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TiVo Inc. (TIVO - Analyst Report) reported earnings of 10 cents per share in the third quarter of fiscal 2014, which beat the Zacks Consensus Estimate by 4 cents.

Earnings improved from 23 cents loss reported in the year-ago quarter and 8 cents reported in the previous quarter.

Revenues

TiVo third quarter revenues jumped 42.9% year over year and 24.8% quarter over quarter to $117.3 million, which was well ahead of the Zacks Consensus Estimate of $102.0 million.

The strong year-over-year growth was primarily driven by higher service and technology revenues (69.6% of revenues), which rose 34.0% to $81.7 million and were in line with the higher end of management’s guided range of $80.0 million to $82.0 million.

Excluding revenues of $6.1 million from settlements with Cisco (CSCO - Analyst Report) and Google , owner of Motorola, service and technology, in the previous quarter, revenues were up 15.2% sequentially.

Hardware revenues (30.4% of revenues) surged 68.9% year over year and 54.1% sequentially to $35.6 million in the last quarter.

Net additions to total subscriptions during the quarter were 274K compared with 212K in the second quarter and 225K in the year-ago quarter.

Churn rate per month was a negative 1.8%, which improved from negative 1.5% in the previous quarter and negative 1.4% in the year-ago quarter.

TiVo’s total subscriber base was 3.89 million compared with 3.62 million in the previous quarter and 2.942 million in the year-ago quarter. Of these 52% paid recurring fees in the last quarter

During the quarter, the company signed a deal with Blue Ridge Communications and launched its first IPTV solution in partnership with Com Hem.

TiVo’s audience research & measurement business TRA recently announced deals with Proctor and Gamble (PG - Analyst Report), dunnhumbyUSA and Simulmedia.

Operating Results

Subscription acquisition costs (SAC) decreased to $160.0 from $171.0 in the year-ago quarter and $278.0 in the second quarter. This was primarily driven by robust performance from TiVo’s Roamio. The company recently launched out-of-home streaming on Roamio boxes.

Gross margin expanded 680 basis points (bps) to 57.5% on a year-over-year basis. Sequentially, gross margin improved 560 bps in the reported quarter.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding litigation expenses and proceeds were $25.2 million compared with $18.0 million in the previous quarter and $3.0 million in the year-ago quarter.

Operating expenses (excluding litigation proceeds) decreased 6.2% year over year and 7.8% sequentially to $55.9 million. The decline was primarily due to significant decline in general & administrative expenses.

Operating income was $11.5 million compared with $60.4 million in the year-ago quarter and $102.4 million in the previous quarter. Both the year-ago quarter and the previous quarter included litigation proceeds of approximately $78.4 million and $108.1 million, respectively.

Excluding proceeds in both the quarters, operating income improved from a loss of $18.0 million in the year-ago quarter and $11.8 million in the previous quarter.

Net income (excluding litigation proceeds) was $13.7 million compared with a loss of $18.0 million in the year-ago quarter and $12.3 million in the previous quarter.

At the end of the third quarter, cash, cash equivalents and short-term investments remained flat at $1.03 billion on a sequential basis.

Guidance

For the fourth quarter of fiscal 2014, TiVo expects Service and Technology revenues in the range of $83.0 - $85.0 million (up 30.0% at the mid-point compared with $65.7 million in the year-ago quarter). Management expects deployments of multiple system operators (MSO) to drive revenues.

TiVo anticipates net income in the range of $2.0–$5.0 million and an adjusted EBITDA of $16.0–$19.0 million. However, additional operating expenses related to higher sales & marketing is likely to hurt EBITDA in the quarter.

Management expects accelerated year-over-year growth in TiVo-owned gross additions in the forthcoming quarter due to continued momentum particularly from the Roamio product and increased marketing efforts.

Our Take

The resolution of patent litigation issues removes a major overhang on TiVo. The company continues to innovate and its strong product pipeline is a major positive going forward. TiVo’s focus on forging deals with mid-tier operators (who will not build their own offering) is a prudent move in our view.

We believe that TiVo has significant growth opportunities in Western Europe and Latin America, given its partnerships with local providers. TiVo’s strong balance sheet will also enable the company to pursue strategic acquisitions and its aggressive share buyback program will boost growth in the near term.

However, increasing competition and higher operating expenses are the primary headwinds in the near term.

Currently, TiVo has a Zacks Rank #3 (Hold).

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