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 March 31, 2010





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  X  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 ____    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 filerX   Accelerated filer____  Non-accelerated filer____  Smaller reporting company___


(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  X





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 April 30, 2010Common stock, $0.001 par value
102,056,280














ROVI CORPORATION


FORM 10-Q


INDEX





PART I - FINANCIAL INFORMATION






PageItem 1.
Unaudited Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009
2Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2010
3Condensed Consolidated Statements of Cash Flowsfor the Three Months Ended March 31, 2010 and 2009
4Notes to Condensed Consolidated Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24Item 3.
Quantitative and Qualitative Disclosures about Market Risk
33Item 4.
Controls and Procedures
34PART II - OTHER INFORMATIONItem 1.
Legal Proceedings
35Item 1A.
Risk Factors
36Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
53Item 3.
Defaults Upon Senior Securities
53Item 4.
(Removed and Reserved)
53Item 5.
Other Information
53Item 6.
Exhibits
54Signatures
55







i


PART I.                     FINANCIAL INFORMATION





Item 1.                     Financial Statements





ROVI CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


(Unaudited)





ASSETS




March 31,

December 31,2010

2009Current assets:Cash and cash equivalents
$           243,635

$          165,410Short-term investments
111,716

107,362Restricted cash
36,841

36,838Trade accounts receivable, net
74,258

71,875Taxes receivable
136,559

6,363Deferred tax assets, net
16,913

7,844Prepaid expenses and other current assets
11,562

10,661Total current assets
631,484

406,353Long-term marketable securities
26,161

26,674Property and equipment, net
39,929

43,124Finite-lived intangible assets, net
761,524

779,371Long-term deferred tax assets, net
-

13,691Other assets
19,495

27,861Goodwill
856,511

854,065$        2,335,104

$        2,151,139






LIABILITIES AND STOCKHOLDERS’ EQUITY


Current liabilities:Accounts payable and accrued expenses
$                 57,185

$             81,369Deferred revenue
15,328

16,536Current portion of long-term debt
-

18,486Total current liabilities
72,513

116,391Taxes payable, less current portion
82,714

80,675Long-term debt, less current portion
552,648

411,551Deferred revenue, less current portion
3,972

4,919Long-term, deferred tax liabilities, net
45,472

-Other non current liabilities
20,161

17,334777,480

630,870Stockholders’ equity:Common stock
107

106Treasury stock
(125,068)

(25,068)Additional paid-in capital
1,728,272

1,657,888Accumulated other comprehensive loss
(3,203)

(2,078)Accumulated deficit
(42,484)

(110,579)Total stockholders’ equity
1,557,624

1,520,269$             2,335,104

$         2,151,139


- 1 -





ROVI CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


(Unaudited)


Three Months EndedMarch 31,2010

2009Revenues




$     130,053

$      111,158Costs and expenses:Cost of revenues




41,644

15,170Research and development




25,929

23,024Selling, general and administrative




34,125

32,131Depreciation




4,791

4,549Amortization




20,582

20,259Restructuring and asset impairment charges




-

7,971Total costs and expenses




127,071

103,104Operating income from continuing operations




2,982

8,054Interest expense




(10,887)

(17,578)Interest income and other, net




(6,773)

1,455Loss on debt redemption




(14,313)

-Loss from continuing operations before income taxes




(28,991)

(8,069)Income tax benefit




(108,520)

(2,724)Income (loss) from continuing operations, net of tax




79,529

(5,345)Discontinued operations, net of tax




(11,434)

(36,170)Net income (loss)




$          68,095

$              (41,515)Basic income (loss) per share:Basic income (loss) per share from continuing operations




$              0.77

$                  (0.05)Basic loss per share from discontinued operations




$           (0.11)

$                  (0.36)Basic net income (loss) per share




$              0.66

$                  (0.41)Shares used in computing basic net earnings per share




102,560

100,124Diluted income (loss) per share:Diluted income (loss) per share from continuing operations




$             0.74

$                  (0.05)Diluted loss per share from discontinued operations




$          (0.10)

$                  (0.36)Diluted net income (loss) per share




$             0.64

$                  (0.41)Shares used in computing diluted net earnings per share




106,403

100,124
 See the accompanying notes to the unaudited condensed consolidated financial statements.








- 2 -







ROVI CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


(In thousands, except per share data)


(Unaudited)





Common stock

Treasury StockShares

Amount

Shares


Amount

Additional paid-in

capital
Accumulated other

comprehensive loss

Accumulated

deficit

Total Stockholders’

EquityBalances as of December 31, 2009
105,720,821

$        106

(2,262,975)


$      (25,068)

$        1,657,888

$                    (2,078)

$          (110,579)

$             1,520,269Comprehensive income:Net income
-

-

-


-

-

-

68,095

68,095Foreign currency translation adjustment, net of tax
-

-

-


-

-

(1,073)

-

(1,073)Unrealized losses in investments, net of tax
-

-

-


-

-

(52)

-

(52)Total comprehensive income















66,970Issuance of common stock upon exercise of options
783,808

1

-


-

13,476

-

-

13,477Issuance of common stock under employee

stock purchase plan
425,503

-

-


-

4,947

-

-

4,947Issuance of restricted stock, net
28,479

-

-


-

-

-

-

-Equity-based compensation
-

-

-


-

8,439

-

-

8,439Equity  component of convertible debt, net of tax
-

-

-


-

56,953

-

-

56,953Convertible debt repurchase
-

-

-


-

(16,537)

-

-

(16,537)Repurchase of warrant and sale of call option, net
-

-

-


-

3,106

-

-

3,106Stock repurchase
-

-

(2,702,700)


(100,000)

-

-

-

(100,000)Balances as of March 31, 2010
106,958,611

$        107

(4,965,675)


$    (125,068)

$        1,728,272

$                    (3,203)

$           (42,484)

$             1,557,624  See the accompanying notes to the unaudited condensed consolidated financial statements.






- 3 -





ROVI CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)








Three Months EndedMarch 31,2010
2009Cash flows from operating activities:Net income (loss)
$                68,095
$              (41,515)Adjustments to reconcile net income (loss) to net cash (used in) provided by operations:Loss from discontinued operations, net of tax
11,434
36,170Change in fair value of interest rate swaps and caps, net of premium
2,327
-Depreciation and amortization
25,373
24,808Amortization of note issuance costs and convertible note discount
6,468
6,515Equity-based compensation
8,439
4,653Restructuring and asset impairment charge
-
4,142Loss on debt redemption
13,777Deferred taxes
15,007
(15,261)Loss on sale of Guideworks
1,407
-Changes in operating assets and liabilities, net of assets and liabilities acquired:Accounts receivable, net
(2,383)
284Deferred revenue
(2,155)
(1,002)Prepaid expenses, other current assets and other assets
(5,147)
1,434Income taxes
(125,975)
8,976Accounts payable, accrued expenses, and other long-term liabilities
(35,120)
(13,067)Net cash (used in) provided by operating activities of continuing operations
(18,453)
16,137Net cash provided by operating activities of discontinued operations
-
1,184Net cash (used in) provided by operating activities
(18,453)
17,321Cash flows from investing activities:Proceeds from disposition of businesses, net of costs to sell
-
281,400Reclass portion of sales proceeds from disposition of business to restricted cash
-
(36,782)Purchases of long and short-term marketable investments
(32,787)
(15,176)Sales or maturities of long and short term marketable investments
28,575
13,207Purchases of property and equipment
(1,407)
(2,427)Payments for acquisition, net of cash acquired
(5,748)Other investing, net
4,113
-Net cash (used in) provided by investing activities of continuing operations
(7,254)
240,222Cash flows from financing activities:Payments under capital lease and debt obligations
(263,645)
(240,002)Sale of convertible bond call option and repurchase of warrant, net
3,105
-Purchase of treasury stock
(100,000)
-Proceeds from issuance of debt, net of issuance costs
446,517
-Proceeds from exercise of options and other financing activities
18,424
2,914Net cash provided by (used in) financing activities of continuing operations
104,401
(237,088)Net cash used in financing activities of discontinued operations
-
(114)Net cash provided by (used in) financing activities
104,401
(237,202)Effect of exchange rate changes on cash
(469)
(983)Net increase in cash and cash equivalents
78,225
19,358Cash and cash equivalents at beginning of period
165,410
199,188Cash and cash equivalents at end of period
$             243,635
$             218,546
 See the accompanying notes to the unaudited condensed consolidated financial statements.





- 4 -





ROVI CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE 1 – BASIS OF PRESENTATION







Rovi Corporation and its subsidiaries (collectively “Rovi” or the “Company) offerings include interactive program guides (IPGs), embedded licensing technologies (such as recommendations and search capability), media recognition technologies and licensing of the Company’s database of descriptive information about television, movie, music, books, and game content and content protection technologies and services.  In addition to offering Company developed IPGs, our customers may also license our patents and deploy their own IPG or a third party IPG.  The Company’s solutions are deployed by companies in the consumer electronics, cable and satellite, entertainment and online distribution markets.





The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in accordance with such rules and regulations.  However, the Company believes the disclosures 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.  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 2009 Annual Report on Form 10-K.





The Condensed Consolidated Statements of Operations for the interim periods presented are not necessarily indicative of the results expected for the entire year ending December 31, 2010, for any future year, or for any other future interim period.





Certain prior period amounts have been reclassified to conform to the current period presentation.





On February 26, 2010, the Company sold its 49% interest in the Guideworks LLC joint venture (“Guideworks”) to Comcast Corporation (“Comcast”) and simultaneously purchased Comcast’s interest in the patents which had been developed by Guideworks.  Guideworks was a research and development joint venture with Comcast that develops interactive program guide solutions, which are distributed by the Company under the i-Guide brand.  Under these agreements, the Company received a net payment of $4.2 million and realized a $1.4 million loss on sale of its interest in Guideworks.  The Company had been recording its 49% interest in Guideworks as an operating expense in accordance with ASC 730-20, Research and Development Arrangements.  Included in research and development expenses for the three months ended March 31, 2010 and 2009, are $1.7 million and $2.8 million, respectively, in expenses related to Guideworks.





- 5 -




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





On January 1, 2010, the Company adopted Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Arrangements, (“ASU 2009-13”) and Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements That Include Software Elements(“ASU 2009-14”).  With the exception of the adoption of these accounting pronouncements related to revenue recognition, which are discussed below, there have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.





Revenue Recognition





ASU 2009-13 modifies the requirements for determining whether a deliverable in a multiple element arrangement can be treated as a separate unit of accounting by removing the criteria that objective and reliable evidence of fair value exists for the undelivered elements. The new guidance requires consideration be allocated to all deliverables based on their relative selling price using vendor specific objective evidence (VSOE) of selling price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If neither VSOE nor TPE exist, management must use its best estimate of selling price (ESP) to allocate the arrangement consideration.  The Company adopted this update under the prospective method and has applied the new guidance to agreements entered into or materially modified after January 1, 2010.





The adoption of ASU 2009-13 may have a material impact on the Company’s revenue in any given future period.  For example, the Company often enters into IPG patent license agreements in which it provides a licensee a release for past infringement as well as the right to ship an unlimited number of units over a set period for a flat fee.  Under the previous multiple element guidance, the Company generally would not be able to provide objective and reliable evidence of the fair value of the go-forward license arrangement (the undelivered element) and therefore would have recognized all revenue for such agreement ratably over the term of the agreement.  Applying the guidance in the update, the Company would use ESP to allocate the consideration between the release for past infringement and the go-forward patent license.  As the revenue recognition criteria for the past infringement would generally be satisfied upon the execution of the agreement, the amount of consideration allocated to the past infringement would be recognized in the quarter the agreement is executed and the amount allocated to the go forward license agreement would be recognized ratably over the term.





For the three months ended March 31, 2010, the adoption of ASU 2009-13 increased revenue, income before income taxes and net income by $2.5 million each, and EPS by $0.02, as compared to application of the previous guidance.





ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 985-605, Software-Revenue Recognition. The Company adopted ASU 2009-14 on a prospective basis and applied the new guidance to revenue arrangements entered into or materially modified after January 1, 2010.  The adoption of ASU 2009-14 did not have a material impact on the Company’s financial position or results from operations.





The Company’s revenue from continuing operations primarily consists of license fees for IPG products and patents, royalty fees on copy-protected products, licenses for its content protection technologies and license fees for its entertainment metadata.  The Company recognizes revenue when the following conditions are met (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured.






- 6 -





The Company licenses its proprietary IPG technology to consumer electronics (“CE”) manufacturers and to multi-channel video service providers.  The Company generally recognizes revenue from IPG product and patent licensing on a per-unit shipped model (with CE manufacturers) or a per-subscriber model (with service providers).  The Company’s recognition of revenues from per-unit license fees is based on units reported shipped by the manufacturer.  CE manufacturers normally report their unit shipments to us in the quarter immediately following that of actual shipment by the manufacturer.  Revenues from per-subscriber fees are recognized in the period the services are provided by a licensee, as reported to us by the licensee.  Revenues from annual or other license fees are recognized based on the specific terms of the license arrangement.  For instance, certain IPG licensees enter into agreements for which they have the right to ship an unlimited number of units over a specified term for a flat fee.  The Company records the fees associated with these arrangements on a straight-line basis over the specified term.





The Company also generates advertising revenue through its IPGs.  Advertising revenue is recognized when the related advertisement is provided.  All advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers.





The Company’s ACP technology licensing agreements often provide for the payment of a per-unit royalty fee for the shipment of DVDs and the shipment of digital set-top boxes that incorporate our technology.  The Company relies on royalty reports from customers and/or third parties as the basis for revenue recognition, provided there is persuasive evidence of an arrangement and that collection of a fixed and determinable fee is considered probable.  The Company has established significant experience and relationships with certain customers to reasonably estimate current period volume for purposes of making an accurate revenue accrual.  Accordingly, royalty revenue from these customers is recognized as earned.  Revenue from other customers is recognized as reported until such time that the Company can establish a basis for making reasonable estimates, in which case revenue is recognized on an as-earned basis.  Licensees generally report activity within 30 to 60 days after the end of the month or quarter in which such activity takes place. The Company has also entered into agreements with certain entertainment studios for which they have the right to ship an unlimited number of DVDs that utilize our ACP technology over a specified term for a flat fee.  The Company records the revenue associated with these arrangements on a straight-line basis over the specified term.  In addition, the Company has also entered into agreements with CE manufacturers in which they pay us a one-time fee for a perpetual license to our ACP technology.   Provided that collectability is reasonably assured, we record revenue related to these agreements when the agreement is executed as we have no continuing obligation and the amounts are fixed and determinable.





In accounting for multiple-element arrangements, one of the key judgments to be made is the accounting value that is attributable to the different contractual elements. Revenue arrangements with multiple deliverables are divided into separate units of accounting when the delivered item has value to the customer on a stand-alone basis.  The Company then determines the fair value of each element using the selling price hierarchy of VSOE, TPE or ESP, as applicable; and allocates the total consideration among the various elements based on the relative selling price method.  The allocation of value may impact the amount and timing of revenue recorded in the consolidated statement of operations during a given period.





NOTE 3 – ACQUISITIONS





2010 Acquisitions





In March 2010, the Company paid approximately $5.7 million for substantially all of the assets of a business which had developed a recommendation engine for cross-platform multimedia companies offering engaging experiences around diverse catalogs of entertainment content.  The Company acquired these assets to enhance and expand its media search and recommendations capability.








- 7 -





2009 Acquisitions





In April 2009, the Company acquired substantially all of the assets of Muze, Inc. (“Muze”) for approximately $17.0 million in cash.  Muze provides metadata on video, music, games and books to retailers, Internet destinations, software producers, consumer electronics manufacturers and mobile service providers in the United States and Europe.  The Company acquired Muze to expand its worldwide entertainment metadata portfolio and enhance its technology platform for delivering metadata.




The Company also paid approximately $8.3 million for a music metadata distribution business in the Asia Pacific region.  This transaction closed on July 1, 2009.





NOTE 4 – DISCONTINUED OPERATIONS





During the three months ended March 31, 2010, the Company recorded $11.4 million in expenses related to indemnification for IP infringement claims relating to the Company’s Software business which was sold in 2008.





On February 28, 2009, the Company sold its TV Guide Network and TV Guide Online business units for approximately $242 million in cash, of which $36.8 million was deposited in a 15 month escrow account as a source of recovery in the event the buyer has an indemnifiable claim.  The Company has recorded this $36.8 million as restricted cash on its Condensed Consolidated Balance Sheet.





On January 27, 2009, the Company sold its TVG Network business unit for approximately $50.7 million.  Included in the net assets sold was $11.9 million of cash.





The results of operations of the Company’s discontinued businesses consist of the following (in thousands):


Three Months EndedMarch 31,2010

2009Net revenue:TV Guide Network / TV Guide Online
$                            -

$                 20,319TVG Network
-

2,616Pre-tax (loss) incomeTV Guide Network / TV Guide Online
$                            -

$                   1,825TVG Network
-

(694)Software
(11,434)Pre-tax loss on disposal of business units
-

(3,468)Income tax benefit (expense) (1)
-

(33,833)Loss from discontinued operations, net of tax
$              (11,434)

$             (36,170)


(1)
No tax benefit was recorded for the three months ended March 31, 2010, as a result of the deferred tax valuation allowance recorded during the same period (see Note 13). The $33.8 million in tax expense for the three months ended March 31, 2009, is primarily due to the sales of TVG Network and TV Guide Network and TV Guide Online including goodwill for which the Company had no basis for tax purposes.








- 8 -


NOTE 5 – DEBT





Convertible Senior Notes Due 2040





In March 2010, the Company issued $460.0 million in 2.625% convertible senior notes (the “2040 Convertible Notes”) due in 2040 at par, pursuant to an indenture, dated as of March 17, 2010, by and between the Company and Bank of New York Mellon Trust Company, N.A., as Trustee. The 2040 Convertible Notes may be converted, under the circumstances described below, based on an initial conversion rate of 21.1149 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $47.36 per share).





Prior to November 15, 2039, holders may convert their 2040 Convertible Notes into cash and the Company’s common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending June 30, 2010, if the last reported sale price of the Company’s common stock for at least 20 trading days during the 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 applicable conversion price in effect on each applicable trading day; (ii) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period 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 day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture, or (iv) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to that redemption date.  From November 15, 2039 until the close of business on the scheduled trading day immediately preceding the maturity date of February 15, 2040, holders may convert their 2040 Convertible Notes into cash and shares of the Company’s common stock at the applicable conversion rate, at any time, regardless of the foregoing circumstances.  After February 20, 2015, the Company has the right to call for redemption all, or a portion, of the 2040 Convertible Notes at 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.  Holders have the right to require the Company to repurchase the 2040 Convertible Notes on February 20, 2015, 2020, 2025, 2030 and 2035 for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.





Upon conversion, a holder will receive the conversion value of the 2040 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 following the conversion date. The conversion value of each 2040 Convertible Note will be paid in cash up to the aggregate principal amount of the 2040 Convertible Notes to be converted and shares of common stock to the extent the conversion value exceeds the principal amount of the converted note.  Upon the occurrence of a fundamental change (as defined in the indenture) at any time, the holders may require the Company to repurchase for cash all or a portion of their 2040 Convertible Notes at a price equal to 100% of the principal amount of the 2040 Convertible Notes being repurchased plus accrued and unpaid interest, if any.  In addition, following certain corporate events that occur prior to February 20, 2015, the conversion rate will be increased for holders who elect to convert their notes in connection with such a corporate event in certain circumstances.





In accordance with ASC 470, related to accounting for convertible debt instruments that may be settled in cash upon conversion, the Company has separately accounted for the liability and equity components of the 2040 Convertible Notes to reflect its non-convertible debt borrowing rate of 7.75%, at the time the instrument was issued, when interest cost is recognized.  The Company allocated $94.8 million to the equity component, which is recorded as additional paid in capital, and the remaining $365.2 million of the proceeds to the liability component of the 2040 Convertible Notes.  In addition, $2.8 million of the $13.5 million of note issuance costs were allocated to the equity component and recorded to additional paid in capital. The Company also recorded a $35.1 million deferred tax liability in conjunction with the 2040 Convertible Notes, with the offsetting amount recorded as a reduction to additional paid in capital.




- 9 -





As of March 31, 2010, the principal amount of the Company’s 2040 Convertible Notes was $460 million, the unamortized discount on the 2040 Convertible Notes was $94.2 million and the carrying amount was $365.8 million.   During the three months ended March 31, 2010, the Company recorded $0.6 million of interest expense for the 2040 Convertible Notes related to the amortization of the discount.





Convertible Senior Notes Due 2011





In August 2006, Rovi Solutions, a wholly-owned subsidiary of the Company, issued $240.0 million in 2.625% convertible senior notes (the “2011 Convertible Notes”) due in 2011 at par pursuant to an indenture, dated as of August 23, 2006, between Rovi Solutions and the Bank of New York Trust Company, N.A.  In connection with the Gemstar-TV Guide International (“Gemstar”) acquisition, the Company entered into a supplemental indenture with respect to the 2011 Convertible Notes whereby the 2011 Convertible Notes became convertible into shares of the Company’s common stock. The 2011 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 35.3571 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $28.28 per share).   During the three months ended March 31, 2010, the Company repurchased $40.9 million in par value of the 2011 Convertible Notes for $56.4 million.  The Company allocated $39.9 million of the purchase price to the liability component and the remaining $16.5 million to the equity component of the 2011 Convertible Notes.  The $16.5 million allocated to the equity component was recorded as a reduction to additional paid in capital.  In connection with the repurchase, the Company also recorded a $1.8 million loss on debt redemption which represents the difference between the carrying value of the 2011 Convertible Notes retired and the $39.9 million allocated to the liability component above and the write-off of the related note issuance costs.





Prior to June 15, 2011, holders may convert their 2011 Convertible Notes into cash and the Company’s common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending September 30, 2006, if the last reported sale price of the Company’s common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 120% of the applicable conversion price in effect on the last trading day of the immediately preceding fiscal quarter; (ii) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period 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 day; or (iii) upon the occurrence of specified corporate transactions, as defined in the indenture. From June 15, 2011 until the close of business on the scheduled trading day immediately preceding the maturity date of August 15, 2011, holders may convert their 2011 Convertible Notes into cash and shares of the Company’s common stock at the applicable conversion rate, at any time, regardless of the foregoing circumstances.





Upon conversion, a holder will receive the conversion value of the 2011 Convertible Notes converted equal to the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a specified period following the conversion date. The conversion value of each Convertible Note will be paid in: (i) cash equal to the lesser of the principal amount of the 2011 Convertible Note or the conversion value, as defined, and (ii) to the extent the conversion value exceeds the principal amount of the 2011 Convertible Note, a combination of common stock and cash. In addition, upon a fundamental change (as defined in the indenture) at any time, the holders may require Rovi Solutions to repurchase for cash all or a portion of their 2011 Convertible Notes  at a price equal to 100% of the principal amount of the 2011 Convertible Notes being repurchased plus accrued and unpaid interest, if any.





In accordance with ASC 470, the Company has separately accounted for the liability and equity component of the 2011 Convertible Notes to reflect its non-convertible debt borrowing rate of 7.4%, at the time the instrument was issued, when interest cost is recognized.  As of March 31, 2010, and December 31,





- 10 -
 
 
 
 2009, the principal amount of the Company’s 2011 Convertible Notes was $199.1 million and $240.0 million, respectively.  As of March 31, 2010 and December 31, 2009, the unamortized discount on the 2011 Convertible Notes was $12.2 million and $17.2 million, respectively, resulting in a carrying amount of $186.9 million and $222.8 million, respectively.   During the three months ended March 31, 2010 and 2009, the Company recorded $2.4 million and $2.3 million of interest expense for the 2011 Convertible Notes related to the amortization of the discount.





Concurrently with the issuance of the 2011 Convertible Notes, the Company entered into a convertible bond call option whereby the Company has options to purchase up to 7.96 million shares, subject to anti-dilution adjustments similar to those contained in the 2011 Convertible Notes, of the Company’s common stock at a price of approximately $28.28 per share. These options expire on August 15, 2011 and must be settled in net shares. The cost of the convertible bond call option was approximately $46.1 million and has been recorded as a reduction to stockholders’ equity.   In connection with the repurchase of a portion of the 2011 Convertible Notes in March 2010, the Company unwound a corresponding portion of the convertible bond call option and in the process received a payment of $15.3 million.  This payment has been recorded as an increase to additional paid in capital.  As of March 31, 2010, the Company continues to have the option to purchase up to 6.6 million shares of its common stock under the terms described above.





In addition, concurrent with the issuance of the 2011 Convertible Notes, the Company sold warrants to purchase up to 7.96 million shares of its common stock at a price of $32.9248 per share. The warrants expire on various dates from August 16, 2011 through the 104th scheduled trading day following August 16, 2011, and must be settled in net shares. The Company received approximately $30.3 million in cash proceeds for the sales of these warrants which have been recorded as an increase to stockholders’ equity.  In connection with the repurchase of a portion of the 2011 Convertible Notes in March 2010, the Company unwound a corresponding portion of the warrants for $12.2 million.  This payment has been recorded as a decrease to additional paid in capital.  As of March 31, 2010, warrants to purchase up to 6.6 million shares of the Company’s common stock under the terms described above remained outstanding.





Senior Secured Term Loan





In connection with the Gemstar acquisition, the Company entered into and fully drew-down a $550 million five year senior secured term loan credit facility (“Term Loan”). As of December 31, 2009, the Term Loan balance was $207.2 million.  During the three months ended March 31, 2010, the Company paid off and retired the Term Loan.  In connection with retiring the Term Loan, the Company recorded a $12.5 million loss on debt redemption, primarily due to writing off the remaining note issuance costs.





NOTE 6 – INVESTMENTS





The following is a summary of available-for-sale and other investment securities (in thousands) as of March 31, 2010:




Cost

Unrealized Gains

Unrealized Losses

Fair ValueCash

$    35,713

$           -

$            -

$    35,713Cash equivalents - money markets
207,922

-

-

207,922Total cash and cash equivalents
$  243,635

$           -

$            -

$   243,635Restricted cash
$    36,841

$           -

$            -

$   36,841Available-for-sale investments:Auction rate securities
$    17,000

$           -

$ (1,815)

$   15,185Corporate debt securities
39,220

147

(28)

39,339Treasury/Agencies
31,282

1

(30)

31,253Total available-for-sale investments
$    87,502

$      148

$    (1,873)

$   85,777Auction rate securities classified as trading






$  46,690ARS Put Option






$5,410Total cash, cash equivalents, restricted cash and investments



$  418,353







- 11 -






Cost

Unrealized Gains

Unrealized Losses

Fair ValueCash

$    36,801

$           -

$            -

$   36,801Cash equivalents - money markets
128,609

-

-

128,609Total cash and cash equivalents
$  165,410

$           -

$            -

$ 165,410Restricted cash
$    36,838

$           -

$            -

$   36,838Available-for-sale investments:Auction rate securities
$    17,100

$           -

$  (1,821)

$   15,279Corporate debt securities
38,583

189

(24)

38,748Treasury/Agencies
22,300

1

(17)

22,284Total available-for-sale investments
$    77,983

$      190

$  (1,862)

$   76,311Auction rate securities classified as trading






$   51,952ARS Put Option






$     5,773Total cash, cash equivalents, restricted cash and investments



$ 336,284





In December 2008, the Company entered into an agreement with UBS AG which provides (1) the Company the right (“ARS Put Option”) to sell these auction rate securities back to UBS AG at par, at the Company’s sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) UBS AG the right to purchase these auction rate securities or sell them on the Company’s behalf at par anytime through July 2, 2012. The Company elected to measure the ARS Put Option under the fair value option and to classify the auction rate securities covered under this agreement as trading securities. Increases in the fair value of the auction rate securities covered by this agreement are offset by decreases in the fair value of the ARS Put Option.  The Company’s auction rate securities which were not purchased from UBS AG continue to be classified as available-for-sale securities.





Market values were determined for each individual security in the investment portfolio.  The Company attributes the unrealized losses in its auction rate securities portfolio to liquidity issues rather than credit issues.  The Company’s available-for-sale auction rate securities portfolio at March 31, 2010 is comprised solely of AAA rated investments in federally insured student loans and municipal and educational authority bonds. The Company continues to earn interest on all of its auction rate security instruments.





- 12 -


NOTE 7 – INTEREST RATE SWAPS AND CAPS





In connection with the issuance of the 2040 Convertible Notes, the Company entered into interest rate swaps with a notional amount of $460 million under which it pays a weighted average floating rate of 6 month USD – LIBOR minus 0.342%, set in arrears, and receives a fixed rate of 2.625%.  These swaps expire in February 2015.   In addition, in connection with the remaining balance of the 2011Convertible Notes, the Company also entered into interest rate swaps with a notional amount of $185 million under which it pays a weighted average floating rate of 6 month USD – LIBOR plus 1.241%, set in arrears, and receives a fixed rate of 2.625%.  These swaps expire in August 2011.  The Company entered into these swaps as it believes interest rates will increase in the future at a slower pace than the market currently anticipates, thus allowing it to reduce its overall interest expense related to the convertible debt.  The Company also purchased interest rate caps for $4.0 million with notional amounts that range from $270 million to $200 million from 2012 to 2015.  The Company will receive payments under these interest rate caps if 6 month USD-LIBOR, on the reset dates, exceeds 6% from February 2012 to February 2013, 5% from February 2013 to February 2014, or 4% from February 2014 to February 2015.  Included in the above are interest rate swaps with a notional value of $175 million which, based on the Company’s current credit rating, would require the Company to post collateral if our net liability under these interest rate swaps exceeds $12.5 million.





The Company has not designated any of its interest rate swaps or caps as hedges.  The Company records these interest rate swaps and caps on its balance sheet at fair market value with the changes in fair market value recorded in interest income and other, net in its condensed consolidated statement of operations.  During the three months ended March 31, 2010, the Company recorded a $6.3 million loss for the change in the fair value of its interest rate swaps and caps.  For information on the fair value of the Company’s interest rate swaps and caps see Note 8.





NOTE 8 – FAIR VALUE MEASURMENTS





In accordance with ASC 820, the Company uses three levels of inputs to measure fair value:





Level 1. Quoted prices in active markets for identical assets or liabilities.





Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or valuations in which all significant inputs are observable or can be obtained from observable market data.





Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.





The Company values its interest rate swaps using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.





The Company’s auction rate securities are valued using a discounted cash flow analysis or other type of valuation model. These analyses are highly judgmental and consider, among other items, the





- 13 -
 
 
 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 similar characteristics to the securities held by us.





The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period.  Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments at March 31, 2010 (in thousands):





Reclass for

Counterparty

Quoted Prices in Active Markets

Significant Other

Observable Inputs
Significant

Unobservable

InputsTotal

Netting

(Level 1)

(Level 2)

(Level 3)Current AssetsMoney market funds (1)

$         244,763

$                     -

$             244,763

$                           -

$                          -Corporate debt securities (2)

28,363

-

-

28,363

-US treasury bills (2)

3,814

-

3,814



-US agency debt securities (2)

27,439

-



27,439

-Auction rate securities (3)

46,690

-

-

-

46,690ARS Put Option (4)

5,410

-





5,410Non-Current AssetsAuction rate securities (5)

15,185

-

-

-

15,185Corporate debt securities (5)

10,976





10,976Interest rate caps

-

(3,699)

-

3,699

-Total Assets

$         382,640

$            (3,699)

$             248,577

$                70,477

$                 67,285LiabilitiesInterest rate swaps (6)

$              2,327

$            (3,699)

$                          -

$                  6,026

$                            -Total Liabilities

$              2,327

$            (3,699)

$                          -

$                  6,026

$                            -




(1)
$207.9 million included in cash and cash equivalents and $36.8 million included in restricted cash on the condensed consolidated balance sheet.


(2)
Included in short-term investments on the condensed consolidated balance sheet and classified as available-for-sale securities.


(3)
Included in short-term investments on the condensed consolidated balance sheet and classified as trading securities.


(4)
Included in short-term investments on the condensed consolidated balance sheet.  The Company has elected the fair value option for the ARS Put Option.


(5)
Included in long-term marketable securities on the condensed consolidated balance sheet and classified as available-for-sale securities.


(6)
Included in other non-current liabilities on the condensed consolidated balance sheet.





The following table provides a summary of changes in the Company’s Level 3 auction rate securities and ARS Put Option as of March 31, 2010 (in thousands):





Balance at December 31, 2009
$     73,004Gain on ARS classified as trading and recorded in other income
363Unrealized gain included in accumulated other comprehensive income
6ARS Put Option loss recorded in other income
(363)Settlements
(5,725)Balance at March 31, 2010
$     67,285




The fair value of the Company’s outstanding debt at March 31, 2010 is as follows (in thousands):







- 14 -






SignificantQuoted Prices

Otherin Active

ObservableMarkets

InputsCarrying Value

(Level 1)

(Level 2)2011 Convertible Notes (1)
$                    186,867



$             271,7722040 Convertible Notes (1)
365,781

462,469$                    552,648






(1)
The par value of the 2011 Convertible Notes and 2040 Convertible Notes is $199.1 million and $460 million, respectively.  See Note 5 for additional details.





NOTE 9 – EQUITY-BASED COMPENSATION





Stock Options Plans





The Company currently grants stock options and restricted stock awards from the 2008 Equity Incentive Plan (“2008 Plan”) and the 2000 Equity Incentive Plan (“2000 Plan”).





As of March 31, 2010, the Company had a total of 29.6 million shares reserved and 13.0 million shares available for issuance under the 2000 and 2008 Plans. The 2000 and 2008 Plans provide for the grant of stock options, restricted stock awards and similar types of equity awards by the Company to employees, officers, directors and consultants of the Company.  For options granted during the period ended March 31, 2010, the vesting period was generally four years where one quarter of the grant vests at the end of the first year, and the remainder vests monthly.  Option grants have contractual terms ranging from five to ten years.





Restricted stock awards generally vest annually over four years.  As of March 31, 2010, the number of shares awarded but unvested was 1.1 million.





Employee Stock Purchase Plan





The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants 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 in each purchase period at 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, whichever price is lower.





As of March 31, 2010, the Company had a total of 7.5 million shares reserved and 6.6 million shares available for future issuance under the ESPP.





Valuation and Assumptions





The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The fair value of equity-based payment awards on the date of grant is determined by an option-pricing model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. The Company determines the fair value of its restricted stock awards as the difference between the market value of the awards on the date of grant less the exercise price of the awards granted.





- 15 -





Estimated volatility of the Company’s common stock for new grants is determined by using a combination of historical volatility and implied volatility in market traded options. When historical data is available and relevant, the expected term of options granted is determined by calculating the average term from historical stock option exercise experience. When there is insufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to changes in the terms of option grants, the Company uses the “simplified method” as permitted under Staff Accounting Bulletin No. 110.  For options granted after July 15, 2008, the Company changed its standard vesting terms from three to four years and its contractual term from five to seven years.  Since the Company did not have sufficient data for options with four year vesting terms and seven year contractual life, the simplified method was used to calculate expected term.  The risk-free interest rate used in the option valuation model is from U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records equity-based compensation expense only for those awards that are expected to vest. The assumptions used to value equity-based payments are as follows:





Three months ended

March 31,2010

2009Option Plans:Dividends
None

NoneExpected term
4.6 years

4.6 yearsRisk free interest rate
2.1%

1.9%Volatility rate
37%

47%ESPP:Dividends
None

NoneExpected term
1.3 years

1.3 yearsRisk free interest rate
0.5%

0.8%Volatility rate
35%

53%





As of March 31, 2010, there was $40.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested equity-based payments granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of 2.3 years.




The weighted average grant date fair values of equity-based awards are as follows:





Three months ended

March 31,2010

2009Option grants
$  11.17

$   6.34Restricted stock award grants
$  30.07

$ 15.73Employee purchase share rights
$    8.64

$   3.04








- 16 -





The total intrinsic value of options exercised during the three months ended March 31, 2010, was $12.9 million. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.





NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS





The following table summarizes the Company’s goodwill activity associated with its continuing operations (in thousands):





Goodwill, net at December 31, 2009
$    854,065Changes due to foreign currency exchange rates and other
(502)2010 acquisitions
2,948Goodwill, net at March 31, 2010
$    856,511







The Company assesses its goodwill for impairment annually as of October 1, or more frequently if circumstances indicate impairment may have occurred.  To accomplish this, the Company determines the fair value of its reporting unit using a discounted cash flow approach and / or a market approach and compares it to the carrying amount of the reporting unit at the date of the impairment analysis.  As the Company only has one reporting unit, the Company’s publicly traded equity is a key input in determining the fair value of the reporting unit.  When the Company conducted its impairment analysis in 2009, its fair value exceeded its GAAP equity by approximately 126%.  A significant decline in the value of the Company’s publicly traded equity and /or a significant decrease in the Company’s future business prospects could require the Company to record a goodwill and / or intangible assets impairment in the future.





The Company’s finite-lived intangible assets associated with its continuing operations are as follows (in thousands):





March 31, 2010Gross Costs

Accumulated

Amortization

NetFinite-lived  intangibles:Developed technology and patents
$    828,923

$     (147,945)

$     680,978Existing contracts and   customer relationships
47,634

(12,289)

35,345Content databases
50,960

(11,507)

39,453Trademarks / Tradenames
8,300

(2,552)

5,748$   935,817

$     (174,293)

$      761,524





December 31, 2009Gross Costs

Accumulated Amortization

NetFinite-lived  intangibles:Developed technology and patents
$      827,838

$      (131,201)

$      696,637Existing contracts and customer relationships
46,577

(11,323)

35,254Content databases
50,973

(10,086)

40,887Trademarks / Tradenames
8,300

(1,707)

6,593$      933,688

$      (154,317)

$      779,371











- 17 -





As of March 31, 2010, the Company estimates its amortization expense in future periods to be as follows (in thousands):





Amortization

ExpenseRemainder of 2010

$  59,7762011

77,3522012

73,4432013

71,3882014

70,537Thereafter

409,028Total amortization expense

$ 761,524





NOTE 11 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES





Muze Restructuring Plan





In connection with the acquisition of substantially all of the assets of Muze (see Note 3), management implemented a plan to restructure Muze’s operations resulting in a charge of $0.9 million during the second quarter of 2009. This was done to eliminate redundancies with the Company’s entertainment metadata business. This charge included $0.7 million for employee severance and a $0.2 million liability for the fair value of future lease payments on abandoned office space. The Company paid all of the employee severance costs in 2009. As of March 31, 2010, the liability for the future lease payments related to the abandoned office space was $0.1 million.





Q1 2009 Restructuring Plan





In conjunction with the disposition of the media properties (TV Guide Magazine, TVG Network, TV Guide Network and TV Guide Online) acquired in the Gemstar acquisition, the Company’s management approved several actions resulting in a restructuring and asset impairment charge of $8.4 million.  This was done to create cost efficiencies for the Company since it would no longer support any of these businesses.  These charges included $1.3 million in severance, a $2.9 million liability for the fair value of future lease payments on abandoned office space and $4.2 million in non–cash asset impairment charges related to the abandoned office space. The Company paid all of the employee severance costs in 2009. As of March 31, 2010, the liability for future lease payments related to the abandoned office space was $2.1 million.  During the first quarter of 2009, the Company also reversed the remaining $0.4 million in liabilites related to a fiscal 2007 restructuring plan.





Gemstar Acquisition Restructuring Plan





In conjunction with the Gemstar acquisition, management acted upon a pre-acquisition plan to restructure certain Gemstar operations resulting in severance of $21.2 million. This was done in order to create cost efficiencies for the combined Company. The severance liability was recognized as an assumed liability in the Gemstar acquisition and, accordingly, resulted in an increase to goodwill.  As of March 31, 2010, the remaining liability is $0.3 million.





NOTE 12 – EARNINGS PER SHARE (“EPS”)





ASC 260 defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that should be included in computing EPS using the two-class method.   The Company’s non-vested restricted stock awards granted prior to June 30, 2009, qualify as participating securities.






- 18 -




Basic net 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 and dilutive common equivalent shares outstanding during the period except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive.  The calculation of earnings per common share and diluted earnings per common share is presented below.




Three Months Ended

March 31,2010

2009Basic income (loss) per common shareIncome (loss) from continuing operations

$      79,529

$       (5,345)Income allocated to participating securities

(479)

-Income (loss) allocated to common shareholders from continuing operations

$      79,050

$       (5,345)Discontinued Operations

$   (11,434)

$     (36,170)Loss allocated to participating securities

69

-Discontinued operations allocated to common shareholders

$    (11,365)

$     (36,170)Net income (loss)

$      68,095

$     (41,515)Income allocated to participating securities

(410)

-Net income (loss) allocated to common shareholders

$      67,685

$     (41,515)Weighted average basic common shares outstanding

102,560

100,124Income (loss) per common share from continuing operations

$           0.77

$         (0.05)Loss per common share from discontinued operations

(0.11)

(0.36)Net income (loss) per common share

$           0.66

$         (0.41)Diluted income (loss) per common shareIncome (loss) from continuing operations

$      79,529

$       (5,345)Income allocated to participating securities

(462)

-Income (loss) allocated to common shareholders from continuing operations

$      79,067

$       (5,345)Discontinued Operations

$   (11,434)

$    (36,170)Loss allocated to participating securities

66

-Discontinued operations allocated to common shareholders

$    (11,368)

$    (36,170)Net income (loss)

$      68,095

$    (41,515)Income allocated to participating securities

(396)

-Net income (loss) allocated to common shareholders

$      67,699

$    (41,515)Weighted average diluted common shares outstanding

102,560

100,124Dilutive potential common shares

3,843

-Weighted average diluted common shares outstanding

106,403

100,124Income (loss) per common share from continuing operations

$           0.74

$        (0.05)Loss per common share from discontinued operations

(0.10)

(0.36)Net income (loss) per common share

$           0.64

$        (0.41)


- 19-





The following weighted average potential common shares were excluded from the computation of diluted net earnings per share as their effect would have been anti-dilutive (in thousands):




Three months ended

March 31,2010

2009Stock options

1,031

7,955Restricted stock

-

485Warrants (1)

-

7,955Convertible Notes (1)

9,713

8,486Total weighted average potential common shares excluded from diluted net earnings per share

10,744

24,881







(1)
See Note 5 for additional details.  In addition, in connection with a 2007 acquisition, the Company agreed to issue a warrant for the purchase of 0.9 million shares of its common stock.  This warrant has not been issued and is not included in the table above.





NOTE 13 – INCOME TAXES





During the three months ended March 31, 2010, the Company entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement (PFA) program confirming that the Company recognized an ordinary tax loss of approximately $2.4 billion from the 2008 sale of its TV Guide Magazine business.  As a result in the quarter ended March 31, 2010, the Company recorded a discrete tax benefit for the release of $576.8 million of reserves for uncertain tax positions previously netted against the deferred tax assets established in connection with the tax loss resulting from the 2008 sale of TV Guide Magazine.  The Company also reduced the deferred tax asset established in connection with the tax loss resulting from the 2008 sale of TV Guide Magazine by $115 million to reflect the actual tax loss per the closing agreement with the Internal Revenue Service.




The Company intends to file federal income tax carryback claims of approximately $125 million under the five year loss carryback provisions of the Worker, Homeownership, and Business Assistance Act of 2009for taxes paid by Rovi group members during the 5 year carryback period.  The Company recorded a short-term receivable for the estimated refund on its March 31, 2010 balance sheet.






In assessing the realizability of its overall balance of deferred tax assets, the Company considered whether it is more likely than not that some or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the deferred tax assets will become deductible.  Positive and negative evidence about the Company is considered and weighted in making this judgment.  The Company is forecasting, on a GAAP basis, a cumulative 3 year loss from domestic continuing operations for the current and prior two years.  Under ASC 740, Income Taxes, a GAAP cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset.  While the Company believes that its fundamental business model is robust, there is not sufficient verifiable positive evidence to overcome the negative evidence from the cumulative loss position and as such the Company concluded that it is not more likely than not that all of its deferred tax assets will be realized.  Consequently, in the quarter ended March 31, 2010, the Company recorded a valuation allowance for the excess of its gross deferred tax balance over the amount of deferred tax assets which can be realized by the carryback of losses to prior years and the amount of taxable temporary differences which will reverse during the loss carryforward period.  The valuation allowance recorded was a discrete tax expense of $347 million.










After taking into account the discrete items for the release of its reserves for uncertain tax positions, the reduction in the deferred tax asset originally recorded for the TV Guide Magazine ordinary tax loss and the recording of a valuation allowance, the Company recorded an income tax benefit of $108.5 million and $2.7 million from its continuing operations for the three months ended March 31, 2010 and 2009, respectively.





Income tax benefit for the three months ended March 31, 2009, includes a discrete tax benefit of $1.9 million resulting from the enactment of a California tax law change during the quarter which reduced the balance of deferred tax liabilities expected to be paid in 2011 and years thereafter. Income tax expense is based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year, including the amount of foreign reinvested earnings.





The Company recognizes a liability for uncertain tax positions.  The gross tax-affected unrecognized tax benefits which, if recognized, would affect our tax rate were $56.1 million as of March 31, 2010.  A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is (in thousands):





Balance as of January 1, 2010
$  634,020Additions for tax provisions of prior years
1,068Reductions for PFA resolution
(576,884)Balance as of March 31, 2010
$   58,204







The Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations for years before 2006.





NOTE 14 – STOCK REPURCHASE PROGRAM





In February 2010, the Company’s Board of Directors authorized the repurchase of up to $100 million of common stock in connection with the offering of the 2040 Convertible Notes.  The Board of Directors also authorized a stock repurchase program which allows the Company to repurchase up to an additional $200 million of its common stock in the open market from time to time at prevailing market prices or otherwise, as conditions warrant.  This $200 million authorization includes any amounts which were outstanding under previously authorized stock repurchase programs.  In connection with the 2040 Convertible Note offering the Company repurchased 2.7 million shares of its common stock for $100 million.  These repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity. As of March 31, 2010, treasury stock consisted of 5.0 million shares of common stock that had been repurchased, with a cost basis of approximately $125.1 million.  In addition, the Company’s Board of Directors also authorized the repurchase of up to $100 million of the Company’s 2011 Convertible Notes in open market from time to time.





NOTE 15 – COMMITMENTS AND CONTINGENCIES




Indemnifications




In the normal course of business, the Company provides indemnification 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 licensee’s products and services, provided the licensee is not in violation of the terms and conditions of the agreement and/or additional performance or other requirements for such indemnification. In some cases, the Company may receive tenders of defense and indemnity arising out of products that are no longer provided by the Company due to having divested certain assets, but which were previously licensed 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 our 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 Company’s 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.




DirecTV, Inc. v. Finisar Corporation.In April 2005, Gemstar received a notice of a potential claim for indemnification from DirecTV Group, Inc. (“DirecTV”) as a result of a lawsuit filed by Finisar Corporation (“Finisar”) against DirecTV in the United States District Court for the Eastern District of Texas. Finisar alleged that several aspects of the DirecTV satellite transmission system, including aspects of its advanced electronic program guide (“EPG”) and the storage, scheduling, and transmission of data for the EPG, infringed a Finisar patent. On July 7, 2006, the Court awarded Finisar approximately $117 million. In addition, the Court ordered DirecTV to pay approximately $1.60 per activated set-top box in licensing fees going forward in lieu of an injunction until the expiration of Finisar’s patent in 2012. The parties both filed appeals to the Federal Circuit, which subsequently ruled that the trial court’s construction of certain terms of the patent was too broad, vacated the jury’s verdict of infringement, held that one of the seven patent claims at issue is invalid, and left standing the remaining six claims for reconsideration by the trial court. The appeals court also reversed the jury’s finding that DirecTV’s infringement was willful. The trial court subsequently ruled in DirecTV’s favor on its summary judgment motion that the remaining claims of the subject patent were invalid, and in January 2010 the court of appeals confirmed that ruling. The Company has not established a reserve with respect to this matter in its consolidated financial statements.




Comcast Cable Communications Corp., LLC v. Finisar Corporation, in the United States District Court for the Northern District of California. In support of a potential claim for indemnification, Comcast Cable Communications Corp., LLC (“Comcast”) put the Company on notice that it had received communications from Finisar asserting infringement of U.S. Patent 5,404,505 (the “‘505 patent”). On July 7, 2006, Comcast filed a declaratory judgment action in the Northern District of California asking the Court to rule, among other things, that it does not infringe the ‘505 patent and/or that the patent is invalid. On May 15, 2008, Finisar entered into a covenant and stipulation with Comcast, filed with the California Court, that it would not assert any claim of the ‘505 patent against Comcast or certain related entities, other than claim 25. On July 11, 2008, the Court ruled on Comcast’s summary judgment motion, finding that claim 25 is invalid, and therefore finding that Comcast’s non-infringement motion is moot. Comcast has not taken any further action insofar as its potential indemnity claim against the Company is concerned.




Legal Proceedings




Thomson, Inc. v. Gemstar-TV Guide International, Inc., in the Superior Court of the State of Indiana for the County of Hamilton. On May 23, 2008, Thomson, Inc. (“Thomson”) initiated this action, seeking, among other things, indemnification from the Company in connection with its settlement of the patent claims against it in SuperGuide Corporation v. DirecTV Enterprises, Inc., et al., in the United States District Court for the Western District of North Carolina.  The parties reached a confidential settlement in the matter and the Company paid all amounts due in March 2010.




DIRECTV, Inc. v. Gemstar-TV Guide Interactive, Inc., American Arbitration Association - Los Angeles. On March 20, 2009, DirecTV filed this arbitration demand seeking indemnity for payments made in settlement of two patent infringement lawsuits, including the SuperGuide Corporation v. DirecTV Enterprises, Inc., et al. matter. The Company received the arbitrators’ final ruling on the matter and paid the amount that the arbitrators awarded to DirecTV in the arbitration in March 2010.






John Burke v. TV Guide Magazine Group, Inc., Open Gate Capital, Rovi Corp., Gemstar-TV Guide International, Inc. On August 11, 2009, plaintiff filed a purported class action lawsuit claiming that the Company’s former subsidiary, TV Guide Magazine, breached agreements with its subscribers and violated








consumer protection laws with its practice of counting double issues toward the number of issues in a subscription. On September 10, 2009, the Company filed an answer to the complaint along with a petition to remove the case to federal court. On December 18, 2009, the case was dismissed with prejudice, and plaintiff has filed an appeal of that dismissal.




In addition to the items listed above, 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 has established loss provisions only for matters in which losses are probable and 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 or results of operations. At this time, management has not reached a determination that the matters listed above or any other litigation, individually or in the aggregate, are expected to result in liabilities that will have a material adverse effect on our financial position or results of operations or cash flows.











Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





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, 2009 as filed with the SEC.





Overview




We are focused on powering the discovery and enjoyment of digital entertainment by providing a broad set of integrated solutions that are embedded in our customers’ products and services and used by end consumers to simplify and guide their interaction with digital entertainment. Our offerings include interactive program guides (IPGs), IPG advertising, embedded licensing technologies (such as recommendations and search capability), media recognition technologies and licensing of our extensive database of descriptive information about television, movie, music, books, and game content and content protection technologies and services. In addition to offering Company developed IPGs, our customers may also license our patents and deploy their own IPG or a third party IPG. We group our revenue into the following categories – (i) CE manufacturers, (ii) service providers, and (iii) other. We include in service provider revenues any revenue related to an IPG deployed by a service provider in a subscriber household whether the ultimate payment for that IPG comes from the service provider or from a manufacturer of a set-top box. Revenues for IPGs included in a set-top box deployed by a service provider where payment was made by the set-top box manufacturer were previously classified in CE manufacturers. Revenue related to an IPG deployed in a set-top box sold at retail is included in CE manufacturers. Our management feels this classification is preferable as it allows a better association between service provider revenue and digital households deploying a Company-provided IPG or an IPG deployed under a patent license with us. CE manufacturers deploy such Company products and services as Connected Platform, TV Guide On Screen, Guide Plus+, G-GUIDE, VCR Plus+, web services, LASSO and Tapestry. Service providers deploy such Company products and services as Passport Echo, Passport DCT, Passport, i-Guide and web services. Other includes our business of licensing our extensive database of descriptive information about television, movie, music and game content and our entertainment company content protection products and services such as ACP, RipGuard, CopyBlock and BD+.









On January 27, 2009, we sold our TVG Network business and on February 28, 2009 we sold our TV Guide Network and TV Guide Online businesses.  Together TV Guide Magazine, TVG Network, TV Guide Network and TV Guide Online are collectively referred to as the “Media Properties”. The results of operations and cash flows of the Media Properties and the Company’s Software business, which was sold in 2008, have been classified as discontinued operations for all periods presented.





On February 26, 2010, we sold our 49% interest in the Guideworks LLC joint venture (“Guideworks”) to Comcast Corporation (“Comcast”) and simultaneously purchased Comcast’s interest in the patents which had been developed by Guideworks. Guideworks was a research and development joint venture with Comcast that develops interactive program guide solutions, which are distributed by the Company under the i-Guide brand.  Under these agreements, the Company received a net payment of $4.2 million and realized a $1.4 million loss on sale of its interest in Guideworks.  The Company had been recording its 49% interest in Guideworks as an operating expense in accordance with ASC 730-20, Research and Development Arrangements.Included in research and development expenses for the three months ended March 31, 2010 and 2009, are $1.7 million and $2.8 million, respectively, in expenses related to Guideworks.





- 24 -


Results of Operations




The following tables present our condensed consolidated statements of operations for our continuing operations compared to the prior year (in thousands).







Three Months EndedMarch 31,2010

2009

Change $

Change %Revenues:Service providers
$        67,399

$       52,433

14,966

29%CE manufacturers
48,579

46,486

2,093

5%Other
14,075

12,239

1,836

15%Total revenues
130,053

111,158

18,895

17%Costs and expenses:Cost of revenues
41,644

15,170

26,474

175%Research and development
25,929

23,024

2,905

13%Selling, general and administrative
34,125

32,131

1,994

6%Depreciation
4,791

4,549

242

5%Amortization
20,582

20,259

323

2%Restructuring and asset impairment charges
-

7,971

(7,971)

-100%Total operating expenses
127,071

103,104

23,967

23%Operating income from continuing operations
2,982

8,054

(5,072)

-63%Interest expense
(10,887)

(17,578)

6,691

-38%Interest income and other, net
(6,773)

1,455

(8,228)

-565%Loss on debt redemption
(14,313)

-

(14,313)

NALoss from continuing operations before taxes
(28,991)

(8,069)

(20,922)

259%Income tax benefit
(108,520)

(2,724)

(105,796)

3884%Income (loss) from continuing operations, net of tax
79,529

(5,345)

84,874

-1588%Loss from discontinued operations, net of tax
(11,434)

(36,170)

24,736

-68%Net income (loss)
$        68,095

$       (41,515)

109,610

-264%
  Service Providers Revenue





For the three months ended March 31, 2010, revenue from the sale of our products to service providers increased 29% compared to the same period in the prior year.  This increase was primarily due to a $10.1 million increase in IPG patent revenue and a $3.7 million increase in IPG product revenues. IPG revenues benefited from new IPG patent licensees in Europe and Australia as well as from digital subscriber growth domestically.  We expect revenue from licensing our IPG products and patents to continue to grow in the future from increased international licensing and from continued digital subscriber growth.





CE Manufacturers Revenue





For the three months ended March 31, 2010, revenue from the sale of our products and licensing of our patents to CE manufacturers increased by 5% compared to the same period in the prior year. This increase was primarily due to an increase in IPG revenue, which was partially offset by a decline in VCR Plus+ and ACP revenues.  As the transition to digital continues, we expect future growth in our IPG and other digital businesses will substantially offset the continued decline in our VCR Plus+ and ACP analog businesses.











Other Revenue





Other revenue consists primarily of licensing of our underlying media content/metadata and licensing of our content protection technologies to entertainment companies.  For the three months ended March 31, 2010, Other revenue increased compared to the same period in the prior year primarily due to increased revenue from our data business, largely driven by the Muze acquisition.  This increase was partially offset by a decline in our content protection revenues from entertainment studios.





Cost of Revenues





For the three months ended March 31, 2010, cost of revenues increased from the same period in the prior year primarily due to approximately $24.5 million in costs associated with indemnification claims in excess of reserves established in purchase accounting in conjunction with the Gemstar-TV Guide International (“Gemstar”) acquisition. These primarily relate to the resolution of the DirecTV and Thompson, Inc. matters (see Note 15 to the Condensed Consolidated Financial Statements).





Research and Development





For the three months ended March 31, 2010, research and development expenses increased from the same period in the prior year primarily due to an increase in cash and stock compensation expense driven by an increase in research and development headcount. We anticipate that exiting Guideworks (see Note 1 to the Condensed Consolidated Financial Statements) will reduce research and development expenses by approximately $1 million to $2 million per quarter.





Selling, General and Administrative





For the three months ended March 31, 2010, selling, general and administrative expenses increased from the same period in the prior year primarily due to a $2.4 million increase in stock compensation expense.  Stock compensation expense increased primarily due to options and restricted shares granted in 2009 and increased participation in the Company’s employee stock purchase plan.








Restructuring and asset impairment charges





In the first quarter of 2009, in conjunction with the disposition of the Media Properties, management approved several actions resulting in a restructuring and asset impairment charge of $8.4 million.  During the first quarter of 2009, we reversed the remaining $0.4 million in liabilities related to the fiscal 2007 restructuring plan. See Note 11 to the Condensed Consolidated Financial Statements.





Interest Expense





Interest expense decreased compared to the same period in the prior year due to lower average debt balances.  During 2009, the Company made $440 million in debt payments.





Interest Income and other, Net





Interest income and other, net, was an expense of $6.8 million for the three months ended March 31, 2010, versus income of $1.5 million for the three months ended March 31, 2009.  The change is primarily due to the Company recording $6.3 million in losses related to marking its interest rate swaps and interest rate caps to market (see Note 7 to the Condensed Consolidated Financial Statements).  Also contributing to the loss was a $1.4 million expense recorded in connection with the sale of our interest in the Guideworks joint venture.








Loss on Debt Redemption





During the three months ended March 31, 2010, we spent $207.2 million to pay-off and retire our term loan.  We realized a $12.5 million loss on redemption, primarily due to writing off the remaining note issuance costs.  In addition, we repurchased $40.9 million in par value of our convertible notes due in 2011 (the “2011 Convertible Notes”) for $56.4 million.   In connection with this repurchase, we recorded a $1.8 million loss on debt redemption which represents the difference between the carrying value of the 2011 Convertible Notes retired and the $39.9 million allocated to the liability component of the notes and the write-off of the related note issuance costs. See Note 5 to the Condensed Consolidated Financial Statements.





Income Taxes





During the three months ended March 31, 2010, we entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement (PFA) program confirming that the Company recognized an ordinary tax loss of approximately $2.4 billion from the 2008 sale of its TV Guide Magazine business.  As a result, in the quarter ended March 31, 2010, we recorded a discrete tax benefit for the release of $576.8 million of reserves for uncertain tax positions previously netted against the deferred tax assets established in connection with the tax loss resulting from the 2008 sale of TV Guide Magazine.  We also reduced the deferred tax asset established in connection with the tax loss resulting from the 2008 sale of TV Guide Magazine by $115 million to reflect the actual tax loss per the closing agreement with the Internal Revenue Service.  In addition, during the three months ended March 31, 2010, we recorded a $347 million valuation allowance against our deferred tax assets (see Note 13 to the Condensed Consolidated Financial Statements).





Income tax expense is based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year, including the amount of foreign reinvested earnings.





Discontinued Operations





Discontinued operations for the three months ended March 31, 2010, includes expenses and reserves we recorded for indemnification claims related to the Software business which was disposed of in 2008 (see Note 4 to the Condensed Consolidated Financial Statements.)





Discontinued operations for the three months ended March 31, 2009, is primarily income tax expense arising from the sale of TVG Network, TV Guide Network and TV Guide Online.





Costs and Expenses





Cost of revenues consists primarily of service costs, patent prosecution, patent maintenance and patent litigation costs.  Research and development expenses are comprised primarily of employee compensation and benefits and consulting costs.  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.





Critical Accounting Policies and Use of Estimates





The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements.  These Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent





assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, equity-based compensation, goodwill and intangible assets, impairment of long lived assets and income taxes.  Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.





On January 1, 2010, we adopted Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Arrangements, (“ASU 2009-13”) and Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements That Include Software Elements(“ASU 2009-14”).  With the exception of the adoption of these accounting pronouncements related to revenue recognition, which are discussed below, there have been no material changes  in our critical accounting policies during the three months ended March 31, 2010, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.




Revenue Recognition




ASU 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Arrangements, modifies the requirements for determining whether a deliverable in a multiple element arrangement can be treated as a separate unit of accounting by removing the criteria that objective and reliable evidence of fair value exists for the undelivered elements. The new guidance requires consideration be allocated to all deliverables based on their relative selling price using vendor specific objective evidence (VSOE) of selling price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If neither VSOE nor TPE exist, management must use its best estimate of selling price (ESP) to allocate the arrangement consideration.  We adopted this update under the prospective method and have applied the guidance to agreements entered into or materially modified after January 1, 2010.





The adoption of ASU 2009-13 may have a material impact on our revenue in any given future period.  For example, we often enter into IPG patent license agreements in which we provide a licensee a release for past infringement as well as the right to ship an unlimited number of units over a set period for a flat fee.  Under the previous multiple element guidance, we generally would not be able to provide objective and reliable evidence of the fair value of the go-forward license arrangement (the undelivered element) and therefore would have recognized all revenue for such agreement ratably over the term of the agreement.  Applying the guidance in the update, we would use ESP to allocate the consideration between the release for past infringement and the go-forward patent license.  As the revenue recognition criteria for the past infringement would generally be satisfied upon the execution of the agreement, the amount of consideration allocated to the past infringement would be recognized in the quarter the agreement is executed and the amount allocated to the go forward license agreement would be recognized ratably over the term.





For the three months ended March 31, 2010, the adoption of ASU 2009-13 increased revenue, income before income taxes and net income by $2.5 million each, and increased EPS by $0.02, as compared to application of the previous guidance.





ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 985-605, Software-Revenue Recognition. We adopted ASU 2009-14 on a prospective basis and applied the new guidance to revenue arrangements entered into or materially modified after January 1, 2010.  The adoption of ASU 2009-14 did not have a material impact on our financial position or results from operations.




We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectability is reasonable assured. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we





report.   For example, for multiple element arrangements, we must: (1) determine whether and when each element has been delivered and whether the delivered element has stand-alone value to the customer (2) determine the fair value of each element using the selling price hierarchy of VSOE, TPE or ESP, as applicable; and (3) allocate the total consideration among the various elements based on the relative selling price method.





We license our proprietary IPG technology to CE manufacturers and to service providers. We generally recognize revenue from IPG product and patent licensing on a per-unit shipped model (with CE manufacturers) or a per-subscriber model (with service providers). Our recognition of revenues from per-unit license fees is based on units reported shipped by the manufacturer. CE manufacturers normally report their unit shipments to us in the quarter immediately following that of actual shipment by the licensee. Revenues from per-subscriber fees are recognized in the period the services are provided by a licensee, as reported to us by the licensee. Revenues from annual or other license fees are recognized based on the specific terms of the license arrangement. For instance, certain IPG licensees enter into agreements for which they have the right to ship an unlimited number of units over a specified term for a flat fee. We record the fees associated with these arrangements on a straight-line basis over the specified term. We often enter into IPG patent license agreements in which we provide a licensee a release for past infringement as well as the right to ship an unlimited number of units over a future period for a flat fee. In this type of arrangement, we generally would use ESP to allocate the consideration between the release for past infringement and the go-forward patent license.  As the revenue recognition criteria for the past infringement would generally be satisfied upon the execution of the agreement, the amount of consideration allocated to the past infringement would be recognized in the quarter the agreement is executed and the amount allocated to the go forward license agreement would be recognized ratably over the term.





We also generate advertising revenue through our IPGs.  Advertising revenue is recognized when the related advertisement is provided.  All advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers.





Revenues from licensing our ACP technology are often generated from licensing agreements that provide for payment of a per-unit royalty fee for the shipment of DVDs and the shipment of digital set-top boxes.  We rely on royalty reports from customers and/or third parties as the basis for revenue recognition, provided there is persuasive evidence of an arrangement and that collection of a fixed and determinable fee is considered probable.  We have established significant experience and relationships with certain customers to reasonably estimate current period volume for purposes of making an accurate revenue accrual.  Accordingly, royalty revenue from these customers is recognized as earned.  Revenue from other customers is recognized as reported until such time that the Company can establish a basis for making reasonable estimates, in which case revenue is recognized on an as-earned basis.  Licensees generally report activity within 30 to 60 days after the end of the month or quarter in which such activity takes place. Any unusual or unanticipated volumes in a particular period can add significant fluctuations on the revenue reported.  We have also entered into agreements with certain entertainment studios for which they have the right to ship an unlimited number of DVDs that utilize our ACP technology over a specified term for a flat fee.  We record the revenue associated with these arrangements on a straight-line basis over the specified term.  In addition, we also enter into agreements with CE manufacturers in which they pay us a one-time fee for a perpetual license to our ACP technology.   Provided that collectability is reasonably assured, we record revenue related to these agreements when the agreement is executed as we have no continuing obligation and the amounts are fixed and determinable.





Amounts for fees collected or invoiced and due relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized when the applicable revenue recognition criteria are satisfied.











Liquidity and Capital Resources





We finance our operations primarily from cash generated by operations. Our continuing operating activities used net cash of $18.5 million and provided net cash of $16.1 million in the three months ended March 31, 2010 and 2009, respectively.  Cash from operating activities decreased from the prior period primarily due to the payment of indemnification related claims to DirecTV and Thompson (see Note 15 to the Condensed Consolidated Financial Statements).  The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those factors set forth under the caption “Risk Factors” contained in this Form 10-Q.





Net cash used in investing activities from continuing operations was $7.3 million versus net cash provided of $240.2 million in the same period during the prior year. During the three months ended March 31, 2010, we made $1.4 million in capital expenditures and acquired a business which had developed a recommendation engine for cross-platform multimedia companies for approximately $5.7 million (see Note 3 to the Condensed Consolidated Financial Statements).  Included in 2009 investing activities were $281.4 million in cash received from the sale of the Media Properties, partially offset by $36.8 million of proceeds being classified as restricted cash (see below). We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will be between $15 million and $20 million for the full year in 2010.





Included on our balance sheet at March 31, 2010, is $36.8 million in restricted cash.  As part of the sale of TV Guide Network and TV Guide Online, we deposited this cash in an escrow account in the event the buyer has an indemnifiable claim.  We expect the cash remaining in the escrow account will be released to us in May 2010.





Net cash provided by financing activities from continuing operations was $104.4 million versus net cash used of $237.1 million in the same period during the prior year.  During the three months ended March 31, 2010, we issued $460 million in convertible debt ($446.5 million, net of issuance costs) and paid $207.2 million to pay-off and retire our Term Loan.  In addition, we repurchased $40.9 million in par value of our 2011 Convertible Notes for $56.4 million and repurchased $100.0 million of our common stock.  We received $18.4 million in cash from the exercise of employee stock options and the purchase of shares through our employee stock purchase plan.  Net cash used during the three months ended March 31, 2009, was primarily due to payments made on our debt.





As discussed in Note 5 of the Condensed Consolidated Financial Statements, in March 2010, we issued $460.0 million in 2.625% convertible senior notes (the “2040 Convertible Notes”) due in 2040 at par. The 2040 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 21.1149 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $47.36 per share).  We used $159.6 million of the net proceeds from the 2040 Convertible Notes to repay all outstanding amounts under our Term Loan, which we expect will result in a reduction in our interest expense.  As discussed above, we also used $100.0 million of the net proceeds to repurchase approximately 2.7 million shares of our common stock and approximately $56.4 million of the net proceeds to repurchase $40.9 million principal amount of our 2011 Convertible Notes.





Prior to November 15, 2039, holders may convert their 2040 Convertible Notes into cash and our common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending June 30, 2010, if the last reported sale price of our common stock for at least 20 trading days during the 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 applicable conversion price in effect on each applicable trading day; (ii) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day





of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture, or (iv) if we call any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to that redemption date.  From November 15, 2039 until the close of business on the scheduled trading day immediately preceding the maturity date of February 15, 2040, holders may convert their 2040 Convertible Notes into cash and shares of our common stock, if any, at the applicable conversion rate, at any time, regardless of the foregoing circumstances.  On or after February 20, 2015, we have the right to call for redemption all, or a portion, of the 2040 Convertible Notes at 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.  Holders have the right to require us to repurchase the 2040 Convertible Notes on February 20, 2015, 2020, 2025, 2030 and 2035 for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.





Upon conversion, a holder will receive the conversion value of the 2040 Convertible Notes converted based on  the conversion rate multiplied by the volume weighted average price of our common stock over a specified observation period following the conversion date. The conversion value of each 2040 Convertible Note will be paid in cash up to the aggregate principal amount of the 2040 Convertible Notes to be converted and shares of common stock to the extent the conversion value exceeds the principal amount of the converted note.  Upon the occurrence of a fundamental change (as defined in the indenture) at any time, the holders may require us to repurchase for cash all or a portion of their 2040 Convertible Notes at a price equal to 100% of the principal amount of the 2040 Convertible Notes being repurchased plus accrued and unpaid interest, if any.  In addition, following certain corporate events that occur prior to February 20, 2015, the conversion rate will be increased for holders who elect to convert their notes in connection with such a corporate event in certain circumstances.





In connection with the issuance of the 2040 Convertible Notes, we entered into interest rate swaps with a notional amount of $460 million under which we pay a weighted average floating rate of 6 month USD – LIBOR minus 0.342%, set in arrears, and receive a fixed rate of 2.625%.  These swaps expire in February 2015.   In addition, we also entered into interest rate swaps with a notional amount of $185 million under which we pay a weighted average floating rate of 6 month USD – LIBOR plus 1.241%, set in arrears, and receive a fixed rate of 2.625%.  These swaps expire in August 2011.  We entered into these swaps as we believe interest rates will increase in the future at a slower pace than the market currently anticipates, thus allowing us to reduce our overall interest expense related to our convertible debt.  We also purchased interest rate caps for $4.0 million with notional amounts that range from $270 million to $200 million from 2012 to 2015.  We will receive payments under these interest rate caps if 6 month USD-LIBOR, on the reset dates, exceeds 6% from February 2012 to February 2013, 5% from February 2013 to February 2014, or 4% from February 2014 to February 2015.  Included in the above are interest rate swaps with a notional value of $175 million which, based on our current credit rating, would require us to post collateral if our net liability under these interest rate swaps exceeds $12.5 million.





In August 2006, our wholly owned subsidiary, Rovi Solutions, issued the 2011 Convertible Notes which may be converted, under certain circumstances described below, based on an initial conversion rate of 35.3571 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $28.28 per share).  As of March 31, 2010, $199.1 million of the 2011 Convertible Notes remain outstanding.





Prior to June 15, 2011, holders may convert their 2011 Convertible Notes into cash and our common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending September 30, 2006, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 120% of the applicable conversion price in effect on the last trading day of the immediately preceding fiscal quarter; (ii) during the





five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; or (iii) upon the occurrence of specified corporate transactions, as defined in the indenture. From June 15, 2011, until the close of business on the scheduled trading day immediately preceding the maturity date of August 15, 2011, holders may convert their 2011 Convertible Notes into cash and shares of our common stock, if any, at the applicable conversion rate, at any time, regardless of the foregoing circumstances.  During the three months ended March 31, 2010, the common stock sales price condition discussed in (i) above was met and therefore the 2011 Convertible Notes are eligible for conversion during the second quarter of 2010.





Upon conversion, a holder will receive the conversion value of the 2011 Convertible Notes converted equal to the conversion rate multiplied by the volume weighted average price of our common stock during a specified period following the conversion date. The conversion value of each 2011 Convertible Note will be paid in: (i) cash equal to the lesser of the principal amount of the 2011 Convertible Note or the conversion value, as defined, and (ii) to the extent the conversion value exceeds the principal amount of the 2011 Convertible Note, a combination of common stock and cash. In addition, upon a fundamental change (as defined in the indenture) at any time, the holders may require us to repurchase for cash all or a portion of their 2011 Convertible Notes at a price equal to 100% of the principal amount of the 2011 Convertible Notes being repurchased plus accrued and unpaid interest, if any.





In February 2010, our Board of Directors authorized a stock repurchase program, which allows us to purchase up to $200 million of our common stock in the open market from time to time at prevailing market prices or otherwise, as conditions warrant.  This authorization is in addition to their authorization to repurchase up to $100 million of our common stock in conjunction with the offering of the 2040 Convertible Notes and includes any amounts which were outstanding under previously authorized stock repurchase programs.  In addition, the Company’s Board of Directors also authorized the repurchase of up to $100 million of the Company’s 2011 Convertible Notes in open market from time to time.





As of March 31, 2010, we had $243.6 million in cash and cash equivalents, $111.7 million in short-term investments, $26.2 million in long-term marketable securities and $36.8 million in restricted cash.





Included in short-term investments and long-term marketable securities are auction rate securities with a fair value of $61.9 million and par value of $69.1 million. Our auction rate securities portfolio is solely comprised of AAA rated federally insured student loans and municipal and educational authority bonds. However, the auction rate securities we hold have failed to trade at recent auctions due to insufficient bids from buyers. This limits the short-term liquidity of these instruments and may limit our ability to liquidate and fully recover the carrying value of our auction rate securities if we needed to convert some or all to cash in the near term. Included in the above are auction rate securities acquired through UBS AG with a par value of $52.1 million. In December 2008, we entered into an agreement with UBS AG which provides (i) us the right to sell these auction rate securities back to UBS AG at par, at our sole discretion, anytime during the period from June 30, 2010, through July 2, 2012, and (ii) UBS AG the right to purchase these auction rate securities or sell them on our behalf at par anytime through July 2, 2012.  During the three months ended March 31, 2010, UBS repurchased $5.7 million of these auction rate securities at par.





We believe that based upon our cash and cash equivalent and short-term investment balances, the current lack of liquidity in the auction rate securities market will not have a material impact on our liquidity or our ability to fund our operations.





We believe that our current cash, cash equivalents and marketable securities and our annual cash flow from operations will be sufficient to meet our working capital, capital expenditure and debt requirements for the foreseeable future.










Impact of Recently Issued Accounting Standards





See Note 2 to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial statements.





Item 3.  Quantitative and Qualitative Disclosures about Market Risk





We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and security investments.  Changes in these factors may cause fluctuations in our earnings and cash flows.  We evaluate and manage the exposure to these market risks as follows:





Fixed Income Investments:  We have an investment portfolio of money market funds and fixed income securities, including those classified as cash equivalents, short-term investments and long-term marketable investment securities of $377.2 million as of March 31, 2010.  Most of these securities are subject to interest rate fluctuations.  An increase in interest rates could adversely affect the market value of our fixed income securities while a decrease in interest rates could adversely affect the amount of interest income we receive.





Our investment portfolio consists principally of money market mutual funds, U.S. Treasury and agency securities, corporate bonds, commercial paper and auction rate securities. We regularly monitor the credit risk in our investment portfolio and take appropriate measures to manage such risks prudently in accordance with our investment policies.





As a result of adverse conditions in the financial markets, auction rate securities may present risks arising from liquidity and/or credit concerns. At March 31, 2010, the fair value of our auction rate securities portfolio totaled approximately $61.9 million. Our auction rate securities portfolio is comprised solely of AAA rated federally insured student loans, municipal and educational authority bonds. The auction rate securities we hold have failed to trade for over one year due to insufficient bids from buyers.  This limits the short-term liquidity of these securities.





Included in the aforementioned securities are auction rate securities acquired through UBS AG with a par value of $52.1 million.  Due to the failure of the auction rate market in early 2008, UBS and other major banks entered into discussions with governmental agencies to provide liquidity to owners of auction rate securities.  In December 2008, the Company entered into an agreement with UBS which provides (1) the Company the right to sell these auction rate securities back to UBS AG at par, at the Company’s sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) UBS AG the right to purchase these auction rate securities or sell them on the Company’s behalf at par anytime through July 2, 2012.





We limit our exposure to interest rate and credit risk, however, by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios.  The primary objective of these policies is to preserve principal while at the same time maximizing yields, without significantly increasing risk.  A hypothetical 50 basis point increase in interest rates would result in a $0.3 million decrease in the fair value of our fixed income available-for-sale securities as of March 31, 2010.





While we cannot predict future market conditions or market liquidity, we believe that our investment policies provide an appropriate means to manage the risks in our investment portfolio.





Foreign Currency Exchange Rates.  Due to our reliance on international and export sales, we are subject to the risks of fluctuations in currency exchange rates.  Because a substantial majority of our




international and export revenues, as well as expenses, are typically denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country.  Many of our subsidiaries operate in their local currency, which mitigates a portion of the exposure related to the respective currency collected.





Indebtness.We have two debt instruments outstanding: convertible debt with a par value of $460 million and convertible debt with a par value of $199.1 million.  The terms of these debt instruments are more fully described in Note 5 to the Condensed Consolidated Financial Statements.





Interest Rate Swaps and Caps.In connection with the issuance of the 2040 Convertible Notes, we entered into interest rate swaps with a notional amount of $460 million under which we pay a weighted average floating rate of 6 month USD – LIBOR minus 0.342%, set in arrears, and receive a fixed rate of 2.625%.  These swaps expire in February 2015.   In addition, we also entered into interest rate swaps with a notional amount of $185 million under which we pay a weighted average floating rate of 6 month USD – LIBOR plus 1.241%, set in arrears, and receive a fixed rate of 2.625%.  We also purchased interest rate caps for $4.0 million with notional amounts that range from $270 million to $200 million from 2012 to 2015.  We will receive payments under these interest rate caps if 6 month USD-LIBOR, on the reset dates, exceeds 6% from February 2012 to February 2013, 5% from February 2013 to February 2014, or 4% from February 2014 to February 2015.  Included in the above are interest rate swaps with a notional value of $175 million which, based on our current credit rating, would require us to post collateral if our net liability under these interest rate swaps exceeds $12.5 million.  As a result of entering into these swaps increases in the 6 month USD – LIBOR rate will cause our interest expense to increase.  A hypothetical 50 basis point increase in the 6 month USD-LIBOR rate would result in a $3.2 million increase in our interest expense.








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.    During the quarter ended March 31, 2010, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.











PART II.  OTHER INFORMATION





Item 1.  Legal Proceedings







The Company is involved in legal proceedings related to intellectual property rights and other matters. The following legal proceedings include those of the Company and its subsidiaries.




Indemnifications




DirecTV, Inc. v. Finisar Corporation. In April 2005, Gemstar received a notice of a potential claim for indemnification from DirecTV Group, Inc. (“DirecTV”) as a result of a lawsuit filed by Finisar Corporation (“Finisar”) against DirecTV in the United States District Court for the Eastern District of Texas. Finisar alleged that several aspects of the DirecTV satellite transmission system, including aspects of its advanced electronic program guide (“EPG”) and the storage, scheduling, and transmission of data for the EPG, infringed a Finisar patent. On July 7, 2006, the Court awarded Finisar approximately $117 million. In addition, the Court ordered DirecTV to pay approximately $1.60 per activated set-top box in licensing fees going forward in lieu of an injunction until the expiration of Finisar’s patent in 2012. The parties both filed appeals to the Federal Circuit, which subsequently ruled that the trial court’s construction of certain terms of the patent was too broad, vacated the jury’s verdict of infringement, held that one of the seven patent claims at issue is invalid, and left standing the remaining six claims for reconsideration by the trial court. The appeals court also reversed the jury’s finding that DirecTV’s infringement was willful. The trial court subsequently ruled in DirecTV’s favor on its summary judgment motion that the remaining claims of the subject patent were invalid, and in January 2010 the court of appeals confirmed that ruling. The Company has not established a reserve with respect to this matter in its consolidated financial statements.




Comcast Cable Communications Corp., LLC v. Finisar Corporation, in the United States District Court for the Northern District of California. In support of a potential claim for indemnification, Comcast Cable Communications Corp., LLC (“Comcast”) put the Company on notice that it had received communications from Finisar asserting infringement of U.S. Patent 5,404,505 (the “‘505 patent”). On July 7, 2006, Comcast filed a declaratory judgment action in the Northern District of California asking the Court to rule, among other things, that it does not infringe the ‘505 patent and/or that the patent is invalid. On May 15, 2008, Finisar entered into a covenant and stipulation with Comcast, filed with the California Court, that it would not assert any claim of the ‘505 patent against Comcast or certain related entities, other than claim 25. On July 11, 2008, the Court ruled on Comcast’s summary judgment motion, finding that claim 25 is invalid, and therefore finding that Comcast’s non-infringement motion is moot. Comcast has not taken any further action insofar as its potential indemnity claim against the Company is concerned.




Litigation




Thomson, Inc. v. Gemstar—TV Guide International, Inc., in the Superior Court of the State of Indiana for the County of Hamilton. On May 23, 2008, Thomson, Inc. (“Thomson”) initiated this action, seeking, among other things, indemnification from the Company in connection with its settlement of the patent claims against it in SuperGuide Corporation v. DirecTV Enterprises, Inc., et al., in the United States District Court for the Western District of North Carolina.  The parties reached a confidential settlement in the matter and the Company paid all amounts due in March 2010.




John Burke v. TV Guide Magazine Group, Inc., Open Gate Capital, Rovi Corp., Gemstar-TV Guide International, Inc. On August 11, 2009, plaintiff filed a purported class action lawsuit claiming that the Company’s former subsidiary, TV Guide Magazine, breached agreements with its subscribers and violated consumer protection laws with its practice of counting double issues toward the number of issues in a subscription. On September 10, 2009, the Company filed an answer to the complaint along with a petition to remove the case to federal court. On December 18, 2009, the case was dismissed with prejudice, and plaintiff has filed an appeal of that dismissal.









In addition to the items listed above, 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 has established loss provisions only for matters in which losses are probable and 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 them to pay damages or make other expenditures in amounts that could have a material adverse effect on their financial position or results of operations. At this time, management has not reached a determination that the matters listed above or any other litigation, individually or in the aggregate, are expected to result in liabilities that will have a material adverse effect on our financial position or results of operations or cash flows.





Item 1A.  Risk Factors




In addition to the other information contained in this Report on Form 10-Q, you should consider carefully the following risks. This list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock. If any of these risks occur, our business, financial condition or operating results could be adversely affected.




If we fail to develop and deliver innovative technologies in response to changes in the technology and entertainment industries, our business could decline.




The markets for our products and technologies are characterized by rapid change and technological evolution. We will need to continue to expend considerable resources on research and development in the future in order to continue to design and deliver enduring, innovative entertainment products and technologies. Despite our efforts, we may not be able to develop and effectively market new products, technologies and services that adequately or competitively address the needs of the changing marketplace. In addition, we may not correctly identify new or changing market trends at an early enough stage to capitalize on market opportunities. At times, such changes can be dramatic, such as the shift from VHS videocassettes to DVDs for consumer playback of movies in homes and elsewhere, the anticipated shift to high definition DVD or the transition from packaged media to Internet distribution. The continued decline in worldwide shipments of VCRs has resulted in a decline in our VCR Plus+ revenues over time, causing us to focus on growth in other parts of our business. Our future success depends to a great extent on our ability to develop and deliver innovative technologies that are widely adopted in response to changes in the technology and entertainment industries and that are compatible with the technologies or products introduced by other entertainment industry participants. Despite our efforts and investments in developing new products, services and technologies:




•
we cannot assure you that the level of funding and significant resources we are committing for investments in new products, services and technologies will be sufficient or result in successful new products, services or technologies;




•
we cannot assure you that our newly developed products, services or technologies can be successfully protected as proprietary intellectual property rights or will not infringe the intellectual property rights of others;




•
we cannot assure you that any new products or services that we develop will achieve market acceptance;




•
our products, services and technologies may become obsolete due to rapid advancements in technology and changes in consumer preferences; and




•
our competitors and/or potential customers may develop products, services or technologies similar to those developed by us, resulting in a reduction in the potential demand for our newly developed products, services or technologies.




Our failure to successfully develop new and improved products, services and technologies, including as a result of any of the risks described above, may reduce our future growth and profitability and may adversely affect our business, results and financial condition.











If we are unable to compete effectively with existing or new competitors, we could experience price reductions, fewer customers, reduced margins or loss of market share.




Our IPGs face competition from companies that produce and market program guides as well as television schedule information in a variety of formats, including passive and interactive on-screen electronic guide services, online listings, printed television guides in newspapers and weekly publications, and local cable television guides. Our IPG products also compete against customers who choose to build their own IPG and license our intellectual property. In the connected device middleware and metadata marketplace, there is competition not only from other companies, but also from customer-implemented internally-developed solutions. We believe that our DVD digital-to-analog copy protection and videocassette copy protection systems currently have limited competition. It is possible, however, that alternative copy protection technologies could become competitive. Additionally, new competitors or alliances among competitors may emerge and rapidly acquire significant market share in any of these areas. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we do, which could reduce demand for our products or render them obsolete. Increased competition would be likely to result in price reductions and loss of market share, either of which could harm our business.




Our business may be adversely affected by fluctuations in demand for consumer electronics devices incorporating our technologies.




We derive significant revenues from CE manufacturer license fees for our IPG and  analog video content security ("ACP”) technologies based on the number of units shipped. We do not manufacture hardware, but rather depend on the cooperation of CE manufacturers to incorporate our ACP and IPG technologies into their products. Generally, our license agreements do not require manufacturers to include our technology in any specific number or percentage of units, and only a few of these agreements guarantee a minimum aggregate licensing fee. Purchases of new CE devices, including television sets, integrated satellite receiver decoders, DVRs, DVD recorders, personal computers and Internet appliances are largely discretionary and may be adversely impacted by increasing market saturation, durability of products in the marketplace, new competing products, alternate consumer entertainment options and general economic trends in the countries or regions in which these products are offered. The recent global economic downturn and similar global economic trends may significantly impact demand for such CE devices.  As a result, our future operating results may be adversely impacted by fluctuations in sales of consumer electronics devices employing our technologies.




In addition, the decision by manufacturers to incorporate our IPG technology into their products is a function of what other guide technologies and products are available. Our future operating results may be adversely impacted as a result of consumer electronics manufacturers opting not to incorporate our technology into their devices as a result of other available alternatives.




Dependence on the cooperation of cable multi system operators (“MSOs”) and digital broadcast satellite (“DBS”) providers, television broadcasters, hardware manufacturers, publications, data providers and delivery mechanisms could adversely affect our revenues.




We rely on third party providers to deliver our IPG data to consumer electronics devices that include our IPG. Further, our national data network provides customized and localized listings to our IPG service for MSOs and DBS providers and licensees of our data used in third party IPGs for MSOs and DBS providers. There can be no assurance that these delivery mechanisms will distribute the data without error or that the agreements that govern some of these relationships can be maintained on favorable economic terms.




To deliver our IPG data to consumer electronics devices, we have arrangements to carry our data in a part of the television signal called the vertical blanking interval (“VBI”) or its digital signal equivalent, of television stations included in the public broadcasting network, independently owned stations, and stations





owned and operated by various station group owners. We have historically only delivered our IPG data to consumer electronics devices through the VBI in analog broadcast signals.




In anticipation of the 2009 transition to 100% digital transmission in the United States mandated by the FCC, we entered into agreements with CBS Corporation ("CBS") and National Datacast, Inc. ("NDI") which allow for the distribution of our CE IPG data over the digital broadcast signals of both CBS and NDI participating stations, following the installation of necessary equipment. The FCC has ruled that it is within the discretion of an MSO to retransmit or strip out data transmitted in the VBI lines of broadcast stations carried on that MSO’s system. We have agreements with certain MSOs which provide for carriage of our program listing information in either the analog signal VBI or within the digital signal of broadcast television stations.




We also rely on other arrangements in the United States, which are not long-term, with other broadcasters for secondary carriage of our IPG data to consumer electronics devices. We cannot assure you that we will be able to successfully renew or extend any of our existing carriage arrangements when they expire, or that renewals will be on terms that are as favorable to us as the arrangements currently in effect. Our inability to renew the existing arrangements on terms that are favorable to us, or enter into alternative arrangements that allow us to effectively transmit our IPG data to consumer electronics devices could have a material adverse effect on our CE IPG business.




Our IPG data to CE devices broadcast through the VBI can be, and has been in the past in some markets, deleted or modified by some of the local service providers. Widespread deletion or modification of this data by service providers could have a material adverse impact on our CE IPG business. To mitigate this risk in the United States, we have entered into agreements with many service providers to ensure that our IPG data to CE devices will not be deleted or modified by such systems. Additionally, cable companies in the United States are progressively moving their systems from an analog format to a digital format, which poses certain problems to the passage of our IPG data to CE devices carried in their analog signals. Solving such problems will require the cooperation of third parties such as the MSOs and hardware manufacturers, and may also require additional investment by us. Furthermore, in order for CE devices that incorporate our IPG to receive our data, such data must also be able to pass through any receivers through which such CE devices are receiving television programming signals. Even if our IPG data is passed to cable subscribers through cable networks by the service providers, there is a risk that the cable set-top boxes deployed by such subscribers can impede the passage of our IPG data to CE devices. Widespread impedance of our IPG data to CE devices in any of the manners set forth above could have a material adverse impact on our CE IPG business.




We are currently making significant investments in the United States, Europe and Japan to build the capability to provide our program listings information via digital broadcast signals to support the next generation of products from our manufacturing partners. This involves in some cases deploying equipment to aggregate and insert listings data, and securing bandwidth in digital broadcast streams to deliver that data. If we are unable to complete this digital delivery build-out in each of our regions in time to meet the planned deployment of the next generation of digital broadcast reliant CE devices, this could have a material adverse impact on our CE IPG business.




We deliver our data to our IPG service for MSOs and to licensees of our data used in third party IPGs for MSOs via satellite transmission, among other means. While we have built in certain redundancies in our data delivery operation, a third party provides us with satellite capacity to transmit our data to our IPG service for certain MSOs and to licensees of our data used in third party IPGs for MSOs. Our arrangement with the third party provider may be terminated on little or no notice. In the event that a provider of satellite capacity elects not to provide this capacity to transmit our data, there can be no assurance that all of our customers who currently receive our data via such provider will be able to receive our data via alternative means without significant delay or additional cost to us. In the event that such provider elects not to transmit our data, our business, operating results and financial condition could be adversely affected.










In addition, we purchase some of our program guide information from commercial vendors. The quality, accuracy and timeliness of that data may not continue to meet our standards or be acceptable to consumers.




The effects of the global recession may impact our business, operating results, financial condition or liquidity.




The global recession has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, an unprecedented level of intervention from the United States federal government and other foreign governments, decreased consumer confidence, overall slower economic activity and extreme volatility in credit, equity and fixed income markets. While the ultimate outcome of these events cannot be predicted, these macroeconomic developments could negatively affect our business, operating results, financial condition or liquidity in a number of ways. For example, if the economic downturn makes it difficult for our customers and suppliers to accurately forecast and plan future business activities, they may delay, decrease or cancel purchases of our solutions or reduce production of their products. As many of our solutions are licensed on a per-unit fee basis, our customers’ decision to decrease production of their products or devices may decrease our licensing revenue and adversely impact our operating results.




Furthermore, as our customers face a weak economy, they may not be able to gain sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us or to make timely payments to us for previous purchases. If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations. In addition, we may be forced to increase our allowance for doubtful accounts and our days sales outstanding may increase, which would have a negative impact on our cash position, liquidity and financial condition. We cannot predict the timing or the duration of this or any other economic downturn in the economy and we are not immune to the effects of general worldwide economic conditions.




In addition, financial institution failures may cause us to incur increased expenses or make it more difficult either to utilize our existing debt capacity or otherwise obtain financing for our operations, investing activities (including the financing of any future acquisitions), or financing activities (including an increase in our liability to counterparties under interest rate swap contracts and the timing and amount of any repurchases of our common stock or debt we may make in the future). Our investment portfolio, which includes short-term debt securities, is generally subject to general credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by the recent global financial crisis. If the banking system or the fixed income, credit or equity markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected.




Finally, like other stocks, our stock price can be affected by global economic uncertainties and if investors have concerns that our business, operating results and financial condition will be negatively impacted by a worldwide economic downturn, our stock price could decrease.




If the volatility of credit market conditions continues or increases, it could adversely impact our investments and as a result, our liquidity.




The credit markets have experienced liquidity issues and failed auctions in the auction rate securities market. The auction rate securities we hold have failed to trade at auctions due to insufficient bids from buyers. We have recorded unrealized losses related to our available-for-sale auction rate securities to accumulated other comprehensive income due to temporary declines in fair value and have classified all available-for-sale auction rate securities as long-term marketable investments on our balance sheet. If there are future unsuccessful auctions, the fair value of these auction rate securities may continue to decline. The decline in fair value of our available-for-sale auction rate securities may become other than temporary and we may incur impairment charges in connection with these securities which would adversely impact our earnings and financial condition.




We are exposed to risks associated with our changing technology base through strategic acquisitions, investments and divestitures.




We have expanded our technology base in the past through strategic acquisitions and investments in companies with complementary technologies or intellectual property and intend to do so in the future. Acquisitions hold special challenges in terms of successful integration of technologies, products and employees. In addition to the acquisition of Gemstar in May 2008, over the last several years we completed the divestitures of our TV Guide Magazine business (December 2008), our Software business (April 2008), our Games business (April 2008), our eMeta business (November 2008), our TVG Network business (January 2009) and our TV Guide Network and TV Guide Online businesses (February 2009). We also completed the acquisitions of Mediabolic, Inc. (January 2007) and All Media Guide Holdings, Inc. (December 2007) and the acquisition of the assets of Cryptography Research, Inc. (November 2007) and Muze, Inc. (April 2009). We may not realize the anticipated benefits of these acquisitions and divestitures or the benefits of any other acquisitions or divestitures we have completed or may complete in the future, and we may not be able to incorporate any acquired services, products or technologies with our existing operations, or integrate personnel from the acquired businesses, in which case our business could be harmed.




Acquisitions, divestitures and other strategic investments involve numerous risks, including:




•
problems integrating and divesting the operations, technologies, personnel or products over geographically disparate locations;




•
unanticipated costs, litigation and other contingent liabilities;




•
continued liability for pre-closing activities of divested businesses or certain post-closing liabilities which we may agree to assume as part of the transaction in which a particular business is divested;




•
adverse effects on existing business relationships with suppliers and customers;




•
risks associated with entering into markets in which we have no, or limited, prior experience;




•
incurrence of significant exit charges if products acquired in business combinations are unsuccessful;




•
significant diversion of management’s attention from our core business and diversion of key employees’ time and resources;




•
inability to retain key customers, distributors, vendors and other business partners of the acquired business; and




•
potential loss of our key employees or the key employees of an acquired organization.




Financing for future acquisitions may not be available on favorable terms, or at all. If we identify an appropriate acquisition candidate for any of our businesses, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired business, products, technologies or employees into our existing business and operations. Future acquisitions and divestitures may not be well-received by the investment community, which may cause the value of our stock to fall. We cannot ensure that we will be able to identify or complete any acquisition or divestiture in the future.  Further, the terms of any future indebtedness we may incur may restrict our ability to make and finance additional acquisitions or divestitures.




If we acquire businesses, new products or technologies in the future, we may incur significant acquisition-related costs. In addition, we may be required to amortize significant amounts of identifiable intangible assets and we may record significant amounts of goodwill that will be subject to annual testing for impairment. We have in the past and may in the future be required to write off all or part of one or more of these investments that could harm our operating results. If we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing stockholders’ ownership could be significantly diluted. If we were to proceed with one or more significant future





acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash. Acquisitions could also cause operating margins to fall depending upon the financial models of the businesses acquired.




Our strategic investments may involve joint development, joint marketing, or entry into new business ventures, or new technology licensing. Any joint development efforts may not result in the successful introduction of any new products by us or a third party, and any joint marketing efforts may not result in increased demand for our products. Further, any current or future strategic acquisitions and investments by us may not allow us to enter and compete effectively in new markets or enhance our business in our existing markets and we may have to write off our equity investments in companies as we have done in the past.




We have indebtedness which could adversely affect our financial position and prevent us from fulfilling our debt obligations.




As of March 31, 2010, we had total debt from continuing operations of approximately $659.1 million of which $199.1 million of borrowings are under our 2011 Convertible Notes and $460 million are under our 2040 Convertible Notes.  We may also incur additional indebtedness in the future. Our indebtedness may:




•
make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on the notes and our other indebtedness;




•
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;




•
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;




•
require us to use a substantial portion of our cash flow from operations to make debt service payments or post collateral;




•
limit our flexibility to plan for, or react to, changes in our business and industry;




•
place us at a competitive disadvantage compared to our less leveraged competitors; and




•
increase our vulnerability to the impact of adverse economic and industry conditions.




Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business, and other factors affecting its operations, many of which are beyond our control.




We may not be able to generate sufficient cash to service our debt obligations.




Our ability to make payments on and to refinance our indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.




If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit agreements restrict our ability to dispose of assets, use the proceeds from any disposition of assets and to refinance our indebtedness. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.









Repayment of our debt is dependent on cash flow generated by our subsidiaries.




Rovi Corporation’s subsidiaries, including Rovi Solutions Corporation (formerly known as Macrovision Corporation) and Rovi Guides Corporation (formerly known as Gemstar-TV Guide International), own a significant portion of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by the subsidiaries, including Rovi Solutions Corporation and Rovi Guides Corporation, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors or a co-issuer of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.




Despite our current level of indebtedness, we may still be able to incur more indebtedness. This could exacerbate the risks associated with our indebtedness.




We and our subsidiaries may incur additional indebtedness in the future. The terms of our indentures do not prohibit, us or our subsidiaries from incurring additional indebtedness. If we incur any additional indebtedness that ranks equally with existing indebtedness, the holders of that indebtedness will be entitled to share ratably with the holders of our existing debt obligations in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. If new indebtedness is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.




Changes in, or interpretations of, tax rules and regulations, may adversely affect our effective tax rates.




We are subject to income taxes in the U.S. and foreign tax jurisdictions. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by changes in the amount of revenue or earnings that we derive from international sources in countries with high or low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Unanticipated changes in our tax rates could affect our future results of operations.




In addition, federal, state, and foreign tax jurisdictions may examine our income tax returns, including income tax returns of acquired companies and acquired tax attributes included therein. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. In making such assessments, we exercise judgment in estimating our provision for income taxes. While we believe our estimates are reasonable, we cannot assure you that the final determination from these examinations will not be materially different from that reflected in our historical income tax provisions and accruals. Any adverse outcome from these examinations may have a material adverse effect on our business and operating results, which could cause the market price of our stock to decline.








Our success is heavily dependent upon our proprietary technologies.




We believe that our future success will depend on our ability to continue to introduce proprietary solutions for digital content and technologies. We rely on a combination of patent, trademark, copyright and trade secret laws, nondisclosure and other contractual provisions, and technical measures to protect our intellectual property rights. Our patents, trademarks or copyrights may be challenged and invalidated or circumvented. Our patents may not be of sufficient scope or strength or be issued in all countries where products incorporating our technologies can be sold. We have filed applications to expand our patent claims and for improvement patents to extend the current expiration dates, however, expiration of some of our patents may harm our business. If we are not successful in protecting our intellectual property, our business would be harmed.




Others may develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents. Effective intellectual property protection may be unavailable or limited in some foreign countries. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise use aspects of processes and devices that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken may not prevent misappropriation of our technologies. Such competitive threats could harm our business.




We may be subject to legal liability for the provision of third-party products, services or content.




We periodically enter into arrangements to offer third-party products, services, content or advertising under our brands or via distribution on our websites or in our products or service offerings. For example, we license or incorporate certain entertainment metadata into our data offerings. We may be subject to claims concerning these products, services, content or advertising by virtue of our involvement in marketing, branding, broadcasting or providing access to them. Our agreements with these parties may not adequately protect us from these potential liabilities. It is also possible that, if any information provided directly by us contains errors or is otherwise negligently provided to users, third parties could make claims against us, including, for example, claims for intellectual property infringement. Investigating and defending any of these types of claims is expensive, even if the claims do not result in liability. If any of these claims results in liability, we could be required to pay damages or other penalties, which could harm our business and our operating results.




We may initiate patent infringement or patent interference actions or other litigation to protect our intellectual property, which could be costly and harm our business.




We are currently engaged in litigation, and litigation may be necessary in the future, to enforce our patents and other intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.




We, and many of our current and potential competitors, dedicate substantial resources to protection and enforcement of intellectual property rights. We believe that companies will continue to take steps to protect their technologies, including, but not limited to, seeking patent protection. Companies in the technology and content-related industries have frequently resorted to litigation regarding intellectual property rights. Disputes regarding the ownership of technologies and their associated rights are likely to arise in the future and we may be forced to litigate to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly, could distract our management from focusing on operating our business, and might ultimately be unsuccessful. The existence and/or outcome of such litigation could harm our business.




We may be subject to intellectual property infringement claims or other litigation, which are costly to defend and could limit our ability to use certain technologies in the future.




From time to time we receive claims and inquiries from third parties alleging that our internally developed technology, technology we have acquired or technology we license from third parties may





infringe other third parties’ proprietary rights, especially patents. Third parties have also asserted and most likely will continue to assert claims against us alleging infringement of copyrights, trademark rights or other proprietary rights, or alleging unfair competition or violations of privacy rights. We could be required to spend significant amounts of time and money to defend ourselves against such claims. If any of these claims were to prevail, we could be forced to pay damages, comply with injunctions, or stop distributing our products and services while we re-engineer them or seek licenses to necessary technology, which might not be available on reasonable terms or at all. We could also be subject to claims for indemnification resulting from infringement claims made against our customers, strategic partners or the current owners of businesses that we divested, which could increase our defense costs and potential damages. For example, we have received notices and lawsuits from certain customers requesting indemnification in patent-related lawsuits. We evaluate the requests and assess whether we believe we are obligated to provide such indemnification to such customers on a case by case basis. Customers or strategic partners making such requests could become unwilling or hesitant to do business with us if we decline such requests. An adverse determination with respect to such requests or in any of these events described above could require us to change our business practices and have a material impact on our business and results of operations.




Litigation could harm our business and result in:




•
substantial settlement or related costs, including indemnification of customers;




•
diversion of management and technical resources;




•
either our customers discontinuing to use or ourselves discontinuing to sell infringing products;




•
our expending significant resources to develop non-infringing technology; and




•
our obtaining licenses to infringed technology, which could be costly.




We are involved in the business of powering the discovery and enjoyment of digital entertainment, including over the Internet. There has been, and we believe that there will continue to be, an increasing level of litigation to determine the applicability of current laws to, and impact of new technologies on, the use and distribution of content over the Internet and through new devices. As we develop products and services that protect, provide or enable the provision of content in such ways, the risk of litigation against us may increase.




For our business to succeed, we need to attract and retain qualified employees and manage our employee base effectively.




Our success depends on our ability to hire and retain qualified employees and to manage our employee base effectively. Because of the specialized nature of our business, our future success will depend upon our continuing ability to identify, attract, train and retain other highly skilled managerial, technical, sales and marketing personnel, particularly as we enter new markets. Competition for people with the skills that we require is intense, particularly in the San Francisco Bay area where our headquarters are located and Los Angeles where we have significant operations, and the high cost of living in these areas makes our recruiting and compensation costs higher. If we are unable to hire and retain qualified employees, our business and operating results could be adversely affected.




Establishing and maintaining licensing relationships with companies are important to build and support a worldwide entertainment technology licensing ecosystem and to expand our business, and failure to do so could harm our business prospects.




Our future success will depend upon our ability to establish and maintain licensing relationships with companies in related business fields, including:




•
DVD authoring facilities, mastering houses and replicators;




•
DVD authoring tools software companies and replicator test equipment suppliers;




•
DVD hardware manufacturers;











•
semiconductor and equipment manufacturers;




•
operators of entertainment content distributors, including pay-per-view (“PPV”) and video-on-demand (“VOD”) networks;




•
consumer electronics, digital PPV/VOD set-top hardware manufacturers, and PC manufacturers;




•
DRM suppliers; and




•
Internet portals and other digital distribution companies.




Substantially all of our license agreements are non-exclusive, and therefore our licensees are free to enter into similar agreements with third parties, including our competitors. Our licensees may develop or pursue alternative technologies either on their own or in collaboration with others, including our competitors.




Some of our third party license arrangements require that we license others’ technologies and/or integrate our solutions with others. In addition, we rely on third parties to report usage and volume information to us. Delays, errors or omissions in this information could harm our business. If these third parties choose not to support integration efforts or delay the integration of our solutions, our business could be harmed.




If we fail to maintain and expand our relationships with a broad range of participants throughout the entertainment industry, including motion picture studios, broadcasters and manufacturers of CE products, our business and prospects could be materially harmed. Relationships have historically played an important role in the entertainment industries that we serve. If we fail to maintain and strengthen these relationships, these entertainment industry participants may not purchase and use our technologies, which could materially harm our business and prospects. In addition to directly providing a substantial portion of our revenue, these relationships are also critical to our ability to have our technologies adopted as industry standards. Moreover, if we fail to maintain our relationships, or if we are not able to develop relationships in new markets in which we intend to compete in the future, including markets for new technologies and expanding geographic markets, our business, operating results and prospects could be materially and adversely affected. In addition, if major industry participants form strategic relationships that exclude us, our business and prospects could be materially adversely affected.




It may be more difficult for us, in the future, to have our technologies adopted as individual industry standards if entertainment industry participants collaborate on the development of new or different industry standard technologies.




Increasingly, standards-setting organizations are adopting or establishing technology standards for use in a wide-range of CE products. As a result, it is more difficult for individual companies to have their technologies widely adopted as an informal industry standard. In addition, there are a large number of companies, including companies that typically compete against one another, involved in the development of new technologies for use in consumer entertainment products. As a result, these companies often license their collective intellectual property rights as a group, making it more difficult for any single company to have its technologies adopted widely as a de facto industry standard or to have its technologies adopted as an exclusive, explicit industry standard. Examples of this include MPEG-LA (DRM licensing); Blu-ray DVD (high definition DVD format); and Digital Living Network Alliance (DLNA) and the Universal Plug and Play (UPnP) Forum (interoperability of consumer electronics devices). If our technologies are not supported by these standards bodies or patent pools, it may be more difficult for us to grow our business in the future. Our major customers may have a large influence on industry standards and the widespread adoption of new technologies. The selection of alternative technologies to ours or to those on which our technologies operate would harm our business.




Continued consolidation of the cable and satellite broadcasting industry could adversely affect existing agreements.









We have entered into agreements with a large number of MSOs and DBS providers for the licensing or distribution of our technology, products and services. If consolidation of the cable and satellite broadcasting industry continues, some of these agreements may be affected by mergers, acquisitions or system swaps. We cannot assure you that any measures that we have taken to protect us against any negative consequences resulting from those transactions will be effective. Also, a service provider that files a bankruptcy petition or otherwise restructures or liquidates could avoid its future obligations and discharge its past payment obligations under the agreement in some circumstances. Any such events could have a material adverse effect on the amount of revenue we receive under these agreements.




The markets for our data solutions and IPG advertising may not develop and we may fail in our ability to fully exploit these new opportunities if these markets do not develop as we anticipate.




The market for IPG advertising is at an early stage of development and we cannot assure you that we will succeed in our efforts to develop IPG advertising as an advertising medium widely accepted by consumers and advertisers. In addition, MSO, DBS and Internet protocol television, or IPTV, providers who have a patent license from us are not required to provide advertising in their IPG. Therefore our ability to derive advertising revenues from IPGs distributed by our patent licensees is also dependent on the implementation of IPG advertising by such licensees. Likewise, the market for our data solutions is at an early stage and we cannot assure you that we will succeed in growing our data business to the levels we anticipate.




Limitations on control of IPG Inc. may adversely impact our operations.




We hold a 46% interest in IPG Inc., as a joint venture with nonaffiliated third parties, which hold the remaining interest. As a result of such arrangement, we may be unable to control the operations, strategies and financial decisions of IPG Inc. which could in turn result in limitations on our ability to implement strategies that we may favor, or to cause dividends or distributions to be paid. In addition, our ability to transfer our interests in IPG Inc. may be limited under the joint venture arrangement.




We have limited control over existing and potential customers’ and licensees’ decisions to include our technology in their product offerings.




In general, we are dependent on our customers and licensees—including producers and distributors of content for films and videos—to incorporate our technology into their products. Although we have license agreements with many of these companies, many of these license agreements do not require any minimum purchase commitments, or are on a non-exclusive basis, or do not require incorporation of our technology in their products. If our customers were to determine that the benefits of our technology do not justify the cost of licensing the technology, then demand for our technology would decline. Furthermore, while we may be successful in having one or more industry standards-setting organizations require that our technology be used in order for a product to be compliant with the standards promulgated by such organizations there is no guarantee that products associated with these standards will be successful in the market. Our licensees and other manufacturers might not utilize our technology in the future. If this were to occur, our business would be harmed.




Our operating results may fluctuate, which may cause us to not be able to sustain our revenue levels or rate of revenue growth on a quarterly or annual basis which may cause our common stock price to decline.




Our quarterly and annual revenues, expenses and operating results could vary significantly in the future and period-to-period comparisons should not be relied upon as indications of future performance. We may not be able to sustain our revenue levels, or our rate of revenue growth, on a quarterly or annual basis. In addition, we may be required to delay or extend recognition of revenue on more complex licensing arrangements as required under generally accepted accounting principles in the United States. Fluctuations in our operating results have in the past caused, and may in the future cause, the price of our common stock to decline.









Other factors that could affect our operating results include:




•
the acceptance of our technologies by system operators and CE manufacturers;




•
expenses related to, and the financial impact of, possible acquisitions of other businesses and the integration of such businesses;




•
expenses related to, and the financial impact of, the dispositions of businesses, including post- closing indemnification obligations;




•
the timing and ability of signing high-value licensing agreements during a specific period;




•
the potential that we may not be in a position to anticipate a decline in revenues in any quarter until (i) late in the quarter due to the closing of sales agreements late in the quarter or (ii) after the quarter ends due to the delay inherent in reporting from certain licensees;




•
the extent to which new content technologies or formats replace technologies to which our solutions are targeted; and




•
adverse changes in the level of economic activity in the United States or other major economies in which we do business as a result of the threat of terrorism, military actions taken by the United States or its allies, or generally weak and uncertain economic and industry conditions.




Our quarterly operating results may also fluctuate depending upon when we receive royalty reports from certain licensees. We recognize a portion of our license revenue only after we receive royalty reports from our licensees regarding the manufacture of their products that incorporate our technologies. As a result, the timing of our revenue is dependent upon the timing of our receipt of those reports, some of which are not delivered until late in the quarter or after the end of the quarter. This may put us in a position of not being able to anticipate a decline in revenues in any given quarter. In addition, it is not uncommon for royalty reports to include corrective or retroactive royalties that cover extended periods of time. Furthermore, there have been times in the past when we have recognized an unusually large amount of licensing revenue from a licensee in a given quarter because not all of our revenue recognition criteria were met in prior periods. This can result in a large amount of licensing revenue from a licensee being recorded in a given quarter that is not necessarily indicative of the amounts of licensing revenue to be received from that licensee in future quarters, thus causing fluctuations in our operating results.




A significant portion of our revenue is derived from international sales. Economic, political, regulatory and other risks associated with our international business could have an adverse effect on our operating results.




We expect that international and export sales will continue to represent a substantial portion of our net revenues for the foreseeable future. Our future growth will depend to a large extent on worldwide acceptance and deployment of our solutions.




To the extent that foreign governments impose restrictions on importation of programming, technology or components from the United States, the demand for our solutions in these markets could diminish. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States, which increases the risk of unauthorized use of our technologies. Such laws also may not be conducive to copyright protection of digital content, which may make our content protection technology less effective and reduce the demand for it.




Because we sell our products worldwide, our business is subject to the risks associated with conducting business internationally, including:




•
foreign government regulation;




•
changes in diplomatic and trade relationships;




•
changes in, or imposition of, foreign laws and regulatory requirements;




•
changes in, or weakening of copyright and intellectual property (patent) laws;











•
difficulty of effective enforcement of contractual provisions in local jurisdictions;




•
tariffs or taxes and other trade barriers and restrictions;




•
fluctuations in our net effective income tax rate driven by changes in the percentage of revenues that we derive from international sources;




•
changes in a specific country’s or region’s political or economic condition, including changes resulting from the threat of terrorism;




•
difficulty in staffing and managing foreign operations; and




•
fluctuations in foreign currency exchange rates.




Our business could be materially adversely affected if foreign markets do not continue to develop, if we do not receive additional orders to supply our technologies or products for use by foreign system operators, CE manufacturers and PPV/VOD providers or if regulations governing our international businesses change. Any changes to the statutes or the regulations with respect to export of encryption technologies could require us to redesign our products or technologies or prevent us from selling our products and licensing our technologies internationally.




We have made and expect to make significant investments in infrastructure which, if ineffective, may adversely affect our business results.




We have made and expect to make significant investments in infrastructure, tools, systems, technologies and content, including initiatives relating to digital asset and rights management and data warehouses, aimed to create, assist in the development or operation of, or enhance our ability to deliver innovative products and services across multiple media, digital and emerging platforms. These investments may ultimately cost more than is anticipated, their implementation may take longer than expected and they may not meaningfully contribute to or result in successful new or enhanced products, services or technologies.




Some terms of our agreements with licensees could be interpreted in a manner that could adversely affect licensing revenue payable to us under those agreements.




Some of our license agreements contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another licensee on more favorable terms, we must offer some of those terms to our existing licensees. We have entered into a number of license agreements with terms that differ in some respects from those contained in other agreements. These agreements may obligate us to provide different, more favorable, terms to licensees, which could, if applied, result in lower revenues or otherwise adversely affect our business, financial condition, results of operations or prospects. While we believe that we have appropriately complied with the most favored nation terms included in our license agreements, these contracts are complex and other parties could reach a different conclusion that, if correct, could have an adverse effect on our financial condition or results of operations.




Our products could be susceptible to errors, defects, or unintended performance problems that could result in lost revenues, liability or delayed or limited market acceptance.




We develop and offer complex solutions, which we license to customers. The performance of these products typically involves working with sophisticated software, computing and communications systems. Due to the complexity of these products, and despite our quality assurance testing, the products may contain undetected defects or errors that may affect the proper use or application of such products by the customer. Because our products are embedded in digital content and other software, our solutions’ performance could unintentionally jeopardize our customers’ product performance. Any such defects, errors, or unintended performance problems in existing or new products, and any inability to meet customer expectations in a timely manner, could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs and increased service costs, any of which could materially harm our business.









In addition, we rely on customers and third party replicators to properly use our products to protect the software and applications to which our technology may be applied. Any improper use or application of the software by customers or third party replicators may render our technologies useless and result in losses from claims arising out of such improper use of the products.




Because customers rely on our products as used in their software and applications, defects or errors in our products may discourage customers from purchasing our products.




These defects or errors could also result in product liability or warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed.




In protecting copyrights and other intellectual property rights of our customers, our products affect consumer use of our customers’ products. Consumers may view this negatively and discontinue or threaten to discontinue purchase or use of our customers’ products unless our customers stop using our technologies. This may cause a decline in demand for our products or legal actions against us by our customers or consumers.




Government regulations may adversely affect our business.




The satellite transmission, cable and telecommunications industries are subject to pervasive federal regulation, including FCC licensing and other requirements. These industries are also often subject to extensive regulation by local and state authorities. While these regulations do not apply directly to us, they affect cable television providers and other multi-channel video programming distributors, or MVPDs, which are the primary customers for certain of our products and services. FCC regulations prohibit MVPDs (except DBS providers) from deploying after July 1, 2007 consumer electronic navigation devices (e.g., set-top boxes) with combined security and non-security functions (the “integration ban”). The FCC has granted a number of requests for waiver of the integration ban, and denied several petitions for waivers or deferrals. Petitions for reconsideration of the decisions denying waivers are pending before the FCC.  Further developments with respect to these issues or other related FCC action could impact the availability and/or demand for "plug and play" devices, including set-top boxes, all of which could affect demand for IPGs incorporated in set-top boxes or CE devices and correspondingly affect our license fees.




Legislative initiatives seeking to weaken copyright law or new governmental regulation or new interpretation of existing laws that cause resulting legal uncertainties could harm our business.




Consumer rights advocates and other constituencies continuously challenge copyright law, notably the U.S. Digital Millennium Copyright Act of 1998, or DMCA, through both legislative and judicial actions. Legal uncertainties surrounding the application of the DMCA may adversely affect our business. If copyright law is compromised, or devices that can circumvent our technology are permitted by law and become prevalent, this could result in reduced demand for our technologies, and our business would be harmed.




Many laws and regulations are pending and may be adopted in the United States, individual states and local jurisdictions and other countries with respect to the Internet. These laws may relate to many areas that impact our business, including copyright and other intellectual property rights, digital rights management, property ownership and taxation. These types of regulations are likely to differ between countries and other political and geographic divisions. Other countries and political organizations are likely to impose or favor more and different regulation than that which has been proposed in the United States, thus furthering the complexity of regulations. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. Changes to or the interpretation of these laws could





increase our costs, expose us to increased litigation risk, substantial defense costs and other liabilities or require us or our customers to change business practices. It is not possible to predict whether or when such legislation may be adopted, and the adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, could materially and adversely affect our business.




Business interruptions could adversely affect our future operating results.




The provision of certain of our products and services depends on the continuing operation of communications and transmission systems and mechanisms, including satellite, cable, wire, over the air broadcast communications and transmission systems and mechanisms. These communication and transmission systems and mechanisms are subject to significant risks and any damage to or failure of these systems and mechanisms could result in an interruption of the provision of our products and services.




Several of our major business operations are subject to interruption by earthquake, fire, power shortages, terrorist attacks and other hostile acts, and other events beyond our control. The majority of our research and development activities, our corporate headquarters, our principal information technology systems, and other critical business operations are located near major seismic faults. Our operating results and financial condition could be materially harmed in the event of a major earthquake or other natural or man-made disaster that disrupts our business. The communications and transmission systems and mechanisms that we depend on are not fully redundant, and our disaster recovery planning cannot account for all eventualities.




Our telephone and computer networks are subject to security and stability risks that could harm our business and reputation and expose us to litigation or liability.




Online business activities depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks. Any compromise of our ability to transmit such information and data securely or reliably, and any costs associated with preventing or eliminating such problems, could harm our business. Online transmissions are subject to a number of security and stability risks, including:




•
our own or licensed encryption and authentication technology, and access and security procedures, may be compromised, breached or otherwise be insufficient to ensure the security of customer information or intellectual property;




•
we could experience unauthorized access, computer viruses, system interference or destruction, “denial of service” attacks and other disruptive problems, whether intentional or accidental, that may inhibit or prevent access to our websites or use of our products and services;




•
someone could circumvent our security measures and misappropriate our, our partners’ or our customers’ proprietary information or content or interrupt operations, or jeopardize our licensing arrangements, which are contingent on our sustaining appropriate security protections;




•
our computer systems could fail and lead to service interruptions or down-time for our ecommerce web sites; or




•
we may need to grow, reconfigure or relocate our data centers in response to changing business needs, which may be costly and lead to unplanned disruptions of service.




The occurrence of any of these or similar events could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. Because some of our technologies and businesses are intended to inhibit use of or restrict access to our customers’ intellectual property, we may become the target of hackers or other persons whose use of or access to our customers’ intellectual property is affected by our technologies. We may be required to expend significant capital or other resources to protect against the threat of security breaches, hacker attacks or system malfunctions or to alleviate problems caused by such breaches, attacks or failures.









Our Internet-based product and service offerings rely on a variety of systems, networks and databases, many of which are maintained by us at our data centers. We do not have complete redundancy for all of our systems, and we do not maintain real-time back-up of our data, so in the event of significant system disruption, particularly during peak periods, we could experience loss of data processing capabilities, which could cause us to lose customers and could harm our operating results. Notwithstanding our efforts to protect against “down time” for products and services, we do occasionally experience unplanned outages or technical difficulties. In order to provide our Internet-based products and services, we must protect the security of our systems, networks, databases and software.




If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could increase our operating costs and affect our ability to operate our business.




We have a complex business that is international in scope. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are continually in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accountants on the effectiveness of our internal controls over financial reporting. If we or our independent registered public accountants identify areas for further attention or improvement, implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. We have in the past identified, and may in the future identify, significant deficiencies in the design and operation of our internal controls, which have been or will in the future need to be remediated. Furthermore, our independent registered public accountants may interpret the Section 404 requirements and the related rules and regulations differently from how we interpret them, or our independent registered public accountants may not be satisfied with our internal control over financial reporting or with the level at which these controls are documented, operated or reviewed in the future. Finally, in the event we make a significant acquisition, or a series of smaller acquisitions, we may face significant challenges in implementing the required processes and procedures in the acquired operations. As a result, our independent registered public accountants may decline or be unable to report on the effectiveness of our internal controls over financial reporting or may issue a qualified report in the future. This could result in an adverse reaction in the financial markets due to investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements.




We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results.




We have incurred, and will continue to incur, significant legal, accounting and other expenses associated with corporate governance and public company reporting requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and NASDAQ. As long as the SEC requires the current level of compliance for public companies of our size, we expect these rules and regulations to require significant legal and financial compliance costs and to make some activities time-consuming and costly. These rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.




We may be subject to assessment of sales and other taxes for the sale of our products, license of technology or provision of services.









We do not currently collect sales or other taxes on the sale of our products, license of technology or provision of services in states and countries other than those in which we have offices or employees. Our business would be harmed if one or more states or any foreign country required us to collect sales or other taxes from past sales of products, licenses of technology or provision of services, particularly because we would be unable to go back to customers to collect sales taxes for past sales and would likely have to pay such taxes out of our own funds.





The price of our common stock may be volatile.




The market price of our common stock has been, and in the future could be, significantly affected by factors such as:




•
actual or anticipated fluctuations in operating results;




•
announcements of technical innovations;




•
new products or new contracts;




•
announcements by competitors or their customers;




•
announcements by our customers;




•
governmental regulatory and copyright action;




•
developments with respect to patents or proprietary rights;




•
announcements regarding acquisitions or divestitures;




•
announcements regarding litigation or regulatory matters;




•
changes in financial estimates or coverage by securities analysts;




•
changes in interest rates which affect the value of our investment portfolio;




•
changes in tax law or the interpretation of tax laws; and




•
general market conditions.




Announcements by satellite television operators, cable television operators, major content providers or others regarding consumer electronics business combinations, evolving industry standards, consumer rights activists’ “wins” in government regulations or the courts, motion picture production or distribution or other developments could cause the market price of our common stock to fluctuate substantially.




There can be no assurance that our historic trading prices, or those of technology companies in general, will be sustained. In the past, following periods of volatility in the market price of a company’s securities, some companies have been named in class action suits.




Further, the general stock market instability and economic uncertainty may adversely affect the global financial markets, which could cause the market price of our common stock to fluctuate substantially.




We utilize non-GAAP reporting in our quarterly earnings press releases.




We publish non-GAAP financial measures in our quarterly earnings press releases along with a reconciliation of non-GAAP financial measures to those measures compiled in accordance with accounting principles generally accepted in the United States (“GAAP”). The reconciling items have adjusted GAAP net income and GAAP earnings per share for certain non-cash, non-operating or non-recurring items and are described in detail in each such quarterly earnings press release. We believe that this presentation may be more meaningful to investors in analyzing the results of operations and income generation as this is how our business is managed. The market price of our stock may fluctuate based on future non-GAAP results if investors base their investment decisions upon such non-GAAP financial measures. If we decide to curtail use of non-GAAP financial measures in our quarterly earnings press releases, the market price of our stock could be affected if investors analyze our performance in a different manner.










Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item 3.  Defaults Upon Senior Securities.





None.





Item 4. Removed and Reserved








Item 5.  Other Information





None.














Item 6. Exhibits








Incorporated by ReferenceExhibit Number

Exhibit Description

Form

Date

Number

Filed Herewith4.1

Indenture, dated as of March 17, 2010, by and between the Company and Bank of New York Mellon Trust Company, N.A., as Trustee

8-K

3/18/10

4.14.2

Form of Note representing the Rovi Corporation 2.625% Convertible Senior Notes due 2040 (included in the Indenture referenced in Exhibit 4.1)

8-K

3/18/10

4.110.01

2010 Senior Executive Company Incentive Plan

8-K

2/16/10

10.131.01

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.







X31.02

Certification of the Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.







X32.01

Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.







X32.02

Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.







X














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:  May 6, 2010

By:  /s/ Alfred J. AmorosoAlfred J. AmorosoChief Executive Officer









Principal Financial Officer :





Date:  May 6,2010

By:  /s/JamesBudgeJames BudgeChief Financial Officer
















Principal Accounting Officer:




Date:  May 6, 2010

By:  /s/ Peter C. HaltPeter C. HaltChief Accounting Officer