The 1 Thing I Hate In This Report

There's a lot to like about TiVo's (Nasdaq: TIVO  ) fourth-quarter report. But every rose has its thorns, and I see something to hate as well.

Let's start with the good stuff. Analysts looked for net losses around $0.21 per share on $51 million in sales. The final tally was a $0.06 GAAP profit per share on $50.0 million of revenue. The surprise profit came from the recent litigation settlement with AT&T (NYSE: T  ) , which added a $54.4 million one-time payment for damages. Going forward, that event will contribute at least $6 million per quarter in the form of licensing fees -- and I say "at least" because the payments will get larger as Ma Bell's U-Verse TV service grows.

There's only one major courtroom drama left to resolve (and a couple of minor subplots), reducing legal costs in 2012 dramatically. The Verizon (NYSE: VZ  ) case saw a pretty uneventful hearing on Thursday that gently nudged the parties closer to a jury trial but without any new fireworks. Verizon's fiber-based FiOS TV service is not small potatoes. Beyond the potential for direct payments, TiVo is busy building a legal platform for licensing its digital video recording technologies to any broadcaster that wants it.

In a nutshell, TiVo is putting its financial house in order and expects to (grab your smelling salts!) turn a reliable, repeatable profit in the not-too-distant future. Licensing payments and rising subscriber counts will make sustained profits a reality.

So that's the good news. On the downside, I'm afraid that TiVo is preparing to rest on its laurels a wee bit too much.

Management is taking its proverbial foot off the R&D gas pedal. Any technology company planning to stay relevant beyond the next few quarters had better invest in new research with vigor and zest. Instead, TiVo expects R&D budgets to level off in the next quarter and then start shrinking throughout 2012. Management bills this as a positive cost-cutting move. As a TiVo investor, it scares me.

I'm hoping, but can't know for sure, that the research cuts have to do with a new direction. The TiVo boxes you buy at retail are a very low-margin business but take plenty of hardware design work; losing that operation altogether might not be a bad idea. The future here is in licensing software and technology patents to other set-top box builders, after all.

After today's modest price drop, TiVo shares have gained 30% year to date as the software strategy has come into focus. That's a good start, but Foolish analysts have found an even more promising stock for your portfolio this year. Learn all about "The Motley Fool's Top Stock for 2012" in a special report, available free -- but only for a limited time.

Fool contributor Anders Bylund owns shares of TiVo but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. We have a disclosure policy.


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