MMI Marcus and Millichap Inc

TiVo Inc. (TIVO) is scheduled to announce its first quarter 2012 results on May 24, 2011. In the run-up to the first quarter earnings, there are no major variations in analysts’ estimates.

Prior Quarter Recap

TiVo Inc. reported a loss of 30 cents per share in the fourth quarter of 2011, falling short of the Zacks Consensus Estimate of a loss of 28 cents.

Revenues decreased 18.7% year over year to $55.8 million in the fourth quarter. However, total 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.

Results for the quarter were negatively impacted by higher operating expenses that escalated 35.8% on a yearly basis due to higher R&D cost and legal expenses.

For further details please refer to: TiVo Misses, Guides Lower

Current Quarter Expectations

Management expects a disappointing first quarter of 2012. The guidance reflects increased litigation expense and 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 and $38.0 million. Management expects a higher net loss in the range of $35.0 million-$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 range of $25.0 million to $30.0 million. Legal expenses are expected to more than double on a year-over-year basis ($23.0 million in fiscal 2010).

Estimate Revision Trend

For the current quarter, out of the eight analysts covering TiVo, no analyst revised estimates in the last thirty days. The Zacks Consensus Estimate is a loss of 31 cents per share for the quarter.

For the fiscal year 2012, one analyst raised estimates in the last thirty days. Hence, the EPS estimate inched up from a loss of $1.21 to $1.20.

Conclusion

Despite missing earnings expectations in the last two quarters, TiVo posted a positive earnings surprise of 4.76% in the trailing four quarters. Management’s disappointing outlook tends to indicate another dismal quarter.

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

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.

Additionally, TiVo has raised $150.0 million in senior notes, which are expected to mature in 2016. Funding of intellectual property litigations seems to be one of the primary reasons for raising the cash. We believe that going forward, the debt issuance might pose a significant headwind for the company given its lackluster results and depleting cash reserves. 

We have a Neutral recommendation on TiVo over the long term driven by new partnerships with leading companies, new customer wins, product launches and international expansion. However, increasing legal complexities, higher operating expenses, lower subscriber additions and additional debt remain primary headwinds for growth, in our view.

Currently, TiVo has a Zacks #2 Rank, which translates into a Buy rating in the short term.

 
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