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TiVo-Microsoft Drop Charges

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TiVo Inc. (TIVO) and Microsoft Corp. (MSFT) have settled their ongoing patent litigation disputes by dropping all charges against each other. Since 2010, both the companies remained entangled in legal disputes that involved suits and counter suits relating to a certain DVR technology patent. However, Bloomberg reported that no monetary transaction was discussed in the settlement, and TiVo did not grant any patent rights to Microsoft.

In 2009, TiVo had sued AT&T Inc. (T), a Microsoft client, for infringing upon three of its DVR patents. Thereafter, to lend support to its client, Microsoft sued TiVo in 2010. However, in January 2012, AT&T settled its dispute with TiVo for $215.0 million and both the companies dropped all pending litigation charges against each other.

As TiVo and Microsoft settle their litigation cases, it remains to be seen whether Verizon Communications Inc. (VZ) will tread the same path.

TiVo has been defending its patents that have yielded a recurring revenue stream. TiVo’s successful intellectual property monetization began with the $500 million time warp patent settlement with DISH Network and EchoStar Corporation (SATS). The recent settlement with AT&T ensured an upfront payment of $51 million and the remaining $164 million on a quarterly basis through 2018.

Moreover, the present settlement will also bring down the litigation expenses that TiVo incurs every quarter. In the recently concluded quarter, TiVo incurred $16 million in legal settlement expenses and gained $54.4 million from litigation proceeds. Moreover, management expects litigation expenses in the current quarter to decrease significantly with less legal disputes.

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, Suddenlink and DIRECTV going forward.

However, pending patent litigation issues, rising subscription acquisition costs and higher R&D expenses 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 long-term Neutral recommendation on TiVo.

Currently, TiVo has a Zacks #3 Rank, which implies a ‘Hold’ rating in the short term.

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