TiVo Q4: Turned The Corner? Low Cost HD Box Cometh?

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One stockholder’s take…

Our initial impression after reading TiVo’s fiscal fourth quarter earnings release and listening to yesterday’s conference call is that the company may finally have its financial feet under it. While it will take some time to fully digest the financials and commentary, we think it will be increasingly hard for any lingering doomsayers to argue that TiVo is a failing enterprise. Continued growth, improving financials, and the impending MSO rollouts tell us that TiVo will be around for many years to come, and may even begin to thrive.

Some highlights:

  • The Q4 results were better than expected on both the top and bottom lines.
  • Subscriber additions were soft, though management had prepared us for this during the Q3 call. Higher service pricing, hardware pricing (at retail), and consumers’ focus on HD offerings, were given as reasons for the slow sales.
  • Churn was up somewhat. This was attributed to continued attrition among the fully-amortized lifetime subscribers, as well as the consumer shift to HD. Given the lower number of lifetime time sub adds in the four-year-ago Q1, Q2 and Q3 (relative to this Q4), and the likely lower conversion to HD in the non-holiday, non-football season, we expect churn to settle for the next couple of quarters, then increase again later in the FY.
  • The earnings guidance was for a near-breakeven 1QFY08. Given that TiVo usually beats its own guidance, we think there is a good chance of seeing a slightly profitable Q1, and a very good chance of seeing a profitable Q2. Management stated that their financial model will bring the company “significantly closer to EBITDA breakeven” for the full-year FY08.
  • TiVo’s elimination of the lifetime service option, and its new higher-priced service options have led to increases in the average monthly revenue from new subscriptions and, consequently, ARPU. At the same time, customers selecting the pre-pay option are providing operating cash at a level comparable to that of the lifetime option. And nearly 50% of new subs are signing up for 3-year plans, providing a measure of stability to the subscriber base.
  • TiVo’s advertising business continues to grow. Q4 saw year-on-year growth that contributed to a record-high ARPU of $8.99. TiVo recently renewed its advertising deal with Interpublic Media “at a higher commitment level” than last year. And TiVo’s “Program Placement” feature was launched with “significant traction.” The addition of Comcast and Cox subscribers should further improve TiVo’s advertising business.
  • The word of the day was “momentum.” Tom Rogers and Steve Sordello, TiVo’s CEO and CFO, respectively, repeatedly drove home the point that TiVo’s efforts toward product differentiation (and broadband content delivery, in particular), improved subscriber value, MSO relationships, and advertising sales were all beginning to pay dividends.
  • TiVo deployment on Comcast’s systems is expected to begin this spring, and on Cox’s systems later this year. In addition, we were told that TiVo availability on Cablevision Mexico will come in the second quarter.
  • TiVo has already reduced the subsidy on their hardware once this year, and will continue to do so over the course of the year. This, they believe, coupled with advertising based on the many differentiating features that TiVo has developed over the past year or so, will lead to more efficient subscriber acquisition and better financial performance for the year.
  • Rogers repeatedly emphasized that HD was the most significant consumer electronics trend this year, though the high price of TiVo’s Series 3 HD DVR prevented the company from fully participating in the trend. The HD trend is so significant, apparently, that the company has embarked on a crash program to introduce a new, lower cost HD DVR. While they would not commit to an introduction date, one suspects they will have it available by next Christmas if it is humanly possible to do so.
  • TiVo’s lawsuit with Echostar is moving forward through the appeals process. Echostar is to have their main brief filed by April 17, and the briefing process is expected to complete this summer.

12 thoughts on “TiVo Q4: Turned The Corner? Low Cost HD Box Cometh?”

  1. As we’ve discussed before, I’m not a finance guy (or a TiVo stockholder) but I wonder if this analysis is a bit too rosy?

    I’ve come across several less enthusiastic reports on the net, including this blurb on Forbes:

    TiVo’s latest strategy was to offer the hardware for the digital-recording service at lower prices. But William Blair analyst Ralph Schackart pointed out TiVo spent nearly $40 million to add 163,000 subscribers in the fourth quarter, compared with spending $36 million to add 221,000 subscribers in the fourth quarter of 2005.

    Regardless of TiVo’s financial health, I think bringing an affordable HD TiVo unit to market is critical in order to compete with the various cable, satellite, and telephone competitors (some of which may be running TiVo software of their own in the near future).

    As a consumer, I’d like another HD TiVo without spending upwards of $600. Pretty please, TiVo?

  2. Dave: without going into detail on your blogger’s points, I only need to say the results were worse than I ever could have dared to predict in advance (not sure I ever even contemplated such levels.)

    I didn’t write about my initial impressions last night because I just couldn’t believe there weren’t enough mitigating circumstances. I am working on my own (short) piece which I am almost afraid to publish.

    I can’t find support for Management’s claims about the future in their results or in their strategy. It is stunning that TiVo is taking this utter failure and now focusing on it as a plan for FY08.

  3. Honestly not all that surprised that they are hurriedly working on a lower-cost HD box. The ultrapremium TiVo S3 is fantastic for the high-end HD user who won’t blink at the price, but they really need a consumer offering. If it weren’t for the high cost of ownership or the irritation of having to hop to cable, I might have gone for it. Both together made it too unnatractive a prospect.

  5. HDTivo –

    I look forward to your in-depth analysis. Hopefully it will have more substance and less puff than your comment.

  8. While a lower cost HD box will certainly help, I really don’t see how they can release a mainstream box without addressing the most important of the S3 problems – the lack of TivoToGo and Multi-Room Viewing. Until these issues are resolved, consumers will stick with the S2 box.

  9. The author responds…

    Dave’s quote from Ralph Schackart is typical of analysts that don’t do more than a superficial analysis. It’s true that TiVo added only 163K subs versus 221K last year. It is just as true that none of the subs added in Q4 this year were lifetime contracts.

    The analysis we did for ZNF in December showed pretty clearly that lifetime subs contributed little or no financial value to the company. Last year, 30% of new subs were of this parasitic variety, leaving only 155K subs of the recurring revenue variety. The same analysis showed that even with this year’s higher SAC, recurring subs are 22% more valuable than those acquired last year. That puts the numbers more like 155K last year vs. 199K this year on a comparative NPV basis. TiVo may have added fewer total subs, but they were far, far more valuable. There is no way of looking at this as anything but a significant financial improvement.

  10. I came across Bears Stearns guidance after the call… They’re keeping TiVo at “Peer Perform” however they do seem somewhat cautious:

    We think the environment for the O&O business has become increasingly challenging. TiVo is planning to launch a lower-priced HD DVR that could be an answer; however, it will be tough to compete with a cable/DBS offering that may be cheaper and less cumbersome, even though the trade off may be a less user friendly interface.

  11. Mystery Blogger:

    My analysis of your analysis showed it to be way off the mark. Nevertheless, your conclusion is going to be consistent with the view you have, making that off the mark as well.

    With the increase in churn rate (20% higher), increase in ARPU YOY of 2% ($.17), offset by $.02 increase in ACPU, $88 increase in SAC ($72 for FY), show me how the value of a subscriber is increasing and not falling.

  12. Mystery Blogger:

    Also show us going forward how increased advertising spend is going to lead to more GAs, particularly how past numbers support that assertion.

    What gave you the impression that mgmt guided toward GAs so low on the Q3 call?

    Show us how churn has exhibited the type of seasonality you assume for this year, and why, with the churn increase coincident with the pricing plan changes, that rate should improve or stay the same.

    Explain why Q1 guidance of ($4M) -0 is significant when stripping out legal from 1Q07 they lost $5M on a lower Sub base, and they have a $2M inventory writedown from 4Q07.

    Tell us why mgmt’s assertions about future opportunities from things like more efficient marketing, advertising revenues, new HD Unit, Unbox, etc. are [i]likely[/i] and [i]large[/i] enough to make a difference in context.

    In essence, dig behind the hand waving and show some supporting evidence that things are actually better or going to be better.

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