VMED Virgin Media Inc. (MM)

TiVo Inc. (TIVO) reported first quarter loss per share of 9 cents, narrower than the Zacks Consensus Estimate of a loss of 13 cents per share. The loss per share was also lower than the 17 cents reported in the year-ago quarter. Higher revenues primarily drove the year-over-year improvement.

Revenues

TiVo’s first-quarter revenues of $82.6 million not only increased 21.8% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $78 million.

The strong growth was primarily driven by higher service and technology revenues (74.8% of the total revenue), which jumped 13.4% year over year to $61.8 million and was at the higher end of management’s guided range of $60 million to $62 million.

Moreover, hardware revenues (25.2% of the total revenue) jumped 56.7% year over year to $20.8 million in the last quarter.

Net additions to total subscriptions during the quarter were 255K while the churn rate per month was a negative 1.5% compared with a negative 1.6% in the year-ago quarter.

TiVo’s total subscriber base jumped 36% from the year-ago quarter to 3.40 million. Subscription acquisition costs (SAC) decreased to $187 from $232 in the year-ago quarter, primarily driven by improvement in hardware margins.

During the quarter, TiVo reported robust subscription additions from multiple system operators (MSO), such as DIRECTV (DTV) and Virgin Media (VMED), which increased by 277k.

Margins

TiVo’s gross profit for the quarter increased 43.1% on a year over year basis while the gross margin expanded 890 basis points (bps) to 60.0%, primarily due to a higher revenue base. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding litigation expenses and proceeds were $11.7 million compared to a loss of $4.6 million in the year-ago quarter.

The company reported an increase of 8.1% in operating expenses, primarily driven by higher sales and marketing expenses (up 36.7% year over year) and general and administrative expenses (up 34.8% year over year). However, as a percentage of revenue, operating expenses were down 900 bps.

This led TiVo to report an operating loss of $9.1 million, which was significantly better than the loss of $19.6 million in the year-ago quarter. TiVo reported net loss of $10.3 million in the quarter under review, which also improved from the year-ago loss of $20.8 million.

Balance Sheet

TiVo exited the reported quarter with cash, cash equivalents and short-term investments of $570.9 million versus $627.1 million in the previous quarter. The company used $24.1 million cash in operating activities.

Guidance

For the second quarter of 2014, TiVo expects Service and Technology revenues in the range of $68 million to $70 million. TiVo expects deployments of multiple system operators (MSO) to drive second-quarter revenues.

TiVo anticipates net loss in the range of $13 million to $16 million and an adjusted EBITDA of $1 million to ($2) million, including $9 million to $11 million as litigation expenses. TiVo expects to profit on an adjusted EBITDA basis excluding litigation spend.

For fiscal 2014, TiVo expects that the current business trends to drive adjusted EBITDA and profitability, despite anticipating higher litigation spending.

Recommendation

We believe that pending patent litigation issues with Google (GOOG)-owned Motorola remains a headwind in the near term. Moreover, increasing competition from cable and satellite providers could also hurt profitability, going forward.

Nevertheless, we remain optimistic about TiVo’s growth potential owing to new MSO partnerships (GCI and Midcontinent), product launches and international expansion opportunities. Moreover, the successful monetization of patents also ensures a recurring revenue stream for the company over the long term.

Currently, TiVo has a Zacks Rank #3 (Hold).

 
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