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To TiVo or not to TiVo

Tue, 08/29/2006 - 7:41am

Copyright 2006 Cable News Network
All Rights Reserved
CNNMoney.com
August 28, 2006 Monday 3:20 PM EST
By Paul R. La Monica, CNNMoney.com editor at large
From Lexis Nexis

Wall Street just can't figure out TiVo. Sure, most consumers love the digital video recorder company, which has become the equivalent of Kleenex or Google for the DVR industry.

But over the past few years, the stock chart has looked like one of those sine/cosine graphs from your high school trigonometry class: plenty of peaks and valleys.

Bulls argue that TiVo's loyal subscribers and innovative technology and patents will eventually lead the company, which continues to lose money, to financial riches. Bears counter that there is too much competition from cable companies, which offer their own DVRs to customers at a reasonable price.

For now, TiVo is once again on the upswing. Shares of TiVo have surged 53 percent in 2006, with much of the move coming this month. The stock has zoomed more than 20 percent in the past week and a half on news of a favorable court ruling and a licensing agreement with cable company Cox Communications.

Earlier in August, a federal judge issued an injunction against satellite TV company EchoStar, ruling that EchoStar must stop selling many of its own digital video recorders since a jury found in April that EchoStar had infringed on one of TiVo's patents. An appeals court later blocked the injunction temporarily, however.

Still, some think the TiVo-EchoStar legal battle opens the door for TiVo to make more deals with cable companies that would rather not fight TiVo in court. To that end, Cox, the nation's fourth-largest cable company, announced last week that it would allow its DVR customers to download TiVo software to their cable boxes beginning next year.

In addition, DirecTV announced in April that it was extending its deal to support customers that currently have TiVo through DirecTV for another three years. Although the satellite company is not marketing TiVo to new subscribers because it has developed its own DVR with sister company NDS Group, this deal was seen as significant because as part of the agreement, DirecTV and TiVo also agreed that they would not sue each other over patents.

"My sense is that TiVo has been negotiating with cable companies all along, but the recent verdict helps. The Cox deal was probably sped up a little bit by the injunction against EchoStar," said Alan Gould, an analyst with Natexis Bleichroeder. "I would assume that TiVo is negotiating with Time Warner, Charter, Cablevision and other big cable companies." (Time Warner also owns CNNMoney.com.)

In theory, this should be great news for TiVo. And Gould has an $11 target on TiVo's stock, which is about 38 percent higher than the price at which the stock currently trades.
 
How big is the cable opportunity?

But how much will TiVo really gain from striking licensing deals with cable companies? This remains to be seen, and that has some analysts turning skeptical, especially following the recent run in TiVo's stock.

After all, TiVo already has a deal with Comcast, the nation's largest cable company, that is similar to the one with Cox. Comcast will roll out TiVo's software to its customers later this year, but analysts aren't certain how much TiVo will receive from Comcast.

"I would like to get more details about how the rollouts at cable companies will occur since that could have a big impact on the economics for TiVo," said Mark Harding, an analyst with Maxim Group.

Harding said that it would be more beneficial to TiVo if all Comcast and Cox DVR customers automatically received upgraded services with TiVo since that would lead to more monthly subscription revenue for the cable companies and TiVo to divvy up.

Instead, it appears that subscribers will have the option to download the software, Harding said.

As such, one analyst thinks that deals with cable firms won't wind up being that much of a revenue growth opportunity for TiVo.

"Even if all major U.S. cable operators incorporated TiVo's software as a subscriber option for their DVRs, and using aggressive assumptions, this would not be more than $35-$40 million per year by 2009," wrote Brian Coyne, an analyst with Friedman, Billings, Ramsey, in a report last week following the news of the Cox deal.

Coyne pointed out that this amounts to just 8 percent of the total revenue he expects TiVo to generate next year.

Analysts are hoping for more details about the Cox and Comcast deals when TiVo reports its latest financial results on Wednesday. Wall Street expects the company to report a quarterly loss of 14 cents per share on sales of $51 million.

It is the escalating losses that have some concerned. TiVo actually broke even in last year's second quarter. For the full year, analysts expect TiVo to report a loss of 67 cents a share, compared to an annual loss of 41 cents a share in 2005.

"I would be recommending caution on TiVo's stock. With so much uncertainty out there I'd wait on the sidelines," Harding said.

And Natexis' Gould, who is bullish on TiVo's stock, concedes that TiVo probably won't report a full year of positive cash flow until 2008 and that it won't be profitable until after that.

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