Why the TiVo Show Gives Some Investors Pause

Interactive television company TiVo (TIVO Quote) is struggling to fight a dreaded ailment: Kozmo-itis.

Just like the Internet-based delivery firm that charmed city dwellers with instantly gratifying one-hour deliveries of Ben & Jerry's ice cream, TiVo is beloved by the customers who pay for its time-shifting service. Now all the company has to do is make sure it develops a sustainable business.

The next indicator as to whether TiVo's fortune is melting will arrive after Thursday's market close, when the company is expected to report financial results for its fourth quarter ended Jan. 1. Perhaps then Wall Street will get a better idea as to where the company's revenue will be coming from in its new fiscal year, and whether that same revenue will more than triple, as expected, from last year's levels.

On Wednesday, TiVo's shares fell 27 cents to $6. Over the past 52 weeks, the company's shares have ranged between $2.75 and $12.25.

Big Questions

TiVo -- which has developed technology and an accompanying service enabling people to easily pause, record and fast-forward through television programming -- represents larger questions about the interactive-television business. After taking a look at TiVo's high subscriber-retention rate, or listening to a TiVo user wax eloquent about how the service has changed his life, one is easily persuaded a consumer demand exists for gaining more control over television programming.

But as is the case with Liberate Technologies (LBRT Quote) and SeaChange International (SEAC Quote) -- two other interactive TV companies whose stocks have suffered setbacks this week -- some basic, nagging questions remain unanswered: Chiefly, how much demand is there for the personal video recorders that TiVo markets? How much money is there in the market? And will the market develop before the company runs out of money?

That last question is particularly salient, considering that TiVo is a year and a half away from profitability, judged by the yardstick it uses for free-cash flow, says Rob Martin, digital media analyst at Friedman Billings Ramsey. "Now the company has to keep pace with the economic model and maintain market share," says Martin.

To be sure, TiVo's financials are improving. In the third quarter ended Oct. 31, the company reported $5.2 million in revenue, up from $1.1 million one year earlier. The company reported $16.1 million in negative cash flow from operations in the October 2001 quarter. The company had more than $115 million in cash and restricted cash at the end of October, and subsequently sold $14 million in stock. Martin, who is more bullish on TiVo than most of his colleagues on Wall Street, where the stock is thinly held by institutions, says he no longer believes the company faces a major risk of running out of cash. (Martin has a buy rating on the firm; FBR hasn't done underwriting for TiVo.)

What TiVo terms "adjusted EBITDA" -- earnings before interest, taxes, depreciation and amortization, plus the change in the company's deferred revenue -- amounted to a loss of $12.2 million for the quarter, compared with a loss of $66.1 million a year earlier.

What to Heed

TiVo, which gets nearly all its revenue from consumer subscriber fees, made a move to nudge that revenue up in recent days, raising the monthly subscription fee from $9.95 to $12.95. Deutsche Banc Alex. Brown analyst Peter Ausnit estimates the increase will generate $600,000 to $900,000 in incremental revenue starting in the fiscal quarter ending July 30.

When TiVo releases results Thursday, analysts will be paying their usual attention to the usual numbers, such as the January quarter's revenue (the expectation is $6.6 million, according to Thomson Financial/First Call) and earnings (the consensus is a 92-cent loss). They'll also be looking at guidance for the 2003 fiscal year ending next January; currently, the First Call view is that revenue will triple to more than $59 million, while the annual loss should fall to $2.34 a share from the expected $3.73 a share in fiscal 2002.

But Martin and others likely will be more focused on the company's relationships with technology and business partners. It's becoming apparent that personal video recorders are becoming a killer app in the interactive TV market, says Martin, prompting TiVo to shift its business model from one in which it subsidizes the manufacture of PVRs to one emphasizing subscription-revenue splits with business partners instead. In that light, analysts are looking for more information about what companies TiVo can license its technology to, and what the economics of those deals might be.

For example, TiVo recently signed a new licensing agreement with PVR manufacturer Sony (SNE Quote). TiVo also has a marketing and technology agreement with Hughes Electronics' (GMH Quote) DirecTV, and it announced an agreement earlier this week to sell its next-generation box in a special marketing agreement with Best Buy (BBY Quote).

Complicating TiVo's near future, says Martin, is the impending outcome of litigation over TV onscreen-programming guide company Gemstar-TV Guide International's (GMST Quote) patents -- litigation that is sending ripples through TiVo's pond related to its own onscreen program guide.