On January 26th, in response to a TiVo motion to enforce his earlier order to deliver certain documents, a frustrated-sounding U.S. District Court Judge Duffey slapped the wrists of Echostar and “non-party witness” Homer Knearl, requiring them to sign pre-prepared affidavits that they had, in fact, complied with his order. Duffey accused Knearl and Echostar of playing “a legal shell game” and called their earlier responses “vague, equivocal, and qualified.”

TiVo has been seeking documents produced by Knearl and his former associates at the Merchant and Gould law firm that relate to a legal opinion of non-infringement that M&G gave Echostar in their patent dispute with TiVo. That opinion was not allowed into evidence at trial (primarily because of Echostar’s failure to deliver related documents under an earlier court order), and has now become a significant factor in Echostar’s appeal and TiVo’s counter-appeal.

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Financial analysis isn’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholder’s interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ

Preface

One of the problems one encounters when doing research, or “digging into the numbers” is that one can always dig deeper. In digging into the later parts of this TiVo story, we discovered that we could derive much more accurate and robust figures (particularly for churn and revenue from subscriptions and advertising) than we had initially. While our general conclusions are the same, the new numbers are so much of an improvement in terms of both accuracy and reliability that we felt compelled to revise them. What follows are revised numbers, some greater detail as to the way we derived them, and some clarification (we hope) of some of the ideas presented in the earlier version. Of particular interest are Appendices A and B, which are all-new, and discuss the way we derive the important churn and revenue numbers. We have also added a new asset class to TiVo’s valuation that we did not consider before. Finally, we have dropped the discussion of ROI and MIRR as they lengthened the article and did not provide much additional insight over the “gold standard” of NPV.

As before, we try at all opportunities to make conservative assumptions. We realize that our assumptions are conservative almost to the point of pessimism, and we have been accused of just that. But TiVo is a company that lives under a great shadow of Wall Street pessimism, so any show of optimism may be seen as a lack of credibility. We leave it to the reader to decide by what factor our estimates need to be adjusted for our excesses of pessimism.

INTRODUCTION

TiVo is an enigmatic company. While management peppers us with regular press releases hyping their latest deal or newest technology, it rarely provides the kind of information we need to put a value on anything – be it a new advertising relationship, distribution deal, or their own financial statements. In this article we will engage in a bit of 8-K and10-Q exegesis in an effort to understand what is really going on at TiVo. (more…)

Financial analysis isn’’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholder’s interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ

As we listened to the 3Q earnings call from TiVo, we were struck by a number of statements made by TiVo’s management that seemed to be clues as to what we can expect from the company in the future. In this installment, we will look at some of these clues in light of the financial analysis we have just completed, and see what we can learn. But be advised: you are entering an area of higher speculation and greater interpretation than we have visited before.

Subsidize Less, Advertise More

We commented in Part 2 about the apparent reversal of position on hardware subsidy after working for so long to get the boxes to a zero-upfront model:

Following the holiday period, we will be evaluating the success generated by this kind of hardware pricing approach versus an approach where there is less rebate on hardware and a greater proportion dedicated to advertising the TiVo product. (Rogers)

We noted in Part 2 the advantages and disadvantages of an advertising approach versus a subsidy approach. One particularly important advantage to advertising was noted by Rogers:

Particularly given all the differentiation that we have now worked hard to accomplish, we really think that there is a credible basis to think about advertising benefiting TiVo and not just educating people about DVRs in general, where we would not necessarily see the benefit in TiVo sales of that increased advertising spend.

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Financial analysis isn’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholder’s interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ

In Part 1 and Part 2 we focused on TiVo’s biggest business: their subscription recording service. But TiVo has other irons in the fire, and to get a value for the company, we need to consider those items, as well. But first, we’ll finalize our look at subscribers.

In Part 1, we found that the NPV of TiVo’s current subscriber base (including a conservative estimate of the value of the DirecTiVo subscribers), but we have since discovered a flaw in our calculation of TiVo’s advertising revenue (which has also led us to some new insights – but we’ll get to those another day), which we have recomputed as an average $0.47 per month per subscriber for the past twelve months – less that we originally estimated. But we were also able to get a more accurate estimate of the cash flow of monthly and lifetime subscribers, and so we will use those numbers, too. These improvements have caused us to revise our estimate of the NPV of TiVo’s subscriber base to $407 million – somewhat higher than the $388 million we found before.

Lifetime Cash

Earlier, we hinted that there was a “hidden” value to the lifetime subscribers that we had not included. To understand this value, one needs to understand how TiVo accounts for lifetime subscriptions. When TiVo sold a lifetime subscription, they put an amount on the “cash” line of their balance sheet for the full amount of the subscription, and offset it with a “deferred revenue” liability of the same amount. The cash would then amortize over the expected lifetime of the subscription. TiVo picked 48 months as the lifetime of the subscription, so for a $299 lifetime subscription, that amounts to $6.23 per month. Then, each quarter, TiVo takes the appropriate amount of cash

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Financial analysis isn’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholder’s interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ

In Part 1, we gave a value of TiVo’s existing subscriber base. But things are changing at TiVo: lifetime subscriptions are no longer available, and new subscribers can get free hardware, though they pay more in service fees. We need to know how this affects the value of new subscribers and how much TiVo should spend to acquire them.

To examine these issues, we will look at the Net Present Value (NPV) of subscribers, and the Return On Investment (ROI) in acquiring them (actually, instead of ROI, we’ll use MIRR, the Modified Internal Rate of Return). For the purposes of these calculations, we will use a 12% annual (1% per month) cash discount rate, as we did in Part 1. We will also use 12% as the finance rate for MIRR and 6% (0.5% per month) as the reinvestment rate (i.e., the return TiVo can obtain on short-term investments). As in Part 1, we will use 1% per month for subscriber churn, yielding an average sub life of 69 months. In this analysis, however, increasing the predicted churn rate will tend to reinforce our conclusions. Again, keep in mind that in this analysis, we are looking at value of bringing new subscribers on board, whereas in Part 1, we looked at the current value of existing subscribers.

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Financial analysis isn’t something I’m prepared to tackle publicly, so I’ve brought in some muscle for a multi-part series on TiVo’s numbers. Obviously this is speculative in nature and just one stockholder’s interpretation of the limited information TiVo chooses to disclose. Your mileage may vary. -DZ

TiVo is an enigmatic company. While management peppers us with regular press releases hyping their latest deal or newest technology, it rarely provides the kind of information investors need to put a value on anything –- be it a new advertising relationship, distribution deal, or their own financial statements. This is the first article in a multi-part series in which we will engage in a bit of 8-K and 10-Q exegesis in an effort to understand what is really going on at TiVo. In this first installment, we will take a look at the value of TiVo’s subscribers (something CFO Steve Sordello specifically declined to do in the 3Q results call), and find some interesting details along the way.

To find the value of a sub, we’ll need a few pieces of information: how long does a TiVo subscriber remain a subscriber, how much does he pay, how much advertising revenue does he produce? Note that through most of this discussion we are referring to “TiVo-owned” subscribers, and not considering TiVo’s DirecTV subs as they have an economy all their own.

TiVo’s churn hangs around in the 0.9% to 1.0% range, but let’s use 1.0% since it is the most recent number we have. To find the lifetime of the average subscriber, we want to know how many months go by before half of a given body of subscribers has churned away. That is, we need to solve the equation:

• 0.5 = (.99)^N

The result is that the average subscriber lasts about 69 months. (This is actually quite a spectacular result. Consider that DirecTV’s churn is 1.8%, giving them an average sub lifetime of only 38 months.)

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While Davis Freeberg believes recent developments in the TiVo/Echostar patent infringement suit may indicate an imminent settlement, a ZNF secret agent has a different take. -DZ

The story so far
TiVo filed a patent infringement suit against Echostar covering most of Echostar’s DVRs. In April, a jury found that Echostar infringed TiVo’s patent on all the contested claims, that the patent was valid, and that the infringement was willful. The jury awarded TiVo about $73 million dollars in damages. Later the judge in the case increased the damages to about $88 million (for interest during the period of infringement and damages and interest from the time between the jury award and the final judgment). He also ordered an injunction, preventing Echostar from further use or sale of the infringing DVRs (i.e., Echostar had to turn off more than three million of their customer’s DVRs). Echostar appealed the verdict, and was given a stay of the injunction.

What just happened
Recently Echostar made a motion to the appeals court to extend the time, by 60 days, for them to file their so-called “Blue Brief” (i.e., the appellant’s primary brief to the court). The brief was due 10/23. It was an unusual request because appeals courts are notoriously unforgiving, and would likely reject such a request unless it was for a very good reason. Tivo responded to the motion, and Echostar replied to TiVo’s response.

Today, the motion was ruled moot (i.e., irrelevant), because the court issued this order:

ORDERED: Briefing schedule stayed. EchoStar to notify this court within 14 days of date of disposition of final postjudgment motion in dist ct.

What this means is that the entire appeal has been put on hold. Why? Because the court has determined that some aspect of the “final postjudgment motion” must be resolved before the case can proceed. (This issue was probably the reason that Echostar requested the delay, but the court, being no-nonsense, realized that 60 days was arbitrary, and simply said, “tell us when it has been resolved”.)

What is the issue?
The real question is what this “final postjudgment motion” is, and what does it contain that would put the appeal on hold? Not having the actual order from the court, we have to speculate. As I see it, there are two possibilities:

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