Financial analysis isn’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholderâs interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ
TiVo is an enigmatic company. While management peppers us with regular press releases hyping their latest deal or newest technology, it rarely provides the kind of information investors need to put a value on anything â- be it a new advertising relationship, distribution deal, or their own financial statements. This is the first article in a multi-part series in which we will engage in a bit of 8-K and 10-Q exegesis in an effort to understand what is really going on at TiVo. In this first installment, we will take a look at the value of TiVo’s subscribers (something CFO Steve Sordello specifically declined to do in the 3Q results call), and find some interesting details along the way.
To find the value of a sub, we’ll need a few pieces of information: how long does a TiVo subscriber remain a subscriber, how much does he pay, how much advertising revenue does he produce? Note that through most of this discussion we are referring to “TiVo-owned” subscribers, and not considering TiVo’s DirecTV subs as they have an economy all their own.
TiVo’s churn hangs around in the 0.9% to 1.0% range, but let’s use 1.0% since it is the most recent number we have. To find the lifetime of the average subscriber, we want to know how many months go by before half of a given body of subscribers has churned away. That is, we need to solve the equation:
- 0.5 = (.99)N
The result is that the average subscriber lasts about 69 months. (This is actually quite a spectacular result. Consider that DirecTVâs churn is 1.8%, giving them an average sub lifetime of only 38 months.)
To determine how much cash a subscriber generates, let’s first look at subs who pay recurring fees. According to TiVo, the average number of subscribers last quarter was 1.596 million. Of those 55%, or 878,000, paid recurring (monthly) fees, 138,000 were lifetime subs who were past the four year amortization period, and the remainder, 580,000, were lifetime subs still “on the books.” The revenue attributable to these “TiVo-owned” subs was $41.427 million for the quarter, or $13.809 million per month. TiVo recognizes the revenue of lifetime subscribers at $6.23 per month. To find the average payment of the subs paying recurring fees, we solve:
- SubFeesR = ($13.8M â$6.23 * 580K â$0 * 138K – (Ad Revenue)) / 878,000
(Where the “R” subscript indicates subs paying recurring revenue.) Now we have an equation with two unknowns. But in their discussion during the 3Q conference, management told us that the fees paid by new subs was about $13 per month, compared to about $9.50 last year. When we plug $9.50 into the left hand side, we discover that for TiVo-owned subs advertising revenue is about $1.85 million per month or, when spread over all TiVo-owned subs, $1.16 per subscriber per month (again, we are not including TiVo’s DirectTV subs in this calculation â their revenue, both subscriber fees and advertising revenue, is treated separately). (Note, there is a fair bit of slop in the above numbers, so use them with some caution. Though we do think it would be possible to extract advertising income trends from this approach, and maybe I’ll do so in another installment.)
Now, if we take a weighted average of TiVo’s “cost of service revenue” line for the last four quarters, we discover that it costs TiVo about $2.27 per subscriber per month to service the TiVo-owned subscriptions. Putting it all together, we have:
- CFPSR = $9.50 + $1.16 – $2.27 = $8.39
(CFPS = Cash Flow Per Subscriber) We know the average subscriber lasts 39 months, and if we assume a cash discount rate of 12% per year, we get:
- NPVR = $416.55
(NPV = Net Present Value) Note that we do not have to consider subscriber acquisition cost (SAC), because the cost of acquiring the existing subscribers has already been absorbed into the balance sheet. NPVR is the value of a recurring subscriber if you were to sell him for the cash flow he generates. There are about 893,750 of these subscribers today, so collectively they are worth about $372 million.
What about the lifetime subscribers? You are going to be disappointed. Lifetime subscribers generate no subscription revenue. We will say it again: Lifetime subscribers generate no subscription revenue. “Wrong,” you say, “they generate $6.23 per month for four years.” No, they don’t. That is an accounting treatment. TiVo gets the cash for these subscribers up front, and then spreads it out over four years on the income statement, moving cash from the balance sheet, through the income statement, and back to the balance sheet (with brief visits to the cash flow statement). But no money comes to the company that wasnât already there. Look at it this way: if you were to sell these subscribers to someone, you would not include $6.23/month/sub for their remaining months of amortization. (Note that we are talking about existing lifetime subs. Acquiring new lifetime subs is another story â one that we will tell in Part 2.)
So, for the purposes of NPV, there is absolutely no difference between a lifetime subscriber that has reached the end of the amortization period, and one who hasn’t. The lifetime subs generate:
- CFPSL = $1.16 – $2.27 = ($1.11)
(The “L” subscript indicates lifetime subscribers.) Yes, thatâs a negative number. This yields:
- NPVL = ($55.41)
or, a total of about minus $40 million for the entire group of 731,250 lifetime subs.
This gives us a grand total of $332 million (or $3.61 per share) for TiVo’s current subscriber base using a discounted cash flow valuation. (Again, this number does not include the DirectTV subs. If we assume the DTV subs will churn away at 2.2% per month, and then completely disappear at the end of the current 3-year contract extension, and are valued at $0.92 per month per sub, the NPV of these 2.8 million subs is about $56 million, giving TiVo’s total sub base an NPV of $388 million (or $4.21/share).)
- We have assumed that churn remains constant. If churn increases, the value of the subscribers is less than that stated.
- We have assumed that advertising revenue remains constant. Since ad revenue (and other subscriber-based revenue, like viewer metrics) seems to be an increasing business for TiVo, our valuation is probably underestimating the true worth of a subscriber, possibly by a substantial amount.
- Lifetime subscribers are less susceptible to churn, and therefore a larger churn should probably be assigned to the recurring subs, and less to the lifetimes â both of which tend to lower the value of the sub base.
- Lifetime subscribers probably account for a smaller portion of the cost of service revenue, since they do not incur credit card fees, retention costs, etc. Since their cost is overestimated, their value is probably underestimated relative to the recurring subs.
- TiVoâs entire advertising business is more valuable as the total number of âeyeballsâ? increases, therefore the lifetime subscribers have an impact on the total ad revenue TiVo can generate, a factor that is not included in our DCF analysis.
- Lifetime subs are not considered churned until they reach the end of the four-year amortization period and the box does not contact TiVo for six months. Thus, there may be a number of subscribers counted as lifetime subs whose boxes are no longer in use, but have not reached the end of the amortization period. This means that the number of lifetime subscribers is probably somewhat overstated.
- We have not been entirely fair to the value of lifetime subscribers. There is a significant “hidden value” to these subs that we’ll include when we try to put a value on TiVo (probably in Part 4).
In Part 2, we’ll have a look at the value of adding new subscribers, find that ROI isn’t everything, and maybe find an answer to the question of why management signaled it would be shifting subscriber acquisition strategies (yet again).