TiVo: Uncertainty Around Value Of Core Business Makes It Difficult To Invest

Jan.16.12 | About: TiVo Inc. (TIVO)

On January 3, 2012 TiVo settled its patent litigation with AT&T (NYSE:T), avoiding a costly trial that was scheduled to start January 9. As detailed in the press release, AT&T will pay TiVo an initial payment of $51mm plus quarterly payments through June 2018 that will total $164mm. The initial payment plus the quarterly payment stream totals $215mm. Further, if AT&T's subscriber base achieves a certain threshold, AT&T will pay TiVo a monthly license fee per incremental subscriber.

At $10.44 per share TiVo has a market capitalization of $1.5bn and an enterprise value of $1.1bn (pro forma for the AT&T initial payment).

For the first nine months of fiscal 2012 TiVo had a cumulative net loss of $95mm, although in the third quarter ended October 31, 2011 TiVo showed net subscriber additions of 117,000. This was the first quarter in some time in which TiVo's subscribers increased. This increase was largely due to TiVo's strategic shift to provide its technology to MSOs. In fact, MSO subscribers increased by 147,000 in the quarter while TiVo owned subscribers fell by 30,000.

TiVo's success going forward is largely based on rolling out its technology across the subscriber base of large MSOs that are looking for technology differentiation to fight back against the onslaught of viewing options that consumers have such as Netflix (NASDAQ:NFLX), Hulu, Amazon (NASDAQ:AMZN), etc. TiVo's user interface and ability to access both cable and online content is both great and necessary to compete.

The risks to TiVo's business are relatively obvious. Google (NASDAQ:GOOG) is rumored to be launching a new TV product. Rumors around Apple's (NASDAQ:AAPL) potential for an iTV in late 2012 or early 2013 have been growing since the publication of Steve Jobs biography, in which he is citied as having cracked the TV viewing experience. On the one hand, it could be argued that this makes TiVo necessary for MSOs looking to remain competitive. On the other hand, it suggests that TiVo's technology could be leapfrogged by Google, Apple, and others.

The long thesis in TiVo is a sum-of-the-parts analysis consisting of its balance sheet cash, stream of settlement payments from Dish (NASDAQ:DISH) and now AT&T, other payments relative to its IP portfolio (litigation still remains with Verizon (NYSE:VZ), Microsoft (NASDAQ:MSFT), and Motorola (NYSE:MMI)).

TiVo has $3.50 per share of net cash including the AT&T initial payment. The payment stream from Dish and AT&T on a present value basis, assuming a 5% discount rate, equals another $1.75 per share. TiVo's NOLs could be worth $0.50 per share (potentially more in an acquisition scenario assuming the acquirer has positive pre-tax income). This totals to $5.75 per share. Further, assuming Verizon settles at roughly the same economics as AT&T, that could be another $1 per share. Therefore, the SOTP equals $6.75 (65% of TiVo's current share price) before considering additional monetization of TiVo's IP and the core MSO subscriber business.

Given this data, one way to analyze the investment opportunity is to work backwards from the return you would require in order to make an investment. A price of $15 per share implies a 40% return from TiVo's current level. $15 per share implies a market capitalization of $2.3bn. The $6.75 accounted for above suggests a market capitalization of $950. Therefore, in order to invest we need TiVo's core business and remaining IP value to equal $1.35bn (or $8.25 per share). For illustrative purposes, assume the IP value makes up half of the $1.25bn, therefore the core business needs to be worth $675mm. TiVo's LTM revenue is $227.5mm. Therefore, the core business would have to be worth 3x trailing revenue.

My conclusion is that I need more information to properly assess TiVo's core business. I need a better understanding of how MSO subscribers will ramp so I can model the cash flow potential of the business. At its current price there is not enough of a margin of safety to invest.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.