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EX-31.02 - EXHIBIT 31.02 - Rovi Corpexhibit3102-33116.htm
EX-32.01 - EXHIBIT 32.01 - Rovi Corpexhibit3201-33116.htm
EX-32.02 - EXHIBIT 32.02 - Rovi Corpexhibit3202-33116.htm
EX-31.01 - EXHIBIT 31.01 - Rovi Corpexhibit3101-33116.htm
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, 2016
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.)
Two Circle Star Way, San Carlos, CA
 
90470
(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  þ    No  o

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  þ    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Outstanding as of
Class
April 22, 2016
Common Stock
83,296,263





ROVI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 



1


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

March 31, 2016
 
December 31, 2015
ASSETS
(Unaudited)


Current assets:



Cash and cash equivalents
$
71,843


$
101,675

Short-term marketable securities
120,473


107,879

Accounts receivable, net
98,597


87,128

Prepaid expenses and other current assets
28,567


14,191

Total current assets
319,480

 
310,873

Long-term marketable securities
111,266


114,715

Property and equipment, net
36,656


34,984

Intangible assets, net
370,200


386,742

Goodwill
1,343,976


1,343,652

Other long-term assets
7,616


8,330

Total assets
$
2,189,194

 
$
2,199,296





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
58,271


$
74,113

Deferred revenue
12,970


12,106

Current portion of long-term debt
7,000


7,000

Total current liabilities
78,241

 
93,219

Taxes payable, less current portion
5,210


5,332

Deferred revenue, less current portion
7,710


9,414

Long-term debt, less current portion
961,970


960,156

Deferred tax liabilities, net
67,053


66,116

Other long-term liabilities
42,709


34,494

Total liabilities
1,162,893

 
1,168,731

Commitments and contingencies (Note 7)





Stockholders' equity:



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



Common stock, $0.001 par value, 250,000 shares authorized; 131,857 shares issued and 83,288 shares outstanding as of March 31, 2016; and 131,052 shares issued and 82,647 shares outstanding as of December 31, 2015
132


131

Treasury stock, 48,569 shares and 48,405 shares at March 31, 2016 and December 31, 2015, respectively, at cost
(1,167,283
)

(1,163,533
)
Additional paid-in capital
2,435,558


2,419,921

Accumulated other comprehensive loss
(5,003
)

(6,503
)
Accumulated deficit
(237,103
)

(219,451
)
Total stockholders’ equity
1,026,301

 
1,030,565

Total liabilities and stockholders’ equity
$
2,189,194

 
$
2,199,296


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

2


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended March 31,
 
2016

2015
Revenues
$
118,384


$
134,025

Costs and expenses:



Cost of revenues, excluding amortization of intangible assets
22,537


28,130

Research and development
22,669


26,537

Selling, general and administrative
36,082


39,948

Depreciation
4,234


4,370

Amortization of intangible assets
19,132


19,364

Restructuring and asset impairment charges
2,333


1,717

Total costs and expenses
106,987

 
120,066

Operating income from continuing operations
11,397


13,959

Interest expense
(10,531
)

(12,358
)
Interest income and other, net
(17
)

686

Loss on interest rate swaps
(13,087
)

(9,718
)
Loss on debt extinguishment


(100
)
Loss before income taxes
(12,238
)
 
(7,531
)
Income tax expense
5,414


7,939

Net loss
$
(17,652
)
 
$
(15,470
)
 
 
 
 
Basic loss per share:
$
(0.22
)
 
$
(0.18
)
Weighted average shares used in computing basic loss per share
81,375

 
88,304

 
 
 
 
Diluted loss per share:
$
(0.22
)
 
$
(0.18
)
Weighted average shares used in computing diluted loss per share
81,375

 
88,304


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

3


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2016
 
2015
Net loss
$
(17,652
)
 
$
(15,470
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustment
973

 
148

Unrealized gain on marketable securities
527

 
144

Other comprehensive income, net of tax
1,500

 
292

Comprehensive loss
$
(16,152
)
 
$
(15,178
)

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


4


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(17,652
)
 
$
(15,470
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation
4,234

 
4,370

Amortization of intangible assets
19,132

 
19,364

Amortization of convertible note discount and note issuance costs
3,445

 
3,459

Asset impairment charge
452

 

Change in fair value of interest rate swaps
11,002

 
8,869

Equity-based compensation
8,438

 
12,063

Deferred income taxes
939

 
3,459

Other operating, net
2,503

 
2,315

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,445
)
 
357

Prepaid expenses and other current assets and other long-term assets
(13,717
)
 
(1,080
)
Accounts payable and accrued expenses and other long-term liabilities
(14,065
)
 
(11,571
)
Accrued income taxes
(1,472
)
 
(622
)
Deferred revenue
(840
)
 
561

Net cash (used in) provided by operating activities
(9,046
)
 
26,074

Cash flows (used in) provided by investing activities:
 
 
 
Payments for purchase of short- and long-term marketable securities
(31,879
)
 
(41,237
)
Proceeds from sales or maturities of short- and long-term marketable securities
22,798

 
124,800

Payments for purchase of property and equipment
(10,732
)
 
(2,463
)
Payments for purchase of patents
(2,500
)
 

Other investing, net
(17
)
 
(27
)
Net cash (used in) provided by investing activities
(22,330
)
 
81,073

Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from revolving credit facility

 
100,000

Payments on revolving credit facility

 
(100,000
)
Proceeds from issuance of long-term debt, net of issuance costs

 
335,616

Principal payments on long-term debt
(1,750
)
 
(289,136
)
Proceeds from sale of warrants

 
31,326

Payments for purchase of call options

 
(64,825
)
Payments for deferred holdback and contingent consideration
(750
)
 
(3,000
)
Payments for purchase of treasury stock

 
(60,494
)
Payments for withholding taxes related to net share settlement of restricted stock units
(3,750
)
 

Proceeds from exercise of options and employee stock purchase plan
7,215

 
5,681

Net cash provided by (used in) financing activities
965

 
(44,832
)
Effect of exchange rate changes on cash and cash equivalents
579

 
71

Net (decrease) increase in cash and cash equivalents
(29,832
)
 
62,386

Cash and cash equivalents at beginning of period
101,675

 
154,568

Cash and cash equivalents at end of period
$
71,843

 
$
216,954


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

5


ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Rovi Corporation (the “Company”), a Delaware corporation, is focused on powering entertainment discovery and personalization through product technology and intellectual property and using data and analytics to monetize interactions across multiple entertainment platforms. The Company provides a broad set of content discovery solutions that are embedded in our customers' products and services to connect consumers with entertainment, including device embedded and cloud-based interactive program guides (“IPGs”), natural language conversational voice and text search and recommendation services and our extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). The Company also offers advertising and a portfolio of data and analytics products including advertising and programming promotion optimization that enable audience targeting in traditional pay TV advertising along with subscriber and operator analytic and insight products that service providers can use to unlock the usage patterns and behaviors of pay TV subscribers. The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets.

Basis of Presentation and Principles of Consolidation

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

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2016, for any future year, or for any other future interim period.

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

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

Use of Estimates

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


6


Concentrations of Risk

As a percent of revenue, customers and concentrations of customers representing more than 10% of revenue were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
AT&T Inc.
13
%
 
13
%
Aggregate of AT&T Inc., Comcast Corporation and Time Warner Cable Inc.
27
%
 
24
%

Substantially all of the Company's revenue from AT&T Inc. is reported in the Intellectual Property Licensing segment. In March 2016, the Company's contract with Time Warner Cable Inc. was extended to December 2016. The Company's contract with Comcast Corporation expired on April 1, 2016. The Company's contract with AT&T expires in December 2022.

As of March 31, 2016 and December 31, 2015, one customer represented 30.1% and 21.9% of Accounts receivable, net, respectively.

Recent Accounting Pronouncements

Standards Recently Adopted

In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license element, the customer accounts for the arrangement as a service contract. The prospective adoption of this guidance on January 1, 2016 did not have a material effect on the Condensed Consolidated Financial Statements.

Standards Pending Adoption

In March 2016, the FASB simplified certain areas of accounting for stock-based compensation, including accounting for the income tax consequences of stock-based compensation, determining the classification of awards as either equity or liabilities, classifying certain items within the statement of cash flows and introducing an accounting policy election to account for forfeitures of nonvested awards as they occur. The simplified guidance is effective for the Company in the first quarter of 2017. Depending on the area simplified, the guidance is effective either prospectively, retrospectively or using a modified retrospective approach. Early adoption is permitted. The Company is evaluating the effect of adoption on its Condensed Consolidated Financial Statements.
    
In March 2016, the FASB clarified the requirements for assessing whether contingent options that can accelerate the payment of principal on debt instruments require bifurcation as an embedded derivative. The amendments require a contingent option embedded in a debt instrument to be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. The clarified guidance is effective for the Company in the first quarter of 2017 using a modified retrospective approach with early adoption permitted. The Company is evaluating the effect of adoption on its Condensed Consolidated Financial Statements.

In February 2016, the FASB issued a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding right-of-use assets on the balance sheet. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. The amendments are effective for the Company in the first quarter of 2019 using a modified retrospective approach with early adoption permitted. The Company is evaluating the effect of adoption on its Condensed Consolidated Financial Statements and expects that its existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets.


7


In January 2016, the FASB amended certain aspects of the recognition and measurement guidance for financial assets and liabilities. The amendments are effective for the Company in the first quarter of 2018 with the effect of adoption recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is not permitted. The Company is evaluating the effect of adoption on its Condensed Consolidated Financial Statements.

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

(2) Investments

The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
March 31, 2016
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
47,304

 
$

 
$

 
$
47,304

Cash equivalents - Money market funds
24,539

 

 

 
24,539

Cash and cash equivalents
$
71,843

 
$

 
$

 
$
71,843

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(648
)
 
$
10,152

Corporate debt securities
101,563

 
94

 
(66
)
 
101,591

Foreign government obligations
11,803

 

 
(17
)
 
11,786

U.S. Treasuries / Agencies
108,194

 
78

 
(62
)
 
108,210

Marketable securities
$
232,360

 
$
172

 
$
(793
)
 
$
231,739

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
303,582


 
December 31, 2015
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
56,745

 
$

 
$

 
$
56,745

Cash equivalents - Money market funds
44,930

 

 

 
44,930

Cash and cash equivalents
$
101,675

 
$

 
$

 
$
101,675

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(540
)
 
$
10,260

Corporate debt securities
98,997

 

 
(327
)
 
98,670

Foreign government obligations
11,878

 

 
(56
)
 
11,822

U.S. Treasuries / Agencies
102,120

 
5

 
(283
)
 
101,842

Marketable securities
$
223,795

 
$
5

 
$
(1,206
)
 
$
222,594

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
324,269


The Company attributes unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities are comprised solely of AAA-rated investments in federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.

8



As of March 31, 2016, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in less than 1 year
$
120,502

 
$
120,473

Due in 1-2 years
101,058

 
101,114

Due in more than 2 years
10,800

 
10,152

Total
$
232,360

 
$
231,739


(3) Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
 
March 31, 2016
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
24,539

 
$
24,539

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
52,724

 

 
52,724

 

Foreign government obligations
11,786

 

 
11,786

 

U.S. Treasuries / Agencies
55,963

 

 
55,963

 

Long-term marketable securities
 
 
 
 
 
 
 
Auction rate securities
10,152

 

 

 
10,152

Corporate debt securities
48,867

 

 
48,867

 

U.S. Treasuries / Agencies
52,247

 

 
52,247

 

Total Assets
$
256,278

 
$
24,539

 
$
221,587

 
$
10,152

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Interest rate swaps
$
(2,862
)
 
$

 
$
(2,862
)
 
$

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
(33,893
)
 

 
(33,893
)
 

Total Liabilities
$
(36,755
)
 
$

 
$
(36,755
)
 
$

 

9


 
December 31, 2015
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
44,930

 
$
44,930

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
43,876

 

 
43,876

 

Foreign government obligations
7,827

 

 
7,827

 

U.S. Treasuries / Agencies
56,176

 

 
56,176

 

Long-term marketable securities
 
 

 

 

Auction rate securities
10,260

 

 

 
10,260

Corporate debt securities
54,794

 

 
54,794

 

Foreign government obligations
3,995

 

 
3,995

 

U.S. Treasuries / Agencies
45,666

 

 
45,666

 

Total Assets
$
267,524

 
$
44,930

 
$
212,334

 
$
10,260

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Interest rate swaps
$
(195
)
 
$

 
$
(195
)
 
$

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
(25,557
)
 

 
(25,557
)
 

Total Liabilities
$
(25,752
)
 
$

 
$
(25,752
)
 
$


The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three months ended March 31, 2016 and 2015, there were no transfers between levels of the fair value hierarchy.

Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended March 31,
 
2016
 
2015
 
Auction Rate Securities
 
Auction Rate Securities
 
IntegralReach Contingent Consideration
 
Veveo Contingent Consideration
Balance at beginning of period
$
10,260

 
$
10,638

 
$
(3,000
)
 
$
(3,000
)
Settlements and sales

 

 
3,000

 

Unrealized losses included in accumulated other comprehensive loss
(108
)
 

 

 

Balance at end of period
$
10,152

 
$
10,638

 
$

 
$
(3,000
)

Valuation Techniques
The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets, obtained from a third party pricing service.
The fair value of auction rate securities is estimated using a discounted cash flow analysis or other type of valuation model. These estimates are highly judgmental and incorporate, among other items, the likelihood of redemption, credit and liquidity spreads, duration, interest rates and the timing and amount of expected future cash flows. These securities are also compared, when possible, to other observable data with characteristics similar to the securities held by the Company.
The fair value of interest rate swaps is estimated using a discounted cash flow analysis on the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments and the

10


discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments that reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company considers the impact of its master netting agreements.
The fair value of contingent consideration related to acquisitions is estimated utilizing a probability-weighted discounted cash flow analysis based on the terms of the underlying purchase agreement. The significant unobservable inputs used in calculating the fair value of the contingent consideration include financial performance scenarios, the probability of achieving those scenarios and the discount rate.
Other Fair Value Disclosures
The carrying amount and fair value of debt issued by the Company were as follows (in thousands): 
 
March 31, 2016
 
December 31, 2015
 
Carrying Amount
 
Fair Value (1)
 
Carrying Amount
 
Fair Value (1)
2020 Convertible Notes
$
287,527

 
$
327,543

 
$
284,241

 
$
298,494

Term Loan Facility B
681,443

 
679,153

 
682,915

 
656,688

Total
$
968,970

 
$
1,006,696

 
$
967,156

 
$
955,182


(1)
The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active and considers interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considers the nonperformance risk of the Company. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued by the Company would be classified in Level 2 of the fair value hierarchy.

(4) Goodwill and Intangible Assets, Net

Goodwill

Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill by reportable segment were as follows (in thousands):
 
Intellectual Property Licensing
 
Product
 
Total
December 31, 2015
$
1,184,500

 
$
159,152

 
$
1,343,652

Foreign currency translation

 
324

 
324

March 31, 2016
$
1,184,500

 
$
159,476

 
$
1,343,976


Goodwill at each reporting unit is evaluated for potential impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Goodwill is evaluated annually for potential impairment as of the beginning of the fourth quarter.

Intangible Assets, Net

In January 2016, the Company purchased a portfolio of patents for $2.5 million in cash. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over a weighted average period of 5.3 years.

11



Intangible assets, net consisted of the following (in thousands): 
 
March 31, 2016
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
877,688

 
$
(529,049
)
 
$
348,639

Existing contracts and customer relationships
47,524

 
(38,165
)
 
9,359

Content databases and other
59,217

 
(47,015
)
 
12,202

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total
$
992,729

 
$
(622,529
)
 
$
370,200

 
 
 
 
 
 
 
December 31, 2015
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,188

 
$
(512,060
)
 
$
363,128

Existing contracts and customer relationships
47,524

 
(36,933
)
 
10,591

Content databases and other
59,014

 
(45,991
)
 
13,023

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total
$
990,026

 
$
(603,284
)
 
$
386,742


As of March 31, 2016, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands): 
Remainder of 2016
$
56,874

2017
73,880

2018
70,470

2019
68,025

2020
67,272

Thereafter
33,679

Total
$
370,200


(5) Restructuring and Asset Impairment Charges

In the three months ended March 31, 2016, the Company initiated certain facility rationalization activities, including relocating its corporate headquarters from Santa Clara, California to San Carlos, California and consolidating its Silicon Valley operations into the new corporate headquarters, and eliminated a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.3 million were recognized in the three months ended March 31, 2016.

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 the Company conducted a review of its remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, the Company took cost reduction actions that resulted in Restructuring and asset impairment charges. Amounts recognized in three months ended March 31, 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.

12


Components of Restructuring and asset impairment charges were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Future minimum lease payments, net
$
214

 
$
1,503

Severance costs
388

 
214

Contract termination costs
1,279

 

Asset impairment
452

 

Restructuring and asset impairment charges
$
2,333

 
$
1,717


Accrued restructuring costs were as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
Future minimum lease payments, net
$
1,010

 
$
2,015

Severance costs
451

 
250

Contract termination costs
1,942

 

Accrued restructuring costs
$
3,403

 
$
2,265


(6) Debt and Interest Rate Swaps

Details of the Company's financing arrangements were as follows (dollars in thousands):
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
287,527

 
$
345,000

$
284,241

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
687,750

681,443

 
689,500

682,915

Total Long-term debt
 
 
 
$
1,032,750

968,970

 
$
1,034,500

967,156

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

 
 
7,000

Long-term debt, less current portion
 
 
 
 
$
961,970

 
 
$
960,156


2020 Convertible Notes

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

The 2020 Convertible Notes are convertible at an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes, which is equivalent to an initial conversion price of $28.9044 per share of common stock. Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.


13


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

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

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

The Company has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using the Company’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal amount of the 2020 Convertible Notes. The difference between the principal amount of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets included the following (in thousands):
 
March 31, 2016
 
December 31, 2015
Liability component
 
 
 
Principal outstanding
$
345,000

 
$
345,000

Less: Unamortized debt discount
(51,249
)
 
(54,215
)
Less: Unamortized debt issue costs
(6,224
)
 
(6,544
)
Carrying amount
$
287,527

 
$
284,241

 
 
 
 
Equity component
$
63,854

 
$
63,854


Components of interest expense related to the 2020 Convertible Notes were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Stated interest
$
431

 
$
144

Amortization of debt discount
2,965

 
947

Amortization of debt issue costs
321

 
115

Total interest expense
$
3,717

 
$
1,206


The Company incurred $9.3 million in transaction costs related to the issuance of the 2020 Convertible Notes which were allocated to liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at the date of issuance. Transaction costs of $7.6 million attributable to the liability component were recorded in Long-term debt, less current portion in the Condensed Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.


14


Purchased Call Options and Sold Warrants

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

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

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

Senior Secured Credit Facility

On July 2, 2014, the Company, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). Loans under Term Loan Facility A bore interest, at the Company's option, at a rate equal to either the London Interbank Offering Rate ("LIBOR"), plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum. Loans under Term Loan Facility B bear interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum. Loans under the Revolving Facility bore interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum, subject to reduction by 0.25% or 0.50% based on the Company's total secured leverage ratio (as defined in the Credit Agreement).

In June 2015 and September 2015, the Company made voluntary principal prepayments of $50.0 million and $75.0 million, respectively, on Term Loan Facility A. The September 2015 voluntary principal prepayment extinguished Term Loan Facility A.

In February 2015, $100.0 million was borrowed against the Revolving Facility, in part, to extinguish a portion of the 2040 Convertible Notes. In March 2015, using a portion of the proceeds from the 2020 Convertible Notes issuance, all outstanding borrowings under the Revolving Facility were repaid. In September 2015, the Revolving Facility was terminated at the Company's election.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Credit Agreement is secured by substantially all of the Company's assets. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No additional payment was required in February 2016.


15


Convertible Senior Notes Due 2040

The Company issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par (the “2040 Convertible Notes”) pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015, holders of $287.4 million of outstanding principal exercised their right to require the Company to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, the Company redeemed the remaining $3.6 million of outstanding 2040 Convertible Notes. In connection with these transactions, $0.1 million was recorded as Loss on debt extinguishment in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015.

Components of interest expense related to the 2040 Convertible Notes were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Stated interest
$

 
$
1,089

Amortization of debt discount

 
1,865

Amortization of debt issue costs

 
241

Total interest expense
$

 
$
3,195


Debt Maturities

As of March 31, 2016, aggregate future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
Remainder of 2016
$
5,250

2017
7,000

2018
7,000

2019 (1)
352,000

2020
7,000

Thereafter
654,500

Total
$
1,032,750


(1)
While the 2020 Convertible Notes are scheduled to mature on March 1, 2020, future principal payments are presented based on the date the 2020 Convertible Notes can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances.

Interest Rate Swaps

The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as Loss on interest rate swaps in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2016 and 2015, the Company recorded losses of $13.1 million and $9.7 million, respectively, on its interest rate swaps.


16


Details of the Company's interest rate swaps as of March 31, 2016 and December 31, 2015 were as follows (dollars in thousands):
 
 
 
Notional
 
 
Contract Inception
Contract Effective Date
Contract Maturity
March 31, 2016
December 31, 2015
Interest Rate Paid
Interest Rate Received
Senior Secured Credit Facility
 
 
 
 
May 2012
January 2014
January 2016
$

$
197,000

(1)
One month USD-LIBOR
May 2012
April 2014
March 2017
$
215,000

$
215,000

(2)
One month USD-LIBOR
June 2013
January 2016
March 2019
$
250,000

$
250,000

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

$
125,000

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

$
200,000

2.93%
One month USD-LIBOR

(1)
The Company paid a fixed interest rate which gradually increased from 0.58% for the three-month settlement period ended in June 2014 to 1.65% for the settlement period ended in January 2016.
(2)
The Company pays a fixed interest rate which gradually increases from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ending in March 2017.

(7) Commitments and Contingencies

Indemnifications

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

Legal Proceedings

The Company is party to various legal actions, claims and proceedings as well as other actions, claims and proceedings incidental to its business. The Company accrues a liability for matters in which losses are considered probable and the amount of loss can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims or sanctions, that, if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position, results of operations or cash flows. As of March 31, 2016, the Company does not believe any litigation matters, individually or in the aggregate, will have a material adverse effect on its Condensed Consolidated Financial Statements.

(8) Stockholders' Equity

(Loss) Earnings Per Share

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


17


The number of shares used to calculate Basic EPS and Diluted EPS were as follows (in thousands):
    
Three Months Ended March 31,
 
2016
 
2015
Weighted average shares used to calculate Basic EPS
81,375

 
88,304

Dilutive effect of equity-based compensation awards

 

Weighted average shares used to calculate Diluted EPS
81,375

 
88,304


Weighted average potential shares excluded from the computation of Diluted EPS as their effect would have been anti-dilutive were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Stock options
3,657

 
4,239

Restricted awards
2,799

 
2,869

2020 Convertible Notes (1)
11,936

 
2,992

2040 Convertible Notes (1)

 
3,447

Warrants
11,936

 
2,992

Weighted average potential shares excluded from the calculation of Diluted EPS
30,328

 
16,539

 
(1)
See Note 6 for additional details.

For the three months ended March 31, 2016 and 2015, 0.8 million and 0.7 million weighted average performance-based restricted awards, respectively, were excluded from the computation of Diluted EPS as the performance metric had yet to be achieved or their inclusion would have been anti-dilutive.

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

In periods when the Company reports income from continuing operations, the potential dilutive effect of additional shares that may be issued on conversion of the 2020 Convertible Notes are included in the calculation of Diluted EPS under the treasury stock method if the price of the Company’s common stock exceeds the conversion price. The 2020 Convertible Notes have no impact on Diluted EPS until the price of the Company's common stock exceeds the conversion price of $28.9044 per share because the principal of the 2020 Convertible Notes is required to be settled in cash. Based on the closing price of the Company's common stock of $20.51 per share on March 31, 2016, the if-converted value of the 2020 Convertible Notes was less than the outstanding principal.

Under the treasury stock method, the 2020 Convertible Notes would be dilutive if the Company’s common stock closes at or above $28.9044 per share. However, on conversion, no economic dilution is expected from the 2020 Convertible Notes as the exercise of call options purchased by the Company with respect to its common stock described in Note 6 is expected to eliminate any potential dilution from the 2020 Convertible Notes that would have otherwise occurred. The call options are always excluded from the calculation of Diluted EPS as they would be anti-dilutive under the treasury stock method.

The warrants sold by the Company with respect to its common stock described in Note 6 have an effect on Diluted EPS when the Company’s share price exceeds the warrant’s strike price of $40.1450 per share. As the price of the Company’s common stock increases above the warrant strike price, additional dilution would occur.

Share Repurchase Program

During the three months ended March 31, 2015, the Company repurchased 3.3 million shares of its common stock pursuant to its Board authorized repurchase plan for $70.0 million. No shares were repurchased pursuant to the Company's Board authorized repurchase plan during the three months ended March 31, 2016.

On April 29, 2015, the Board of Directors authorized the repurchase of up to $125.0 million shares of the Company's common stock. The April 2015 authorization included amounts which were outstanding under previously authorized share repurchase programs. As of March 31, 2016, the Company had $50.5 million of stock repurchase authorization remaining.

18


    
The Company issues restricted stock units as part of the equity incentive plans described in Note 9. For the majority of restricted stock units, beginning in the fourth quarter of 2015, shares are withheld to satisfy required withholding taxes at the vesting date. Shares withheld to satisfy required withholding taxes in connection with the vesting of restricted stock units are treated as common stock repurchases in the Condensed Consolidated Financial Statements because they reduce the number of shares that would have been issued on vesting. However, these withheld shares are not considered common stock repurchases under the Company's authorized share repurchase plan. During the three months ended March 31, 2016, the Company withheld 0.2 million shares of common stock to satisfy $3.8 million of required withholding taxes.

(9) Equity-based Compensation

Stock Options

The Company grants equity-based compensation awards from its 2008 Equity Incentive Plan (the “2008 Plan”). As of March 31, 2016, the Company had 23.4 million shares reserved and 6.4 million shares available for issuance under the 2008 Plan. The 2008 Plan permits the grant of stock options, restricted stock, restricted stock units and similar types of equity awards to employees, officers, directors and consultants of the Company. Stock options generally have vesting periods of four years with one quarter of the grant vesting on the first anniversary of the grant, and the remainder vesting monthly thereafter. Stock options generally have a contractual term of seven years. Restricted stock is considered outstanding at the time of the grant as holders are entitled to voting rights. Awards of restricted stock and restricted stock units (collectively, "restricted awards") are generally subject to a four year graded vesting period. 

The Company grants performance-based restricted stock units to certain of its senior officers for three year performance periods. Vesting in the awards is subject to either performance conditions or a market condition as well as a three year service period. Depending on the level of achievement, the maximum number of shares that could be issued on vesting could be up to 200% of the target number of performance-based restricted stock units granted.

For awards subject to performance conditions, the fair value per award is fixed at the grant date; however, the amount of compensation expense is adjusted throughout the performance period based on the probability of achievement of a target revenue compound annual growth rate and an Adjusted EBITDA (defined in Note 11) margin, with compensation expense based on the number of shares ultimately issued. For awards subject to a market condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period based on changes in the level of achievement of the relative Total Shareholder Return metric.

Employee Stock Purchase Plan

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

As of March 31, 2016, the Company had 1.4 million shares of common stock reserved and available for issuance under the ESPP.

Valuation Techniques and Assumptions

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


19


Assumptions used to estimate the fair value of equity-based compensation awards were as follows: 
 
Three Months Ended March 31,
 
2016
 
2015
Stock options:
 
 
 
Expected volatility
55.7
%
 
45.0
%
Expected term
4.1 years

 
4.0 years

Risk-free interest rate
1.2
%
 
1.3
%
Expected dividend yield
0.0
%
 
0.0
%
ESPP shares:
 
 
 
Expected volatility
60.9
%
 
35.0
%
Expected term
1.3 years

 
1.3 years

Risk-free interest rate
0.6
%
 
0.4
%
Expected dividend yield
0.0
%
 
0.0
%
Restricted stock units subject to market conditions:
 
 
 
Expected volatility
55.9
%
 
41.0
%
Expected term
3.0 years

 
3.0 years

Risk-free interest rate
1.0
%
 
1.0
%
Expected dividend yield
0.0
%
 
0
%

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

The weighted-average grant date fair value of equity-based awards (per award) and pre-tax equity-based compensation expense (in thousands) was as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Stock options
$
10.30

 
$
9.05

ESPP shares
$
7.62

 
$
6.94

Restricted awards
$
24.27

 
$
25.53

 
 
 
 
Pre-tax equity-based compensation
$
8,438

 
$
12,063

 
As of March 31, 2016, there was $64.3 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested equity-based awards which is expected to be recognized over a remaining weighted average period of 2.6 years.

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2016 and 2015 was $0.6 million and $0.3 million, respectively. Intrinsic value is calculated as the difference between the market price of the shares at the time of exercise and the exercise price of the stock option.

As of March 31, 2016, 1.2 million shares of restricted stock were outstanding and unvested, which includes 0.4 million shares of performance-based restricted stock. As of March 31, 2016, 2.5 million restricted stock units were outstanding and unvested, which includes 0.4 million performance-based restricted stock units. The aggregate fair value of restricted awards vested during the three months ended March 31, 2016 and 2015 was $20.2 million and $22.6 million, respectively.

20



(10) Income Taxes

Due to the fact that the Company has a significant net operating loss carryforward and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of Income tax expense. Components of Income tax expense were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Foreign withholding tax
$
3,707

 
$
3,548

State income tax
393

 
3,338

Foreign income tax
645

 
639

Change in net deferred tax liabilities
460

 
647

Change in unrecognized tax benefits
209

 
(233
)
Income tax expense
$
5,414

 
$
7,939

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

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

Segment results are derived from the Company's internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used by the consolidated company. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the measure of segment profitability reviewed by the CODM. In addition, certain costs are not allocated to the segments as they are considered Corporate costs. Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources. The CODM uses an Adjusted EBITDA (as defined below) measure to evaluate the performance of, and allocate resources to, the segments. Segment balance sheets are not used by the CODM to allocate resources or assess performance.


21


Segment results were as follows (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Intellectual Property Licensing
 
 
 
Service Provider
$
42,736


$
47,153

Consumer Electronics
13,524


17,866

Revenues
56,260

 
65,019

Adjusted Operating Expenses (1)
14,157

 
16,615

Adjusted EBITDA (2)
42,103

 
48,404

Product
 
 
 
Service Provider
51,106


51,025

Consumer Electronics
4,765


5,393

Other
6,253


12,588

Revenues
62,124

 
69,006

Adjusted Operating Expenses (1)
46,647

 
52,136

Adjusted EBITDA (2)
15,477

 
16,870

Corporate:
 
 
 
Adjusted Operating Expenses (1)
12,046

 
13,396

Adjusted EBITDA (2)
(12,046
)
 
(13,396
)
Consolidated:
 
 
 
Revenues
118,384

 
134,025

Adjusted Operating Expenses (1)
72,850

 
82,147

Adjusted EBITDA (2)
45,534

 
51,878

Depreciation
4,234

 
4,370

Amortization of intangible assets
19,132

 
19,364

Restructuring and asset impairment charges
2,333

 
1,717

Equity-based compensation
8,438

 
12,063

Contested proxy election costs

 
405

Operating income from continuing operations
11,397

 
13,959

Interest expense
(10,531
)
 
(12,358
)
Interest income and other, net
(17
)
 
686

Loss on interest rate swaps
(13,087
)
 
(9,718
)
Loss on debt extinguishment

 
(100
)
Loss before income taxes
$
(12,238
)
 
$
(7,531
)

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

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

(12) Subsequent Event

On April 29, 2016, the Company announced it entered into a definitive agreement to acquire TiVo Inc. (“TiVo”), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, for $10.70 per share, which is comprised of $2.75 per share in cash and $7.95 per share of the common stock of a newly formed holding company that will own the Company and TiVo. At current prices the aggregate purchase price is approximately $1.1 billion and the cash consideration will be funded from the cash and investments on hand at the combined company. The consideration

22


payable in stock is subject to a two-way collar between Rovi stock prices of $16.00 and $25.00, with the Rovi stock price based on the average volume weighted average Rovi stock price over the fifteen trading days ending three trading days prior to the transaction closing. Between a Rovi stock price of $18.71 and $16.00, the Company has the option to pay incremental cash instead of issuing more shares. The definitive agreement contains additional adjustment provisions. Both companies' boards of directors have approved the transaction. The acquisition is expected to close in the third quarter of 2016, subject to approval by Rovi and TiVo stockholders, regulatory approvals and other customary closing conditions.
    

23



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

In some cases, these forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “predict,” “potential,” “intend,” or “continue,” and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see Part I, Item 1A., "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2015. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements.

The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015 and the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Executive Overview of Results

Revenue for the three months ended March 31, 2016 decreased by 12% compared to the prior year as a result of a 13% decline in revenue in our Intellectual Property Licensing segment and a 10% decline in revenue in our Product segment. For the three months ended March 31, 2016, 27% of revenue was from our contracts with AT&T Inc., Comcast and Time Warner Cable. In March 2016, our contract with Time Warner Cable Inc. was extended to December 2016. Our contract with Comcast Corporation expired on April 1, 2016. Our contract with AT&T expires in December 2022.

For the three months ended March 31, 2016, our net loss was $17.7 million, or $0.22 of diluted loss per share, compared to a net loss of $15.5 million, or $0.18 of diluted loss per share, in the prior year. The increased loss was primarily the result of a decrease in revenue and a $3.4 million increase in Loss on interest rate swaps. These factors were partially offset by cost savings associated with lower compensation costs, including equity-based compensation, lower patent defense costs, a decrease in consulting costs, a decrease in interest costs incurred to service our debt portfolio and lower income tax expense.



24


Comparison of Three Months Ended March 31, 2016 and 2015

The condensed consolidated results of operations for the three months ended March 31, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Revenues
$
118,384

 
$
134,025

 
$
(15,641
)
 
(12
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues, excluding amortization of intangible assets
22,537

 
28,130

 
(5,593
)
 
(20
)%
Research and development
22,669

 
26,537

 
(3,868
)
 
(15
)%
Selling, general and administrative
36,082

 
39,948

 
(3,866
)
 
(10
)%
Depreciation
4,234

 
4,370

 
(136
)
 
(3
)%
Amortization of intangible assets
19,132

 
19,364

 
(232
)
 
(1
)%
Restructuring and asset impairment charges
2,333

 
1,717

 
616

 
36
 %
Total costs and expenses
106,987

 
120,066

 
(13,079
)
 
(11
)%
Operating income from continuing operations
11,397

 
13,959

 
(2,562
)
 
(18
)%
Interest expense
(10,531
)
 
(12,358
)
 
1,827

 
(15
)%
Interest income and other, net
(17
)
 
686

 
(703
)
 
(102
)%
Loss on interest rate swaps
(13,087
)
 
(9,718
)
 
(3,369
)
 
35
 %
Loss on debt extinguishment

 
(100
)
 
100

 
(100
)%
Loss before income taxes
(12,238
)
 
(7,531
)
 
(4,707
)
 
63
 %
Income tax expense
5,414

 
7,939

 
(2,525
)
 
(32
)%
Net loss
$
(17,652
)
 
$
(15,470
)
 
$
(2,182
)
 
14
 %

Revenues

For the three months ended March 31, 2016, revenue decreased 12% compared to the prior year as a result of an $8.8 million decrease in revenue in our Intellectual Property Licensing segment and a $6.9 million decrease in revenue in our Product segment. Intellectual Property Licensing generated 47.5% of total revenue for the three months ended March 31, 2016 compared to 48.5% in the prior year. For additional details on the changes in revenue, see the discussion of our segment results below.

Cost of revenues, excluding amortization of intangible assets
  
Cost of revenues, excluding amortization of intangible assets, consist primarily of service costs, employee-related costs, patent prosecution, maintenance and litigation costs and an allocation of overhead and facilities costs. For the three months ended March 31, 2016, Cost of revenues, excluding amortization of intangible assets, decreased 20% from the prior year primarily due to a $2.5 million decrease in patent prosecution and defense costs and a decrease in compensation and consulting costs due to cost saving initiatives.

Research and development

Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs. For the three months ended March 31, 2016, Research and development expenses decreased 15% compared to the prior year primarily due to lower spending on our Metadata operations and guide products due to cost saving initiatives.

Selling, general and administrative

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


25


The 10% decrease in Selling, general and administrative expenses during the three months ended March 31, 2016 was primarily due to lower legal and consulting costs and the prior year including $0.4 million of costs incurred in 2015 related to a contested proxy election, as well as lower equity-based compensation and lower marketing spend.

Restructuring and asset impairment charges

In the three months ended March 31, 2016, we initiated certain facility rationalization activities, including relocating our corporate headquarters from Santa Clara, California to San Carlos, California and consolidating our Silicon Valley operations into the new corporate headquarters, and eliminating a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.3 million were recognized in the three months ended March 31, 2016.

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 we conducted a review of our remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, we took cost reduction actions that resulted in Restructuring and asset impairment charges of $1.7 million in the three months ended March 31, 2015. Amounts recognized in three months ended March 31, 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.

Interest expense

For the three months ended March 31, 2016, Interest expense decreased compared to the prior year primarily due to a lower effective interest rate on the 2020 Convertible Notes compared to the 2040 Convertible Notes, as well as a decrease in average debt outstanding.

Interest income and other, net

For the three months ended March 31, 2016, the decrease in Interest income and other, net was primarily due to an increased loss on foreign currency remeasurement of $0.6 million.

Loss on interest rate swaps

We have not designated any of our interest rate swaps as hedges for accounting purposes and therefore changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Condensed Consolidated Statements of Operations (see Note 6 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference). We generally utilize interest rate swaps to convert the interest rate on a portion of our floating interest rate loans to a fixed interest rate. Under the terms of our interest rate swaps, we generally receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future London Interbank Offering Rate ("LIBOR"), we generally will have a gain when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally will have a loss when adjusting our interest rate swaps to fair value.

Loss on debt extinguishment

During the three months ended March 31, 2015, we redeemed $287.4 million in principal of our 2040 Convertible Notes for cash, resulting in a Loss on debt extinguishment of $0.1 million.

Income tax expense

Due to our significant net operating loss carryforward and a valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our Income tax expense.

We recorded Income tax expense for the three months ended March 31, 2016 of $5.4 million, which primarily consists of $3.7 million of foreign withholding taxes, $0.6 million of foreign income taxes and a $0.5 million increase in net deferred tax liabilities.


26


We recorded Income tax expense for the three months ended March 31, 2015 of $7.9 million which primarily consists of $3.5 million of foreign withholding taxes, $3.3 million of state income taxes, a $0.6 million increase in net deferred tax liabilities and $0.6 million of foreign income taxes.

Segment Results

We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA in the following discussion use the definitions provided in Note 11 of the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Intellectual Property Licensing Segment

The Intellectual Property Licensing segment's results of operations for the three months ended March 31, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
42,736

 
$
47,153

 
$
(4,417
)
 
(9
)%
Consumer Electronics
13,524

 
17,866

 
(4,342
)
 
(24
)%
Intellectual Property Licensing Revenues
56,260

 
65,019

 
(8,759
)
 
(13
)%
Adjusted Operating Expenses
14,157

 
16,615

 
(2,458
)
 
(15
)%
Adjusted EBITDA
$
42,103

 
$
48,404

 
$
(6,301
)
 
(13
)%
Adjusted EBITDA Margin
74.8
%
 
74.4
%
 
 
 
 

For the three months ended March 31, 2016, Intellectual Property Licensing revenue decreased 13% compared to the prior year due to a 9% decrease in revenue from Service Providers and a 24% decrease in revenue from CE manufacturers. Revenue from Service Providers decreased primarily due to a top ten North American service provider being out of license in the three months ended March 31, 2016. The decrease in revenue from consumer electronics ("CE") manufacturers was primarily due to a decrease in our licensees' market share, combined with continuing pressures on their business models, which has caused our revenue from CE manufacturers to decline. Such declines could continue unless we are able to successfully license new entrants to this market.  

Intellectual Property Licensing segment Adjusted Operating Expenses decreased 15% during the three months ended March 31, 2016 primarily due to a $2.5 million decrease in patent prosecution and defense costs.

Product Segment

The Product segment's results of operations for the three months ended March 31, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
51,106

 
$
51,025

 
$
81

 
 %
Consumer Electronics
4,765

 
5,393

 
(628
)
 
(12
)%
Other
6,253

 
12,588

 
(6,335
)
 
(50
)%
Product Revenues
62,124

 
69,006

 
(6,882
)
 
(10
)%
Adjusted Operating Expenses
46,647

 
52,136

 
(5,489
)
 
(11
)%
Adjusted EBITDA
$
15,477

 
$
16,870

 
$
(1,393
)
 
(8
)%
Adjusted EBITDA Margin
24.9
%
 
24.4
%
 
 
 
 

For the three months ended March 31, 2016, Product segment revenue decreased 10% compared to the prior year as Service Provider revenue was flat, while CE revenue decreased 12% and Other revenue decreased 50%. The decrease in Other revenue was the result of the continuing decline in Analog Content Protection revenue, as well as the three months ended March 31, 2015 including a significant perpetual license fee from a manufacturer of set-top boxes. Analog Content Protection revenue is expected to continue to decline in the future.

27



Adjusted Operating Expenses decreased 11% during the three months ended March 31, 2016 compared to the prior year primarily as a result of a decrease in spending on our Metadata operations and guide products due to cost saving initiatives.

Corporate

Corporate costs for the three months ended March 31, 2016 compared to the prior year were as follows (dollars in thousands):    
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Adjusted Operating Expenses
$
12,046

 
$
13,396

 
$
(1,350
)
 
(10
)%

For the three months ended March 31, 2016, Corporate Adjusted Operating Expenses decreased primarily due to a decrease in compensation and consulting costs.

Liquidity and Capital Resources

We finance our operations primarily from cash generated by our operations. We believe our cash position remains strong and our cash, cash equivalents and marketable securities and anticipated cash flow generated from operations, supplemented with access to capital markets as necessary, are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, interest payments and income tax payments in addition to investments in future growth opportunities and share repurchases for at least the next twelve months. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions.

As of March 31, 2016, we had $71.8 million in Cash and cash equivalents, $120.5 million in Short-term marketable securities and $111.3 million in Long-term marketable securities. Our cash, cash equivalents and marketable securities are held in numerous locations around the world, with $211.9 million held by our foreign subsidiaries as of March 31, 2016. Due to our net operating loss carryforwards, we could repatriate amounts held outside the U.S. to the U.S. with a minimal tax impact.

Sources and Uses of Cash

Cash flows for the three months ended March 31, 2016 compared to the prior year were as follows (in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Net cash (used in) provided by operating activities
$
(9,046
)
 
$
26,074

 
$
(35,120
)
 
(135
)%
Net cash (used in) provided by investing activities
(22,330
)
 
81,073

 
(103,403
)
 
(128
)%
Net cash provided by (used in) financing activities
965

 
(44,832
)
 
45,797

 
(102
)%
Effect of exchange rate changes on cash and cash equivalents
579

 
71

 
508

 
715
 %
Net (decrease) increase in cash and cash equivalents
$
(29,832
)
 
$
62,386

 
$
(92,218
)
 
(148
)%

Net cash (used in) provided by operating activities for the three months ended March 31, 2016 decreased $35.1 million primarily due to an increase in accounts receivable, prepaying a third party for an intellectual property license in 2016 and higher payments on accounts payable and accrued liabilities. In April 2016, we collected a significant payment from our largest customer. The availability of cash generated by our operations in the future could be affected by business risks including, but not limited to, the Risk Factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, which are incorporated herein by reference.

Net cash (used in) provided by investing activities for the three months ended March 31, 2016 decreased $103.4 million due to a decrease in net proceeds from net sales and maturities of marketable securities of $92.6 million and higher spending on capital expenditures associated with relocating our corporate headquarters to San Carlos, California. The three months ended March 31, 2016 includes a payment of $2.5 million for the purchase of a patent portfolio. We anticipate capital

28


expenditures to grow our business and strengthen our operations infrastructure of between $25 million and $30 million for the full year 2016.

Net cash provided by financing activities for the three months ended March 31, 2016 included the receipt of $7.2 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan and a $1.8 million principal payment on our Term Loan Facility B. Net cash used in financing activities for the three months ended March 31, 2015 included $287.4 million in principal payments on our 2040 Convertible Notes and the issuance of $345.0 million in principal of our 2020 Convertible Notes. Using proceeds from the 2020 Convertible Notes, we repaid $100.0 million which had been borrowed against our Revolving Facility in February 2015, in part, to extinguish a portion of the 2040 Convertible Notes. In connection with issuing the 2020 Convertible Notes, we purchased a call option to manage the potential dilution to earnings per share from conversion of the 2020 Convertible Notes and sold a warrant for a net cash payment of $33.5 million. The three months ended March 31, 2015 also includes the payment of $3.0 million in contingent consideration related to previous acquisitions. In addition, during the three months ended March 31, 2015 we used $60.5 million to repurchase shares of our common stock and received $5.7 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan.

On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock.  The April 2015 authorization includes any amounts which were outstanding under previously authorized stock repurchase programs. As of March 31, 2016, our remaining stock repurchase authorization was $50.5 million.

Pending Acquisition of TiVo

On April 29, 2016, we announced we entered into a definitive agreement to acquire TiVo Inc. (“TiVo”), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, for $10.70 per share comprised of $2.75 per share in cash and $7.95 per share of the common stock of a newly formed holding company that will own the Company and TiVo. At current prices the aggregate purchase price is approximately $1.1 billion. The consideration payable in stock is subject to a two-way collar between Rovi stock prices of $16.00 and $25.00, with the Rovi stock price based on the average volume weighted average Rovi stock price over the fifteen trading days ending three trading days prior to the transaction closing. If our share price increases between the date of the purchase agreement and the transaction closing, TiVo stockholders will receive fewer shares (a lower exchange ratio) until our share price reaches $25.00, at which point ownership and exchange ratio will be fixed at 0.3180 per share. Conversely, if our share price decreases between date of the purchase agreement and the date the transaction closes, TiVo stockholders will receive more shares until our stock price reaches $18.71. Between a share price of $18.71 (an exchange ratio of 0.4250 per share) and $16.00 (an exchange ratio of 0.4969 per share), we have the option to pay incremental cash instead of issuing more shares. Depending upon what we elect to do if our stock price is between $16.00 and $18.71, the cash consideration could range from approximately $277 million to $392 million. If our stock price is below $16.00, we have the option to select an exchange ratio between 0.4250 and 0.4969 and the cash consideration would be calculated based upon the exchange ratio selected, but in no event will the cash consideration be more than $3.90 per share. The closing of the transaction will also trigger a fundamental change under the indenture governing TiVo’s $230 million 2% convertible senior notes due 2021, which will require TiVo to offer to repurchase the notes at par plus accrued and unpaid interest. We anticipate most, if not all, of the TiVo noteholders will require TiVo to repurchase their notes. The transaction’s cash consideration and the repurchase of the TiVo convertible notes will be funded from the cash and investments on hand at the combined company. Both companies' boards of directors have approved the transaction. The acquisition is expected to close in the third quarter of 2016, subject to approval by Rovi and TiVo stockholders, regulatory approvals and other customary closing conditions.

Capital Resources

The outstanding principal and carrying amount of debt we issued were as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Outstanding Principal
 
Carrying Amount
 
Outstanding Principal
 
Carrying Amount
2020 Convertible Notes
$
345,000

 
$
287,527

 
$
345,000

 
$
284,241

Term Loan Facility B
687,750

 
681,443

 
689,500

 
682,915

Total
$
1,032,750

 
$
968,970

 
$
1,034,500

 
$
967,156


During the next twelve months, $7.0 million of outstanding principal is scheduled to mature. For more information on our borrowings, see Note 6 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

29



2020 Convertible Notes

We issued $345.0 million in aggregate principal of 0.500% Convertible Notes that matures on March 1, 2020 at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes (which represents an initial conversion price of approximately $28.9044 per share). Holders may convert the 2020 Convertible Notes prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

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

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

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

On July 2, 2014, we, as parent guarantor, and two of our wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of our other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (the “Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (the “Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”).

As a result of voluntary principal prepayments in June 2015 and September 2015, Term Loan Facility A was extinguished. In September 2015, the Revolving Facility was terminated at our election.

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


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The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions. The Credit Agreement is secured by substantially all of the Company's assets. We may be required to make an additional payment on Term Loan Facility B each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No payment was required in February 2016.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference.

Contractual Obligations

For information about our contractual obligations, see "Contractual Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Our contractual obligations have not changed materially since December 31, 2015.

Off-Balance Sheet Arrangements
    
For information about our off-balance sheet arrangements, see "Off-Balance Sheet Arrangements" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Since December 31, 2015, we have not engaged in any material off-balance sheet arrangements, including the use of structured finance vehicles, special purpose entities or variable interest entities.

Recent Accounting Pronouncements

For a summary of applicable recent accounting pronouncements, see Note 1 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we are exposed to market risks, including those related to changes in interest rates, foreign currency exchange rates and security prices that could impact our financial position, results of operations or cash flows. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2015.

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 proce