We are upgrading TiVo Inc. (TIVO) to Neutral from our previous Underperform rating on its better-than-expected fourth-quarter 2010 results driven by higher revenues.
TiVo recently 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 down from the prior-year quarter. The company had reported a loss of 4 cents per share in the fourth quarter of 2009 due to higher R&D and litigation expenses.
Although revenue growth was encouraging in the quarter driven by higher hardware sales, growing costs and reduced subscriber additions led to lower profitability. 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.
Recently, TiVo also 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). As a result of the 5-year multimedia patent infringement, TiVo has been awarded $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.
In our opinion, the stock is riding an impressive wave of success on its recent win on the long-standing patent infringement dispute with Dish Network, which opens up major new markets and licensing opportunities for TiVo, in addition to the immediate cash payoff from the legal win. This is also very positive for TiVo’s brand image, which should drive the company’s value going forward.
Moreover, the company has signed a number of agreements and entered into partnerships with Blockbuster Inc. (BBI), Netflix Inc. (NFLX), Amazon.com (AMZN), Best Buy (BBY), Virgin Media, RCN Corp. (RCNI) and Walt Disney (DIS), which will be beneficial in the longer term. TiVo also struck a deal with Google Inc. (GOOG) to integrate its television viewing data into Google’s measurement for ads sold through the Google TV Ads platform. Further, the company’s international expansion provides a new growth platform.
TiVo is not immune to the current challenging economic environment and is facing erosion of its subscriber base. Moreover, intense competition and competitive offerings from cable and satellite providers such as Comcast Corp, (CMCSA), Cox, Dish and DirecTV (DTV) is posing a threat to its DVR business resulting in reduced subscriber additions. Further, TiVo has been increasing its R&D spending to stay ahead of the competition, which is hurting its profitability.
Despite being hit by the recession, TIVO has held up better than most companies that depend on discretionary consumer spending. We like the recent success the company is having and expect the momentum to continue, which is reason we are upgrading the shares to Neutral.
Accordingly, our six-month target price of $18.00 is based on a target P/B of 9.6x (above the industry average of 7.4x) our estimated book value of $1.88 per share at April 30, 2010.
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