TiVo Feeling the Heat - TheStreet

Updated from March 10

Shares of

TiVo

(TIVO) - Get Report

dropped 5% on Friday as Wall Street worried about the company's prospects.

In its quarterly report on Thursday, TiVo's management said it would shift from focusing on adding subscribers to shoring up the company's bottom line in this current fiscal year.

Analysts generally panned the move, arguing that the company should continue to push for new subscribers at the expense of profits, as cable and satellite TV companies roll out competing products.

TiVo licenses digital video recording technology to set-top box manufacturers and offers subscriptions to its digital television guide.

"Our longer-term bias remains somewhat negative on TiVo's business, particularly given ongoing competitive concerns and with the strategic decision to reduce growth meaningfully and achieve breakeven," Friedman Billings Ramsay analyst Alan Bezoza wrote in a report on Friday.

"We feel that these factors make TiVo's investment case much less interesting relative to the more aggressive roll-outs by cable and satellite operators," Bezoza added, lowering his price target on TiVo shares to $4 from $5 and reiterating his market perform rating. TiVo has not been an investment banking client of FBR in the last year.

Christopher Rowen of SunTrust Robinson Humphrey had a different, but still negative, take on TiVo's report. In his own research note on Friday, Rowen argued that instead of focusing on subscribers, TiVo should put even greater efforts into posting profits. If it wanted to, the company could likely end the year in the black and show substantial earnings growth next year.

Instead, the company is likely to post uninspiring revenue growth this year -- and a full-year loss, he said.

Given the company's guidance and its current cost structure, "our TIVO earnings model achieves an uninspiring straddle, with neither rapid growth nor meaningful profitability," Rowen said, downgrading the stock to a neutral rating from a buy. "We worry about TIVO's ability to ever find a profitable and leverageable combination of marketing spend and revenue growth," he said. TiVo has not been a recent investment banking client of SunTrust.

Following the downbeat reports, TiVo's stock was off 22 cents, or 5%, to $4.12 in recent trading. Earlier in the session, the company's shares traded off as much as 28 cents, or 6.5%, to $4.06.

The debate on the street followed TiVo's fourth-quarter report on Thursday. In it, the company posted a fourth-quarter loss that nearly tripled the red ink it spilled in the fourth quarter a year earlier.

TiVo lost $33.67 million, or 42 cents a share, in its just-completed quarter. In contrast, the company lost $12.36 million, or 18 cents a share, in the year-ago period.

Analysts were projecting that the company would lose 43 cents a share in the quarter, according to Thomson First Call.

In a statement, TiVo attributed the wider loss to its plan of offering greater rebates to attract new subscribers. Fueled by that acquisition plan, the company added 698,000 net subscriptions in the quarter, giving it nearly 3 million at the end of the quarter, or a 30% gain on its prior base.

Excluding the rebate expenses, the company's revenue grew 39% to $59.43 million. TiVo's widely watched services revenue jumped 73% in the quarter to $33 million.

In the first quarter, the company projected a loss of $8 million to $10 million on $37.4 million to $38 million in service and technology revenue. For the full year, the company forecast a loss of $10 million to $25 million, excluding the cost of stock options, on service and technology revenue ranging from $155 million to $165 million. The company predicted that it would post a profit in its fourth quarter, excluding stock-options expenses.

Under new accounting rules, all public companies must begin recognizing options expenses for quarters that end after June.

Assuming that the company's share count remains roughly the same, TiVo's guidance implies a loss of 10 cents to 12 cents a share in the first quarter and 12 cents to 31 cents a share for the year.

Wall Street is forecasting a loss of 9 cents a share in the company's first quarter. For the full year, analysts expect the company to lose 33 cents a share.

Company officials said that the company would cut back on marketing and rebate expenses as it strives for profitability. The company forecast that it would add about 265,000 to 300,000 new subscribers in the first quarter after adding about 264,000 on a smaller base in the year-ago period.

But analysts noted that the company's move to be less aggressive on acquiring subscriptions comes as competition appears to be heating up.

DirecTV

(DTV)

, for instance, plans to roll out a competing digital video recorder later this year, analysts noted. That could be an important blow to TiVo, because DirecTV accounted for 1.2 million, or 71%, of the 1.7 million new subscribers TiVo added last year.

"We consider TiVo's subscriber growth achieved through its DIRECTV partnership to be somewhat irrelevant, in light of DIRECTV's recent introduction of its own DVR solution and its stated intention of deemphasizing TiVo," said Ferris, Baker Watts analyst Murray Arenson in his research note Friday. "We continue to believe that TiVo is handicapped in its ability to grow aggressively without a major distribution partner."

TiVo has not been a recent investment banking client of FBW.