TiVo Changing Strategy

TiVo Inc. (Nasdaq: TIVO), the pioneer in digital video recorders (DVRs) with annual revenue of $120.4 million, reported Q3 results yesterday that beat earnings estimates due to litigation damages received from digital media equipment company EchoStar. This short-term boost, however, will not be enough to help TiVo gain market share as it moves beyond the set-top box.

Service and technology revenue in Q3 declined 11% to $51.7 million from $58.3 million. Net income, however, was up to $100.6 million or $0.98 per share boosted by $105 million in initial litigation damages from EchoStar. Excluding the damages award, net loss would have been $0.9 million.

Adjusted EBITDA was $95.3 million, including $87.8 million of litigation proceeds from EchoStar, compared with $0.2 million last year. TiVo ended the third quarter with approximately $205 million in cash and short-term investments and no debt. In an effort to reduce costs, TiVo announced a 7% cut in jobs last week.

TiVo-owned subscription gross additions declined 25% from 69,000 last year to 44,000. At the end of the quarter, TiVo-owned subscriptions were 1.7 million and cumulative total subscriptions were 3.5 million. Monthly churn rate was 1.4 %, versus 1.5% in Q2. The company’s MSO broadcaster subscriber base, including DirecTV, Comcast, Cablevision Mexico and Seven, declined by 135,000 from the second quarter. This quarter, subscription acquisition costs (SAC) were $139, compared with $304 y-o-y and $135 last quarter.

In my last post on TiVo, I observed that it is threatened by the trends of on-demand video and IPTV both of which eliminate the need to record shows. Its recent partnership with Netflix addresses this threat by allowing TiVo subscribers access to Netflix’s library of over 12,000 videos directly on their TV sets.

TiVo also launched Nero Liquid TV, a PC-based version of TiVo with Nero, a German-based provider of digital media solutions, which would provide the TiVo experience on a PC and allow viewers to create DVDs of their favorite programs.

TiVo is also partnering with Research in Motion to develop mobile entertainment services for BlackBerry. It has also announced TiVo Mobile, a phone optimized website to browse television shows from a mobile.

Based on the weak economy, for the fourth quarter of fiscal 2009, TiVo expects service and technology revenues in the range of $47 to $49 million, a net loss in the range of $10 to $12 million, and an adjusted EBITDA loss in the range of $2 to $4 million.

The stock is currently trading around $4.40 with a market cap of about $452 million. It hit a 52-week low of $4.00 on November 21.