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TiVo Inc.(TIVO - Analyst Report), a developer of advanced television services including digital video recorders (DVR), reported loss per share of 17 cents in the second quarter of 2012, narrower than the Zacks Consensus Estimate of a loss of 20 cents. However, the reported loss widened from the year-ago quarter’s loss of 13 cents per share.

Operating performance

TiVo reported first quarter 2012 net loss of $19.6 million compared with a net loss of $15.3 million in the prior-year quarter.

Gross profit increased 34.7% year over year to $34.9 million and gross margin expanded 700 basis points (bps) to 46.1% in the reported quarter, primarily due to higher revenues.

Operating expenses escalated 28.5% year over year to $53.2 million. Research & development (R&D) expense surged 34.7% year over year to $26.0 million in the quarter. Additionally, general and administrative costs increased 25.7% from the corresponding quarter in the prior year to $17.8 million. Sales and marketing, and subscription acquisition costs increased 17.4% from the year-ago quarter to $2.4 million. 

Moreover, adjusted EBITDA registered a loss of $9.2 million, below the management guidance of a loss of $14 million to $16 million. However, the adjusted EBITDA loss widened from the loss of $6.5 million in the year-ago quarter.

Revenue

Revenues increased 18.6% year over year to $61.2 million in the second quarter and handsomely beat the Zacks Consensus Estimate of $54.0 million. Revenues for the quarter were positively impacted by an 18.1% increase in Services and technology revenue, which jumped to $49.6 million and was ahead of management guidance range of $46 million-$48 million.

Moreover, Hardware revenue also jumped 21.1% from the year-ago quarter to $11.6 million.

TiVo-owned subscription gross additions for the quarter were 25,000 compared with 32,000 gross additions in the year-ago quarter. Churn rate was 1.9% in the quarter and was flat year over year. Subscription acquisition costs increased 112.6% year over year.

Balance Sheet and Cash Flow

At the end of the second quarter, cash, cash equivalents and short-term investments rose from the year-ago quarter’s $351.2 million to $627.8 million, due to the receipt of the first DISH Network Corp. (DISH - Analyst Report) settlement payment of $300 million.

Cash flow from operations was $247.2 million in the quarter compared with a negative $24.0 million in the previous quarter.

Guidance

TiVo expects Service and Technology revenues to range between $49.0 million and $51.0 million. Management expects net loss in the range of $27.0 million to $29.0 million in the third quarter. Adjusted EBITDA is expected between ($17.0) million and ($19.0) million for the third quarter of 2012.

Our Take

The company reported better-than-expected results on the back of strong revenue growth and has been witnessing subscription growth from partners such as RCN, Suddenlink, and Virgin Media. Additionally partners such as Charter, DIRECTV, and ONO would likely provide further momentum. Moreover, TiVo has begun manufacturing high-definition boxes for satellite provider DIRECTV, which could accelerate TiVo’s customer acquisition rate by the end of the year.

We continue to believe that new partnerships with leading companies coupled with new customer wins, product launches and international expansion will drive top-line growth.

The biggest positive, in our view, is the settlement of the patent suite against DISH and EchoStar Corp. (SATS - Snapshot Report). This has not only reduced legal expenses but also provided a recurring revenue stream for TiVo over the long term. We believe TiVo’s financial position will also improve due to the settlement.

Moreover, we believe that this settlement has enhanced TiVo’s reputation, justifying the aggression with which it has been defending its intellectual property.

However, the company continues to see patent litigation issues against Microsoft Corp. (MSFT - Analyst Report), AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report). Going forward, these litigation issues will remain an overhang.

Moreover, increasing competition from cable and satellite providers will act as a headwind going forward.

We have a Neutral recommendation on TiVo over the long term (6-12 months). Currently, TiVo has a Zacks #4 Rank, which implies a Sell rating in the short-term (1-3 months).

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