TiVo dives into pile of cash, steely eyed investors don't blink
Patent cash from Cisco 'n' pals, loadsa subscribers – what do we have to do, guys?
Analysis TiVo came out with its strongest set of figures this week, including underlying TiVo service subscribers, as well as bundling in the results of its patents settlements with Cisco and Motorola, and yet its enterprise value could not be lower, showing that investors still have no confidence in its long-term business.
TiVo has over $1bn in the bank and yet is valued at under $1.4bn, making its core business worth $400mn, despite the fact that guaranteed license revenues over the next four or five years, from legal actions, come to more than that. The company’s management claimed that it has now reached sustainable profitability, although that ignores the fact that court and legally negotiated licence revenues going forward for some years, get it over the line, not purely organic growth.
The truth is that TiVo, like Netflix, cannot be defined by current performance, but should be judged more like Apple, by the way it has managed to turn the entire TV industry around.
In Apple’s case this generated huge profits early on and later, as the industry caught up, these were diluted. For these companies it has been the other way around. This quarter TiVo produced net income of $268.9m, and said that even before the Cisco and Motorola settlement, it had beaten its guidance numbers.
And it has just had a technology refresh just days ago in the form of its Roamio product line, the first time we’ve been disappointed with a TiVo box since we began following the company, with a kind of "me too" flavour lingering in the mouth after it was announced – a bit faster, does a tiny bit more, has more storage, plus everything that the Premiere had, plus a few more tuners. Errr, that’s it.
But the truth of TiVo has to be realised outside the courtroom, and for the most part outside of the US. If you take a look at another announcement regarding TiVo this week, the fact that its Swedish partner Com Hem will launch TiVo services in the very next quarter, then this speaks volumes.
We can never understand why cable company executives tell their investors how wonderfully everything is going while producing a set of results that show that consumers are dumping their products, and in the Com Hem numbers out this week, it could not be more apparent. Cable companies typically respond by charging more, creating future alienation of more customers, and continuing the spiral.
But TiVo represents the salvation of Com Hem, in the same way that it helped turn the ship at Virgin Media in the UK.
Com Hem continues to pass more homes, but pay TV customers fell to 605,700 down 8,000 in one quarter, its broadband subscribers are lower than they were a year ago at 543,400, and its telephony customers fell 6,000 to 323,700. Total unique connected homes fell 2,000 in the quarter to 821,700, so all of its numbers are down. Com Hem for this quarter had revenue down at SEK 1,108 million ($170m) for the second quarter of 2013, compared to SEK 1,148 million ($176m) last time, but with EBITDA slightly up.
While we accept that the more important issue for European cable operators is how many broadband homes each operators has, because that is cable’s most profitable suit, the TiVo system could not come a moment too soon for Com Hem, and will almost certainly prevent a further fall in pay TV numbers, and lead eventually to higher TV ARPU and more profitability.
Com Hem last week launched a 500Mbps broadband using a Compal DOCSIS 3.0 cable gateway, so the other half of its equation also seems to be resolved.
But emotionally, cable TV companies hate losing TV customers, which is why when we remind them of it they snarl and say that it’s no big deal, and talk about rising RGUs in a bad tempered way blaming the switch from analogue to digital – but in Com Hem’s case, the network is already all-digital and it needs to turn the tide with its falling RGUs. It cut the deal with TiVo to turn this tide over a year ago, but only clarified its plans in detail back in February.
It will plot a course towards all IP over cable, through the use of multi-screen with a combination of security specialist Verimatrix for revenue protection and Tivo’s hybrid box to allow OTT content into the home. All this was built around the adoption of Harmonic’s QAM tuner range throughout its cable network to enable faster data services and the migration of video to IP/DOCSIS* at its own pace.
The shift at Com Hem will be faster than, say, at Virgin Media, because its plight is more desperate, and it will be offering the Tivo box to new subscribers for accessing services over IP, and will not give them a traditional cable set-top.
Like many US cable operators, Com Hem in Sweden was ranked in consumer surveys as the TV brand with the least satisfied customers in Sweden for three years in a row in 2007, 2008 and 2009. It was only in 2006 that the company, owned by private equity groups the Carlyle Group and Providence Equity Partners, acquired Liberty Global in Sweden, to get to the numbers it has today.
Stop telling us we're rubbish... it's making us insecure
It is hard being told consistently by your customers that you are rubbish and doing everything wrong, but this is the state of cable in many parts of Europe and attention to customer service, the culling of poorer subscribers, the ramping of broadband speeds, and the introduction of a new TV experience which doesn’t cost the earth is a long journey, which for Com Hem is almost over.
And it is this impoverished state of cable that is TiVo’s great hope going forward. It needs to continue to sign more such deals, and so far that has not let up. And as Com Hem comes to fruition with a genuinely new pay TV experience for Sweden, yet another reference account will be built out that testifies to the TiVo magic.
Tom Rogers, President and CEO of TiVo, said, "TiVo has now reached a very important milestone. After making significant progress over the last several years, amid scrutiny for not being net income profitable, we believe TiVo has now achieved the milestone of sustained net income profitability.
"As a result of the latest litigation settlements, which will produce significantly increased licensing revenue well into the future and which have substantially increased our cash resources, along with our continued focus on innovation as demonstrated by the highly acclaimed Roamio launch, and the expected continued growth of our MSO subscription base, TiVo has reached a brand new chapter in its financial performance that puts the Company on an entirely new trajectory.”
For the second quarter, service and technology revenues for TiVo were $77m at the top of its guidance compared to $54.1m a year earlier. And that’s just taking $6.1m from the Cisco /Motorola settlement, with the rest of that money being taken as past damages.
But with no further huge settlements on the horizon, TiVo investors want to hear about growth in subscribers, and Rogers pointed to the one million new TiVo subscriptions through operator relationships during the last year, and says that Atlantic Broadband, Cable One, Com Hem, GCI, Midcontinent, and Mediacom have all recently gone live or are close to going live. Com Hem is in the middle of a soft launch with its peculiar combination of a hybrid QAM/IPTV, whereby EPG data is sent over the DOCSIS channel.
Guidance going forwards was $80m to $82m next quarter, with net income between $6m and $8m. If it hits those numbers, investors won’t be able to continue to undervalue TiVo for much longer.
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* Data Over Cable Service Interface Specification, an international telecommunications standard
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