connoisseur of the untold stories on wall street, skewed toward activism

Choosing When To Watch TV

Added on by Gordon Gekko .
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TiVo  (NASDAQ: TIVO) remains the pioneer for digital video recorders (DVRs), which allows people to record and watch TV. TiVo now boasts some $625 million in cash on its balance sheet, or $4.90 per share. Its current cash position makes up 45% of the company's market cap, and its net current asset value (current assets less total liabilities per share) is a robust $2.25.

TiVo also recently settled a $400 million plus lawsuit with Google's Motorola. After the announcement, TiVo said it was doubling its share buyback to $200 million. Cash is expected to top $1 billion at the end of this quarter, not counting the $400 million settlement.

After the Google litigation, Lazard Capital put its sum of the parts valuation at $12, which is 10% upside from current levels. This was a move down from their prior $17 valuation due to the lower than expected litigation settlement.

Other significant tailwinds for the company? Core revenue was up 24% in fiscal 2013 and are expected to be up another 16% in 2014. This should come as the company not only continues to expand in the U.S., but also sets its sights on international markets.

Although patent wins are analysts' focus, the company is approaching a point where profitability will be the real value to the shares. TiVo has over 3 million subscribers, with over 2 million in the MSO (multiple system operators) channel, which is its fastest growing segment.

TiVo is also making the move into the high margin consulting-type business. It recently acquired an audience research measurement tool and has the capability to provide advertisers with second by second commercial viewing patterns. Taking this idea a step further, TiVo is looking to track when and what viewers are fast-forwarding through. TiVo also has opportunities to integrate new services within its interface; the company has already integrated Spotify and Flingo.

While the company figures out its next step of growth, it has plenty of cash flow that is expected to come from licensing revenue (settlements). DISH Network (NASDAQ:DISH) and EchoStar will pay the company $500 million over 2012 to 2017, AT&T $215 million through 2018, and Verizon $150 million through 2018.

Satellite headwinds, or tailwinds?

One of the biggest headwinds for TiVo is competing products, where the likes of Dish Network and DirecTV (NASDAQ: DTV) are no stranger to offering DVR-type services. Enter Dish's newest DVR device, the Hopper. The device allows subscribers to record 6 HD shows at once.

However, the TV pay market is definitely saturated, with 85% of U.S. homes covered. Thus, it appears the majority of the attention is being taken away from this market as the primary satellite and cable operators are focusing on higher growth areas, leaving the market open for TiVo.

The real growth catalyst for Dish remains its robust portfolio of wireless/satellite spectrum. One of the reasons I like Dish is that it has recognized the need to embrace mobile; hence, the company's attempt to buy Sprint earlier this year. Charlie Ergen, Dish CEO, continues to focus on its entry into the wireless industry. The company is in the process of snatching up LightSquared's assets, to get more spectrum.

In the meantime, Dish has been working on putting its wireless spectrum to work. This includes the deal with NTELOS earlier this year, which involves deploying a fixed-mobile broadband network to offer high-speed Internet services to various rural communities in Virginia, West Virginia, Maryland, North Carolina, Pennsylvania, Ohio and Kentucky.

DirecTV is the number one satellite broadcaster in the U.S., with some 20 million subscribers and 16 million in Latin America. The reason I'm a bit skeptical of DirecTV is concerns with its growing Latin America market, namely Brazil. Unlike Dish's significant opportunity in wireless, DirecTV has vast opportunities in the under-penetrated Latin America market. In the latest earnings call, DirecTV lowered its 2013 Latin America revenue guidance to 10%, versus the previous 20%.

Other issues? The company was the leading bidder for Hulu and considered the likely winner. That was until Hulu decided to stay private. I definitely think DirecTV needed Hulu at this stage in the game.

Both the major satellite providers will be looking to embark on new areas as the pay TV maker gets more saturated. Of course, DirecTV claims to be pursuing other video on demand (VOD) ideas, but I still prefer Dish's foray toward mobile more than DirecTV's move to VOD.

Bottom line

TiVo is by no means a sure thing, as if there is such thing in investing. However, I think the risk/reward is very compelling for the company. It has a proven ability to monetize its patents and it has various opportunities in the advertising market to tap new revenue streams. I also think the company's patent portfolio offers some downside protection, where in the worst case, these patents could be sold for much higher value than is carried on its books.