TiVo Reports Mixed 1Q

Zacks

TiVo Inc (TIVO) reported mixed first quarter 2013 results, with loss per share of 17 cents deteriorating from the Zacks Consensus Estimate of a loss of 15 cents as well as the year-ago earnings of $1.04 per share.

Quarter Details

Revenues increased 48.1% year over year to $67.8 million in the first quarter and surpassed the Zacks Consensus Estimate of $64.0 million. Revenues for the quarter were positively impacted by Services and technology revenue, which jumped 40% to $54.5 million and was within management’s guided range of $53.0 million-$55.0 million. Moreover, hardware revenue also shot up 91.8% year over year to $13.3 million.

Net subscription additions for the quarter were 206,000 compared with 88,000 subscription loss in the year-ago quarter. Churn rate was negative 1.6% in the quarter versus negative 2.3% posted in the prior-year quarter. Subscription acquisition costs (:SAC) increased 51.6% year over year to $232.

Gross profit increased 64.3% year over year to $34.6 million and gross margin expanded to 51.1% in the reported quarter, primarily due to lower, service and technology costs, which fully offset a significant increase in hardware cost.

Operating expenses (excluding litigation proceeds) decreased 5.3% year over year to $54.2 million. Research & development (R&D) expense surged 12.2% year over year. However, this was fully offset by a lower general & administrative expense (G&A) down 28.0% during the reported quarter.

In the year-ago quarter, TiVo earned $175.7 million as litigation proceed from the settlement with DISH Network, which significantly reduced expenses and increased profitability. However, absence of any such proceed during the reported quarter had a negative impact on TiVo’s profitability.

The company reported an operating loss of $19.6 million compared with an operating income of $139.5 million in the year-ago quarter. Adjusted EBITDA was ($10.0) million compared with $149.4 million in the year-ago quarter. Adjusted EBITDA was in line with the lower end of management’s guided range of ($10.0) million to ($21.0) million. TiVo reported first quarter 2013 net loss of $20.8 million compared with a net profit of $139.0 million in the year-ago quarter.

TiVo exited the first quarter with cash, cash equivalents and short-term investments of $567.3 million versus $618.8 million in the previous quarter.

Guidance

For the second quarter of 2013, TiVo expects service and technology revenues in the range of $53 million to $55 million. TiVo expects net loss in the range of $28.0 million to $30.0 million and an adjusted EBITDA loss in the range of ($16.0) million to ($18.0) million.

For the full year, TiVo expects R&D expenses to decline in the second half as compared to the first half of 2013. TiVo expects litigation expenses to increase in the second half of fiscal 2013. However, TiVo expects to spend much less in litigation costs compared with fiscal 2012.

TiVo expects adjusted EBITDA to significantly benefit from higher licensing revenue and subscriber fees. Management expects adjusted EBITDA to breakeven for full year 2013.

Our Take

We remain optimistic about TiVo’s long-term growth potential due to new partnerships, product launches and international expansion. We believe that TiVo will continue to witness strong subscriber growth based on its partnerships with Virgin Media Inc. (VMED), RCN, ONO, Charter Communications, Comcast Corp. (CMCSK), Suddenlink and DIRECTV going forward.

However, pending patent litigation issues (Verizon, Motorola and Time Warner), rising subscription acquisition costs, higher hardware and sales & marketing costs are expected to impact TiVo’s profitability over the next few quarters. Increasing competition from cable and satellite providers could also hurt profitability over the long term. Thus, we have a Neutral recommendation on TiVo over the long term (6-12 months).

Currently, TiVo has a Zacks #3 Rank, which implies a Hold rating for the short term (1-3 months).

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