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Technology Stocks : Tivo (TIVO) Interactive TV -- Ignore unavailable to you. Want to Upgrade?

To: Sam Citron who wrote (1563)	3/15/2005 3:36:26 PM
From: Road Walker	Read Replies (2) \| Respond to of 2093

TiVo (TIVO) 10:56 AM ET March 15, 2005 $5.82 +1.99 (+52%) Wait. Rewind that. This changes everything. TiVo announces a deal with Comcast today under which they will essentially license customized software for Comcast DVRs. This is an extremely smart shift in strategy - and one which is long overdue. In an Ahead of the Curve article on December 4, 2004, entitled "TiVo: Increasing Loss/Subscriber Trend Not Good," we strongly questioned TiVo's strategy of focusing on their own TiVo-owned customer base instead of exploiting the extremely good business model of partnership deals, already proven by the DirecTV deal. In fact, we wrote "...the entire company should probably be adjusted to acquire as many partnership subscribers as possible, including more than those that DirecTV provides. That model holds promise, financially." In addition, we specifically stated "a second partnership deal, perhaps with a cable vendor, needs to be established to provide leverage against DirecTV dictating terms when their contract expires" and "remaining capital could then be allocated towards subsidizing the operations of the company." It seemed unlikely (then) that TiVo would adopt this strategy, however, based on statements by Cofounder-CEO Mike Ramsey, who was still clinging to the "lost dream" of revolutionizing TV. But then Ramsey "resigned" (plans to step down as soon as replacement is hired) and soon after President Marty Yudkovitz resigned. Did the board decide that Ramsey's vision really was a "lost dream?" Seems accurate to view things that way, given today's announcement. This is a reversal of prior strategy. In addition, if you combine today's announcement with TiVo's "profitability" statements last week, however, a better picture of the TiVo emerges - with implications for the "TiVo-owned" customer base. That market is no longer top priority. After last quarter's earnings report last week, we were baffled by TiVo's statement that they would reach profitability in 2006. Combined with the huge increase of rebates (as percentage of revenue, Q4 was 76% of revenue, versus Q3's 65%) and the disturbing trends of increasing expenses/subscriber as the company gets bigger, it seemed impossible for TiVo to become profitable - given the strategy of making the TiVo-owned customer the top priority. The cost of acquiring TiVo-owned subscribers was just too high. Many analysts agreed, as our Story Stock of March 11 described. With this deal, however, it becomes clearer how TiVo can reach profitability. The Comcast deal has extreme leverage, since TiVo will not be building hardware boxes. This is a software-only deal. Licensing software is scalable. Although the financial terms of the deal have not been revealed, it can be assumed that Comcast will absorb the marketing costs to their base, and perhaps the servicing costs as well (answering the "this thing doesn't work" questions). The revenue to TiVo will probably come without high operational costs, unlike the TiVo-owned subscriber model. But the service won't begin until early 2006. To reach profitability this year, there is only one obvious deduction, after putting together all of these "clues." Expenses are going to be cut harshly at TiVo, perhaps even in the current quarter. The huge marketing effort towards building the TiVo-owned base will be cut back. In the last six months, sales and marketing cost $25+ million. One year ago, sales and marketing for six months was just $8 million. The huge rebates to get TiVo subscribers to cross the line will be deemphasized. At 76% of revenue, it was a huge expense. That will slow the growth of TiVo-owned subscriber base, but who cares? The future for TiVo lies with deals like this. The stock is up 50% this morning, but if TiVo announces layoffs in the marketing staff or an end to rebates, it will probably go up even more. But until the financial deal with Comcast is visible, accurately forecasting TiVo's financial future is hard. If it amounts to just $1.50 per month (DirecTV pays $1.30/month) per subscriber and TiVo gets 100% of Comcast's 8.5 million subscribers with digital cable, the total revenue would be $32 revenue quarterly. While that is double current revenues, 100% penetration is impossible. It implies that TiVo needs more of these cable deals - a lot more. They have made the right strategic shift, but they still have a long way to go. Its probably still better to just "TiVo" the stock chart and watch it later, unless you like the Speculative channel a lot. - Robert V. Green Briefing.com Back to Stock Summary