TiVo Inc. (TIVO) is offering Convertible Senior Notes worth $120.0 million in a private placement to qualified institutional buyers as per Rule 144A under the Securities Act of 1933. The Senior Notes will mature in 2016.
TiVo also expects to grant an over allotment option of purchasing up to an additional $18.0 million of aggregate principal amount to its initial buyers.
The issued notes will be convertible into the company’s common stock at the option of the buyers. However, the interest rate, conversion rate and offer price are yet to be determined, subject to negotiation between the company and the initial buyers.
Funding of intellectual property litigations was one of the primary reasons for raising the cash.
TiVo is entangled in various legal battles against large companies such as Echostar Corp. (SATS), Dish Network Corp. (DISH), Microsoft Corp. (MSFT), AT&T (T), Verizon Communications Inc. (VZ) and most recently, Motorola Mobility Holdings Inc. (MMI).
In the fourth quarter of 2011, TiVo’s legal expenses were 46.0% of its total operating expenses. TiVo expects legal expenses to double year over year going forward. We believe this huge legal expense is affecting TiVo’s profitability and any negative outcome would further hurt its growth over the long term.
TiVo’s growth also depends on its ability to launch new products on a regular basis, as the company faces stiff competition in the Digital Video Recorder (DVR) market from cable and satellite providers such as Comcast Corp. (CMCSA), Cox, Dish Network Corp. and DirecTV (DTV). TiVo stated that a portion of the funds raised would also be used to fund its R&D activities, as well as general corporate purposes.
For fiscal 2012, TiVo expects its R&D spending to increase in the range of $25.0 million to $30.0 million. In fiscal year 2011 the company had spent $81.6 million in R&D.
In the last quarter, TiVo had $209.4 million in cash and cash equivalents and short term investments on its balance sheet and did not have any debt, despite the lackluster quarter. The issuance of this debt might be a significant headwind for the company going forward, since interest payments would impact the bottom line.
Recommendation
We expect that new partnerships with leading companies, along with new customer wins, product launches and international expansion will drive top-line growth. However, increasing legal complexities, higher operating expenses, lower subscriber additions and additional debt remain the primary headwinds for growth, in our view.
We have a Neutral rating on TiVo over the long term (6-12 months). Currently, TiVo has a Zacks #4 Rank, which translates into a Sell rating in the short term (1-3 months).
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