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TiVo Gains from Verizon Settlement

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TiVo Inc. (TIVO - Free Report) will be receiving $250.4 million from Verizon Communications Inc. (VZ - Free Report) to settle a certain DVR technology related patent infringement lawsuit. According to the terms, Verizon is set to make an upfront payment of $100 million and will be paying the remaining $150.4 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. According to the licensing agreement, Verizon will pay monthly licensing fees to TiVo if the subscriber base of Verizon’s DVR surpasses a certain limit through July 2018. This would be beneficial for TiVo as the company would generate incremental revenue with Verizon’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 third successful intellectual property monetization. The first one was the $500 million time warp patent settlement with DISH Network Corp. (DISH - Free Report) and EchoStar Corp. (SATS - Free Report) . The second settlement was with AT&T Inc. (T - Free Report) for $215 million.  Moreover, TiVo and Microsoft Corp. (MSFT - Free Report) had settled their patent litigation disputes by dropping all charges against each other.

The present settlement will also bring down the litigation expenses that TiVo incurs every quarter owing to these ongoing patent disputes. This apart, partnerships with leading companies, new customer wins, product launches and international expansion will drive top-line growth.

However, pending patent litigation issues against Motorola and Cisco Systems Inc (CSCO - Free Report) coupled with rising R&D 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. 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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