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TiVo Inc. (TIVO - Analyst Report) reported better-than-expected third quarter 2013 results as the company’s loss per share of 13 cents was narrower than the Zacks Consensus Estimate of a loss of 23 cents.  Including litigation proceed of $78.4 million related to Verizon settlement, TiVo reported earnings of 44 cents per share compared with loss of 21 cents in the year-ago quarter.

Quarter Details

Revenue for the reported quarter increased 26.6% from the year-ago quarter to $82.0 million and was ahead of the Zacks Consensus Estimate of $71.0 million. Growth was primarily driven by higher Service and Technology revenue, which jumped 17.6% year over year to $60.9 million and exceeded management’s guidance of $57 million to $59 million. Moreover, a 62.5% jump in hardware revenue led to revenue growth.

Net addition to the total subscriptions during the quarter was 225K, while the churn rate was a negative 1.4%. TiVo’s total subscriber base jumped 43.7% from the year-ago quarter to 2.94 million. In the quarter under review, Subscription acquisition costs (“SAC”) decreased to $171.0 from $296.0 in the year-ago quarter due to lower hardware subsidy.

Gross profit climbed 34.2% year over year to $41.6 million. Gross margin expanded 290 basis points to 50.7% in the reported quarter, primarily due to higher revenue base.

Operating results were primarily boosted by $78.4 million in litigation proceeds. This helped TiVo report an operating income of $60.5 million, which was significantly higher than the loss of $23.5 million in the year-ago quarter. However, excluding the litigation proceeds the company reported operating loss of $17.9 million.

Adjusted EBITDA excluding litigation expenses and proceeds was $2.97 million compared with a loss of $5.7 million in the year-ago quarter.

The company reported net income of $60.9 million or 44 cents per share compared to a loss of $24.5 million or 21 cents per share in the year-ago quarter.

TiVo exited the reported quarter with cash, cash equivalents and short-term investments of $623.6 million versus $542.8 million in the previous quarter. Cash flow from operations was $52.0 million in the nine months ended October 31, 2012.

Guidance

For the fourth quarter of 2013, TiVo expects service and technology revenues in the range of $63.0 million to $65.0 million. It expects net loss in the range of $15.0 million to $17.0 million and an adjusted EBITDA loss between ($2.0) million and ($4.0) million.

Management expects the fourth quarter revenue to gain from the MSO revenue and Verizon licensing revenue. Moreover, management expects subscription acquisition costs to be lower on a year-over-year basis, primarily due to higher subscription additions and a shift in mix to higher SKU’s. Pertaining to the ongoing litigation cases, TiVo expects expenses related to legal matters to remain high in the fourth quarter as well. However, it could decline marginally on a sequential basis.

Recommendation

TiVo reported better-than-expected results based on the litigation proceeds from the Verizon (VZ - Analyst Report) settlement and the expansion of total subscriber base. We remain optimistic about TiVo’s growth potential owing to new partnerships, product launches and international expansion opportunities.

We believe that TiVo will continue to witness subscriber growth based on its partnerships with Virgin Media Inc. , Comcast Corp. (CMCSA - Analyst Report) and Suddenlink, to name a few. Moreover, the successful monetization of patents also ensures a recurring revenue stream for the company.

However, pending patent litigation issues, rising R&D costs, and higher hardware and sales & marketing costs are expected to impact TiVo’s profitability in the short term. Increasing competition from cable and satellite providers could also hurt profitability over the long term.

Thus, we have a Neutral recommendation on TiVo over the long term. Currently, TiVo has a Zacks #3 Rank, which implies a ‘Hold’ rating for the short term.

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