The shares of Rovi Corporation (NASDAQ:ROVI) are trading 16.48% lower after an update from the digital entertainment company cited an unfavorable Supreme Court ruling. In a court case against Netflix, Inc. (NASDAQ:NFLX) concerning five patents involved in over-the-top (OTT) video service, the court has ruled in favor of Netflix, Inc. (NASDAQ:NFLX), stating that the patents are invalid, referring to a 2014 Supreme Court ruling involving Alice Corp. Pty. Ltd. v. CLS Bank International. On the other hand, Netflix’s shares are up by 16.43% today, on both the ruling and the company’s second quarter financial results, released after-hours yesterday.
After the decision, Samir Armaly, Executive Vice President of intellectual property and licensing division of Rovi Corp, said, “While we are pleased that the Court sided with Rovi on the key claim construction issues, we are disappointed in, and strongly disagree with, the Court’s decision finding the five patents invalid and plan to appeal that decision.” He further cited other major video streaming service providers using its patents. Mr. Armaly added, “Other leading OTT providers, including Apple, Google and Hulu, have previously taken a license under the Rovi patent portfolio, and we remain confident that Netflix, Inc. (NASDAQ:NFLX) requires a similar license.”
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Earlier in March, activist investor Glenn W. Welling’s Engaged Capital filed preliminary proxy materials with the SEC after losing patience in the digital entertainment company’s efforts to increase shareholder value. The investment manager had 549,900 shares of Rovi Corporation (NASDAQ:ROVI) in its portfolio at the time, with a market value of $10.01 million as of the end of the first quarter. Prior to filing the proxy materials, Engaged Capital raised several issues that it believed could help the company create more value for its investors. The fund sent an open letter to the management of the digital entertainer nominating four directors, including Mr. Welling, while pointing out the negative shareholder value generated in the past couple of years. However, Rovi Corporation (NASDAQ:ROVI) criticized this step, while stating that the fund was undermining the selection process by not providing interview access to its nominated candidates. In May, two of those nominees were elected to the board by Rovi shareholders, those being Raghavendra Rau and Glenn W. Welling.
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The shares of Rovi Corporation (NASDAQ:ROVI) are down by 34.63% year-to-date heading into its second quarter financial results on July 30. Despite the poor run for the company’s shares, smart money held a bullish outlook on the stock during the first quarter, with 32 hedge fund investors holding positions worth $171.21 million at the end of the period. These figures were far better than the previous quarter investments of $130.84 million from 20 investors. We also took into account the 19.39% decline in the shares of Rovi Corporation (NASDAQ:ROVI) during the first quarter, indicating a very positive sentiment among hedge fund investors. Some of the primary investors of the company include Israel Englander’s Millennium Management with 1.38 million shares valued at $25.4 million, Chuck Royce’s Royce & Associates, and George Soros’ Soros Fund Management.
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Just before the second quarter 2015 financial results, Tom Carson, CEO of Rovi Corp, has boosted his investments in the company with the additional purchase of 10,000 shares on July 6. However, there are concerns about the size of the investment at just$158,000, a fraction of the CEO’s salary, as it indicates that the CEO is not exactly “all in” on the stock of the company.
Nonetheless, we recommend investors initiate a position in the company following in the footsteps of its CEO, and given the large dip today, and the representation that activist Welling now has on the company’s board.
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