Undervalued TiVo wins yet another legal battle
Braces self for flood of investor cash
Analysis There is likely to (eventually) be a flurry of investment activity in TiVo over the coming weeks, as investors shake the tinsel and party poppers from their eyes and the depression on the markets that 2011 brought, and realize what an undervalued stock it has become. The shares spiked on January 3 as it announced that it had landed a $215m settlement with AT&T in their patent dispute, but then settled back down to lose all its gains, despite the markets generally being slightly up.
Back in May 2010, TiVo was valued at a cool and fairly reasonable $1.9bn, but fell when there was a temporary reversal in its legal dispute with EchoStar and Dish Networks, a dispute that it went on to win. Today it is valued at almost exactly $1bn, despite having won that much and more in legal actions over the past few years. Today, with over $600m in liquid assets – and legal actions promising it far more – it could liquidate and make more than its current value.
Last quarter its own subscriptions also turned positive for the first time in four years as deals TiVo cut a year or so ago began to bear fruit. And the settlement with AT&T is perhaps only the first of many more. TiVo has, time and time again, proven that it holds valid patents which not only resulted in the invention of the digital video recorder, but which also have developed that concept, through extensions into search and recommendation, video metadata usage and new formats for advertising, as well as the collection of audience viewing data.
Its partnership with Virgin in the UK led to 170,000 UK service additions in the last quarter, and turned its subscriber base up 117,000 on the quarter. It has similar deals at Ono in Spain and at new cable customers including RCN, Suddenlink, Grande and Charter in the US, which will begin to be additional over the next two quarters and Ono recently reported rapid uptake and interest.
By continuing to value TiVo at just $1bn, with over $600m in liquid assets, that creates an enterprise value of just $400m, even less than it had before the AT&T settlement – which will add a minimum of $215m to its coffers over time. There remains the prospect of TiVo having further wins at Microsoft and Motorola, two DVR software and DVR suppliers to both AT&T and Verizon, as well as one at Verizon itself. Microsoft has tried to counter the TiVo suit based on entirely different technologies, while Motorola claims to have invented the DVR itself, despite the fact that it only introduced such a device about five years after the market began, and that the patents is cites used tape.
The TiVo patent filings have been scrutinised in previous cases and have been found not to have infringed in the past. It was strange that Motorola has never chosen to sue Cisco, Technicolor, Pace, Samsung, Humax or NDS, to name but a few, which all build or design devices that are DVRs. It seems it would have done so if it truly believed that a company that it acquired had already invented the DVR. In Faultline's opinion, it doesn't really believe this.
Both Motorola and Microsoft have created far more damage to TiVo than AT&T or Verizon have done, and while it was predicted in October that AT&T would be first to settle around now, and that Verizon would soon follow, these two major suppliers have substantial DVR sales outside of AT&T and Verizon. Motorola has even had TiVo put its own software on Motorola set tops made for Comcast, so it knows the TiVo technology inside and out and has had help making its DVRs better – from TiVo.
Faultline calculated that AT&T would end up paying at least $170m to TiVo plus further licences and in the end it has taken $215m for all the devices it has deployed up to now, with just $51m up front and $164m to follow in quarterly payments to 2018, roughly $23m a year or $5.75m a quarter. But as AT&T adds more DVR licences it will begin paying further amounts each quarter, on a per device basis above a certain unspecified level of installations.
A similar deal with Verizon will add some $11.5m a quarter to TiVo revenues, pushing it permanently over the $60m a quarter mark, and perhaps getting it close to long term profitability. Given the rapidly rising value of key patents recently, it‘s hard to see how TiVo‘s patent hoard is not finding a way into its stock value. All of this happens just as DirecTV has begun launching a new TiVo offering in select markets during December, with a nationwide rollout to follow later this year.
One, two, three...disarm!
At some point someone will have to make an acquisition run at TiVo if it keep this low value. AT&T and TiVo have now also entered a mutual patent licensing arrangement and each of them will dismiss all pending litigation between each other. "We are extremely pleased to reach an agreement with AT&T, which acknowledges the value of our intellectual property," said Tom Rogers, CEO and President of TiVo.
"This settlement, on the heels of our recent operational success that has resulted in the growth of TiVo's overall subscriber base, is another major accomplishment for TiVo and we believe a great outcome for our shareholders. The combination of guaranteed payments and future additional fees paid to TiVo in the event that AT&T's pay TV business continues to grow inline with consensus analyst expectations, represents hard-earned compensation for our IP enforcement efforts. The settlement also provides us rights to innovate TiVo products and services under license from AT&T and allows us to avoid significant legal expenses that we expect would have been incurred by us during and after trial." Microsoft, which supplied software technology for U- verse, brought its case after AT&T was sued in 2009 and also filed a patent case with the US International Trade Commission. That case went to trial in December and findings are supposed to be out during March. We imagine talks with Microsoft are continuing.
Copyright © 2012, Faultline
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