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Stock Strategist

Contract Concerns Ding Rovi

Investors able to handle risk could find value in the shares.

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 Rovi (ROVI) reported weaker-than-expected third-quarter results, with its consumer electronics segment down notably because a large manufacturer went off contract during the period. Discussions with the company remain on track, though, and Rovi believes the manufacturer should come back under contract during the fourth quarter. At that time, Rovi would receive catch-up payments for the time out of license. The lumpiness of the consumer electronics revenue and opaqueness of the discussions is obviously a concern and reinforces our very high fair value uncertainty rating. Still, the company reiterated its full-year outlook, and we maintain our $20 fair value estimate and narrow economic moat rating. The stock sold off aggressively after the earnings release and trades at a substantial discount to our fair value estimate. We would suggest it to investors with a very high penchant for risk and the ability to look through lumpy quarterly results.

On the licensing front, Rovi continues to focus on its big four intellectual property licensing deals (Comcast, Dish, Time Warner Cable, and DirecTV), which all come up for renewal in the next year. These deals will have a significant impact on Rovi's financial performance, if renewed. We believe the firm should come to amicable terms with each of the big four providers. A couple of highlights during the quarter support this conviction: Rovi signed a short-term licensing deal with Time Warner Cable and extended a licensing deal with Sky in Europe.

Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.