JMP Securities Initiated on TIVO with an Outperform and $18 Target!
• We are initiating coverage of TiVo Inc. with a Market Outperform rating and $18.00 price target, based on a sum-of-the-parts analysis. TiVo is transitioning its business model from primarily a retail set-top box ("STB") company to a hybrid retail and cable/satellite software and IP licensing company. The company is aggressively pursuing new MSO/DBS licensees and leveraging its position in the living room, adding new functionality, including over-the-top ("OTT") streaming video, integrated linear and OTT search, and audience measurement statistics. Furthermore, TiVo is expanding beyond its traditional STB platform to include other connected devices, broadening its ecosystem. • F2Q12 was the first quarter of positive MSO growth (+10k) in 20 quarters and we expect that trend to accelerate as already announced agreements start and ramp deployment. • AT&T (T, NC) claim construction appears similar to the Echostar (SATS, NC) ruling, and is likely to boost the probability of a settlement (including Microsoft). Furthermore, we believe that the pending claim construction with Verizon (VZ, NC) will likely be skewed towards TiVo. • Pipeline of new MSO agreements, primarily in Europe, remains strong. • Company telegraphs cutting R&D spending in FY13, which increased about $28M (34% y/y) over FY12. A possible settlement with AT&T (MSFT) and VZ (MOT) would not only generate incremental revenue, but also trim about $35M in annual legal costs. We estimate that the boost in R&D spending and legal expenses in FY12 represents about $50M-$60M (vs. our $32M projected cash burn for FY13). • Competition to gain a foothold in the living-room makes TiVo a compelling acquisition target (given its stand-alone and MSO agreements). • We are currently modeling FY12 revenue and EPS of $189M and $0.50, respectively, vs consensus of $190M and $0.53. Our modeling suggests that most of the difference is due to the expected timing of existing MSO sub-adoption, which we have taken a conservative view of. • TiVo is currently trading at 2.6x net cash of $3.92 per share on the balance sheet, with good visibility for EBITDA profitability in FY13.