TiVo Inc. (TIVO) hasn’t always had the most consistent performance in the past quarters, reporting net losses in three of the past five fiscals, a consequence of an eroding subscriber base and lower subscription revenues. However, this past quarter showed a different picture, with total subscriptions growing 34% year over year and a 27.9% increase in Service and Technology revenues (80% of total revenue), resulting in overall quarterly revenue growth of 19.7%. Furthermore, 2013’s negative earnings of $0.04 jumped substantially to a solid $1.99 at the beginning of fiscal 2014, and analysts expect this upward trend to continue for the rest of the year. Thus, Jim Simons' (Trades, Portfolio) hedge fund recently added over 1000% of the company’s shares to its portfolio.
Expansion and Smart Acquisitions to Boost Growth
While TiVo’s advertising business has the potential of growing in the long term, due to the purchase of advertising analytics company TRA Inc. and its partnerships with NBC, CBS Corp. (CBS) and six other important advertising firms (Interpublic Group of Companies Inc. (IPG) and Publicis, among others), it’s the company’s core Service and Technology business expansion that will remain the future key growth catalyst. The firm’s subscriber base pays a monthly fee, enabling it to record, watch and control live television. However, the most recently announced partnership with WaveDivision, will expand the viewing experience to web and mobile platforms, thereby driving demand. Furthermore, the recurring fees received from satellite television providers that offer TiVo’s services to their subscribers will allow for steady income in the medium term.
In terms of innovation, the newly launched TiVo Roamio, which connects users to the company’s mobile apps, is already available on Apple Inc. (AAPL) devices and the launch for Google Inc. (GOOG)’s Android platform is expected for this year. But in addition to its new pipeline of products, management is also keen on expanding its international presence. Thus, distribution deals with Charter Communications Inc. (CHTR) and Virgin Media Inc. (VMED) will enable TiVo to gain traction in Australia, Mexico, Spain, Canada, UK and Scandinavia, which is bound to boost growth. Also, while DVR penetration is expected to grow significantly over the next few years, the company should enjoy a surge in demand for its technology, bolstered by its partnership with Netflix Inc. (NFLX).
A Rosy Outlook
Although TiVo faces strong competition from cable, telecommunications and satellite operators, the company’s recent back-to-back legal settlements regarding its patent rights will now allow it to freely use its technology. Furthermore, the settlements provided by DISH Network Corp. (DISH), Microsoft Corporation (MSFT), Time Warner Cable (TWC), Verizon Communications Inc. (VZ) and Cisco Systems Inc. (CSCO) (among others), will ensure the firm a revenue stream of $1.6 billion over the next five years, thereby benefiting overall profits. Therefore, investors can expect quarterly net income to range between $5 million and $8 million, with an adjusted EBITDA between $20 million and $25 million for fiscal 2015, a consequence of lower operating expenses. Annual EBITDA is expected to also continue 2013’s spiking upward trend, ranging around $100 million.
Furthermore, the company’s 26.4% operating margin will continue to expand, thanks to 2013’s completed acquisitions of WaveDivision and Digitalsmiths. Also, I believe TiVo’s substantial 49.5% ROE and 20.9% ROA are extremely attractive features, and given 2014’s surge in free cash flow – up from $40 million to an impressive $488 million in just one year – investors can expect returns to remain solid looking forward. Moreover, as the company’s stock is currently trading at a 62% price discount relative to the industry’s average, this is the accurate purchasing time to make solid profits.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.