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26 November 2015

Rogers successor at TiVo will welcome transitional Q3 results

TiVo CEO Tom Rogers will be leaving the business in February on something of a high, stepping down from CEO to remain on the board as Chairman – although his semi-departure will incur $8 million to $12 million in “transition costs.” The company will be looking for a new CEO that can do something to address the 20% loss in value that the TiVo share price has suffered this year – sitting at a current market cap of $913 million, despite its total assets being listed as $1.1 million. Despite all the good work Rogers has done, investors think that TiVo is worthless.

The set top maker reported 12% growth in Q3 revenue, with net income of $5.3 million, down $1 million from the Q3 2014, with revenues of $132.3 million, up 12% from Q3 2014 and around $30 million higher than analysts were predicting. Notably, its Services and Software revenue segment rose 22% to $44.7 million in the quarter, up 17% year on year, with MSO revenue up 60% year on year. Thanks to its Cubiware division, this is a segment that will likely continue to grow, as set top functionality becomes increasingly abstracted into software.

TiVo makes a significant chunk of its money by licensing its patents, and occasionally suing to get people to use them, but beginning in the next couple of years, those initial patents will begin expiring, and TiVo will be forced to find a way to plug the hole they leave in the balance sheets. Its operator software and services division is the target of this required expansion – with Rogers confident in the growth of the division.

“We now serve over 70 global operators in 30 countries who have a global footprint together of 90 million homes between them. Our operator-related software and service revenues are now growing at a double-digit rate and are expected to soon contribute more than $100 million per year, whereas 10 years ago, we had no deployed cable partners. Basically, we took a company on the brink and turned it into a world leader in advanced television, defining the gold standard for how the next-generation of television viewing will be provided,” CEO Rogers said on the earnings call.

The technology licensing revenues have grown consistently since 2012’s $35 million, up to 2015’s expected $170 million, but when TiVo outlines its expected future technology revenues, its acquisitions of Digitalsmiths and Cubiware make a lot more sense. Growth in technology licensing will stall in 2018, anticipated at $174 million, before plummeting to $88 million in 2019, and nearly evaporating in 2020 at $1.8 million. By then TiVo will have to rely on other revenue streams or begin suing people further afield.

In the coming Q4, TiVo forecasts a $5 million to $8 million net loss, on revenues of $101 million to $104 million. It added 418,000 net subscriptions in Q3, a company record, to finish Q3 with 6.5 million total – up 26% from Q3 2014, and up 7% on the previous quarter. Upwards of 85% of that growth was from deals with small and medium sized pay TV operators. TiVo lists the TiVo-owned direct subscription ARPU per month as $7.22, down from 2014’s $7.82.

TiVo reported that over 4 million of those operator subs were international, driven by deals with Vodafone in Spain and Virgin Media in the UK, and it revealed a new win with Millicom in Latin America – alongside the fact that there are discussions with Indian operators. In addition, TiVo said its churn rate was now 1.4%, down from 1.6% in the previous year.

Rogers also touched on progress with Cubiware, a Polish middleware developer that the company acquired back in May, which had deals with some 40 operators, covering around 12 million homes. Given that its Mexican Cablemas and Columbus (now Cable and Wireless, in the process of being acquired by Liberty Global) account for a little over 4 million homes, the rest of those 38 operators average out to deployments of around 200,000 – exactly the sort of business that TiVo is targeting to sell TiVo service into, and a great opportunity for conversion. Two new Cubiware deals were announced on the call, at Supercanal in Argentina and Multimedia Polska in Poland.

TiVo has also announced that its new Bolt set top continues to receive positive reviews, and added that the Bolt’s SkipMode ad-jumping feature will be introduced to older Roamio models via software update commencing December 10th.

The feature has so far avoided the lawsuits that plagued Dish’s Hopper feature, partly because SkipMode is limited to specific shows (prime time content on specific networks), while Hopper was pretty indiscriminate – and subsequently drew the broadcaster’s collective venom. The market capitalization has the potential to more than double in the coming years, but the identity of the new CEO is the thing that will trigger it, or kill it.