Foolish Forecast: TiVo Ready to Play

For four quarters running, DVR pioneer TiVo (Nasdaq: TIVO) has confounded its critics on one hand -- by reporting smaller losses than predicted, while feeding them ammunition on the other -- because small losses are still losses. Will tomorrow afternoon's fiscal Q1 2008 earnings news mark the company's entry into the black? With just a $0.02 per-share loss predicted, an earnings beat could do the trick.

What analysts say:

• Buy, sell, or waffle? Seventeen analysts slow-mo TiVo, and their opinions cover the entire spectrum: seven buys, four holds, and six sells.
  
  
• Revenues. On average, they're looking for 5.6% sales growth to $58.2 million.
  
  
• Earnings. Meanwhile, the aforementioned $0.02 per-share loss is predicted.

What management says:
Whether TiVo has learned to make a profit, its skill at printing press releases -- even about the most mundane matters -- is still unmatched. Since last quarter's earnings report, the company has announced terms for renewing its data license agreement with Tribune (NYSE: TRB) Media Services, which feeds TiVo its television program guide information. We also learned of a renewal of its vendor agreement with Best Buy (NYSE: BBY).

Stirring stuff, surely. But hardly the equal of the news that Interpublic (NYSE: IPG) has signed onto TiVo's "Stop||Watch" ratings service, which permits real-time monitoring of how TV-watchers deal with commercial interruptions (i.e. do they watch 'em or skip 'em?). Strangely, TiVo chose to file the two more mundane news items with the SEC, while the Interpublic announcement was apparently considered not material to the business.

What management does:
Press releases aside, profits continue to elude TiVo. Rolling gross margins continued to deteriorate last quarter, and operating margins turned back downward. In addition, marketing costs soared 61% year over year, offset somewhat by a 25% decline in general and administrative spending.

Margins	10/05	1/06	4/06	7/06	10/06	1/07
Gross	30.4%	37.8%	36.5%	35.2%	34.5%	33.3%
Operating	(24.2%)	(20.2%)	(23.2%)	(20.7%)	(16.6%)	(20.2%)
Net	(25.4%)	(18.9%)	(21.5%)	(22.1%)	(19.4%)	(18.5%)

All data courtesy of Capital IQ, a division of Standard & Poor's -- with the exception of 1/07 data, which was calculated directly from the firm's most recent 10-K filing. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So with margins still heading down, why are Wall Street analysts predicting TiVo will come near to breaking even this quarter?

For one thing, the analysts are just parroting what management has already said publicly. In last quarter's earnings release, CFO Steve Sordello advised that the firm was targeting "Adjusted EBITDA breakeven for the full-year Fiscal 2008," and hoped to break even on a GAAP basis in fiscal Q1 2008 (that's tomorrow.) Over the last couple of quarters, we've seen progress toward this goal reflected in the firm's spending trends. For example, marketing costs are up on average just 32% against sales growth of 30% -- not too large a disparity. Meanwhile, the firm has driven general and administrative costs down 21%.

On the downside, Sordello's promise to "invest aggressively in our product" doesn't jibe very well with the firm's record of increasing R&D spending by just 22% year over year in the second half of fiscal 2007. Allowing R&D spending to lag sales growth may help the firm meet its goal of earning a profit this year. Still, as I've mentioned in the past in relation to similar action at EMC (NYSE: EMC), it's rarely a wise move for tech firms to skimp on investment in research.

Hey, did you see the Foolish duel on TiVo earlier this year? No worries, we TiVo'ed it for you. Replay it here: Dueling Fools: TiVo.

Tivo and Best Buy are both Motley Fool Stock Advisor selections. To see what other stocks have been selected to be part of the market-crushing service's portfolio, take a free 30-day trial today.

Fool contributor Rich Smith does not own shares of any company named above.