After a difficult multiyear period, original DVR innovator TiVo (NASDAQ: TIVO) once again has profitability within its grasp. The company recently posted Street-beating earnings for the first quarter, and forecast the coming year to investors' and analysts' delight. Still, TiVo operates in a hyper-competitive, technology-driven business. This makes it a difficult investment prospect that should only appeal to investors if it is determined to have a wide margin of safety. After a one-year gain of more than 30%, can TiVo still offer investors upside potential, or has the company's recovery already been priced into the stock?
The name of the game for the recently ended quarter was subscriber growth. Even though the company still posted a net loss, subscribers drifted up 277,000 in the quarter -- the most substantial quarterly gain in seven years. The news helped bring the stock to its 52-week high early this week.
As for the financials, things certainly improved over the year-ago quarter. Perhaps the most important fact for investors to take in is that the company did achieve EBITDA profitability, which even management seemed surprised at given a hefty litigation expense for the quarter. The company earned $800,000 in EBITDA, and is set to remain in the black for the remainder of the year (again, in terms of EBITDA). Without the $10.9 million litigation expense with Motorola, TiVo would have brought in $12 million in EBITDA.
On the bottom line, net loss was halved to $0.09, down from a loss of $0.17 in the year-ago quarter and far better than analyst expectations of a $0.15 loss. Revenue came in at $82.6 million, up from $67.8 million in 2012.
The main drivers for the growth were, as mentioned, subscriber growth, but also effective cost management. R&D spending was down 13% year over year, even while the company remains focused on personalizing television.
Management expects the strong growth to continue in coming quarters as the company executes its strategy and continues to develop new relationships with partners, such as the recent Atlantic Broadband distribution partnership. Atlantic is the 12th-biggest U.S. MSO provider in the country.
The company's balance sheet remains very conservative, with current assets handily covering total liabilities and a lowered run rate.
Without doubt, things are improving over at TiVo. But does this mean that investors should take a closer look?
Not so fast
Litigation expenses regarding patents with several much larger technology companies will remain chunky for the foreseeable future (one to three years). Even with the company's recent successes in court, management admits that the legal process from case to case remains very expensive and puts pressure on profitability. With continued success, TiVo may very well be in a great position financially, but this is not yet a guarantee. The company will soon be facing Cisco (NASDAQ: CSCO), but has yet to begin discovery -- a very, very costly process. Similar to its challenges against DISH Network and AT&T, TiVo alleges that Cisco violated four company-owned patents that make possible the playback of time-shifted television. The suit was originally filed soon after Cisco sued TiVo for not granting a broad enough product license to prevent suits such as these. Cisco lost that suit.
Given TiVo's history of courtroom victories, anticipation of the cases may already be priced into the stock, as it currently trades at a rich level compared to its still-limited EBITDA.
Though TiVo seems headed for a more stable business in the future and has certainly posted impressive gains in user numbers, the stock price does not offer enough downside protection for the potential negative outcomes in court. Investors may want to wait for a better entry point or for more clarity regarding the litigation.