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TiVo Inc. (TIVO - Analyst Report) has filed a lawsuit against Cisco Systems Inc. (CSCO - Analyst Report), alleging that Cisco infringed four of its digital video recorder (DVR) technology patents, Reuters reported.

Cisco claimed that TiVo has been milking these patents by suing companies using the technology and at the same time refusing to license the technology. This could be the reason that Cisco filed a lawsuit against TiVo a few days back, asking the court to force TiVo to license the technology or declare the patents void.

TiVo’s countersuing of Cisco therefore comes as no surprise. TiVo's defense of its patents have generated a recurring revenue stream for the company. Notably Cisco’s DVRs are sold by its Scientific Atlanta division to companies such as AT&T Inc. (T - Analyst Report), Time Warner Cable Inc (TWC - Analyst Report) and Verizon Communications Inc (VZ - Analyst Report).

TiVo has already won some lawsuits in the past, which were related to the same patents that are being contested in this present case. Therefore, there is no question as to the ownership of the patents. We think that the thing to be decided by the judge is whether TiVo can lawfully avoid licensing the technology. Cisco clearly intends to license the technology and will be happy if the court enforces this.

But TiVo being the owner could say that it should be able to decide who it licenses to. Its successful intellectual property monetization began with the $500 million time warp patent settlement with DISH Network and EchoStar Corporation (SATS - Snapshot Report).

The recent settlement with AT&T ensured an upfront payment of $51 million and the remaining $164 million on a quarterly basis through 2018. More recently, TiVo and Microsoft Corp. (MSFT - Analyst Report) had settled their ongoing patent litigation disputes by dropping all charges against each other. The settlement did not lead to any monetary transaction and TiVo did not grant any patent rights to Microsoft.

Notably, the absence of any litigation proceedings during the recently reported quarter had a negative impact on TiVo’s profitability. The company reported net loss of $20.8 million compared to a net profit of $139.0 million in the year-ago quarter.

Moreover, pending patent litigation issues (Verizon, Motorola and Time Warner), rising subscription acquisition costs, higher hardware and sales & marketing costs are expected to impact TiVo’s profitability over the next few quarters. Increasing competition from cable and satellite providers could also hurt profitability over the long term.

However, we remain optimistic about TiVo’s long-term growth potential, which is backed by new partnerships, product launches and international expansion. We believe that TiVo will continue to witness strong subscriber growth based on its partnerships with Virgin Media Inc. , RCN, ONO, Charter Communications, Comcast Corp. (CMCSA), Suddenlink and DIRECTV going forward.

Thus, 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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