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14 November 2019

TiVo underperforms in Q3, CommScope not much better

TiVo and CommScope are looking strangely similar. Both are huge companies with increasingly marginalized Customer Premises Equipment (CPE) product ranges. And now both have published dismal quarterly results which inspire little faith in their futures.

As TiVo prepares to split into two, we would hope that its two segments – Product and Intellectual Property (IP) – would be on the road to becoming self-sufficient. Yet this quarter shows that amid overall net losses, the Product segment’s net revenues are down – despite recent launches – and the company’s lucrative IP portfolio is facing valuation troubles.

Similarly, CommScope suffered a huge net loss as most of its segments saw declining sales. It seems that the set top business of new subsidiary Arris is no exception. Both firms’ Q3 results bring into question the future of CPE hardware as an attractive business pursuit.

First up TiVo, which has branded its Q3 as “solid” despite falling revenues, swelling operating costs, and an overall net loss of $151.4 million. As the company prepares to split into two, the divorce date is now set for April 2020 and it seems neither side of the business is in great health.

Year on year, TiVo’s revenues fell 4% to $158.5 million as operating costs grew by $123.9 million, or 73%, from $172.4 million to $296 million. Net revenue from the Product segment is $82.8 million, down 13% year on year. On a quarterly basis, IP net revenues are down 17% to $75.736 million.

Peter Half, CFO, justified much of this poor showing by pointing to a non-cash goodwill impairment charge of $137.5 million. Yet even if this charge was to be excluded, TiVo’s total operating costs were still down $13.6 million, or 8%, year-on-year.

Some 58% ($79.3 million) of the goodwill impairment charge came from TiVo’s Product business, which linked to “the sustained decrease in our stock price and a reevaluation of our long-term plan for the Product business under our new executive leadership.” The other $58.2 million (42%) of the charge was derived from the IP half of the business. While IP lawsuits have been TiVo’s bread and butter for the past few years, this appears to be changing.

This summer saw TiVo lose 2 out of 3 cases to Comcast under the judgement of the ITC, with another 5 patents withdrawn by TiVo before judgement was passed. Whilst this by no means overturned the scoreboard – TiVo has come out on top in most IP disputes since 2016 – it provided an eerie reminder as to the instability of the company’s staple revenue stream.

TiVo’s remaining IP portfolio is now valued at $829.1 million, almost double the value of the Product segment – $461.2 million. There is clearly a long way for the company to fall if IP proves increasingly obsolete.

Building a company around patents is a time bomb and TiVo’s Q3 documents seems all too aware of that fact, stating that “if we fail to renew licenses, or renew licenses with materially different terms than those assumed, if there is an adverse outcome with respect to patent infringement claims we have asserted against Comcast, an impairment of goodwill for the Intellectual Property Licensing reporting unit could result, the effect of which could be material.”

On the earnings call, President and CEO, David Shull, championed “that separating the IP Licensing and Product businesses is the best strategy to maximize shareholders’ value”, arguing that, “as standalone entities, unconstrained by each other, the two businesses will be better positioned to pursue growth opportunities.”

Interviews are underway for management positions and the split is aimed for April 2020.

The past month or so has seen TiVo boosting its Product portfolio, perhaps in response to the recent IP defeats. The TiVo Edge set-top – for cable and antenna – and TiVo+ streaming service were both launched last month. These offerings marked the first signs of life at the company in a long while, although they were far from cutting edge.

TiVo Edge’s promises of ‘8 gazillion channels’ seemed wholly ignorant of the market into which it was entering. TiVo+ certainly seemed more of its time – an on-demand streaming service which was app-free. Shull recognized TiVo+ as being “a big first step for us, because this is not historically a content company. This is a company that’s been designing hardware.”

TiVo plans to ramp up the product side of the business from next year onwards. Shull spoke of a “coming out party, early next year around CES and around the Q1 roadshow”, which would illuminate the company’s plans for future growth of the product segment.

 

Now onto CommScope. The company suffered a net loss of $156.6 million, a huge slump compared with Q3 2018’s net profit of $63.8 million. This was nonetheless an improvement from Q2, which saw a net loss of $334 million.

Much like TiVo, CommScope’s hardware sales seem to be sliding. The company’s CPE segment saw net sales of $826.4 million, down 12.2% year on year. Increased sales in the Asia Pacific region were not enough to offset the slump in sales seen in EMEA and North America.

When news of the Arris acquisition first broke in 2018, Faultline predicted that this would accelerate the decline of Arris’ set top segment. We felt CommScope would reposition the firm to suit its existing portfolio, suspecting that the acquisition was likely driven by Ruckus Wireless, an Arris subsidiary that has little to do with video.

In the past 6 months, we have seen this take place. The video segment of the company has been marginalized in favor of its Distributed Access Architecture (DAA) inventory to complement CommScope’s core offerings.

CommScope certainly spent much of this years’ IBC pushing the CPE segment with announcements such as the SMD 7852 set top. Nonetheless, Faultline has expressed concern for the segment in recent times, noting how it does not naturally compliment CommScope’s existing portfolio. Furthermore, when it has done, the two firms have confused consumers by announcing overlapping products.

Following a disappointing Q2, Arris CEO and CommScope’s SVP of CPE, Bruce McClelland was abruptly booted out the door. Joe Chow, previously of Quantenna, since took over the role but it seems this has yet to turn the segment around.

Yet Arris is hardly a spare limb. The company, acquired in March this year for $7.4 billion, continues to deliver a huge portion of CommScope’s total revenue, making up 56% of net sales – $1.34 billion out of CommScope’s total $2.38 billion.

Marvin Edwards, President and CEO of CommScope, told the analyst call that the company is on track to deliver $75 million in cost synergies within one year of the acquisition of Arris.

CommScope’s other segments proved generally disappointing. Connectivity Solutions segment net sales were down 13.3% year on year. Mobility Solutions net sales of $405.9 million increased 6% year on year, although they were down 24% from Q2. Network and Cloud segment sales continue to disappoint – down 29.2% year on year. Finally, Arris’ subsidiary Ruckus Wireless’ net sales of $136.5 million were down 23.2% year on year, and down 10% from Q2.

Alexander Pease, EVP and CFO, noted that “results were negatively impacted by softness in the network cable and connectivity business driven by the continued trend of lower capital spending form certain North American carriers.”