TiVo’s Future in Question

By Hal Plotkin Silicon Valley Correspondent

May 22, 2001 04:00 PM

TiVo Inc. 52-week stock performance

Most analysts won’t be surprised to see TiVo Inc. {TIVO} post slightly lower than originally forecast losses when the company reports first quarter earnings on Thursday. But the agreement about the prospects for the pioneering maker of personal digital television video recorders mostly ends there, with some experts seeing lots of upside in the company’s beaten down stock, while others predict a dire fate for TiVo and its investors.

“I continue to believe that TiVo will vanish from the Earth within 12 months from now,” says Peter Ausnit, who tracks the digital and interactive television markets as an analyst at Deutsche Banc Alex. Brown, based in San Francisco.

Ausnit is the lone financial analyst with a “sell” recommendation on the stock, which is unusual. Outright “sell” recommendations are rare in the analyst community. The six other financial analysts tracking TiVo’s stock currently rate it either a “buy” or a “hold.”

Ausnit says the issue is cash, and that the company appears certain to run out of green before the firm can turn a profit.

As of the end of January, TiVo reported having $124.5 million in cash on hand, which is up from the $106 million it had in the bank at the same time one-year earlier thanks, in part, to the ramping of sales of the company’s video recorders and service packages.

What worries Ausnit, however, is the company’s burn rate. TiVo lost $206.4 million last year, with almost $90 million of those losses coming in the final quarter.

Earlier this month, TiVo president and CEO Mike Ramsay announced a cost-cutting plan that he says will assure the company’s survival through the balance of this year without need of any fresh capital.

“In today’s capital markets, companies like TiVo need to take the initiative to manage their business without the need for external funding,” Ramsay said in a statement that accompanied the details of TiVo’s plan to cut $60 million in expenses this year. “We are implementing cost reductions and increasing revenues. This gives TiVo the staying power to capitalize on its leadership position in Personal TV and to execute on our service strategy in this exciting new category.”

Several other analysts who are also tracking the firm, both industry and financial, side with Ramsay, and say they remain upbeat about TiVo, notwithstanding Ausnit’s prophesy of doom.

“I’m fairly optimistic about TiVo,” says P.J. McNealy, senior analyst at Gartner, based in San Jose. “The company is striking deals which are sending it in the right direction.”

TiVo has recently announced new or fortified deals with several marketing partners, including AOL Time Warner Inc. {AOL} and DIRECTV Inc., a unit of Hughes Electronics Corp., which is owned by General Motors Corp. {GMH}. The partnerships are aimed at integrating the functionality of the TiVo product into the set-top boxes used by cable and satellite television broadcasters.

“The ultimate goal is to take TiVo and bake it in to the set-top boxes,” says David Miller, an analyst at Sutro and Company, based in Los Angeles.

Among other things, TiVo’s product allows television viewers to pause live programming, easily search for and record favorite shows, and skip commercials. Recorded programs are stored on a hard disk, rather than on videotapes, which makes organizing and accessing them a breeze. So far, the company has relied mostly on sales of its branded units made by third parties, which connect to cable set-top boxes.

In the future, however, most analysts agree the company’s fate will hinge on whether enough set top box makers choose to work with TiVo, go with rival makers of personal digital video recording software, such as Microsoft Corp. {MSFT} or ReplayTV, which was recently acquired by SONICBlue Inc. {SBLU}, or decide to develop similar software in-house or on contract.

“TiVo has put a lot of time and effort into designing their system,” says Mary Joy Scafidi, senior analyst at IDC, based in Irvine, Calif. “I think they’ve done a lot of things right.”

Scafidi says she has used all three personal digital video recorders now on the market, TiVo, ReplayTV, and Microsoft’s UltimateTV, the last of which currently only works with a satellite television hook-up.

“TiVo is the one I prefer to watch,” she says. “It has the best combination of features.”

Scafidi says TiVo’s remote control, for example, packs many features into an easy-to-use and intuitive interface that has great appeal to couch potatoes.

Miller, of Sutro & Company, currently has a “buy” rating on TiVo’s stock, and says the company’s installed base of more than 150,000 subscribers brings it very close to the critical mass needed to begin creating a range of new revenue producing opportunities.

“Think about the television ratings business,” he says. “The Nielsen [TV] ratings are based on something like 10,000 households. But TiVo has better data about exactly what type of people are watching which programs when. What you’ll see is TiVo selling that data to places like NBC and CBS.”

For privacy reasons, TiVo has pledged not to sell information that identifies specific television viewers. But the company does plan to make the data available en masse, broken down into various demographic categories. The company also might be able to eventually find ways to insert ads into television programming despite its product’s commercial skipping feature, for example, by playing short, targeted commercials right after a viewer hits the unit’s “play” button, which would run the spots before a program resumes.

The bigger hope for TiVo, though, in addition to selling data about viewer habits, is that it can carve out a lucrative role for itself once its digital video recorder technology is married with interactive television services that allow viewers to buy products or request information using their remote controls.

“I believe in TiVo’s functionality,” says Scafidi, of IDC. “But in the longer term the network operators will manage the service themselves because they’ll want to merge it with interactive TV.”

Miller, of Sutro & Company, says TiVo’s stock is a good buy right now, in part, because the stock is trading close to the value of the company’s cash on hand.

“TiVo’s shares plunged along with other tech shares that haven’t turned a profit,” he says. “But if the company was not viable it would have gone to zero.”

It didn’t, he says, because enough investors realize that TiVo has something many other money-losing tech firms don’t have: growing numbers of happy, paying customers.

“Most TiVo customers are very satisfied, and those customers are very important,” says Scafidi, of IDC.

“I think it is too soon to tell what will happen to TiVo,” she adds. “But having the customers makes it more likely the company will be acquired,” rather than fail entirely, she says.

TiVo, Inc. reports first quarter earnings after the end of the regular trading session on Thursday. Analysts are expecting the company to post a loss of $1.23 a share, as compared with a loss of 66 cents a share for the same period one year earlier.

Much of the losses are associated with costs involved in marketing a new consumer electronics product. Analysts say the most important item to look for during the earnings announcement will be any news about progress regarding the company’s plans to make money by selling data about the viewing habits of its installed user base.

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