Deferred tax assets, net
10,553


18,553

Prepaid expenses and other current assets
14,638


12,851

Total current assets
325,874


452,560

Long-term marketable securities
164,533


131,378

Property and equipment, net
34,563


37,227

Intangible assets, net
424,864


463,348

Goodwill
1,343,543


1,343,652

Other long-term assets
22,961


17,225

Total assets
$
2,316,338


$
2,445,390





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
68,776


$
83,208

Deferred revenue
19,922


18,399

Current portion of long-term debt
7,000


302,375

Total current liabilities
95,698


403,982

Taxes payable, less current portion
9,483


10,100

Deferred revenue, less current portion
14,755


15,722

Long-term debt, less current portion
1,042,582


804,557

Long-term deferred tax liabilities, net
76,062


80,751

Other long-term liabilities
27,106


24,014

Total liabilities
1,265,686


1,339,126

Commitments and contingencies (Note 9)





Stockholders' equity:



Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding
—


—

Common stock, $0.001 par value, 250,000 shares authorized; 130,756 shares issued and 86,858 outstanding as of June 30, 2015, and 130,627 shares issued and 91,729 outstanding as of December 31, 2014
131


131

Treasury stock, 43,898 shares and 38,898 shares at June 30, 2015 and December 31, 2014, respectively, at cost
(1,113,386
)

(1,013,218
)
Additional paid-in capital
2,397,069


2,339,817

Accumulated other comprehensive loss
(5,871
)

(5,307
)
Accumulated deficit
(227,291
)

(215,159
)
Total stockholders’ equity
1,050,652


1,106,264

Total liabilities and stockholders’ equity
$
2,316,338


$
2,445,390


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015

2014
 
2015
 
2014
Revenues
$
127,820


$
137,062

 
$
261,845

 
$
279,512

Costs and expenses:



 
 
 
 
Cost of revenues, excluding amortization of intangible assets
25,669


26,040

 
53,799

 
58,536

Research and development
27,017


28,933

 
55,142

 
54,490

Selling, general and administrative
39,494


37,494

 
77,854

 
72,404

Depreciation
4,448


4,550

 
8,818

 
8,951

Amortization of intangible assets
19,236


19,330

 
38,600

 
38,020

Restructuring and asset impairment (benefit) charges
(178
)

3,505

 
1,539

 
5,682

Total costs and expenses
115,686


119,852

 
235,752

 
238,083

Operating income from continuing operations
12,134


17,210

 
26,093

 
41,429

Interest expense
(11,715
)

(13,196
)
 
(24,073
)
 
(26,759
)
Interest income and other, net
(183
)

1,597

 
503

 
1,835

Income (loss) on interest rate swaps
4,399


(4,701
)
 
(5,319
)
 
(7,336
)
Loss on debt extinguishment
(20
)

—

 
(120
)
 
—

Income (loss) from continuing operations before income taxes
4,615


910

 
(2,916
)
 
9,169

Income tax expense
1,277


3,624

 
9,216

 
10,200

Income (loss) from continuing operations, net of tax
3,338


(2,714
)
 
(12,132
)
 
(1,031
)
Income (loss) from discontinued operations, net of tax
—


74

 
—

 
(55,874
)
Net income (loss)
$
3,338


$
(2,640
)
 
$
(12,132
)
 
$
(56,905
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:



 
 
 
 
Continuing operations
$
0.04


$
(0.03
)
 
$
(0.14
)
 
$
(0.01
)
Discontinued operations
—


—

 
—

 
(0.61
)
Basic earnings (loss) per share
$
0.04


$
(0.03
)
 
$
(0.14
)
 
$
(0.62
)
Weighted average shares used in computing basic earnings (loss) per share
85,248

 
91,019

 
86,767

 
92,246

Diluted earnings (loss) per share:



 
 
 
 
Continuing operations
$
0.04


$
(0.03
)
 
$
(0.14
)
 
$
(0.01
)
Discontinued operations
—


—

 
—

 
(0.61
)
Diluted earnings (loss) per share
$
0.04


$
(0.03
)
 
$
(0.14
)
 
$
(0.62
)
Weighted average shares used in computing diluted earnings (loss) per share
85,487

 
91,019

 
86,767

 
92,246


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
3,338

 
$
(2,640
)
 
$
(12,132
)
 
$
(56,905
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(666
)
 
378

 
(518
)
 
520

Unrealized (losses) gains on marketable securities
(190
)
 
25

 
(46
)
 
172

Other comprehensive (loss) income, net of tax
(856
)
 
403

 
(564
)
 
692

Comprehensive income (loss)
$
2,482

 
$
(2,237
)
 
$
(12,696
)
 
$
(56,213
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(12,132
)
 
$
(56,905
)
Adjustments to reconcile net loss to net cash provided by operations:
 
 
 
Loss from discontinued operations, net of tax
—

 
55,874

Depreciation
8,818

 
8,951

Amortization of intangible assets
38,600

 
38,020

Amortization of convertible note discount and note issuance costs
6,986

 
8,747

Decrease in fair value of interest rate swaps
3,461

 
7,247

Equity-based compensation
22,716

 
22,160

Deferred income taxes
3,747

 
(4,757
)
Other operating, net
3,001

 
4,233

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(747
)
 
18,899

Prepaid expenses and other current assets and other long-term assets
(1,544
)
 
(2,180
)
Accounts payable and accrued expenses and other long-term liabilities
(7,334
)
 
(8,398
)
Accrued taxes
(380
)
 
4,668

Deferred revenue
556

 
25,539

Net cash provided by operating activities of continuing operations
65,748

 
122,098

Net cash used in operating activities of discontinued operations
(194
)
 
(1,968
)
Net cash provided by operating activities
65,554

 
120,130

Cash flows from investing activities:
 
 
 
Purchases of short- and long-term marketable securities
(134,396
)
 
(138,430
)
Sales or maturities of short- and long-term marketable securities
182,376

 
310,563

Purchases of property and equipment
(5,536
)
 
(10,189
)
Payments for acquisitions, net of cash acquired
(5,140
)
 
(60,707
)
Proceeds from sale of business
—

 
50,298

Other investing, net
(53
)
 
(789
)
Net cash provided by investing activities of continuing operations
37,251

 
150,746

Net cash provided by investing activities of discontinued operations
—

 
—

Net cash provided by investing activities
37,251

 
150,746

Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
100,000

 
—

Payments on revolving credit facility
(100,000
)
 
—

Proceeds from issuance of long-term debt, net of issuance costs
335,616

 
—

Principal payments on long-term debt
(344,490
)
 
(50,000
)
Proceeds from sale of warrants
31,326

 
—

Payments for purchase of call options
(64,825
)
 
—

Payments for purchase of treasury stock
(104,519
)
 
(123,139
)
Proceeds from exercise of options and employee stock purchase plan
5,866

 
11,638

Net cash used in financing activities of continuing operations
(141,026
)
 
(161,501
)
Net cash used in financing activities of discontinued operations
—

 
—

Net cash used in financing activities
(141,026
)
 
(161,501
)
Effect of exchange rate changes on cash and cash equivalents
(407
)
 
251

Net (decrease) increase in cash and cash equivalents
(38,628
)
 
109,626

Cash and cash equivalents at beginning of period
154,568

 
156,487

Cash and cash equivalents at end of period
$
115,940

 
$
266,113


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Significant Accounting Policies

Description of Business

Rovi Corporation (the “Company”) is focused on powering the discovery and personalization of digital entertainment. The Company provides a broad set of integrated solutions that are embedded in its customers' products and services, connecting consumers with entertainment. Content discovery solutions include interactive program guides (“IPGs”), search and recommendation services, cloud data services and the Company's extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). In addition to offering Company developed IPGs, customers may also license the Company's patents and deploy their own IPG or a third party IPG. The Company also offers advertising and analytics services.  The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets.

Basis of Presentation
    
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are considered necessary to present fairly the results for the periods presented.

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2015, for any future year, or for any other future interim period.

The accompanying Condensed Consolidated Financial Statements include the accounts of Rovi Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary after the elimination of intercompany accounts and transactions.
    
Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.

Major Customers

Customers, and concentrations of customers, representing 10% or more of revenue were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
DIRECTV
12
%
 
11
%
 
12
%
 
11
%
Aggregate of Comcast Corporation, DIRECTV and Time Warner Cable Inc.
24
%
 
22
%
 
23
%
 
21
%


6

Substantially all of the Company's revenue from DIRECTV is reported in the Intellectual Property Licensing segment. The Company's contracts with Time Warner Cable Inc. and DIRECTV expire in September and December of 2015, respectively, and the contract with Comcast Corporation expires in March 2016.

Related Party Transaction

During the three months ended June 30, 2015, the Company recorded $1.5 million in expenses related to the reimbursement of costs incurred by Engaged Capital, LLC (“Engaged”) in connection with the contested proxy election. Engaged is a related party as Glenn W. Welling is a member of the Company’s Board of Directors and is also a Principal and the Chief Investment Officer at Engaged. As of June 30, 2015, the costs are included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (the "FASB") issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license, the customer accounts for the arrangement as a service contract. The guidance is effective beginning January 1, 2016, with early adoption permitted. The guidance can be applied prospectively to all arrangements entered into or materially modified after the effective date or on a retrospective basis. The Company is currently evaluating the effect the transition alternatives and guidance will have on its Condensed Consolidated Financial Statements.

In April 2015, the FASB amended its existing accounting standards for the presentation of debt issuance costs in the statement of financial position. The amendments require that debt issuance costs related to a recognized debt obligation be presented as a deduction from the carrying amount of the debt obligation, with the associated amortization recognized as a component of interest expense. The Company expects to retrospectively apply the amendments in the first quarter of 2016. As of June 30, 2015 and December 31, 2014, the Company presented $13.9 million and $7.6 million, respectively, of debt issuance costs in Other long-term assets in the Condensed Consolidated Balance Sheets.

In May 2014, the FASB amended its existing accounting standards for revenue recognition. The amendments provide enhancements to the quality and consistency of how revenue is recognized while also improving comparability between the financial statements of companies applying U.S. GAAP and International Financial Reporting Standards. The core principle of the amended standard is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for the Company in the first quarter of 2018 and may be applied on a full retrospective or modified retrospective approach. Early adoption is permitted beginning in the first quarter of 2017. The Company is currently evaluating the effect the transition alternatives and amendments will have on its Condensed Consolidated Financial Statements.

In April 2014, the FASB issued guidance which modified the criteria for identifying a discontinued operation. The modification limited the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. Application of the modified criteria on January 1, 2015 did not have a material effect on the Condensed Consolidated Financial Statements.

(2) Acquisitions

2014 Acquisitions

Fanhattan Acquisition

On October 31, 2014, the Company acquired Fanhattan, Inc. ("Fanhattan"), and its cloud-based Fan TV branded products, for $12.0 million in cash.

The unaudited pro forma financial information presented below (in thousands, except per share amounts) presents the combined results of operations as if the acquisition of Fanhattan had been completed on January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of

7

future results of operations. The unaudited pro forma financial information does not include any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the companies.
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Net revenue
$
137,064

 
$
279,517

Operating income from continuing operations
$
13,988

 
$
34,828

Loss from continuing operations, net of tax
$
(5,937
)
 
$
(7,638
)
Basic loss per share from continuing operations
$
(0.07
)
 
$
(0.08
)
Diluted loss per share from continuing operations
$
(0.07
)
 
$
(0.08
)

Veveo Acquisition

On February 28, 2014, the Company acquired Veveo Inc. ("Veveo") for $67.6 million in cash, plus up to an additional $7.0 million in contingent consideration if certain sales and engineering goals are met. Veveo is a provider of intuitive and personalized entertainment discovery solutions. In April 2015, a portion of the contingency period concluded and $2.1 million of contingent consideration was paid as certain engineering goals were satisfied. At June 30, 2015 and December 31, 2014, the contingent consideration has been included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets at its estimated fair value of $0.9 million and $3.0 million, respectively.
    
Patent Acquisition

On July 7, 2014, the Company purchased a portfolio of patents for $28.0 million in cash. The portfolio includes approximately 500 issued and pending patents, with slightly more than half being issued U.S. patents. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over ten years.

2013 Acquisition

On March 8, 2013, the Company acquired IntegralReach Corporation ("IntegralReach") for $10.0 million in cash, plus up to an additional $3.0 million in contingent consideration if certain customer attainment goals were met. IntegralReach is an analytics technology company with core technology built for analyzing large amounts of data. In March 2015, the contingency period concluded and $3.0 million of contingent consideration was paid as certain customer attainment goals were satisfied.

(3) Discontinued Operations and Assets Held for Sale

DivX and MainConcept

During the fourth quarter of 2013, the Company determined it would pursue selling its DivX and MainConcept businesses. DivX and MainConcept were providers of a high-quality video compression-decompression software and a software library that enabled the distribution of content across the internet and through recordable media, in either physical or streamed forms. On March 31, 2014, the Company sold its DivX and MainConcept businesses for $52.5 million in cash, plus up to $22.5 million in additional payments based on the achievement of certain revenue milestones over the three years following the acquisition. The results of operations and cash flows of the DivX and MainConcept businesses have been presented in discontinued operations for all periods presented.

Nowtilus

In March 2014, the Company sold its Nowtilus business. Nowtilus was a provider of video-on-demand solutions in Germany. The results of operations and cash flows of the Nowtilus business have been presented in discontinued operations for all periods presented.


8

All Discontinued Operations

The results of discontinued operations consist of the following (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
DivX and MainConcept
$
—

 
$
—

 
$
—

 
$
14,952

Nowtilus
—

 
—

 
—

 
100

Income (loss) from operations before tax:
 
 
 
 
 
 
 
DivX and MainConcept
—

 
—

 
—

 
1,873

Nowtilus
—

 
—

 
—

 
(562
)
Loss on disposal before tax
—

 
(146
)
 
—

 
(54,648
)
Income tax benefit (expense)
—

 
220

 
—

 
(2,537
)
Income (loss) from discontinued operations, net of tax
$
—

 
$
74

 
$
—

 
$
(55,874
)

(4) Investments
The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
 
June 30, 2015
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
66,481

 
$
—

 
$
—

 
$
66,481

Cash equivalents - Money market funds
49,459

 
—

 
—

 
49,459

Cash and cash equivalents
$
115,940

 
$
—

 
$
—

 
$
115,940

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$
—

 
$
(216
)
 
$
10,584

Corporate debt securities
85,077

 
10

 
(125
)
 
84,962

Foreign government obligations
12,030

 
—

 
(32
)
 
11,998

U.S. Treasuries / Agencies
157,925

 
49

 
(89
)
 
157,885

Marketable securities
$
265,832

 
$
59

 
$
(462
)
 
$
265,429

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
381,369


 
 
December 31, 2014
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
63,622

 
$
—

 
$
—

 
$
63,622

Cash equivalents - Money market funds
90,946

 
—

 
—

 
90,946

Cash and cash equivalents
$
154,568

 
$
—

 
$
—

 
$
154,568

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$
—

 
$
(162
)
 
$
10,638

Corporate debt securities
98,379

 
13

 
(116
)
 
98,276

Foreign government obligations
10,551

 
—

 
(4
)
 
10,547

U.S. Treasuries / Agencies
195,077

 
37

 
(123
)
 
194,991

Marketable securities
$
314,807

 
$
50

 
$
(405
)
 
$
314,452

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
469,020

The Company has designated its marketable securities as available-for-sale.
Fair value is estimated, and realized gains and losses are calculated, based on the specific identification method. 

9

The Company attributes the unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities at June 30, 2015 are comprised solely of AAA-rated investments in federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.
As of June 30, 2015, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in 1 year or less
$
100,928

 
$
100,896

Due in 1-2 years
153,934

 
153,784

Due in more than 2 years
10,970

 
10,749

Total
$
265,832

 
$
265,429


(5) Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. The fair value hierarchy gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):

10

 
 
June 30, 2015
 
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Money market funds
$
49,459

 
$
49,459

 
$
—

 
$
—

 
Short-term marketable securities
 
 
 
 
 
 
 
 
Corporate debt securities
49,574

 
—

 
49,574

 
—

 
U.S. Treasuries / Agencies
51,322

 
—

 
51,322

 
—

 
Long-term marketable securities
 
 
 
 
 
 
 
 
Auction rate securities
10,584

 
—

 
—

 
10,584

 
Corporate debt securities
35,388

 
—

 
35,388

 
—

 
Foreign government obligations
11,998

 
—

 
11,998

 
—

 
U.S. Treasuries / Agencies
106,563

 
—

 
106,563

 
—

 
Total Assets
$
314,888

 
$
49,459

 
$
254,845

 
$
10,584

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
 
Veveo contingent consideration
$
(860
)
 
$
—

 
$
—

 
$
(860
)
 
Interest rate swaps
(1,394
)
 
—

 
(1,394
)
 
—

 
Other long-term liabilities
 
 
 
 
 
 
 
 
Interest rate swaps
(18,855
)
 
—

 
(18,855
)
 
—

 
Total Liabilities
$
(21,109
)
 
$
—

 
$
(20,249
)
 
$
(860
)
 
 
 
December 31, 2014
 
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Money market funds
$
90,946

 
$
90,946

 
$
—

 
$
—

 
Short-term marketable securities
 
 
 
 
 
 
 
 
Corporate debt securities
73,499

 
—

 
73,499

 
—

 
Foreign government obligations
9,534

 
—

 
9,534

 
—

 
U.S. Treasuries / Agencies
100,041

 
—

 
100,041

 
—

 
Long-term marketable securities
 
 

 

 

 
Auction rate securities
10,638

 
—

 
—

 
10,638

 
Corporate debt securities
24,777

 
—

 
24,777

 
—

 
Foreign government obligations
1,013

 
—

 
1,013

 
—

 
U.S. Treasuries / Agencies
94,950

 
—

 
94,950

 
—

 
Total Assets
$
405,398

 
$
90,946

 
$
303,814

 
$
10,638

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
 
IntegralReach contingent consideration
$
(3,000
)
 
$
—

 
$
—

 
$
(3,000
)
 
Veveo contingent consideration
(3,000
)
 
—

 
—

 
(3,000
)
 
Other long-term liabilities
 
 
 
 
 
 
 
 
Interest rate swaps (1)
(16,788
)
 
—

 
(16,788
)
 
—

 
Total Liabilities
$
(22,788
)
 
$
—

 
$
(16,788
)
 
$
(6,000
)


11

(1)
As of December 31, 2014, the fair value of interest rate swaps in an asset position was $5.8 million and in a liability position was $22.6 million. These amounts have been recorded on a net basis in the Condensed Consolidated Balance Sheets.
The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three and six months ended June 30, 2015 and 2014, there were no transfers of assets between levels of the fair value hierarchy.
Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
Auction rate securities
 
Veveo contingent consideration
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
Balance at beginning of period
$
10,638

 
$
(3,000
)
 
$
15,049

 
$
(3,000
)
 
$
(5,700
)
Settlements
—

 
2,140

 
—

 
—

 
—

Unrealized (loss) gain included in accumulated other comprehensive loss
(54
)
 
—

 
96

 
—

 
—

Balance at end of period
$
10,584

 
$
(860
)
 
$
15,145

 
$
(3,000
)
 
$
(5,700
)
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
Balance at beginning of period
$
10,638

 
$
(3,000
)
 
$
(3,000
)
 
$
14,903

 
$
(3,000
)
 
$
—

Purchases
—

 
—

 
—

 
—

 
—

 
(5,700
)
Settlements
—

 
3,000

 
2,140

 
—

 
—

 
—

Unrealized (loss) gain included in accumulated other comprehensive loss
(54
)
 
—

 
—

 
242

 
—

 
—

Balance at end of period
$
10,584

 
$
—

 
$
(860
)
 
$
15,145

 
$
(3,000
)
 
$
(5,700
)
Valuation Techniques
The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets, obtained from a third party pricing service.
The fair value of auction rate securities is estimated using a discounted cash flow analysis or other type of valuation model. These estimates are highly judgmental and consider, among other items, the likelihood of redemption, credit quality, duration, insurance wraps and expected future cash flows. These securities were also compared, when possible, to other observable market data with characteristics similar to the securities held by the Company.
The fair value of interest rate swaps is estimated using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments that reflect nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of its master netting agreements.
The fair value of contingent consideration relating to acquisitions is estimated considering the amount that could ultimately be paid based on the terms of the underlying purchase agreement utilizing a probability-weighted discounted cash flow analysis. The significant unobservable inputs used in calculating the fair value of the contingent consideration include financial performance scenarios, the probability of achieving those scenarios and the discount rate.

12

Other Fair Value Disclosures
The carrying amount and fair value of debt issued by the Company were as follows (in thousands): 
 
June 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair Value (1)
 
Carrying Amount
 
Fair Value (1)
2020 Convertible Notes
$
284,957

 
$
315,675

 
$
—

 
$
—

Term Loan A Facility
74,666

 
73,875

 
124,580

 
120,000

Term Loan B Facility
689,959

 
680,873

 
693,227

 
679,958

2040 Convertible Notes
—

 
—

 
289,125

 
291,354

Total
$
1,049,582

 
$
1,070,423

 
$
1,106,932

 
$
1,091,312


(1)
The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active or an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued by the Company would be classified in Level 2 of the fair value hierarchy.

(6) Goodwill and Intangible Assets, Net

Goodwill allocated to the reportable segments as of June 30, 2015 and changes in the carrying amount of goodwill during the six months ended June 30, 2015 were as follows (in thousands):
 
 
Balance at
Beginning of
Period
 
Foreign Currency Translation
 
Balance at End
of Period
Intellectual Property Licensing
 
$
1,184,500

 
$
—

 
$
1,184,500

Product
 
159,152

 
(109
)
 
159,043

Total
 
$
1,343,652

 
$
(109
)
 
$
1,343,543

    
The Company assesses goodwill for potential impairment annually as of October 1, or more frequently if circumstances indicate the carrying amount of goodwill may not be recoverable.

Intangible assets consist of the following (in thousands): 
 
June 30, 2015
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,187

 
$
(478,109
)
 
$
397,078

Existing contracts and customer relationships
47,524

 
(34,492
)
 
13,032

Content databases and other
58,720

 
(43,966
)
 
14,754

Trademarks / Tradenames
8,300

 
(8,300
)
 
—

Total
$
989,731

 
$
(564,867
)
 
$
424,864

 
 
 
 
 
 
 
December 31, 2014
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,187

 
$
(443,986
)
 
$
431,201

Existing contracts and customer relationships
47,524

 
(32,010
)
 
15,514

Content databases and other
58,638

 
(42,005
)
 
16,633

Trademarks / Tradenames
8,300

 
(8,300
)
 
—

Total
$
989,649

 
$
(526,301
)
 
$
463,348


13

As of June 30, 2015, future estimated amortization expense was as follows (in thousands): 
Remainder of 2015
$
38,370

2016
75,300

2017
73,107

2018
69,698

2019
67,875

Thereafter
100,514

Total
$
424,864


(7) Restructuring and Asset Impairment (Benefit) Charges
In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 the Company conducted a review of its remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, the Company took cost reduction actions that resulted in a restructuring and asset impairment charges. Components of the restructuring and asset impairment (benefit) charges were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Present value of future minimum lease payments for abandoned office space
$
—

 
$
1,221

 
$
1,499

 
$
1,496

Severance
(178
)
 
1,521

 
40

 
2,947

Asset impairment
—

 
763

 
—

 
1,016

Contract termination
—

 
—

 
—

 
223

Restructuring and asset impairment (benefit) charges
$
(178
)
 
$
3,505

 
$
1,539

 
$
5,682

As of June 30, 2015, $1.1 million of severance and $2.2 million in future minimum lease payments for abandoned office space remains accrued.
(8) Debt and Interest Rate Swaps

Details of the Company's financing arrangements were as follows (dollars in thousands):
 
 
 
 
June 30, 2015
 
December 31, 2014
 
Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
284,957

 
$
—

$
—

Term Loan Facility A
Variable
July 2, 2014
July 2, 2019
75,000

74,666

 
125,000

124,580

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
693,000

689,959

 
696,500

693,227

2040 Convertible Notes
2.625%
March 17, 2010
February 15, 2040
—

—

 
290,990

289,125

Total Long-term debt
 
 
 
$
1,113,000

1,049,582

 
$
1,112,490

1,106,932

Less: Current portion of long-term debt
 
 
 
 
7,000

 
 
302,375

Long-term debt, less current portion
 
 
 
 
$
1,042,582

 
 
$
804,557


2020 Convertible Notes

The Company issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at a rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015.

The 2020 Convertible Notes are convertible at an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes, which is equivalent to an initial conversion price of $28.9044 per share of common stock.

14

Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:

•
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
•
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of the Company’s common stock over a specified observation period. On conversion, the Company will pay cash up to the aggregate principal amount of the 2020 Convertible Notes converted and deliver shares of the Company’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.

The initial conversion rate will be subject to adjustment in certain events, including certain events that constitute a make-whole fundamental change (as defined in the 2015 Indenture). In addition, if the Company undergoes a fundamental change (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require the Company to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The initial conversion rate is also subject to customary anti-dilution adjustments.

The 2020 Convertible Notes are not redeemable prior to maturity by the Company and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by the Company. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.

The Company has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using the Company’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal amount of the 2020 Convertible Notes. The difference between the principal amount of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Liability Component
 
 
 
Principal outstanding
$
345,000

 
$
—

Less: Unamortized debt discount
60,043

 
—

Carrying amount
$
284,957

 
$
—

 
 
 
 
Equity Component
$
63,854

 
$
—



15

Components of interest expense related to the 2020 Convertible Notes were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Stated interest
$
431

 
$
—

 
$
575

 
$
—

Amortization of debt discount
2,864

 
—

 
3,811

 
—

Total interest expense
$
3,295

 
$
—

 
$
4,386

 
$
—


The Company incurred $9.4 million in transaction costs related to the issuance of the 2020 Convertible Notes. The Company allocated the transaction costs to the liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at date of issuance. Transaction costs of $7.7 million attributable to the liability component were recorded in Other long-term assets in the Condensed Consolidated Balance Sheets and are being amortized to interest expense over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.

Purchased Call Options and Sold Warrants

Concurrent with the issuance of the 2020 Convertible Notes, the Company paid $64.8 million to purchase call options with respect to its common stock. The call options give the Company the right, but not the obligation, to purchase up to 11.9 million shares of the Company's common stock at a strike price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by the Company on conversion of the 2020 Convertible Notes. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.

Concurrent with the issuance of the 2020 Convertible Notes, the Company received $31.3 million from the sale of warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of common stock at a strike price of $40.1450 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at the Company's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.

The amounts paid to purchase the call options and received to sell the warrants were recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets.

Senior Secured Credit Facility

On July 2, 2014, the Company, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) a five-year $125 million term loan A facility (the “Term Loan A Facility”), (ii) a seven-year $700 million term loan B facility (the “Term Loan B Facility” and together with the Term Loan A Facility, the “Term Loan Facility”) and (iii) a five-year $175 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). Loans under the Term Loan A Facility bear interest, at the Company's option, at a rate equal to either the London Interbank Offering Rate ("LIBOR"), plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum. Loans under the Term Loan B Facility bear interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum. Loans under the Revolving Facility bear interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum, subject to reduction by 0.25% or 0.50% based upon the Company's total secured leverage ratio (as defined in the Credit Agreement).

In June 2015, the Company made a voluntary principal prepayment of $50.0 million on the Term Loan A Facility.

In February 2015, $100.0 million was borrowed against the Revolving Facility, in part, to extinguish a portion of the 2040 Convertible Notes. In March 2015, using a portion of the proceeds from the 2020 Convertible Notes issuance, all outstanding borrowings under the Revolving Facility were repaid. As of June 30, 2015, $175.0 million was available under the Revolving Facility.

16


The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Term Loan A Facility and the Revolving Facility contain financial covenants that require the Company to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. The Term Loan B Facility does not contain a minimum consolidated interest coverage ratio or a maximum total leverage ratio covenant. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No additional payment was required in February 2015.

Convertible Senior Notes Due 2040

The Company issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par (the “2040 Convertible Notes”) pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015, holders of $287.4 million of outstanding principal exercised their right to require the Company to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, the Company redeemed the remaining $3.6 million of outstanding principal. As of June 30, 2015, no amounts related to the 2040 Convertible Notes remain outstanding.

In accounting for the 2040 Convertible Notes, the Company separately accounted for the liability and equity components to reflect its non-convertible borrowing rate of 7.75% at the time the instrument was issued. The debt discount was amortized through February 2015, which was first date the 2040 Convertible Notes could be called by the Company or put to the Company by the holders.

Related to the 2040 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Principal outstanding
$
—

 
$
290,990

Less: Unamortized debt discount
—

 
1,865

Carrying amount
$
—

 
$
289,125


Components of interest expense related to the 2040 Convertible Notes were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Stated interest
$
25

 
$
1,910

 
$
1,114

 
$
3,819

Amortization of debt discount
—

 
3,454

 
1,865

 
6,845

Total interest expense
$
25

 
$
5,364

 
$
2,979

 
$
10,664


Debt Maturities

As of June 30, 2015, aggregate future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
Remainder of 2015
$
3,500

2016
7,000

2017
7,000

2018
7,000

2019 (1)
427,000

Thereafter
661,500

Total
$
1,113,000


(1)
Aggregate future principal payments on the 2020 Convertible Notes have been included based on the date they can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances.

17


Interest Rate Swaps

The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as Income (loss) on interest rate swaps in the Condensed Consolidated Statements of Operations. During the three months ended June 30, 2015 and 2014, the Company recorded a gain of $4.4 million and a loss of $4.7 million, respectively, on its interest rate swaps. During the six months ended June 30, 2015 and 2014, the Company recorded losses of $5.3 million and $7.3 million, respectively, on its interest rate swaps.

Details of the Company's interest rate swaps as of June 30, 2015 and December 31, 2014 were as follows (dollars in thousands):
Contract Inception
Contract Effective Date
Contract Maturity
Notional
Interest Rate Paid
Interest Rate Received
2040 Convertible Notes
 
 
 
 
March 2010
March 2010
February 2015
$
460,000

(1)
2.625%
November 2010
August 2010
February 2015
460,000

(2)
(3)
Senior Secured Credit Facility
 
 
 
May 2012
January 2014
January 2016
197,000

(4)
One month USD-LIBOR
May 2012
April 2014
March 2017
215,000

(5)
One month USD-LIBOR
June 2013
January 2016
March 2019
250,000

2.23%
One month USD-LIBOR
September 2014
January 2016
July 2021
125,000

2.66%
One month USD-LIBOR
September 2014
March 2017
July 2021
200,000

2.93%
One month USD-LIBOR

(1)
The Company paid a weighted average of six month USD-LIBOR minus 0.342%, set in arrears.
(2)
The Company paid a fixed interest rate which gradually increased from 0.203% for the six-month settlement period ended in February 2011 to 2.619% for the six-month settlement period ended February 2015.
(3)
The Company receives a weighted average of six month USD-LIBOR minus 0.342%, set in arrears.
(4)
The Company pays a fixed interest rate which gradually increases from 0.58% for the three-month settlement period ended in June 2014 to 1.65% for the settlement period ending in January 2016.
(5)
The Company pays a fixed interest rate which gradually increases from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ending in March 2017.

The combination of interest rate swaps related to the 2040 Convertible Notes had the effect of fixing the interest rate the Company paid at a fixed rate which gradually increased from 0.203% for the six-month settlement period ended in February 2011 to 2.619% for the six-month settlement period ended in February 2015.

(9) Commitments and Contingencies

Lease Commitments
The Company leases facilities and certain equipment pursuant to noncancelable operating lease agreements expiring through 2025. Rent expense is recognized on a straight-line basis over the lease term.  Allowances from lessors for tenant improvements are amortized over the lease term on a straight-line basis. Leasehold improvements are capitalized and depreciated over the shorter of the useful life of the asset or the remaining term of the lease.

18

Future minimum payments for operating leases as of June 30, 2015 were as follows (in thousands):
Remainder of 2015
$
10,651

2016
17,799

2017
13,264

2018
11,863

2019
10,023

Thereafter
42,963

Gross future minimum lease payments
$
106,563

Less: Sublease revenues
(9,372
)
Net future minimum lease payments
$
97,191


Indemnifications

In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees against claims made by third parties arising out of the use and / or incorporation of the Company's products, intellectual property, services and / or technologies into the licensees' products and services. In some cases, the Company may receive tenders of defense and indemnity arising out of products, intellectual property services and / or technologies that are no longer provided by the Company due to having divested certain assets, but which were previously licensed or provided by the Company. The Company's indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee under the license agreement; however, some license agreements, including those with the Company's largest multiple system operators and digital broadcast satellite providers, have larger limits or do not specify a limit on amounts that may be payable under the indemnity arrangements. The Company cannot estimate the possible range of losses that may affect the results of operations or cash flows in a given period or the maximum potential impact of these indemnification provisions on its future results of operations.

Legal Proceedings

The Company is party to various legal actions, claims and proceedings as well as other actions, claims and proceedings incidental to its business. The Company accrues a liability for matters in which losses are considered probable and the amount of loss can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims, or sanctions, that if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position, results of operations or cash flows. As of June 30, 2015, the Company does not believe any litigation matters, individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or cash flows.


19


(10) Stockholders' Equity

Changes in Stockholders' Equity

Stockholders’ equity as of June 30, 2015 and 2014 and changes in stockholders’ equity during the three months ended June 30, 2015 and 2014 were as follows (in thousands):
  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of March 31, 2015
 
130,955

 
$
131

 
(42,191
)
 
$
(1,083,216
)
 
$
2,386,207

 
$
(5,015
)
 
$
(230,629
)
 
$
1,067,478

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
3,338

 
3,338

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(856
)
 
 
 
(856
)
Issuance of common stock upon exercise of options
 
12

 
—

 
 
 
 
 
185

 
 
 
 
 
185

Cancellation of restricted stock, net
 
(211
)
 
—

 
 
 
 
 


 
 
 
 
 
—

Equity-based compensation
 
 
 
 
 
 
 
 
 
10,653

 
 
 
 
 
10,653

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
24

 
 
 
 
 
24

Stock repurchases
 
 
 
 
 
(1,707
)
 
(30,170
)
 
 
 
 
 
 
 
(30,170
)
Balances as of June 30, 2015
 
130,756

 
$
131

 
(43,898)

 
$
(1,113,386
)
 
$
2,397,069

 
$
(5,871
)
 
$
(227,291
)
 
$
1,050,652


  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of March 31, 2014
 
130,303

 
$
128

 
(35,570
)
 
$
(939,833
)
 
$
2,300,148

 
$
(3,710
)
 
$
(199,680
)
 
$
1,157,053

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,640
)
 
(2,640
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
403

 
 
 
403

Issuance of common stock upon exercise of options
 
84

 
1

 
 
 
 
 
1,399

 
 
 
 
 
1,400

Issuance of restricted stock, net
 
20

 
1

 
 
 
 
 
(1
)
 
 
 
 
 
—

Equity-based compensation
 
 
 
 
 
 
 
 
 
11,991

 
 
 
 
 
11,991

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
233

 
 
 
 
 
233

Balances as of June 30, 2014
 
130,407

 
$
130

 
(35,570)

 
$
(939,833
)
 
$
2,313,770

 
$
(3,307
)
 
$
(202,320
)
 
$
1,168,440


20


Stockholders’ equity as of June 30, 2015 and 2014 and changes in stockholders’ equity during the six months ended June 30, 2015 and 2014 were as follows (in thousands):
  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of December 31, 2014
 
130,627

 
$
131

 
(38,898
)
 
$
(1,013,218
)
 
$
2,339,817

 
$
(5,307
)
 
$
(215,159
)
 
$
1,106,264

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(12,132
)
 
(12,132
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(564
)
 
 
 
(564
)
Issuance of common stock upon exercise of options
 
73

 
—

 
 
 
 
 
1,293

 
 
 
 
 
1,293

Issuance of common stock under employee stock purchase plan
 
253

 
—

 
 
 
 
 
4,573

 
 
 
 
 
4,573

Cancellation of restricted stock, net
 
(197
)
 
—

 
 
 
 
 
—

 
 
 
 
 
—

Equity-based compensation
 
 
 
 
 
 
 
 
 
22,716

 
 
 
 
 
22,716

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
52

 
 
 
 
 
52

Equity component related to issuance of 2020 Convertible Notes
 
 
 
 
 
 
 
 
 
63,854

 
 
 
 
 
63,854

Equity component related to 2020 Convertible Notes issuance costs
 
 
 
 
 
 
 
 
 
(1,737
)
 
 
 
 
 
(1,737
)
Issuance of warrants related to 2020 Convertible Notes
 
 
 
 
 
 
 
 
 
31,326

 
 
 
 
 
31,326

Purchase of call options related to 2020 Convertible Notes
 
 
 
 
 
 
 
 
 
(64,825
)
 
 
 
 
 
(64,825
)
Stock repurchases
 
 
 
 
 
(5,000
)
 
(100,168
)
 
 
 
 
 
 
 
(100,168
)
Balances as of June 30, 2015
 
130,756

 
$
131

 
(43,898)

 
$
(1,113,386
)
 
$
2,397,069

 
$
(5,871
)
 
$
(227,291
)
 
$
1,050,652


  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of December 31, 2013
 
128,351

 
$
128

 
(30,570
)
 
$
(816,694
)
 
$
2,279,196

 
$
(3,999
)
 
$
(145,415
)
 
$
1,313,216

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(56,905
)
 
(56,905
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
692

 
 
 
692

Issuance of common stock upon exercise of options
 
215

 
1

 
 
 
 
 
3,450

 
 
 
 
 
3,451

Issuance of common stock under employee stock purchase plan
 
692

 
—

 
 
 
 
 
8,188

 
 
 
 
 
8,188

Issuance of restricted stock, net
 
1,149

 
1

 
 
 
 
 
(1
)
 
 
 
 
 
—

Equity-based compensation
 
 
 
 
 
 
 
 
 
22,847

 
 
 
 
 
22,847

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
90

 
 
 
 
 
90

Stock repurchases
 
 
 
 
 
(5,000
)
 
(123,139
)
 
 
 
 
 
 
 
(123,139
)
Balances as of June 30, 2014
 
130,407

 
$
130

 
(35,570)

 
$
(939,833
)
 
$
2,313,770

 
$
(3,307
)
 
$
(202,320
)
 
$
1,168,440




21

Earnings Per Share

Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period, except for periods of a loss from continuing operations. In periods of a loss from continuing operations, no common share equivalents are included in Diluted EPS because their effect would be anti-dilutive.

The following is a reconciliation between the number of shares used to calculate Basic EPS and Diluted EPS (in thousands):
    
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Weighted average shares used to calculate Basic EPS
85,248

 
91,019

 
86,767

 
92,246

Dilutive effect of employee equity incentive plans
239

 
—

 
—

 
—

Weighted average shares used to calculate Diluted EPS
85,487

 
91,019

 
86,767

 
92,246


Weighted average potential shares excluded from the computation of Diluted EPS as their effect would have been anti-dilutive were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Stock options
4,070

 
4,677

 
4,291

 
4,666

Restricted stock and restricted stock units
2,007

 
3,199

 
2,914

 
3,186

2020 Convertible Notes (1)
11,936

 
—

 
7,781

 
—

2040 Convertible Notes (1)
76

 
6,144

 
1,752

 
6,144

Total weighted average potential shares excluded from the calculation of Diluted EPS
18,089

 
14,020

 
16,738

 
13,996

 
(1)
See Note 8 for additional details.

For the three months ended June 30, 2015 and 2014, the Company excluded 0.9 million and 0.9 million and for the six months ended June 30, 2015 and 2014, the Company excluded 0.9 million and 0.9 million weighted average shares of performance-based restricted stock and restricted stock units from the computation of Diluted EPS, respectively, as the performance metric had yet to be achieved or their inclusion would be anti-dilutive.

Effect of the 2020 Convertible Notes and related transactions on Diluted EPS

In periods when the Company reports income from continuing operations, the potential dilutive effect of additional shares that may be issued on conversion of the 2020 Convertible Notes are included in the calculation of Diluted EPS under the treasury stock method when the price of the Company’s common stock exceeds the conversion price. The 2020 Convertible Notes will have no impact on Diluted EPS until the price of the Company's common stock exceeds the conversion price of $28.9044 per share because the principal of the 2020 Convertible Notes is required to be settled in cash.  Based on the closing price of the Company's common stock of $15.95 per share on June 30, 2015, the if-converted value of the 2020 Convertible Notes was less than the outstanding principal.

Under the treasury stock method, the 2020 Convertible Notes would be dilutive if the Company’s common stock closes at or above $28.9044 per share. However, on conversion, no economic dilution is expected from the 2020 Convertible Notes as exercise of the call options is expected to eliminate any potential dilution from the 2020 Convertible Notes that would have otherwise occurred when the price of the Company’s common stock exceeds the conversion price. The call options are always excluded from the calculation of Diluted EPS as they would be anti-dilutive under the treasury stock method.

The warrants have an effect on Diluted EPS when the Company’s share price exceeds the warrant’s strike price of $40.1450 per share. As the price of the Company’s common stock increases above the warrant strike price, additional dilution would occur.


22

Share Repurchase Program

During the three months ended June 30, 2015, the Company repurchased 1.7 million shares of its common stock for $30.2 million. During the three months ended June 30, 2014, the Company did not repurchase any shares of its common stock. During the six months ended June 30, 2015 and 2014, the Company repurchased 5.0 million shares and 5.0 million shares of its common stock for $100.2 million and $123.1 million, respectively.

On April 29, 2015, the Board of Directors authorized the repurchase of up to $125.0 million of the Company's common stock.  The April 2015 authorization included amounts which were outstanding under previously authorized stock repurchase programs. As of June 30, 2015, the Company had $100.5 million of stock repurchase authorization remaining.

(11) Equity-based Compensation

Stock Option Plan

The Company grants equity-based compensation awards from its 2008 Equity Incentive Plan (the “2008 Plan”). As of June 30, 2015, the Company had 23.3 million shares reserved and 7.3 million shares available for issuance under the 2008 Plan. The 2008 Plan permits the grant of stock options, restricted stock, restricted stock units and similar types of equity awards to employees, officers, directors and consultants of the Company. Option grants generally have vesting periods of four years where one quarter of the grant vests at the end of the first year, and the remainder vests monthly thereafter. Options grants generally have a contractual term of seven years. Restricted stock is considered outstanding at the time of the grant as holders are entitled to voting rights. Awards of restricted stock are generally subject to a four year graded vesting period. 

In March 2015, the Compensation Committee of the Board of Directors approved a grant of performance-based restricted stock units to certain senior officers of the Company for the 2015 to 2017 performance period. Vesting in the March 2015 award is subject to either performance conditions (i.e., achieving minimum defined levels of Company financial results) or a market condition (i.e., achieving a minimum relative Total Shareholder Return) as well as a three year service period ended March 1, 2018. The number of shares to be issued on vesting could be up to 200% of the target number of performance-based restricted stock units granted depending on the level of achievement.

For awards subject to performance conditions that were granted in March 2015, the fair value per award is fixed at the grant date; however, the amount of compensation expense will be adjusted throughout the performance period based on the probability of achievement of a target revenue compound annual growth rate and an Adjusted EBITDA (see Note 13) margin, with final compensation expense recognized based on the number of shares ultimately issued. For awards subject to a market condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period based on changes in the level of achievement of the relative Total Shareholder Return metric.

As of June 30, 2015, the number of restricted stock outstanding and unvested was 2.1 million, which includes 0.7 million performance-based restricted stock. As of June 30, 2015, the number of restricted stock units outstanding and unvested was 1.7 million, which includes 0.3 million performance-based restricted stock units.

Employee Stock Purchase Plan

The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares each purchase period at the lower of 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period.

As of June 30, 2015, the Company had 2.2 million shares of common stock reserved and available for issuance under the ESPP.

Valuation Techniques and Assumptions

The Company uses the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options and ESPP shares. The fair value of stock options and ESPP shares is estimated on the grant date using complex and subjective inputs, such as the expected volatility of the Company's common stock over the expected term of the award and projected employee exercise behavior. The Company estimates the fair value of restricted stock and restricted stock units subject to

23

service or performance conditions as the market value of the Company's common stock on the date of grant and uses a Monte Carlo simulation to estimate the fair value of restricted stock units subject to market conditions.

Assumptions used to estimate the fair value of equity-based compensation awards were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Options:
 
 
 
 
 
 
 
Expected volatility
N/A
 
47
%
 
45
%
 
48
%
Expected term
N/A
 
4.0 years

 
4.0 years

 
4.0 years

Risk-free interest rate
N/A
 
1.2
%
 
1.3
%
 
1.1
%
Expected dividend yield
N/A
 
0
%
 
0
%
 
0
%
ESPP:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A

 
35
%
 
41
%
Expected term
N/A
 
N/A

 
1.3 years

 
1.3 years

Risk-free interest rate
N/A
 
N/A

 
0.4
%
 
0.2
%
Expected dividend yield
N/A
 
N/A

 
0
%
 
0
%
Restricted Stock Units subject to a Market Condition:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A

 
41
%
 
N/A

Expected term
N/A
 
N/A

 
3.0 years

 
N/A

Risk-free interest rate
N/A
 
N/A

 
1.0
%
 
N/A

Expected dividend yield
N/A
 
N/A

 
0
%
 
N/A


Expected volatility is estimated using a combination of historical volatility and implied volatility derived from publicly-traded options on the Company's common stock. When historical data is available and relevant, the expected term of the award is estimated by calculating the average term from historical experience. When there is insufficient historical data to provide a reasonable basis on which to estimate the expected term, the Company uses the average of the vesting period and the contractual term of the award to estimate the expected term of the award. The risk-free interest rate is the yield on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the award at the grant date. The Company does not anticipate paying cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The number of awards expected to be forfeited during the requisite service period is estimated at the time of grant using historical data to estimate pre-vesting forfeitures and equity-based compensation is only recognized for those awards for which the requisite service is expected to be rendered. Forfeiture estimates are revised during the requisite service period and the effect of changes in the number of awards expected to be forfeited is recorded as a cumulative adjustment in the period estimates are revised.

The grant date weighted-average fair value of equity-based awards was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Options
N/A

 
$
8.82

 
$
9.05

 
$
9.01

ESPP
N/A

 
N/A

 
$
6.94

 
$
6.62

Restricted stock and restricted stock units
$
17.62

 
$
22.06

 
$
23.96

 
$
24.56

 
The Company recorded $10.7 million and $12.0 million in pre-tax equity-based compensation expense for the three months ended June 30, 2015 and 2014, respectively. The Company recorded $22.7 million and $22.2 million in pre-tax equity-based compensation expense for the six months ended June 30, 2015 and 2014, respectively.

As of June 30, 2015, there was $68.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested equity-based awards which is expected to be recognized over a remaining weighted average period of 2.6 years.
    
The total intrinsic value of options exercised during the three months ended June 30, 2015 and 2014 was $0.0 million and $0.6 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2015 and

24

2014 was $0.3 million and $1.6 million, respectively. Intrinsic value is calculated as the difference between the market value of the shares at the time of exercise and the exercise price of the option.

(12) Income Taxes

Due to the fact that the Company has a significant net operating loss carryforward and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of income tax expense.

Components of income tax expense were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Foreign withholding tax
$
3,525

 
$
4,954

 
$
6,657

 
$
9,734

Reserves for uncertain tax positions
215

 
565

 
(18
)
 
3,155

Change in net deferred tax liabilities
260

 
(1,508
)
 
3,633

 
(2,943
)
State income tax (benefit) expense
(3,195
)
 
(606
)
 
(2,182
)
 
228

Foreign income taxes
472

 
219

 
1,126

 
26

Income tax expense
$
1,277

 
$
3,624

 
$
9,216

 
$
10,200


State income tax (benefit) expense for the three and six months ended June 30, 2015 includes a benefit of $4.0 million from settling the Company's 2008 California tax return.

Included in the change in net deferred tax liabilities for the three and six months ended June 30, 2014 is a benefit of $2.1 million related to net operating losses. The change in net deferred tax liabilities for the six months ended June 30, 2014 also includes a benefit of $1.2 million due to the Veveo acquisition. The Veveo acquisition resulted in a net deferred tax liability related to finite-lived intangible assets. These net deferred tax liabilities are considered a source of future taxable income which allowed us to reduce our pre-acquisition deferred tax asset valuation allowance. The change in our pre-acquisition deferred tax asset valuation allowance resulting from the acquired net deferred tax liabilities was not recorded as a component of the Veveo purchase price allocation and was credited to income tax expense.

The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses potential outcomes of these audits in order to determine the appropriateness of its tax provision. Adjustments to uncertain tax positions are made to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular income tax audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously recognized, and therefore the resolution of one or more of these uncertainties in any particular period could have a material adverse impact on the Condensed Consolidated Financial Statements.

(13) Segment Information

Reportable segments are identified based on the Company's organizational structure and information reviewed by the Company’s chief operating decision maker ("CODM") to evaluate performance and allocate resources. The Company's operations are organized into two reportable segments for financial reporting purposes: the Intellectual Property Licensing segment and the Product segment. The Intellectual Property Licensing segment consists primarily of IPG patent licensing to third party guide developers such as multi-channel video service providers (e.g., cable, satellite and internet-protocol television), consumer electronics (“CE”) manufacturers, set-top box manufacturers and interactive television software and program guide providers in the online, over-the-top video and mobile phone businesses. The Product segment consists primarily of the licensing of Company-developed IPG products and services provided for multi-channel video service providers and CE manufacturers, in-guide advertising revenue, analytics revenue and revenue from licensing Metadata. The Product segment also includes sales of legacy Analog Content Protection, VCR Plus+, connected platform and media recognition products.

Segment results are derived from the Company's internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used by the consolidated company. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded

25

from the measure of segment profitability reviewed by the CODM. In addition, certain costs are not allocated to the segments as they are considered Corporate costs. Corporate costs primarily include certain general and administrative costs such as corporate management, finance, legal and human resources. The CODM uses an Adjusted EBITDA (as defined below) measure to evaluate the performance of, and allocate resources to, the segments. Segment balance sheets are not used by the CODM to allocate resources to, or assess performance of, the segments.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Intellectual Property Licensing:
 
 
 
 
 
 
 
Revenues
$
69,732

 
$
72,684

 
$
134,751

 
$
145,610

Adjusted Operating Expenses (1)
15,405

 
15,015

 
32,020

 
34,972

Adjusted EBITDA (2)
54,327

 
57,669

 
102,731

 
110,638

Product:
 
 
 
 
 
 
 
Revenues
58,088

 
64,378

 
127,094

 
133,902

Adjusted Operating Expenses (1)
49,012

 
51,040

 
101,148

 
99,979

Adjusted EBITDA (2)
9,076

 
13,338

 
25,946

 
33,923

Corporate:
 
 
 
 
 
 
 
Adjusted Operating Expenses (1)
13,169

 
13,222

 
26,565

 
26,480

Adjusted EBITDA (2)
(13,169
)
 
(13,222
)
 
(26,565
)
 
(26,480
)
Consolidated:
 
 
 
 
 
 
 
Revenues
127,820

 
137,062

 
261,845

 
279,512

Adjusted Operating Expenses (1)
77,586

 
79,277

 
159,733

 
161,431

Adjusted EBITDA (2)
50,234

 
57,785

 
102,112

 
118,081

Depreciation
4,448

 
4,550

 
8,818

 
8,951

Amortization of intangible assets
19,236

 
19,330

 
38,600

 
38,020

Restructuring and asset impairment (benefit) charges
(178
)
 
3,505

 
1,539

 
5,682

Equity-based compensation
10,653

 
11,980

 
22,716

 
22,160

Contested proxy election costs
3,941

 
—

 
4,346

 
—

Transaction, transition and integration expenses
—

 
1,210

 
—

 
1,839

Operating income from continuing operations
12,134

 
17,210

 
26,093

 
41,429

Interest expense
(11,715
)
 
(13,196
)
 
(24,073
)
 
(26,759
)
Interest income and other, net
(183
)
 
1,597

 
503

 
1,835

Income (loss) on interest rate swaps
4,399

 
(4,701
)
 
(5,319
)
 
(7,336
)
Loss on debt extinguishment
(20
)
 
—

 
(120
)
 
—

Income (loss) from continuing operations before income taxes
$
4,615

 
$
910

 
$
(2,916
)
 
$
9,169


(1)
Adjusted Operating Expenses is defined as operating expenses excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, contested proxy election costs, transaction, transition and integration expenses and changes in contingent consideration.

(2)
Adjusted EBITDA is defined as operating income excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, contested proxy election costs, transaction, transition and integration expenses and changes in contingent consideration.

26



ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Discussions of some of the matters contained in this Quarterly Report on Form 10-Q for Rovi Corporation (the “Company,” “we” or “us”) may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and as such, may involve risks and uncertainties, including the discussion contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have based these forward-looking statements on our current expectations and projections about future events or future financial performance, which include implementing our business strategy, developing and introducing new technologies, obtaining, maintaining and expanding market acceptance of the technologies we offer, and competition in our markets.

In some cases, these forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “predict,” “potential,” “intend,” or “continue,” and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see “Item 1A. – Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2014. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements.

The following commentary should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2014 and the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Overview

We are focused on powering content discovery and personalization through our technology and intellectual property, using data and analytics to monetize interactions across multiple entertainment platforms. We provide a broad set of integrated solutions that are embedded in our customers' products and services to connect consumers with entertainment through content discovery solutions, including interactive program guides (“IPGs”), search and recommendation services, cloud data services and our extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). We also offer advertising and analytics services.  We have patented many aspects of content discovery, digital video recorder and video-on-demand functionality and multi-screen functionality, as well as interactive applications and advertising.  We have historically licensed this portfolio for use with linear television broadcast.  However, there is an emerging industry transition to Internet platform technologies which are enabling new video services for television in homes as well as on multiple screens such as tablets and smartphones.  We believe this transition presents new opportunities to license our intellectual property portfolio for different use cases and to different customers, as well as to develop, market and sell products and services which enable such functionality. Building on this foundation, we are establishing broad industry relationships with the companies leading the next generation of digital entertainment.  Our strategy includes developing products and services that complement our intellectual property and address the opportunity presented by this industry transformation. Our solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets. For financial reporting purposes, our business is organized in two segments: Intellectual Property Licensing and Product.

Revenue for the three months ended June 30, 2015 decreased by 7% compared to the prior year period as a result of a decline in revenue in our Product segment, and to a lesser degree, a decline in revenue in our Intellectual Property Licensing segment. For the three months ended June 30, 2015, 24% of our revenue was from our contracts with Comcast Corporation ("Comcast"), DIRECTV and Time Warner Cable Inc. ("Time Warner"). Our contracts with Time Warner and DIRECTV expire in September and December of 2015, respectively, and our contract with Comcast expires in March 2016.

For the three months ended June 30, 2015, income from continuing operations was $3.3 million, or $0.04 of diluted earnings per share, compared to a loss from continuing operations of $2.7 million, or $0.03 of diluted loss per share, in the prior year period, respectively. The change in income from continuing operations primarily resulted from changes in the fair value of our interest rate swap portfolio, lower restructuring and asset impairment costs, and the realization of savings from past

27

restructuring actions, partially offset by lower revenue and costs incurred in connection with the contested proxy election in 2015.

During the three months ended June 30, 2015, we strengthened our financial position and improved our liquidity by:

•
generating $39.7 million in operating cash flow from continuing operations,
•
making a voluntary principal prepayment of $50.0 million on our term loan A facility (the “Term Loan A Facility") and
•
repurchasing the remaining $3.6 million of par value of our 2.625% Convertible Senior Notes due in 2040 (the “2040 Convertible Notes”).
        
Comparison of Three and Six Months Ended June 30, 2015 and 2014

The consolidated results of operations for the three and six months ended June 30, 2015 compared to the prior year were as follows (dollars in thousands):
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Revenues
 
$
127,820

 
$
137,062

 
$
(9,242
)
 
(7
)%
Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenues, excluding amortization of intangible assets
 
25,669

 
26,040

 
(371
)
 
(1
)%
Research and development
 
27,017

 
28,933

 
(1,916
)
 
(7
)%
Selling, general and administrative
 
39,494

 
37,494

 
2,000

 
5
 %
Depreciation
 
4,448

 
4,550

 
(102
)
 
(2
)%
Amortization of intangible assets
 
19,236

 
19,330

 
(94
)
 
—
 %
Restructuring and asset impairment (benefit) charges
 
(178
)
 
3,505

 
(3,683
)
 
(105
)%
Total costs and expenses
 
115,686

 
119,852

 
(4,166
)
 
(3
)%
Operating income from continuing operations
 
12,134

 
17,210

 
(5,076
)
 
(29
)%
Interest expense
 
(11,715
)
 
(13,196
)
 
1,481

 
(11
)%
Interest income and other, net
 
(183
)
 
1,597

 
(1,780
)
 
(111
)%
Income (loss) on interest rate swaps
 
4,399

 
(4,701
)
 
9,100

 
(194
)%
Loss on debt extinguishment
 
(20
)
 
—

 
(20
)
 
NA

Income from continuing operations before income taxes
 
4,615

 
910

 
3,705

 
407
 %
Income tax expense
 
1,277

 
3,624

 
(2,347
)
 
(65
)%
Income (loss) from continuing operations, net of tax
 
3,338

 
(2,714
)
 
6,052

 
(223
)%
Income from discontinued operations, net of tax
 
—

 
74

 
(74
)
 
(100
)%
Net income (loss)
 
$
3,338

 
$
(2,640
)
 
$
5,978

 
(226
)%


28

 
 
Six Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Revenues
 
$
261,845

 
$
279,512

 
$
(17,667
)
 
(6
)%
Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenues, excluding amortization of intangible assets
 
53,799

 
58,536

 
(4,737
)
 
(8
)%
Research and development
 
55,142

 
54,490

 
652

 
1
 %
Selling, general and administrative
 
77,854

 
72,404

 
5,450

 
8
 %
Depreciation
 
8,818

 
8,951

 
(133
)
 
(1
)%
Amortization of intangible assets
 
38,600

 
38,020

 
580

 
2
 %
Restructuring and asset impairment charges
 
1,539

 
5,682

 
(4,143
)
 
(73
)%
Total costs and expenses
 
235,752

 
238,083

 
(2,331
)
 
(1
)%
Operating income from continuing operations
 
26,093

 
41,429

 
(15,336
)
 
(37
)%
Interest expense
 
(24,073
)
 
(26,759
)
 
2,686

 
(10
)%
Interest income and other, net
 
503

 
1,835

 
(1,332
)
 
(73
)%
Loss on interest rate swaps
 
(5,319
)
 
(7,336
)
 
2,017

 
(27
)%
Loss on debt extinguishment
 
(120
)
 
—

 
(120
)
 
NA

(Loss) income from continuing operations before income taxes
 
(2,916
)
 
9,169

 
(12,085
)
 
(132
)%
Income tax expense
 
9,216

 
10,200

 
(984
)
 
(10
)%
Loss from continuing operations, net of tax
 
(12,132
)
 
(1,031
)
 
(11,101
)
 
1,077
 %
Loss from discontinued operations, net of tax
 
—

 
(55,874
)
 
55,874

 
(100
)%
Net loss
 
$
(12,132
)
 
$
(56,905
)
 
$
44,773

 
(79
)%

Revenue

For the three months ended June 30, 2015, revenue decreased 7% compared to the prior year as a result of a $6.3 million decrease in revenue in our Product segment and a $3.0 million decrease in revenue in our Intellectual Property Licensing segment. For the six months ended June 30, 2015, revenue decreased 6% compared to the prior year as a result of a $10.9 million decrease in revenue in our Intellectual Property Licensing segment and a $6.8 million decrease in revenue in our Product segment. For additional details on the changes in revenue, see the discussion of our segment results.

Cost of Revenues, Excluding Amortization of Intangible Assets
  
Cost of revenues consist primarily of service costs, employee compensation and benefits, patent prosecution, patent maintenance and patent litigation costs and an allocation of overhead and facilities costs. For the three months ended June 30, 2015, cost of revenues decreased from the prior year primarily due to an $0.8 million decrease in facility and related costs as a result of benefits from past restructuring actions and a $0.3 million decrease in compensation and benefits costs, partially offset by increased investments in our analytics operations. For the six months ended June 30, 2015, cost of revenues decreased from the prior year primarily due to a $5.9 million decrease in patent litigation costs, which was partially offset by increased investments in our analytics operations.

Research and Development

Research and development expenses are comprised primarily of employee compensation and benefits, consulting costs and an allocation of overhead and facilities costs. For the three months ended June 30, 2015, research and development expenses decreased from the prior year primarily due to a decrease in the costs of our Metadata operations resulting from cost saving initiatives. For the six months ended June 30, 2015, research and development expenses increased slightly as compared to the prior year primarily due to increased investments to support our cloud-based platform and analytics services being substantially offset by a decrease in spending on our Metadata operations and on legacy products as a result of our cost saving initiatives.

29


Selling, General and Administrative

Selling and marketing expenses are comprised primarily of employee compensation and benefits, travel, advertising and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee compensation and benefits, travel, accounting, tax and corporate legal fees and an allocation of overhead and facilities costs.

The increase in selling, general and administrative expenses during the three and six months ended June 30, 2015 was primarily due to $3.9 million and $4.3 million, respectively, of costs incurred related to the contested proxy election in 2015 and a $0.5 million and $2.5 million increase in consulting and employee costs related to planning for the upcoming license renewals with Time Warner, DIRECTV, Comcast and Echostar. Cost increases during the three months ended June 30, 2015 were offset in part by a $1.2 million decrease in compensation costs, a $0.5 million decrease in facilities and other operating costs as a result of benefits from past restructuring actions, and lower spending on marketing programs.

Cost increases during the six months ended June 30, 2015 were partially offset by a $1.0 million decrease in facilities and other operating costs as a result of benefits from past restructuring actions.

Amortization of Intangible Assets
    
For the six months ended June 30, 2015, amortization of intangible assets increased from the prior year primarily due to the Veveo acquisition in February 2014 and the acquisition of a patent portfolio in July 2014.

Restructuring and Asset Impairment (Benefit) Charges

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and our narrowed business focus on discovery, in 2014 we conducted a review of our remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, we took cost reduction actions in 2014 that resulted in a restructuring and asset impairment charges of $3.5 million and $5.7 million during the three and six months ended June 30, 2014, respectively. Amounts recorded in 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.

Interest Expense

For the three and six months ended June 30, 2015, interest expense decreased compared to the prior year primarily due to a lower effective interest rate on the 2020 Convertible Notes compared to the 2040 Convertible Notes.

Interest Income and Other, Net

Interest income and other, net decreased for the three and six months ended June 30, 2015 compared to the prior year primarily due to the release of a $1.2 million contingent liability in the three months ended June 30, 2014 that was acquired in a prior acquisition and a $0.6 million decline in equity income from our joint venture in Japan. Foreign currency negatively impacted the three months ended June 30, 2015 and benefited the six months ended June 30, 2015.

Income (loss) on Interest Rate Swaps

We have not designated any of our interest rate swaps as hedges for accounting purposes and therefore changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Condensed Consolidated Statements of Operations (see Note 8 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference). We generally utilize interest rate swaps to convert the interest rate on a portion of our floating interest rate loans to a fixed interest rate. Under the terms of our interest rate swaps we generally receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future London Interbank Offering Rate ("LIBOR"), we generally will have a gain when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally will have a loss when adjusting our interest rate swaps to fair value.

Loss on Debt Extinguishment

During the six months ended June 30, 2015, we redeemed $291.0 million in principal of our 2040 Convertible Notes for cash, resulting in a loss of $0.1 million.


30

Income Tax Expense

Due to the fact that we have a significant net operating loss carryforward and we have recorded a valuation allowance against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our income tax expense.

We recorded income tax expense for the three months ended June 30, 2015 of $1.3 million, which primarily consists of $3.5 million of foreign withholding taxes and $0.5 million of foreign income taxes that were partially offset by a $3.2 million benefit from state income taxes, which reflects the settlement of the Company's 2008 California tax return. We recorded income tax expense for the three months ended June 30, 2014 of $3.6 million, which primarily consists of $5.0 million of foreign withholding taxes, partially offset a $1.5 million change in net deferred tax liabilities. Included in the change in net deferred tax liabilities for the three months ended June 30, 2014 was a tax benefit of $2.1 million related to net operating losses.

We recorded income tax expense for the six months ended June 30, 2015 of $9.2 million, which primarily consists of $6.7 million of foreign withholding taxes, a $3.6 million change in net deferred tax liabilities and $1.1 million of foreign income taxes, which were partially offset by a $2.2 million benefit from state income taxes, which reflects the settlement of the Company's 2008 California tax return. We recorded income tax expense for the six months ended June 30, 2014 of $10.2 million, which primarily consists of $9.7 million of foreign withholding taxes, $3.2 million from the recognition of reserves for uncertain tax positions, partially offset a $2.9 million change in net deferred tax liabilities. Included in the change in net deferred tax liabilities was a benefit of $2.1 million related to net operating losses and a benefit of $1.2 million due to the Veveo acquisition. The Veveo acquisition resulted in a net deferred tax liability related to finite-lived intangible assets. These net deferred tax liabilities are considered a source of future taxable income which allowed us to reduce our pre-acquisition deferred tax asset valuation allowance. The change in our pre-acquisition deferred tax asset valuation allowance resulting from the acquired net deferred tax liabilities was not recorded as a component of the Veveo purchase price allocation and was credited to income tax expense.

Loss from Discontinued Operations

The loss from discontinued operations for the six months ended June 30, 2014 is primarily due to the loss on the sale of the DivX, MainConcept and Nowtilus businesses.

Segment Results

We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA use the definitions provided in Note 13 of the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

Intellectual Property Licensing Segment

The Intellectual Property Licensing segment's results of operations for the three and six months ended June 30, 2015 compared to the prior year were as follows (dollars in thousands):

Three Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Service Provider
$
51,301

 
$
49,762

 
$
1,539

 
3
 %
Consumer Electronics
18,431

 
22,922

 
(4,491
)
 
(20
)%
Intellectual Property Licensing Revenues
69,732

 
72,684

 
(2,952
)
 
(4
)%
Adjusted Operating Expenses
15,405

 
15,015

 
390

 
3
 %
Adjusted EBITDA
$
54,327

 
$
57,669

 
$
(3,342
)
 
(6
)%
Adjusted EBITDA Margin
77.9
%
 
79.3
%
 
 
 
 


31

 
Six Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Service Provider
$
98,454

 
$
99,842

 
$
(1,388
)
 
(1
)%
Consumer Electronics
36,297

 
45,768

 
(9,471
)
 
(21
)%
Intellectual Property Licensing Revenues
134,751

 
145,610

 
(10,859
)
 
(7
)%
Adjusted Operating Expenses
32,020

 
34,972

 
(2,952
)
 
(8
)%
Adjusted EBITDA
$
102,731

 
$
110,638

 
$
(7,907
)
 
(7
)%
Adjusted EBITDA Margin
76.2
%
 
76.0
%
 
 
 
 

For the three months ended June 30, 2015, Intellectual Property Licensing revenue decreased 4% compared to the prior year as a 3% increase in revenue from Service Providers was more than offset by a 20% decrease in revenue from CE manufacturers. The increase in revenue from Service Providers was due to an increase in the number or subscribers for which we receive a monthly patent license fee and a third party IPG provider for set-top boxes executing a bulk purchase of IPG licenses, partially offset by a decline in sales of set-top boxes by a customer. The decrease in revenue from CE manufacturers was due to a decrease in revenue from catch-up payments included in patent license agreements intended to make us whole for the pre-license period of use as compared to the prior year.

For the six months ended June 30, 2015, Intellectual Property Licensing revenue decreased 7% compared to the prior year due to a 1% decrease in revenue from Service Providers and a 21% decrease in revenue from CE manufacturers. The decrease in revenue from Service Providers was due to a decline in sales of set-top boxes by a customer, partially offset by an increase in the number of subscribers for which we receive a monthly patent license fee and a third party IPG provider for set-top boxes executing a bulk purchase of IPG licenses. The decrease in revenue from CE manufacturers was due to a major CE manufacturer being out of contract in 2015 and a decrease in revenue from catch-up payments included in patent license agreements intended to make us whole for the pre-license period of use as compared to the prior year.

Intellectual Property Licensing segment Adjusted Operating Expenses increased 3% for the three months ended June 30, 2015, compared to the prior year primarily due to a $0.5 million increase in consulting and employee costs related to planning for the upcoming license renewals with Time Warner, DIRECTV, Comcast and Echostar. Adjusted Operating Expenses decreased 8% during the six months ended June 30, 2015 compared to the prior year primarily due to a $5.9 million
decrease in patent litigation costs offset by a $2.5 million increase in consulting expenses and employee costs related to planning for the upcoming major service provider license renewals.

Product Segment

The Product segment's results of operations for the three and six months ended June 30, 2015 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Service Provider
$
50,298

 
$
54,291

 
$
(3,993
)
 
(7
)%
Consumer Electronics
5,368

 
5,559

 
(191
)
 
(3
)%
Other
2,422

 
4,528

 
(2,106
)
 
(47
)%
Product Revenues
58,088


64,378

 
(6,290
)
 
(10
)%
Adjusted Operating Expenses
49,012

 
51,040

 
(2,028
)
 
(4
)%
Adjusted EBITDA
$
9,076

 
$
13,338

 
$
(4,262
)
 
(32
)%
Adjusted EBITDA Margin
15.6
%
 
20.7
%
 
 
 
 


32

 
Six Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Service Provider
$
101,323

 
$
102,812

 
$
(1,489
)
 
(1
)%
Consumer Electronics
10,761

 
11,687

 
(926
)
 
(8
)%
Other
15,010

 
19,403

 
(4,393
)
 
(23
)%
Product Revenues
127,094

 
133,902

 
(6,808
)
 
(5
)%
Adjusted Operating Expenses
101,148

 
99,979

 
1,169

 
1
 %
Adjusted EBITDA
$
25,946

 
$
33,923

 
$
(7,977
)
 
(24
)%
Adjusted EBITDA Margin
20.4
%
 
25.3
%
 
 
 
 

For the three months ended June 30, 2015, Product segment revenues decreased 10% compared to the prior year due to a 7% decrease in revenue from Service Providers, a 3% decrease in CE revenue and a 47% decrease in Other revenue. The decrease in Service Provider revenue for the three months ended June 30, 2015 was the result of acceptance of our Passport guide product for deployment in multiple countries with a major Latin American service provider which benefited revenue in 2014, offset in part by an increase in advertising revenues. The decrease in CE revenue was primarily due to a decrease in the number of units shipped that incorporated our products. The decrease in Other revenue was the result of a decline in Analog Content Protection ("ACP") revenue.

For the six months ended June 30, 2015, Product segment revenues decreased 5% compared to the prior year due to a 1% decrease in revenue from Service Providers, an 8% decrease in CE revenue and a 23% decrease in Other revenue. The decrease in Service Provider revenue was primarily the result of acceptance of our Passport guide product for deployment in multiple countries with a major Latin American service provider which benefited revenue in 2014, offset in part by an increase in advertising revenues, including a benefit from a major Pay TV provider agreeing to report advertising sales to us at the end of each month instead of on a one month lag. Due to this change, we now recognize IPG advertising revenue related to this Pay TV provider with no lag. The decrease in CE revenue was primarily due to a decrease in the number of units shipped that incorporated our products and a major CE manufacturer being out of license. The decrease in Other revenue was the result of a decline in ACP revenue; however, both periods included significant perpetual license fees that are not expected to recur for the remainder of 2015 and did not recur in the rest of 2014.

For the three months ended June 30, 2015, Adjusted Operating Expenses decreased 4% compared to the prior year primarily due to a decrease in Metadata research and development costs due to cost savings initiatives. Adjusted Operating Expenses increased 1% during the six months ended June 30, 2015, compared to the prior year primarily due to increased investments made to support our cloud-based platform and analytics services partially offset by a decrease in spending on Metadata and legacy product research and development due to cost saving initiatives.

Corporate

Corporate costs for the three and six months ended June 30, 2015 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Adjusted Operating Expenses
$
13,169

 
$
13,222

 
(53
)
 
—
 %
    
 
Six Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Adjusted Operating Expenses
$
26,565

 
$
26,480

 
85

 
—
%

For the three and six months ended June 30, 2015, Corporate Adjusted Operating Expenses were relatively flat.


33

Liquidity and Capital Resources

We finance our operations primarily from cash generated by our operations. We believe that internally generated cash flows are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, interest payments and income tax payments, in addition to investments in future growth opportunities and share repurchases. We are able to supplement this short-term liquidity, if necessary, with our Revolving Facility and access to capital markets. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions.

Our cash, cash equivalents and marketable securities are held in numerous locations around the world. Our cash position remains strong, and we believe that our cash, cash equivalents and marketable securities and anticipated cash flow generated from operations, as supplemented with access to capital markets, as necessary, will be sufficient to meet our working capital, capital expenditure, debt and operating requirements for at least the next twelve months.

As of June 30, 2015, we had $115.9 million in cash and cash equivalents, $100.9 million in short-term marketable securities and $164.5 million in long-term marketable securities. Of these amounts, $205.5 million was held by our foreign subsidiaries. Due to our net operating loss carryforwards, we could repatriate amounts held outside the U.S. to the U.S. without a material adverse effect on our overall liquidity, financial condition or results of operations.

Sources and Uses of Cash

Cash flows compared to the prior year were as follows (in thousands):
 
 
Six Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
 
Change $
 
Change %
Continuing Operations:
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
65,748

 
$
122,098

 
$
(56,350
)
 
(46
)%
Net cash provided by investing activities
 
37,251

 
150,746

 
(113,495
)
 
(75
)%
Net cash used in financing activities
 
(141,026
)
 
(161,501
)
 
20,475

 
(13
)%
Net cash used in discontinued operations
 
(194
)
 
(1,968
)
 
1,774

 
(90
)%
Effect of exchange rate changes on cash and cash equivalents
 
(407
)
 
251

 
(658
)
 
(262
)%
Net (decrease) increase in cash and cash equivalents
 
$
(38,628
)
 
$
109,626

 
$
(148,254
)
 
(135
)%

Net cash provided by operating activities for the six months ended June 30, 2015 decreased $56.4 million primarily due to the receipt of a significant upfront payment in the first quarter of 2014 related to a multi-year licensing deal signed in the fourth quarter of 2013 and lower revenue leading to lower collections on accounts receivable and a decrease in income from continuing operations, offset in part by lower interest expense and lower non-cash charges from changes in the fair value of our interest rate swap portfolio. The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those Risk Factors in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.

Net cash provided by investing activities for the six months ended June 30, 2015 decreased $113.5 million primarily due to a decrease in net proceeds from net sales and maturities of marketable securities of $124.2 million. The six months ended June 30, 2015 also includes the payment of $5.1 million in continent consideration related to previous acquisitions compared to $60.7 million of net cash paid in 2014 for the Veveo acquisition offset by the receipt of $50.3 million from the 2014 sale of DivX and MainConcept. We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will be between $22.0 million and $28.0 million for the full year 2015.

Net cash used in financing activities for the six months ended June 30, 2015 included $291.0 million of principal payments on our 2040 Convertible Notes and the issuance of $345.0 million of principal of 2020 Convertible Notes. Using the proceeds from the 2020 Convertible Notes issuance, we repaid $100.0 million which had been borrowed against our Revolving Facility in February 2015, in part, to extinguish a portion of the 2040 Convertible Notes. In connection with the 2020 Convertible Notes, we also purchased a call option and sold a warrant to manage the potential dilution to earnings per share for a net cost of $33.5 million. During the six months ended June 30, 2015, we also made a voluntary principal prepayment of $50.0 million on our Term Loan A Facility, used $104.5 million to repurchase shares of our common stock and received $5.9

34

million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. During the six months ended June 30, 2014, we made $50.0 million in debt principal payments and used $123.1 million to repurchase shares of our common stock. The six months ended June 30, 2014 also included the receipt of $11.6 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan.

On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock.  The April 2015 authorization includes any amounts which were outstanding under previously authorized stock repurchase programs.  As of June 30, 2015, our remaining stock repurchase authorization was $100.5 million.

Capital Resources

The outstanding principal and carrying amount of debt we issued were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Outstanding Principal
 
Carrying Amount
 
Outstanding Principal
 
Carrying Amount
2020 Convertible Notes
$
345,000

 
$
284,957

 
$
—

 
$
—

Term Loan Facility A
75,000

 
74,666

 
125,000

 
124,580

Term Loan Facility B
693,000

 
689,959

 
696,500

 
693,227

2040 Convertible Notes
—

 
—

 
290,990

 
289,125

Total
$
1,113,000

 
$
1,049,582

 
$
1,112,490

 
$
1,106,932


As of June 30, 2015, we had $175.0 million available to obtain short-term or long-term financing under our Revolving Facility if we need additional liquidity.

During the next twelve months, $7.0 million of our debt is scheduled to mature. For more information on our borrowings, see Note 8 to the Condensed Consolidated Financial Statements in Part I, Item 1, which is incorporated herein by reference.

2020 Convertible Notes

We issued $345.0 million in aggregate principal of 0.500% Convertible Notes due in 2020 at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes (which represents an initial conversion price of approximately $28.9044 per share). Holders may convert the 2020 Convertible Notes prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:

•
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
•
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of our common stock over a specified observation period. On conversion, we will pay cash up to the aggregate principal amount of the 2020 Convertible Notes converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.

The initial conversion rate will be subject to adjustment in certain events, including certain events that constitute a make-whole fundamental change (as defined in the 2015 Indenture). In addition, if we undergo a fundamental change (as

35

defined in the 2015 Indenture) prior to March 1, 2020, holders may require us to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The initial conversion rate is also subject to customary anti-dilution adjustments.

The 2020 Convertible Notes are not redeemable prior to maturity by us and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by us. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.

Senior Secured Credit Facility

On July 2, 2014, we, as parent guarantor, and two of our wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of our other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) a five-year $125 million term loan A facility (the “Term Loan A Facility”), (ii) a seven-year $700 million term loan B facility (the “Term Loan B Facility” and together with the Term Loan A Facility, the “Term Loan Facility”) and (iii) a five-year $175 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”).

As a result of the $50.0 million voluntary principal prepayment in June 2015, no additional principal payments are scheduled under the Term Loan A Facility until the final maturity date. Loans under the Term Loan A Facility bear interest, at our option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum.

Term Loan B Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on the final maturity date of the Term Loan B Facility. Loans under the Term Loan B Facility bear interest, at our option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.

Loans under the Revolving Facility bear interest, at our option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum, subject to reduction by 0.25% or 0.50% based on our total secured leverage ratio (as defined in the Credit Agreement).

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions. The Term Loan A Facility and Revolving Facility contain financial covenants that require that we maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. The Term Loan B Facility does not contain a minimum consolidated interest coverage ratio or a maximum total leverage ratio covenant. We may be required to make an additional payment on the Term Loan Facility each February. This payment is a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No payment was required in February 2015.

2040 Convertible Notes

We issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015, holders of $287.4 million of outstanding principal exercised their right to require us to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, we redeemed the remaining $3.6 million of outstanding principal. As of June 30, 2015, no amounts related to the 2040 Convertible Notes remain outstanding.

Contractual Obligations

For information about our contractual obligations, see "Contractual and Other Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference. The following table summarizes our contractual obligations at June 30, 2015 (in thousands), except for purchase obligations, which have not materially changed since December 31, 2014.

36


 
 
Payments due by period
Contractual Obligations
 
Total
 
Remainder of 2015
 
2016 - 2017
 
2018 - 2019
 
Thereafter
Long-term debt (1)
 
$
1,113,000

 
$
3,500

 
$
14,000

 
$
434,000

 
$
661,500

Interest on long-term debt (1)
 
172,360

 
15,399

 
60,456

 
58,133

 
38,372

Operating lease commitments
 
106,563

 
10,651

 
31,063

 
21,886

 
42,963

 
 
$
1,391,923

 
$
29,550

 
$
105,519

 
$
514,019

 
$
742,835


(1)
The 2020 Convertible Notes are presented based on the date they can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances. For additional information, see Note 8 to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.

Off Balance Sheet Arrangements
    
Since December 31, 2014, we have not engaged in any material off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and reported results of operations during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Our estimates are based on historical experience and on various other estimates, assumptions and judgments that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

We believe there have been no significant changes to the critical accounting policies and estimates disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements applicable to us, see Note 1 to the Condensed Consolidated Financial Statements in Part I, Item 1, which is incorporated herein by reference.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including those related to changes in interest rates, foreign currency exchange rates and security prices. Changes in these factors may cause fluctuations in our financial position, results of operations or cash flows. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference. Other than market risks associated with the issuance of the 2020 Convertible Notes, which are described below, we believe our exposure to market risk has not changed materially since December 31, 2014.

2020 Convertible Notes

In March 2015, we issued $345.0 million principal 2020 Convertible Notes that have a fixed annual interest rate of 0.500%. As the 2020 Convertible Notes have a fixed interest rate, there is no economic interest rate exposure. However, the fair value of the 2020 Convertible Notes is exposed to fluctuations in interest rates and securities prices. Generally, the fair value of the 2020 Convertible Notes will increase as interest rates fall and the fair value of the 2020 Convertible Notes will increase as the price of our common stock increases.

In connection with the offering of the 2020 Convertible Notes, we purchased call options with respect to our common stock and sold warrants on our common stock. The options are expected to offset the potential dilution with respect to shares of

37

our common stock resulting from any conversion of the 2020 Convertible Notes. The warrants will have a dilutive effect with respect to our common stock to the extent that the market price of our common stock exceeds the strike price of the warrants. However, we have the right to settle the warrants in cash or shares. The strike price of the warrants is $40.1450 per share. The number of shares of our common stock underlying the warrants is 11.9 million shares, subject to anti-dilution adjustments.

For further discussion regarding the 2020 Convertible Notes and the related call options and warrants, see Note 8 to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Control Over Financial Reporting

There has been no change in our internal controls over financial reporting during the quarter ended  June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


PART II. Other Information

ITEM 1. Legal Proceedings
    
The information contained in Note 9 to the Condensed Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

ITEM 1A. Risk Factors
    
We believe that there have been no significant changes to the risk factors associated with our business as compared to those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the three months ended June 30, 2015 (in thousands, except per share amounts):
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2015 to April 30, 2015
312.5

 
$
18.05

 
312.5
 
 
$
50,975.0
 
May 1, 2015 to May 31, 2015
1,394.1

 
$
17.59

 
1,394.1
 
 
$
100,472.5
 
June 1, 2015 to June 30, 2015
—

 
N/A

 
—
 
 
$
100,472.5
 
Total
1,706.6

 
 
 
1,706.6
 
 
 


38

(1)
On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock.  The April 2015 authorization included amounts which were outstanding under our previously authorized stock repurchase programs. 
 
ITEM 3. Defaults Upon Senior Securities
None.

ITEM 4. Mine Safety Disclosures
Not applicable.

ITEM 5. Other Information

None.


39

ITEM 6. Exhibits

 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 

Exhibit Description
 

Form
 

Date
 

Number
 
Filed Herewith
10.01
 
Lease between GC Net Lease (San Carlos) Investors, LLC and Rovi Corporation, dated June 26, 2015
 
 
 
 
 
 
 
X
31.01
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
31.02
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
32.01
 
Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
32.02
 
Certification of Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
X




40

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROVI CORPORATION
 
Authorized Officer:
 
 
Date: July 30, 2015
 
 
 
By:
/s/ Thomas Carson
 
 
Thomas Carson
 
 
President and Chief Executive Officer
 
 
 
Principal Financial Officer:
Date: July 30, 2015
 
 
 
By:
/s/ Peter C. Halt
 
 
Peter C. Halt
 
 
Chief Financial Officer
 
 
 
Principal Accounting Officer:
Date: July 30, 2015
 
 
 
By:
/s/ Wesley Gutierrez
 
 
Wesley Gutierrez
 
 
Chief Accounting Officer and Treasurer



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