TiVo Misses on Q3 Earnings Estimates, Beats Revenues - Analyst Blog

Yesterday, TiVo Inc. (TIVO), a provider of software and technology for set-top boxes, smartphones and tablets, reported mixed results for the third quarter of fiscal 2015. While the top line surpassed the Zacks Consensus Estimate, the bottom line missed the same. The shares witnessed a 1.6% decline in after-hours trading.

The company's earnings (including stock-based compensation expenses) of 6 cents per share missed the Zacks Consensus Estimate by a penny and declined 33.3% from the year-ago quarter figure of 9 cents. The decline was mainly due to higher interest expenses and a lower share count in the last quarter as well as a tax benefit in the year-ago quarter that made for a tougher comparison.

Quarter Details

TiVo's revenues inched up 1% year over year to $118.4 million and surpassed the Zacks Consensus Estimate of $115 million.

The year-over-year growth was primarily driven by higher service and technology revenues (74% of revenues), which rose 7.8% to $88.1 million and were within management's guided range of $86 to $89 million. However, hardware revenues (26% of revenues) registered a year-over-year decline of 14.7% to $30.4 million.

Strong performance by the service and technology segments was mainly driven by a higher subscriber base. During the quarter, TiVo added 328,000 subscriptions bringing the total to 5.1 million reflecting 32% growth year over year. Furthermore, revenues from multiple system operators (MSO) services increased 37% on a year-over-year basis.

In the U.S., customers (including Atlantic Broadband, Cable One, Grande Communications, Suddenlink Communications and RCN and Midcontinent Communications) can connect to Netflix (NFLX) with TiVo set top boxes.

The gross margin expanded 50 basis points (bps) from the year-ago quarter to 58%. Operating expenses decreased nearly 5% year over year to $53.1 million. The decline was primarily due to a year-over-year drop in general and administrative (down 9.8%) and research and development expenses (down 6.2%), partially offset by higher sales and marketing expenses (up 3.5%) and subscriber acquisition cost (up 4%).

Moreover, as a percentage of revenues, operating expenses were down from 47.7% in the year-ago quarter to 44.9%. TiVo's operating income came in at $15.6 million as against $11.5 million reported in the year-ago quarter. However, net income was $6.3 million compared with the year-ago quarter figure of $12.5 million. This was mainly due to a provision of $7.1 million made during the quarter for income taxes, while a tax benefit of $2 million benefited the year-ago quarter.

Balance Sheet

TiVo exited the quarter with cash, cash equivalents and short-term investments of $855.4 million. The company generated approximately $17 million of cash from operations during the nine months ended Oct 31, 2014. During the quarter, TiVo repurchased 9.9 million of its common stock for $128 million under its ongoing share repurchase program of $350 million authorized in Aug 2014.

Guidance

For the fourth quarter of fiscal 2015, TiVo expects Service and Technology revenues in the range of $87–$90 million. The company anticipates net income in the range of $2–$5 million and adjusted EBITDA of $21–$24 million.

The company expects TiVo-Owned acquisition/marketing expenses in the fourth quarter to be higher than the third mainly due to the extra initiative to gain subscribers during holiday season. Moreover, hardware revenues and margins are expected to remain low sequentially due to increasing trend among MSO partners to shift away from third-party hardware to TiVo services.

Our Take

Although TiVo's bottom-line results failed to meet our expectations, we remain optimistic about its future prospects due to sustained focus on product innovations and subscriber acquisition. Further, a higher number of distribution deals with cable companies will support TiVo's expansion plans and strengthen its customer base, which in turn will boost revenues.

We believe that TiVo has significant growth opportunities in Western Europe and Latin America, given its partnerships with local providers. The strong balance sheet will also enable it to pursue strategic acquisitions and aggressive share buyback programs, thereby boosting near-term growth.

However, increasing competition from the likes of Dish Network (DISH) and Cablevision Systems Corporation (CVC) seems to be the primary headwind in the near term.

Currently, TiVo has a Zacks Rank #3 (Hold).

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