TiVo Buys Itself Time by Raising $51 Million

TiVo's (TIVO Quote - Cramer on TIVO - Stock Picks) fate remains unclear, but at least the company has more time to discover it.

The company, marketer of a service that enables couch potatoes to easily record, play back and pause TV shows on a hard disk drive, said Wednesday morning that it had raised $51.8 million in a private placement of convertible debt and warrants.

TiVo, which burned through $50.5 million in the quarter ended April 30 while posting sales of merely $3.2 million, now has more breathing room to effect a workable business plan. But the personal video recorder company still faces a daunting struggle in the wake of a restructuring and a shifting business strategy.

On Wednesday afternoon, TiVo was trading at $6, up 47 cents.

Investors in TiVo's 7% convertible senior notes due 2006 include current shareholders NBC, a unit of General Electric (GE Quote - Cramer on GE - Stock Picks), and Discovery Communications, 49%-owned by John Malone-controlled Liberty Media , according to a TiVo spokeswoman. Also participating in the placement are Rupert Murdoch's British Sky Broadcasting (BSY Quote - Cramer on BSY - Stock Picks) -- a business partner of TiVo's but not previously an investor -- and various institutional investors, says the spokeswoman.

The transaction's dilution of TiVo stock and the amount of money the company will ultimately raise are variable. The debt is convertible into common stock at an initial price of $6.73 a share, but that price could sink as low as $4.21 a share under certain circumstances. At the lower price, the notes could be converted into a total of 12.3 million shares, or about 28% of TiVo's current shares outstanding. The three sets of warrants TiVo issued as part of the transaction could add as much as $55.7 million to TiVo's treasury if exercised and add 7.6 million shares.

Because of the potential dilution, TiVo sought and received permission for the deal from investors representing a majority of current shares.

But now that TiVo has new money in hand, adding to the $71.7 million in cash and $50.7 million in restricted cash it had as of April 30, the company still faces the challenge of executing on a new plan for belt-tightened operations and of reaping licensing revenue from patented technology to supplement the subscription revenue it garners from (at last count) 189,000 subscribers.

Though TiVo has licensing deals with BSkyB, AOL Time Warner (AOL Quote - Cramer on AOL - Stock Picks) and Hughes Electronics' (GMH Quote - Cramer on GMH - Stock Picks) DirecTV, the company faces competition from cable operators and direct broadcast satellite providers who can integrate personal video recorders, or PVR-like technology, into their services. The problem for TiVo, says Deutsche Banc Alex. Brown analyst Peter Ausnit, is that consumers will be able to get a complete, managed PVR service in this manner by paying current service providers an extra $5 or $10 per month. That's likely to be a more attractive proposition, he says, than to be the systems integrator themselves -- buy a TiVo box, hook it up to a satellite box or cable box "and deal with it," Ausnit says. Ausnit has a market perform rating on TiVo; his firm hasn't done underwriting for the company.

As to whether TiVo has a promising patent portfolio, Ausnit terms himself a skeptic.

TiVo executives weren't talking Wednesday, but investors don't have to wait long for a progress report. The company is due to report its financial results for the fiscal second quarter ended July 31 on Thursday after the market's close. Analysts are expecting $4 million in revenue and a 94 cent per-share loss, according to Thomson Financial/First Call.