TiVo Shares Look Undervalued With Growing Subscribers And Future Patent Litigation Cash

| About: TiVo Inc. (TIVO)

Back in 1999, TiVo (NASDAQ:TIVO) took the television market by storm with the first commercially available DVR (digital video recorder) device. Since that time, DVRs have become a standard for cable subscribers around the world. While some companies got caught and had to pay up for stealing TiVo's technology, other companies are beginning to embrace the added benefits TiVo is offering to consumers. With new subscribers rolling in and guaranteed future cash payments from settlements, TiVo shares continue to look undervalued.

TiVo reported strong third quarter earnings last week. The company reported record service and technology revenue of $81.7 million, an increase of 34% from the prior year. Total subscriptions increased 32% to 3.9 million.

One of the highlights of the third quarter was the strong addition of cable providers. Sweden's largest cable operator Com Hem will begin rolling out IPTV, using TiVo services. This deal is of particular importance as it connects TiVo and Netflix together in the European country. This could be the precursor of other cable providers overseas using TiVo as gateway to Netflix for their subscribers. In the United States, both Blue Ridge and Atlantic Broadband have begun the process of getting TiVo offerings to its subscribers. Said during the call TiVo's third quarter was, "the best quarter for TiVo subscription growth since TiVo began mass distribution of its technology and services in the cable DVR market.

Atlantic Broadband, the 13th largest cable provider in the United States, was the first to launch TiVo's game changing service Roamio. Here are some of the benefits of Roamio:

· No compromise viewing-record six shows at once, over 1000 shows can be stored

· Instant recommendations

· Unlimited mobility-live television on tablets, smart phone, in home

· Download and watch shows wherever

· Powerful search

· Internet on television

· Hassle-free setup

· Bundled savings

While some of those features read like the latest commercial for the product, it's important to pick out the big ones. TiVo's service appears to be an improvement on existing DVR services. TiVo subscribers can record and store more shows than many of the large cable providers. The unlimited mobility feature should also be a boost to TiVo's subscriber numbers, as consumers continue to want options regarding watching television shows and movies. Roamio is already compatible with iPads, iPhones, and iPods. An Android application for Roamio is said to be in the works.

The Roamio comes with a high price tag. The basic version is available for $200. Both the Plus ($400) and Pro ($600) versions seem to have costs perhaps too high for most consumers or cable companies to consider. The question will be whether the cable companies pay for most of this or pass on the cost to their subscribers. Price will definitely remain one risk for TiVo in its market penetration attempts.

On the call, executives also said, "TiVo serves at the intersection of broadband and video, an area that has been underexploited and where significant upside continues to exist for cable." As consumers continue to demand more television features from their cable providers, big cable companies will do what they can do maintain their subscribers.

While subscription numbers continue to rise higher, TiVo also has a large amount of cash and future scheduled payments coming from litigation settlements. At the end of the third quarter, the company had over $1 billion in cash, versus a relatively small $172 million level of debt. The cash balance works out to over $8 per share, representing almost 75% of the current stock price.

Back in June, TiVo settled on patent litigation with Motorola, now represented by Google (NASDAQ:GOOG), and Cisco (NASDAQ:CSCO). The two companies agreed to pay $490 million to TiVo. During the press release, TiVo announced the deal brought their patent litigation guaranteed money up to $1.6 billion. The company also doubled the share buyback to $200 million.

Total recognized revenue from settlements is expected to be $83.6 million for the current fiscal year. Going forward, TiVo has guided its settlement revenue to be recognized as the following:

· Fiscal 2015: $169.6 million

· Fiscal 2016-Fiscal 2018: $171 to $174 million

· Fiscal 2019: $886 million

· Fiscal 2020 and on: $8.2 million

That's right, in five years, TiVo will recognize over $800 million for its patents on DVR devices. TiVo has already received much of this litigation revenue, but it will not hit earnings until future years. I expect the company to announce in future earnings calls that it will increase its share buyback. The company could also begin paying a dividend to return capital to shareholders.

As a result of litigation settlements, predicted earnings per share vary drastically. In fiscal 2014, analysts see the company reporting $2.05 in earnings per share. In fiscal 2015, earnings are estimated to drop to $0.35 per share. Revenue is expected to rise 29.6% to $304.9 million for the current fiscal year ending in January. In fiscal 2015, analysts see revenue rising 18.7% to $361.9 million.

Over the last fifty two weeks, shares of TiVo have traded between $9.71 and $14.25. After the recent positive numbers reported, shares could finally break out. TiVo's Roamio service is likely to catch on for cable providers, due to its unique view from anywhere offerings and partnerships with Netflix. TiVo has a bright road ahead with a huge cash balance and more patent settlement revenue being recognized to shareholders.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TIVO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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