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TiVo Inc. (TIVO), a developer of advanced television services including digital video recorders (DVR), reported loss per share of 21 cents in the third quarter of 2012, narrower than the Zacks Consensus Estimate of a loss of 23 cents. However, the reported loss widened from the year-ago quarter’s loss of 18 cents per share.

Revenue

Revenues increased 27.3% year over year to $64.8 million in the third quarter and surpassed the Zacks Consensus Estimate of $60.0 million. Revenues for the quarter were positively impacted by Services and technology revenue, which jumped 25.4% to $51.8 million and was ahead of management’s guidance range of $49 million-$51 million. Moreover, hardware revenue also jumped 36.8% from the year-ago quarter to $13.0 million.

Net subscription additions for the quarter were 117,000 compared with a 112,000 subscription loss in the year-ago quarter. Moreover, this was the first quarter in the last 4 years that the company logged net additions of subscriptions.

Churn rate was a negative 1.7% in the quarter, which improved slightly from a negative 2.0% posted in the comparable prior-year quarter. Subscription acquisition costs (SAC) increased 66.2% year over year.

Operating Performance

Gross profit increased 33.6% year over year to $31.0 million and gross margin expanded 220 basis points (bps) to 47.8% in the reported quarter, primarily due to higher revenues.

Operating expenses escalated 23.3% year over year to $54.5 million. Research & development (R&D) expense surged 33.8% year over year to $27.3 million in the quarter. Moreover, litigation expense was $8.2 million, which the company incurred for the AT&T Inc (T) and Microsoft Corp (MSFT) trials. Loss from operations grew 12.4% from the year-ago quarter to $23.5 million.

Adjusted EBITDA was a loss of $13.9 million, below management guidance of a loss of $19 million to $17 million. However, the adjusted EBITDA loss widened from the loss of $12.2 million in the year-ago quarter.

TiVo reported third quarter 2012 net loss of $24.5 million compared with a net loss of $20.6 million in the prior-year quarter. There were no one-time items in the last quarter.

Balance Sheet and Cash Flow

TiVo exited the third quarter with cash, cash equivalents and short-term investments of $604.3 million versus $627.8 million in the previous quarter. TiVo recognizes $11.0 million from Dish Network Corp. (DISH) as licensing fees.

Cash flow from operations was $225.8 million in the quarter compared with a negative $247.2 million in the previous quarter.

Guidance

For the fourth quarter of 2012, TiVo expects service and technology revenues in the range of $48 million to $50 million. TiVo expects net loss in the range of ($31.0) million to ($33.0) million and an adjusted EBITDA loss in the range of ($21.0) million to ($23.0) million.

The company expects litigation expenses to be higher sequentially as well as on a year-on-year basis in the fourth quarter due to the AT&T and Microsoft trials. However, the company expects the litigation expenses to be lower in the first quarter and fiscal 2013.  The company expects R&D expenses to increase sequentially on the back of the on-going introductory projects.

The company expects to benefit from the R&D efforts and distribution deals that are being deployed to improve the top line in fiscal 2013. Additionally, these improvements will be reflected in the adjusted EBITDA results for fiscal year 2013, according to management.

Our Take

The company reported better-than-expected results on the back of strong revenue growth and has been witnessing subscription growth from partners such as RCN, Suddenlink and Virgin Media Inc. (VMED). Additionally, partners such as Charter, DIRECTV Inc. (DTV), and ONO would likely provide further momentum. Moreover, DIRECTV intends to launch its TiVo offering in select markets in December, which will drive the momentum in forthcoming quarters.

We continue to believe that new partnerships with leading companies combined with new customer wins, product launches and international expansion will drive top-line growth.

However, the company continues to see patent litigation issues against Microsoft Corp. and AT&T Inc. Going forward, these litigation issues will remain an overhang. Moreover, increasing competition from cable and satellite providers will act as a headwind going forward.

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 in the short-term (1-3 months).

 
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