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TiVo Boasts Record Gains

Alan Breznick
11/28/2013

After clashing with cable operators for years, TiVo is definitely enjoying its new role as cable's best friend for life.

Capping off another strong fiscal quarter, TiVo Inc. (Nasdaq: TIVO) added nearly 300,000 cable subscribers in the three-month period ending October 31, a record total for the DVR pioneer. As a result, it closed the quarter with 2.9 million MSO subscribers, up 54% from a year ago, and almost 3.9 million total customers, up 32% from a year ago.

Notably, an increasing portion of TiVo's cable subscriber growth is now coming from MSOs other than the UK's Virgin Media Inc. (Nasdaq: VMED), which has deployed TiVo to nearly half of its cable homes and has been accounting for the bulk of the company's customer gains. TiVo, which gained about 75,000 more cable customers in the third quarter than in the second quarter, said about 80% of that increase, or 60,000 customers, came from other MSOs. In particular, the large Spanish MSO ONO , which has now deployed TiVo to about a third of its subscribers, has been contributing heavily to the company's customer growth.

Just as impressively, TiVo posted quarterly net revenue of $117.3 million, up from $82 million last year, as technology and hardware revenue both soared. Net income also came in high at $10.2 million, well above analysts' expectations and TiVo's own financial guidance for the quarter. That figure, though, marked a big drop from last year's total of $59 million, which was driven mainly by the proceeds of a settled lawsuit with Verizon Communications Inc. (NYSE: VZ).

On their earnings call with analysts late Tuesday, TiVo executives noted that their growing base of North American and European MSO partners now gives them access to a total of 10 million cable video households. With its latest subscriber gains, TiVo is now deployed in about a quarter of those homes.

TiVo President and CEO Tom Rogers told analysts that he sees plenty of upside in those 10 million homes. "We think we could double or triple that opportunity going forward," he said, arguing that the company has just "skimmed the surface" so far. "We expect to benefit from additional MSO subscriber gains."

Noting that other cable companies are showing interest in teaming up, Rogers said TiVo is also seeking to expand that pool of 10 million cable households through deals with other MSOs. Just last week, for instance, the company announced a new pact with Blue Ridge Networks Inc. , a mid-sized US cable operator. "We look beyond our existing footprint when we think about the opportunity," he said. (See BlueRidge Chooses TiVo.)

In response to analyst questioning, Rogers argued that cable operators should follow TiVo's lead in combining video and broadband offerings by integrating traditional pay-TV programming with over-the-top (OTT) video fare. In a much-watched stratagem, Virgin Media is now rolling out TiVo-powered set-tops that integrate Netflix Inc. (Nasdaq: NFLX)'s OTT service and Sweden's com hem AB plans to follow suit shortly. (See Euronews: Orange Fears Merger 'Earthquake'.)

While content licensing deals have prevented cable operators from offering Netflix the same way in the US and MSOs have had "a mixed view" of Netflix, Rogers said the landscape is now changing. With Netflix now reportedly in contract negotiations with Comcast Corp. (Nasdaq: CMCSA, CMCSK), Suddenlink Communications , and other major US cable operators, he said operators are showing increasing interest in incorporating Netflix in their video offerings. (See Netflix-MSO Deal in the Works?)

"Our view has been that the merger of linear television and streaming over-the-top video is where the future is, and Netflix has clearly risen to the level of must-have on the over-the-top side," he said. "I don't think consumers feel as if they have a full package of options until Netflix is included."

Rogers also took a swipe at large US MSOs such as Time Warner Cable Inc. (NYSE: TWC), which is now shedding both video and broadband subscribers, that continue to go their own way instead of striking partnership deals with TiVo. He noted that such mid-sized cable operators as RCN Corp. are faring much better by teaming up with TiVo and splitting the proceeds. (See TW Cable Hemorrhages Subs.)

"There are a fair number of large operators where the issue of control has played out as an issue of continued importance," he said. He argued that most cable operators will eventually have to give up control of some elements, such as their user interfaces, to offer "best-in-class" services and compete effectively in the evolving pay-TV marketplace.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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DOShea
DOShea
11/30/2013 | 3:55:05 PM
Re: TiVo acquisition?
Yeah, I think the settlements are exactly what generated the earlier round of speculation--and as far as I've been able to find, it was speculation and not any reports of actual talks.
bosco_pcs
bosco_pcs
11/30/2013 | 1:57:05 PM
Re: TiVo acquisition?
Dan:

 

My guess is that monetary value, with respect to your "bargain buyout," is not a real issue for the Googles and Apples of the world. Rather, it is about strategic fit and/or patent protection

 

Considering the current share price, not sure. One would think now is better than before, with most of the lawsuits being settled
bosco_pcs
bosco_pcs
11/30/2013 | 1:43:06 PM
Re: who will go next?
Alan:

 

To be clear, we should separate the company from the people who are running the show. The company will survive with or without any white or dark knights, but the managers' survival is another story. My suspicion is that the managers will fight tooth & nail against Malone, or anyone for that matter, but there is so much M&A premium priced in the stock (okay, so this is yet another animal) that management needs some sort of amazing pivot to get rid of all the barbarians!
DOShea
DOShea
11/30/2013 | 10:31:10 AM
TiVo acquisition?
This is a sideways jaunt from the topic at hand, but there has been speculation before about a giant like Google or Apple possibly acquiring TiVo. Is there still some chatter about that? I guess TiVo would no longer be the bargain buyout it would have been even a year ago.
albreznick
albreznick
11/30/2013 | 9:06:11 AM
Re: who will go next?
Good points, Mark. TiVo's profit margin appears to be healthy right now. But it's not clear whether that's from their big MSO customers or their smaller ones. As you suggest, I think we'll see a bunch of smaller and midsize cable ops partner with them over the next couple of years, as well as a couple of big ones.  
albreznick
albreznick
11/30/2013 | 9:03:29 AM
Re: who will go next?
Interesting, Jijesh. I'd say desperation more than anything else. And the realization that TiVo can do things that they can't, particularly on the user interface end. Cable operators are finally, slowly, reluctantly beginning to realize that they have to give up some conrol over their networks and services to meet mounting customer demands for a better user experience.
albreznick
albreznick
11/30/2013 | 9:00:49 AM
Re: Is TiVo enough?
Good question, Dan. I'm not sure TiVo is enough. I think you're right that cable operators have to do some pricing and packaging changes as well. And, as Tom Rogers urges, they have to find ways to incorporate OTT video into their offerings.   
albreznick
albreznick
11/30/2013 | 8:58:25 AM
Re: who will go next?
Bosco, do you really think TWC's says are numbered? I'm not so sure yet. I think they could still survive on their own if they can make some quick pivots and, of course, stave off John Malone a bit longer. But we shall see. 
MarkC73
MarkC73
11/30/2013 | 2:50:56 AM
Re: who will go next?
Probably better to stick with mid and small partner companies, work too well with one of the big guys and it will either do an in-house development or an aquisition.  I wonder what kind of margins TiVo is getting in this arrangement.
DOShea
DOShea
11/29/2013 | 9:43:25 AM
Is TiVo enough?
Is partnering with TiVo enough to stop some cable TV companies from losing video subscribers? Cable may want to re-think pricing and their programming tier structure while they're at it.
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