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TiVo Has Threats Ahead

Posted on Wednesday, Sep 3rd 2008

On August 27, TiVo Inc. (Nasdaq: TIVO), the pioneer in television services for digital video recorders (DVRs), reported Q2 results that beat its own guidance and Street earnings estimates. Q2 revenue was down 5.3% to $53.5 million. Net income was $2.9 million or $0.03 per share, versus net loss of $17.7 million last year and guidance of net loss of $2 to $4 million. The Street had expected a loss of $0.02 per share on revenue of $55.35 million.

Adjusted EBITDA was $10.6 million, versus guidance of $3 to $5 million and adjusted EBITDA loss of $11.2 million last year. TiVo attributed the better-than-expected results to better-than-expected hardware margin and lower-than-expected operating expenses from lower marketing expenses. Gross additions were 36,000 versus 41,000 last year. The monthly churn rate was 1.5%, up from 1.3% in Q1. The number of subscribers has decreased as expected because DirecTV (DTV) has its own DVR technology and has stopped marketing TiVo.

Despite the decline in subscribers, TiVo has managed to turn in good results due its focus on efficient marketing that includes bundling TiVo with HD television sales. Its quarterly subscription acquisition costs (SAC) were $135, down from $758 last year.

Following deals with Comcast and Cox to provide set-top boxes with DVR technology, TiVo has added a new dimension to its service by adding YouTube videos. It has also announced a deal with Amazon that allows users to buy Amazon products from their television sets. Finally, it has launched a power watch rating service that provides commercial ratings in a DVR environment based on demographic data.

And on the international front, its service was launched in Australia by Seven Networks.

For Q3, TiVo expects revenue of $49 to $51 million, net loss of $7 to $9 million and adjusted EBITDA ranging from a loss of $1 million to positive $1 million. It anticipates seasonal increases in selling activity to its retailers, hardware losses, marketing expenses, and higher EchoStar litigation expenses. The Street expects revenue of $57.1 million. It is currently trading around $8.5 with market cap of about $868 million. Earlier coverage on the company is available here and here.

One of the greatest threats to TiVo’s future is true video-on-demand and IPTV, whereby the need to record shows simply goes away. In the next five years, this threat is going to materialize as set-top box technology and the corresponding services come into the market. How does TiVo plan to counter that force?

Chart for TiVo Inc. (TIVO)

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