TiVo Inc. (TIVO) reported second quarter loss of 8 cents per share, a couple of cents narrower than the Zacks Consensus Estimate and lower than earnings of 23 cents reported in the year-ago quarter. Including litigation proceeds of $108.1 million, TiVo reported earnings of $1.96 per share in the quarter.
Quarter Details
TiVo second quarter revenues jumped 53.4% year over year to $100.1 million, which was well ahead of the Zacks Consensus Estimate of $87 million.
The strong year-over-year growth was primarily driven by higher service and technology revenues (76.9% of revenues), which jumped 42.2% year over year to $77.0 million and was above management’s guided range of $68.0 million to $70.0 million.
Excluding revenues of $6.1 million from settlements with Cisco (CSCO) and Google (GOOG), owner of Motorola, service and technology revenues were $70.9 million. Hardware revenues (23.1% of revenues) surged 107.6% year over year to $23.1 million in the last quarter.
Net additions to total subscriptions during the quarter were 212K compared with 255K in the first quarter and 230K in the year-ago quarter. Churn rate per month was a negative 1.5%, which remained flat sequentially but improved slightly from a negative 1.6% in the year-ago quarter.
TiVo’s total subscriber base was 3.62 million compared with 3.40 million in the previous quarter and 2.72 million in the year-ago quarter. Subscription acquisition costs (“SAC”) increased to $278.0 from $249.0 in the year-ago quarter and $187.0 in the first quarter.
Gross margin contracted 370 basis points (bps) to 54.8%, primarily due to higher bandwidth cost and service related expenses. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding litigation expenses and proceeds were $18.0 million compared to a loss of $3.0 million in the year-ago quarter.
Including litigation proceeds operating income was $102.4 million compared with a loss of $26.5 million in the year-ago quarter. Excluding proceeds, operating loss improved to $11.8 million from $26.5 million in the year-ago quarter due to a 6.3% decline in operating expenses.
The year-over-year decline in operating expenses was due to lower research & development expense, sales & marketing-subscription acquisition cost and general & administrative expense, which declined 11.3%, 15.9% and 8.7% respectively.
Net income including litigation proceeds was $270.2 million compared with a loss of $27.7 million in the year-ago quarter. TiVo recognized deferred tax assets in the quarter, which led to a benefit of approximately $167.0 million.
At the end of the second quarter, cash, cash equivalents and short-term investments were $1.03 billion compared with $570.9 million at the end of the first quarter. This significant improvement was primarily due to the Cisco-Motorola settlement.
Cash flow from operations also improved due to the receipt of yearly licensing fee of $33.0 million from Dish Network (DISH).
Following the Cisco-Motorola settlement, TiVo doubled its share buyback program to $200.0 million. The company bought back shares worth $60.0 million during the quarter.
Guidance
For the third quarter of 2014, TiVo expects Service and Technology revenues in the range of $80.0 – $82.0 million (up 33.0% at the mid-point compared with $61.0 million in the year-ago quarter). TiVo expects deployments of multiple system operators (MSO) and additional revenues from Cisco-Motorola settlement to drive revenues in the upcoming quarter.
TiVo anticipates net income in the range of $6.0-$8.0 million and an adjusted EBITDA of $20.0-$22.0 million. However, additional operating expenses related to higher sales & marketing are likely to hurt EBITDA in the quarter.
For fiscal 2014, TiVo expects the current business trends to drive adjusted EBITDA profitability of more than $100.0 million.
Our Take
The resolution of patent litigation issues removes a major overhang on TiVo. The company continues to innovate and its strong product pipeline is a major positive going forward. TiVo’s focus on forging deals with mid-tier operators (who will not build their own offering) is a prudent move in our view.
We believe that TiVo has significant growth opportunities in Western Europe and Latin America, given its partnerships with local providers. TiVo’s strong balance sheet will also enable the company to pursue strategic acquisitions as well as its aggressive program that will boost growth in the near term.
However, increasing competition and higher operating expenses are the primary headwinds in the near term.
Currently, TiVo has a Zacks Rank #3 (Hold).
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