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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.