TiVo Inc. (TIVO) reported a net loss of 9 cents per share for the fourth quarter of fiscal 2010, 3 cents above the Zacks Consensus Estimate of a loss of 12 cents per share but fell from the prior-year quarter. The company had reported a loss of 4 cents per share in the fourth quarter of 2009.

Although revenue growth was encouraging in the quarter driven by higher hardware sales, growing costs and reduced subscriber additions led to lower profitability. TiVo is not immune to the current challenging economic environment and is facing erosion of its subscriber base.

Moreover, intense competition from cable companies such as Comcast (CMCSA) and Cox is posing a threat to its DVR business. As a result, TiVO has been increasing its R&D spending to stay ahead of the competition, which is hurting its profitability.

Results Analysis

TiVo reported a net loss of $10.2 million for the fourth quarter of fiscal 2010, better than its guided range of a net loss of between $13 million and $15 million. Loss in the quarter was higher than the $3.6 million net loss in the year-ago period due to higher R&D and litigation expenses.

Net revenue for the reported quarter increased 15.7% year over year to $68.5 million, compared to $59.2 million reported in the prior-year quarter. Services (the company’s largest segment) witnessed a year-over-year decline of 13.9%, offset by a rise in Technology revenue, which was up 56.7% in the quarter and Hardware revenue, which was up 116.5%. Service and Technology revenue together declined 6.6% to $45.3 million, but was in line with the company’s guidance of $43 – $45 million.

Gross margin dropped to 36.8% from 49.8% in the year-ago period. Operating expenses rose 5.1% year over year in the quarter, leading to higher loss from operations. While R&D expenses rose in the quarter, the company cut its sales and marketing costs.

Adjusted EBITDA of a negative $3.2 million was better than management’s guidance of ($5) million to ($7) million. However, this was down from a positive adjusted EDITDA of $2.5 million reported in the year-ago quarter. The decline in EBITDA was driven by increased research & development spending relating to new products and higher distribution cost.

TiVo-owned subscription gross additions for the quarter were 46,000, down 22% from 59,000 gross additions in the year-ago quarter. Churn increased to 2.6% in the quarter. On a net basis, TiVo-owned subscriptions decreased by 72,000 in the fourth quarter and the TiVo-owned subscription base ended the quarter at approximately 1.5 million subscriptions.
 
TiVo exited the quarter with $244.5 million in cash and marketable securities and no debt.

Other Initiatives

In the quarter, TiVo unveiled TiVo Premiere DVR and a new high-definition user interface. This is TiVo’s first new DVR in nearly three years and comes in configurations of 320-gigabyte and 1-terabyte hard drives that seamlessly blend broadcast TV, as well as the Internet and signals. The partnership with Best Buy (BBY) will help TiVo in the launch of the TiVo Premiere and will help it improve brand visibility and marketing in 2010.

Moreover, the company announced that RCN Corp. (RCNI) will launch TiVo in the second quarter. TiVo also announced a partnership with Conax, a conditional access provider to offer European multi-channel operators a fully comprehensive end-to-end solution.

Guidance

The company provided conservative guidance for the first quarter of fiscal 2011. The guidance reflects increased litigation expense, higher research & development costs due to increased product development and distribution efforts, and higher marketing spending related to the launch of TiVo Premiere.

TiVo anticipates Service and Technology revenues to be in the range of $41 million to $43 million. Management expects a higher net loss in the range of $19 million to $21 million in the first quarter. Adjusted EBITDA loss is expected to be in the range of ($9) million to ($11) million.

Ruling Against Echostar

TiVo recently announced a favorable ruling for the third time in a long running patent infringement dispute (since 2004) against EchoStar Communications Corp. (SATS), the parent company of Dish Network Corp. (DISH). Under the 5-year multimedia patent infringement, TiVo has been awarded a $300 million ($100 million in damages and $200 million in contempt sanctions) by the U.S. Court of Appeals for the Federal Circuit in the Eastern District of Texas, upholding the lower court ruling in TiVo’s favor. To date, the company has been awarded approximately $400 million in sanctions.

The court’s decision recognizes the value of TiVo’s intellectual property and provides incentive for other companies, such as Comcast and DirecTV (DTV) to enter into commercial arrangements with TiVo.

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