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TiVo Inc. ( TIVO - Analyst Report ) is scheduled to receive $215 million from AT&T Inc. ( T - Analyst Report ) as settlement for infringement of a DVR technology patent. As per the terms of the settlement, AT&T is set to make an upfront payment of $51 million and the remaining $164 million on a quarterly basis through 2018. Concurrent with the recent settlement, both the companies have dropped all pending litigation charges against each other.
In addition to this settlement, a mutual patent licensing agreement was signed between the two companies. As per the licensing agreement, AT&T will pay monthly licensing fees to TiVo if the subscriber base of AT&T’s DVR surpasses a certain limit. This would be beneficial for TiVo as the company would generate incremental revenue with AT&T’s DVR business growth.
Through this settlement, TiVo has not only ensured a recurring revenue stream through 2018, but has showed vigor in defending and simultaneously monetizing its intellectual property.
This marks TiVo’s second successful intellectual property monetization. The first one being the $500 million time wrap patent settlement with DISH Network and EchoStar Corporation ( SATS ) .
Moreover, the present settlement will also bring down the litigation expenses that TiVo incurs every quarter owing to these ongoing patent disputes. In the recently concluded quarter, the company incurred $8.2 million pertaining to AT&T and Microsoft Corp ( MSFT - Analyst Report ) trials. The company expects litigation expenses to be higher sequentially as well as annually in the current quarter due to the rest of the ongoing trials. However, the company expects litigation expenses to go down in the upcoming quarter and in fiscal 2013.
With the settlement of the AT&T litigation, it remains to be seen whether Verizon Communications Inc. ( VZ - Analyst Report ) and Microsoft tread the same path and settle their respective litigations with TiVo or continue with the legal proceedings.
We believe that the settlement with AT&T will benefit the company going forward. This apart, partnerships with leading companies, new customer wins, product launches and international expansion will drive top-line growth.
However, the company continues to see patent litigation issues against Microsoft Corp. and Verizon. 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 #3 Rank, which implies a Hold rating for the short-term (1-3 months).
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