Rovi mixed on profit warning; EMC active on earnings; no recovery for FiberTower holders

By Rebecca Melvin

New York, July 18 - Rovi Corp. was the name of the day in the convertible bond market Wednesday, trading actively but mixed as the convertibles slipped outright but improved on a dollar-neutral, or hedged, basis after the Santa Clara, Calif.-based digital entertainment company preannounced a second-quarter shortfall and cut full-year guidance.

EMC Corp. traded actively and the bonds were up almost 4 points outright against a 9.5% rise in the underlying shares. But it wasn't immediately known how the bonds did on a hedged basis after the Hopkinton, Mass.-based information storage and software company posted strong quarterly results and reaffirmed full-year guidance.

United Rentals Inc. was not active but appeared to fall in line with the underlying shares after the Greenwich, Conn.-based equipment rental company reported that it swung to a second-quarter loss on higher revenue.

Holders of FiberTower Corp.'s convertibles received the final word that they will receive no recovery on their investment after the San Francisco-based wireless backhaul and access services provider and its subsidiaries made a pre-packaged Chapter 11 bankruptcy filing Tuesday.

Equities on Wednesday closed solidly higher, with the tech-heavy Nasdaq stock market gaining more than the broader market on a strong earnings report from Intel Corp. late Tuesday. Investors were also cheered by a strong reading on housing starts, which gained last month by the most in nearly four years.

There was no new convertibles issuance in the United States, but internationally Credit Suisse Group AG, via subsidiary, Credit Suisse Group (Guernsey) V Ltd., priced CHF 3.8 billion of mandatory and contingent convertibles, which mature in March of next year.

The offering from the Zurich-based financial services group didn't garner much interest from the convertible community due to the fact that it is "quite short-dated and a private deal," a London-based convertibles analyst said. "We didn't look at it."

Rovi mixed on profit warning

Rovi's 2.625% convertibles due 2040 traded mixed, or down about 2 points outright, but up 1.5 points on a hedged basis, assuming a 20% delta, according to a New York-based trader.

The bonds traded on either side of 95, which was down from 96.875 previously.

Shares of the Santa Clara, Calif.-based digital entertainment company plunged $7.64, or 43%, to $10.01.

The Rovi convertibles' move was similar to that of Alcatel-Lucent SA's convertible bonds, which slipped outright in active trade Tuesday after the French telecommunications-equipment maker posted a second-quarter loss and full-year guidance miss.

"Rovi has surprisingly hung in there, given the terrible numbers. However, they do have $1 billion in cash," a New York-based trader said.

The company, citing delays in adding new licensees in key growth areas, preannounced a second-quarter shortfall - the company reports Aug. 2 - and cut its full-year guidance.

Rovi now expects second-quarter earnings of 35 cents to 38 cents per share, which is lower than the 57 cents analysts expected.

Revenue will be $158 million, which is lower than the $182.2 million estimated by analysts.

Rovi also lowered full-year 2012 guidance. It now expects $1.60 to $1.90 in earnings on $650 million to $680 million in revenue, which is down from $2.35 to $2.65 in earnings on $755 million to $785 million in revenue.

The company attributed the miss primarily to a $21 million year-over-year decline in consumer electronics revenue due largely to delays in adding new patent licenses and general macroeconomic weakness in the global consumer electronics markets, Piper Jaffray & Co. senior research analyst Michael Olson said in a note published Wednesday.

The severity of the issues at Rovi run deeper than Piper expected, Olson said.

"Additionally, we are surprised that the company incorporated a material revenue contribution from deals in the TV everywhere/online video space in 2012 guidance, when uncertainty around getting deals done with these potential licensees was relatively high, in our opinion," Olson wrote.

Olson downgraded the Rovi shares to "neutral" from "overweight" as did J.P. Morgan Securities LLC, among other downgrades.

EMC trades actively

EMC's 1.75% convertibles due December 2013 traded at 159.262 versus an underlying share price of $25.02 on Wednesday.

Shares of the Hopkinton, Mass.-based information storage and software company jumped $2.17, or 9.5%, to $25.09.

EMC reported preliminary second-quarter earnings of 39 cents a share on revenue of $5.31 billion. The earnings and revenue for the quarter were up 10% and 11%, respectively, over the same quarter last year. VMware reported revenue of $1.12 billion, up 22% over the prior year's quarter.

EMC also said it continues to expect to achieve its full-year 2012 goals of $22 billion in revenue and earnings per share of $1.70. EMC reports final results July 24.

In addition, EMC and Palo Alto, Calif.-based VMware, which it owns, said they will swap executives. Pat Gelsinger, currently EMC president and COO of Information Infrastructure Products, will succeed VMware's Paul Maritz as CEO in September. Maritz will remain on the VMware board of directors and join EMC as chief strategist, reporting to CEO Joe Tucci. EMC's current CFO, David Goulden, will be EMC's COO starting in September.

VMware on Tuesday also announced preliminary second-quarter results, including record quarterly revenues of about $1.1 billion, up 22%.

VMware expects full-year revenue to be between $4.5 billion and $4.6 billion.

FiberTower recovery zero

FiberTower missed a coupon payment on its 9% convertibles due 2012 back in November and on Tuesday, after operating in default for more than six months, filed a voluntary Chapter 11 bankruptcy.

The convertibles get 0% of the shares of the new company that emerges from bankruptcy under the prearrangement.

"I don't think the holders are going to waste their time," a convertibles player said about trying to wrangle something for their investment.

"[FiberTower] just went through six months to try to sell the assets and get the best recovery possible and it didn't go very well," the analyst said.

Mentioned in this article:

Alcatel-Lucent SA NYSE and Paris: ALU

EMC Corp. NYSE: EMC

FiberTower Corp. Nasdaq: FTWR

Rovi Corp Nasdaq: ROVI

United Rentals Inc. NYSE: URI

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