Zacks_Analysts' Blog : TiVo Misses, Guides Lower - Analyst Blog

A developer of advanced television services including digital video recorders (DVR), TiVo Inc. (TIVO) reported a loss of 30 cents per share in the fourth quarter of 2011, worse than the Zacks Consensus Estimate of a loss of 28 cents.

TiVo provided disappointing first quarter guidance and expects higher net losses on a sequential basis. Shares plunged 1.22% to $9.70 in the after-hours trading.

Operating performance

TiVo reported fourth quarter 2011 net loss of $34.0 million compared with a net loss of $10.0 million in the prior-year quarter. However, this was in line with the high end of management’s guided range of $32.0 to $34.0 million.

Gross profit decreased 39.5% year over year to $15.4 million. Gross margin declined to 27.5% from 37.0% in the year-ago quarter, primarily due to the sluggish revenue growth in the quarter.

Operating expenses escalated 35.8% year over year to $50.0 million, leading to a higher net loss in the quarter. TiVo reported an operating loss of $34.6 million compared with $11.4 million in the prior-year quarter.

Adjusted EBITDA of a negative $25.8 million was well below $3.0 million reported in the prior-year quarter but was in line with management’s guided range of a negative $24.0 million to $26.0 million.

Revenue

Revenue decreased 18.7% year over year to $55.8 million in the fourth quarter. However, revenue was marginally above the Zacks Consensus Estimate of $54.0 million. The weak year-over-year results were primarily due to 10.2% decline in Service and 38.5% decline in Hardware revenue in the quarter. Technology revenues remained flat in the quarter.

TiVo-owned subscription gross additions for the quarter were 60,000 compared with 46,000 gross additions in the year-ago quarter. Churn rate decreased to 3.0% in the quarter. Subscription acquisition costs increased 41.9% year over year in the quarter.

Balance Sheet and Cash Flow

At the end of the fourth quarter, cash, cash equivalents and short-term investments were $209.4 million versus $227.5 million at the end of third quarter 2011. The company had no debt at the quarter end.

Cash flow from operations was a negative $19.9 million in the quarter compared with a negative $14.4 million in the previous quarter.

Full-Year 2011 Results

For the year 2011, net loss was $84.5 million compared with a loss of just $23.0 million in 2010. The company reported a loss of 74 cents per share in 2011, worse than Zacks Consensus Estimate of a loss of 72 cents.

Revenue decreased 8.0% year over year to $219.6 million. Service and Technology revenue decreased 13.7% and 8.7%, respectively on a year-over-year basis. Hardware increased 5.7% year over year in fiscal 2011.

Gross profit decreased 17.8% year over year to $91.2 million. Gross margin was 41.5% compared with 46.5% in the previous year.

Operating expenses increased 29.8% year over year to $176.8 million. Operating loss was $85.6 million compared with a loss of $25.2 million in the earlier year.

Adjusted EBITDA was negative $51.3 million in the year compared with a positive EBITDA of $9.4 million in the preceding year.

TiVo-owned subscription gross additions for the year were 160,000 compared with 148,000 gross additions a year ago. Churn rate decreased to 2.2% in the quarter. Subscription acquisition costs increased 17.4% year over year.

Guidance

The company provided disappointing guidance for the first quarter of fiscal 2012. The guidance reflects increased litigation expense, higher R&D costs due to increased product development and distribution efforts. The expenses are expected to increase by roughly $7.6 million sequentially in the first quarter.

TiVo expects Service and Technology revenues to range between $36.0 million to $38.0 million. Management expects a higher net loss in the range of $35.0 million to $37.0 million in the first quarter. Adjusted EBITDA is expected to be between ($25.0) million and ($27.0) million in the first quarter of 2012.

For fiscal 2012, TiVo expects R&D spending to increase in the band of $25.0 million to $30.0 million. Legal expenses are expected to increase more than double on a year-over-year basis ($23.0 million in fiscal 2010).

Our Take

During the fourth quarter 2011, TiVo announced a multi-year agreement with Charter Communications (CHTR), the fourth-largest cable operator in the United States to deliver IP-enabled video platform. We continue to believe that new partnerships with leading companies in addition to new customer wins, product launches and international expansion will drive top-line growth.

TiVo remains entangled in various patent lawsuits, which involves major companies such as AT&T Inc. (T), Verizon Communications Inc. (VZ), Microsoft Corp. (MSFT), Dish Network Corp. (DISH) and most recently Motorola Mobility Holdings Inc. (MMI). Going forward, any negative outcome from these various lawsuits will have a negative impact on the shares, in our view.

Moreover, increasing legal expenses (46.0% of total operating expenses in 2011) and increasing competition from cable and satellite providers will hurt profitability going forward.

We have a Neutral rating on TiVo over the long term (6-12 months). Currently, TiVo has a Zacks #4 Rank, which implies a Sell rating over the short-term (1-3 months).