TiVo Misses Estimates, Signs Deals - Analyst Blog

TiVo Inc. (TIVO) reported a net loss of 6 cents a share for the third quarter of fiscal 2010, a penny below the Zacks Consensus Estimate of a loss of 5 cents, and fell substantially from the prior-year quarter. The company had reported EPS of 98 cents in the third quarter of 2009, boosted by $87.8 million in litigation proceeds related to EchoStar Corp. (SATS).
 
TiVo reported a net loss of $6.7 million for the reported quarter, better than its previously guided range of a net loss of between $8 million and $10 million. Excluding the EchoStar litigation proceeds, TiVo would have posted a net loss of $0.9 million last year.
 
Despite an improving spending environment, TiVo provided lower-than-expected guidance. Management expects a higher net loss in the range of $13 million to $15 million in the fourth quarter of 2010 due to higher R&D and litigation expenses.
 
Net revenue for the reported quarter declined 11.8% year over year to $56.9 million compared to $65.5 million reported in the prior-year quarter.  Services (the company’s largest segment) and Hardware revenues witnessed year-over-year declines of 20.9% and 23.2%, respectively, partially offset by a rise in Technology revenue, which was up 134% in the quarter.
 
Service and Technology revenue together declined 8.8% to $47.1 million but was in line with the company’s guidance of $46 – $48 million. For the fourth quarter of 2010, TiVo expects to generate Service and Technology revenue of $43 million to $45 million. 

TiVo is not immune to the current challenging economic environment and is facing erosion of its subscriber base. The economic downturn has made operations more difficult. Gross margin dropped to 46.6% from 53.7%. Results for the quarter were impacted by a one time reduction in service revenues associated with a subscription over-reporting error for the past 18 months by DIRECTV (DTV).
 
TiVo-owned subscription gross additions for the quarter were 34,000, down 25% from 44,000 gross additions in the year-ago quarter. Subscriber acquisition costs fell 48%. The monthly churn or cancellation rate was 1.7%, up from the prior-year quarter churn of 1.4%. At the end of the quarter, there were about 1.5 million TiVo-owned subscribers and 2.7 million total subscribers.
 
TiVo reported its ninth consecutive quarter of positive adjusted EBITDA of $1.4 million and surpassed the management’s guidance of ($2) million to break-even. However, this was down 98.5% from the year-ago quarter due to lower interest income, fall in Service and Hardware revenue and rise in legal expenses. Adjusted EBITDA is expected to be in the range of ($5) million to ($7) million for the fourth quarter of 2010.


The satellite television provider TiVo is a pioneer in digital video recording (DVR) technology. TiVo has made great strides in differentiating its DVRs from less expensive generics, which helped the company bolster its sagging market share and increase revenue. TiVo recently signed a number of content deals with Blockbuster (BBI), Netflix Inc. (NFLX), Amazon.com (AMZN) and Disney (DIS).
 
Moreover, to expand internationally, TiVo announced a strategic partnership with Virgin Media Inc. (VMEDW). Under the partnership, TiVo will develop interactive programs to develop middleware and interface Virgin Media's next-generation high-definition set-top boxes in the UK. TiVo launched products this month in New Zealand, which will further boost its international presence.
 
TiVo plans for domestic roll-outs of DIRECTV and RCN Corp. (RCNI) next year. This is in addition to an expected acceleration in Comcast’s (CMCSA) deployment of its services next year and Best Buy’s (BBY) 2010 marketing initiatives.
 
TiVo also struck a deal with Google (GOOG) to integrate its television viewing data into Google's measurement for ads sold through the Google TV Ads platform.
 
TiVo has a market cap of $1.2 billion with no debt and $245 million in cash. We believe that its recent deals will be beneficial for the company in the longer term.
 
TiVo’s long-standing patent dispute with Dish Network Corp (DISH) remains. Additionally, TiVo has filed a lawsuit against large telecom providers such as AT&T (T) and Verizon Wireless (VZ) over its DVR technology. These disputes are a hurdle to the company’s growth.
 
TiVo also faces increasing competition from cable and satellite providers, who have begun offering DVR services with TiVo’s digital cable in one set-top box at no upfront costs and at comparable monthly subscription rates.

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