TiVo Inc. has hit the fast-forward button.Since July, when its stock fell to less than $6, shares of the pioneering maker of digital-video recorders have increased even as concerns about a credit crunch have punished the overall market.
Although the shares have recently given up some of those gains as the market has dropped, analysts are praising TiVo's new business model, which focuses on licensing agreements with makers of consumer-electronics products and cable- and satellite-television operators. A court decision could also bolster TiVo's prospects.
"This is a strategic repositioning," Leland Westerfield, an analyst at BMO Capital Markets Corp., said of TiVo's moves. "Over the next three years, TiVo's value will be built upon licensing deals." Mr. Westerfield has an "outperform" rating on TiVo and said the shares could hit $20.
The resurgence of TiVo, which revolutionized the way Americans watched television when it first appeared in 1997, is the result of policies initiated by Chief Executive Tom Rogers. After taking charge in July 2005, Mr. Rogers de-emphasized the Alviso, Calif., company's direct-sales model, which aimed to get TiVo's boxes and services into consumers' homes.
While that strategy allowed TiVo to capture most of the revenue for every box it sold, as well as for the recording service it sells to buyers, it is expensive to maintain. As a result, TiVo's revenue often wasn't enough to cover its costs; up until this year, TiVo never posted two successive profitable quarters as a publicly traded company.
Mr. Rogers has turned that model on its head. Now, TiVo has struck deals to distribute its digital-recording services through U.S. cable operators Comcast Corp., satellite-services provider DirecTV Inc. and a growing number of pay-television providers in Australia and Asia.
Through a spokesman, Mr. Rogers declined to comment for this article.
In some cases, TiVo's partners are footing the bill for developing its services and marketing the products. While that shrinks the average revenue per user that TiVo gets because it has to share revenue with its partners, the arrangement lowers TiVo's costs and simultaneously opens it up to a larger potential audience.
The math works well for TiVo. Now TiVo will be promoted by large cable-television operators, getting the product in front of a market that could significantly boost revenue. The company's monthly revenue could jump by $6 million, or 11%, even if only a small percentage of Comcast's customers subscribe.
The initiatives have helped already. In the quarter ended July 31, TiVo posted earnings of three cents a share, compared with expectations of a loss of two cents a share. The company's gross margin also increased, to 54.6% from 32.9%, fueled by the falling costs of electronics components.
Analysts say the new business model will allow TiVo to expand its share of the global DVR market to more than 50% within five years. Right now, it has 20%. Many analysts think TiVo's share price could double next year amid expectations the company will post a profit of at least two cents a share, according to analysts surveyed by Thomson Reuters.
"This new model is really driving profitability," said Todd Mitchell, an analyst at the brokerage Kaufman Brothers. Mr. Mitchell has a $12 price target on TiVo's shares and a "buy" rating.
TiVo has few direct competitors. But analysts say it appears cheap, compared with companies offering similar services. TiVo's price-to-sales ratio is 1.06, lower than Verizon Communications Inc.'s 1.3 and Microsoft Corp.'s 1.2.
To be sure, TiVo's success is far from assured. With an 18-month-old credit crunch dragging down the economy, consumers may decide that the cost of a TiVo box, which can run as high as $300, as well as its service fee of $12.95 a month, are too much of a luxury. During its third-quarter earnings presentation, Mr. Rogers told analysts he was monitoring a slowdown in sales of high-definition televisions because the people who buy those sets are natural TiVo customers.
Still, the company's turnaround looks solid. And the U.S. Supreme Court's decision not to hear an appeal of a patent-infringement case TiVo won against satellite provider Dish Network Corp. could provide a lift.
Many analysts expect the court to reject Dish's request to retry the case, which would remove any doubt as to TiVo's claims on the patents that support its technology. That would allow TiVo to negotiate with more manufacturers, knowing that its patent position has been secured. It would also oblige Dish to pay TiVo $400 million in penalties.
But perhaps the most important development is the change of attitude at TiVo itself. After the dot.com bust, it lost many of its best staffers as the company's prospects waned. Many worried that the company's build-it-and-they-will-come approach wasn't delivering TiVo's products and services to the widest audience possible.
Now, TiVo employees say they are much more excited by the changes that have taken place under Mr. Rogers's leadership.
"We were an island until Tom Rogers came here," said one TiVo staffer. "Now we're not."
By: Ben Charny
Wall Street Journal; October 8, 2008
