Rovi's (ROVI) AT&T Renewal Clears the Way to a $30+ Share Price - B. Riley

B. Riley analyst, Eric Wold, thinks that Rovi's (NASDAQ: ROVI) AT&T renewal signals that Comcast (NASDAQ: CMCSA) and Echostar (NASDAQ: DISH) are likely to follow suit. Although he isn't making any changes to his model today, he notes that his model has conservatism built into it (since the renewed contract terms were unknown) and implies that positive EPS revisions are possible if not likely.

Following the news that Rovi Corporation successfully renewed its license with AT&T to not only cover acquired DirecTV, but also to do so with unchanged pricing and 7 years of visibility/security, the analyst is increasingly optimistic that Comcast and EchoStar will follow their lead and renew their prepaid licenses early next year. The potential for valuation multiples to return to levels seen earlier this year (that could push shares into the $30+ range.

Investors have been concerned that ROVI could experience pricing pressure on the DirecTV renewal given the combined post-merger power of AT&T and DirecTV. However, this renewal provides fixed license fees and cash flow in 2016+ unchanged with what is being paid by AT&T and DirecTV in 2015 – with step-ups in future years.

The bear call has been that the “Big 4” could fight ROVI’s patent portfolio and enter into prolonged litigation. However, this renewal helps prove otherwise and confirms renewal discussions have already moved past the patent validity and use case issues and were focused on economics.

There is significant overlap in the patents used by AT&T/DirecTV, Comcast and EchoStar. This confirmation from AT&T/DirecTV that ROVI’s patents are necessary and worth paying for boosts our optimism that CMCSA and SATS are likely to come to the same conclusion; with their prepaid licenses set to expire in March 2016. These two prepaid licenses were written up as part of the Gemstar acquisition in 2007 and ROVI has recognized zero cash flow since then. The renewals could represent a significant boost from current run rates (by as much as $100-125MM annually).

No change to the buy rating, estimates or $23 Price Target.

For an analyst ratings summary and ratings history on Rovi Corp. click here. For more ratings news on Rovi Corp. click here.

Shares of Rovi Corp. closed at $14.66 yesterday.

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