Tivo Albert Fried And Company Research 01032011 Crafa


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My TIVO upgrade prior to a 20% increase in share price.

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Tivo Albert Fried And Company Research 01032011 Crafa

  1. 1. Rich Tullo Director of Research rtullo@albertfried.com (212) 422 – 7282 January 3, 2011TIVO; UPGRADE TO BUY FROM MARKET PERFORM ON BUYUPSIDE POTENTIAL; $12 TARGET UNCHANGED Price Close $8.77 Thesis We like TIVO’s long- term growth strategy. By deploying the Company’s OTS enabled set- MCAP 1.01B top boxes at MSOs, TIVO offers low cost solutions for middle market Pay TV operators. Near-term subscriber losses are already discounted in TIVO’s valuation in our view. Shares 114.7mm Key Points: 52 Week High $18.93 • We see exceptional upside in TIVO shares for three reasons. I) We think TIVO’s share price valuation is interesting with roughly 43% upside to our $12 Price Target , 125% upside to the 52 52 Week Low $6.92 week high and 21% downside to the 52 week low. II) We like TIVO’s recent design wins and expect a return to growth as distributed subscribers may offset TIVO owned churn in FY2012. III) In our view, TIVO directly benefits from new FCC regulations and the failure of Google TV Avg. Vol. 10Dy. 1.637mm 1.0. • We think TIVO’s graphical user interface (GUI) provides a superior PVR viewing environment Short Interest 14.981mm as compared to most MSO supplied DVRs. We think TIVO’s ability to integrate Over-the-Top programming as well as social media is novel and solidifies the TIVO’s standing as the gold standard in PVR services. We think TIVO’s superior service has resulted strong brand P/BV 5.5x recognition and we think the TIVO service can foster customer loyalty for its MSO partners. • In our view, TIVO is a game changer for the small to mid-sized MSOs as the TIVO service EV/EBITDA NM enables mid-tier players to compete with large Pay TV providers and OTS programmers for subscribers. As more devices invade homes the demand for bandwidth, in our view, will increase PE 2011E 15.9x exponentially. We predict high end homes will need 1 GB broadband connections within 5 years to support the Wireless devices, TVs, DVRs, Games Appliances and PC devices infesting U.S. homes. Thus in our outlook, the CAPEX budgets of MSOs will be focused on providing ESTIMATES (1) bandwidth to the home at the expense of services and content which we think benefits TIVO. • We think the En Banc court decision is critical to TIVO’s share valuation. We expect TIVO to Revenue (In Millions USD) prevail but the odds are close (5/4 by our model). Should TIVO prevail, we expect TIVO to earn a $75 to $200 million settlement from SATS/DISH (NC) TV. In addition to cash, DISH will also FY2010A $189.7 be required to either reach a multi-year agreement with TIVO or cancel PVR service to roughly 10 million subscribers. In our view, an En Banc failure will require TIVO to come to market for capital as legal and R&D expenses burn through TIVO’s cash balances (roughly $227 million as FY2011E $168.9 of F3Q11) within three years. • As TIVO is an event driven special situation we also recommend hedging the downside risk. To FY2012E $167.9 be clear, we think TIVO shares could trade in the $5 to $7 range if the En Banc ruling favors DISH/SATS. Thus we strongly recommend marrying the Feb. $7.00 put options for roughly EPS $0.20 to any new TIVO long position. • Risks to Thesis: F1Q11A ($0.13) • Widespread adoption of competing over-the-top technologies could result in greater organic • revenue declines versus our model. Patent trolls and technology companies such as Microsoft (NC) and DISH/SATS (NC) could F2Q11A ($0.13) prevail in IP lawsuits against TIVO. • Continued economic weakness in the U.S. could weaken discretionary purchases of DVR F3Q11E ($0.18) equipment and services. Price Target: F4Q11E ($0.30) While TIVO’s near term revenue and EBITDA prospects remain guarded, we expect a turn around in TIVO’s prospects in FY2012. We derive our $12 price target by applying a 22x multiple to our $0.55 FY2011E ($0.74) EPS estimate for FY2012. Our multiple is a slight premium to the market multiple but warranted in our view owing to our bullish views on the market for over-the-top services. FY2012E $0.55 (1) GAAP EPS, Service and Technology Revenue only See important notes, disclosures and disclaimers on page 3-5 before making investment decisions.1
  2. 2. TIVO and the Post Transition Home • TV viewers now have more options and we think TIVO’s set-top box technology enables TV viewers to merge OTS services and MSO programming content. In our view, TIVO’s PVR aggregates OTS and programming content thus enabling viewers to customize programming pods comprised of OTS and network broadcasts. • We think all media in 2009-2010 completed a secular migration from traditional analog distribution formats to digital distribution on Broadband and 3G mobile networks. In our view, the TIVO service has also completed this transition. The TIVO service was originally developed when terrestrial broadcast was the dominate TV distribution channel and viewers used TIVO PVRs to record terrestrial TV broadcasts. As viewers migrated onto Broadband networks, VOD and MSO supplied DVR service supplanted TIVO boxes. Owing to the recession in 2008-10 TIVO’s subscriber churn epanded to roughly 2% as subscribers switched off TIVO boxes to save money. • In FY11, TIVO signed a number of new deals with MSO’s including RCN, Suddenlink, Virgin Media (NC), Cox Cable and ONO. TIVO’s new MSO partners have roughly 11 million subscribers and we expect as the new partners launch the TIVO service the Company’s subscriber losses will decline as MSO additions replace TIVO owned churn. • The illustration below highlights the various Broadband demands from multi- media Internet enabled devices in the home. In our view, the TV screen will remain the primary method of viewing Scripted TV, Sports and Cinematic programming owing to picture quality and ability of MSOs to cable content networks and VOD. In our view, technology like the TIVO PVR enhances MSO content while offering network subscribers the option of receiving OTS content.Source: Virgin Media See important notes, disclosures and disclaimers on page 3-5 before making investment decisions.2
  3. 3. Shifting Media Regulations Favor TIVO, In Our View • We think two regulatory changes at the FCC benefit TIVO and will enable the company to attract subscribers. I) On 21 December 2010, the FCC approved new Net Neutrality regulations and we think the rules benefit OTS services and TIVO in our view is a derivative play on Net Neutrality II) We think the FCCs continued interest in developing a functional Cable Card Scheme also benefits PVR suppliers such as TIVO. • Net Neutrality is a new series of FCC regulations which are designed to prevent MSO from denying network access to OTS services. Central to Net Neutrality is the mandate which prevents MSOs from discriminating against Internet traffic volume created by competing OTS services. In our view, if Net Neutrality withstands the U.S. judicial review and is not overturned by the U.S. House of Representatives, then OTS services will compete with MSOs in providing TV content to the home. Thus we think Net Neutrality enables unrestricted A LA Carte programming options to be delivered on the MSO’s Broadband network. Under Net Neutrality, consumers which prefer not to buy bundle programming packages from MSOs can subscribe to OTS services. We like TIVO’s prospects under Net Neutrality since MSOs that provide TIVO PVRs have an OTS monetization vehicle which generates $16 to $20 in total RPU from content aggregation, advertising data, browsing, social networking and content search. • Cable Card (3.0) is a proposed redux of the FCC regulations that require cable operators to enable set-top boxes to accept a universal signal decoder card. Similar to a mobile phone Sim Card, the Cable Card decodes the MSO’s broadcast signal. Cable Card gives consumers the option of buying a cable set- top box versus leasing proprietary equipment from the MSO and with an enabled set-top box consumers can change cable service just by swapping cards. The idea of Cable Card is to increase MSO competition by making switching easier and to also increase set-top box competition by providing alternatives to leased set-top boxes. We like TIVO’s position as an independent provider of set top boxes and we think TIVO will benefit from Cable Card. We expect TIVO owned churn to decline if Cable Card 3.0 succeeds as retail purchased TIVO boxes will be compatible with every cable system and switching MSOs does not imply losing the TIVO service. Source: Virgin Media See important notes, disclosures and disclaimers on page 3-5 before making investment decisions.3
  4. 4. • En Banc: Our theory is the appellate court is now developing criteria on ordering new patent trials. At issue is the level of design change required to initiate a new patent infringement trial. If the issue is procedural, we see multiple scenarios where the U.S. appellate court can rule in TIVO’s favor. We think the odds of a successful En Banc outcome for TIVO is 5:4 and we model TIVO will receive a $75 million contempt ruling by F3Q12. • Should the U.S. En Banc rule against TIVO, we think the shares could trade lower owing to the lack of operating earnings we model in FY2012. However, we think Institutional investors should establish positions in TIVO shares prior to the court’s ruling; which could be in TIVO’s favor; $300 million based on the prior judgment. We see substantial upside to our Target should the courts rule in TIVO’s favor as we think the Company will benefit from a new 11 million subscriber PVR contract with DISH as well as new design wins at MSO’s. Following a favorable ruling, we also see investors speculating on continued success in the TIVO suits against AT&T (NC) and Verizon (NC). If TIVO triumphs versus DISH/SATS the probability that TIVO will succeed in other suits shifts in TIVO’s favor and a settlement with Verizon and AT&T may be more likely. Thus it is possible TIVO shares can rally to the 52 High ($18) as there is a substantial short position in TIVO shares ($15 million) that may cover. • We think marrying puts to a core TIVO Long Position makes sense. If the Court rules against TIVO, marrying a $7 FEB. Put limits the TIVO downside to roughly 23% through February 19, 2010 and investors only give up about 2.3% of the 36.8% upside to our $12 Target. TIVO Married Put 120.0% 100.0% 80.0% 60.0%Gain (Loss) 40.0% 20.0% 0.0% $5.00 $6.00 $7.00 $8.00 $8.77 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $16.00 $17.00 $18.00 -20.0% -40.0% Share Price on 2/19/2010 Source: Albert Fried and Company LLC. See important notes, disclosures and disclaimers on page 5-8 before making investment decisions.4
  5. 5. TIVO Married Put Model Date Price Price Price Price Price Price Price Price Price Price Price Price Price Price PriceTivo Share PX 19-Feb-10 $5.00 $6.00 $7.00 $8.00 $8.77 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $16.00 $17.00 $18.00TIVO Share Cost 3-Jan-10 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77 $8.77TIVO February $7 Put Cost 3-Jan-10 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20TIVO February $7 Put Intrinsic Value 19-Feb-10 $1.80 $0.80 ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20) ($0.20)TIVO Cash Equity Profit (Loss) 19-Feb-10 ($3.77) ($2.77) ($1.77) ($0.77) $0.00 $0.23 $1.23 $2.23 $3.23 $4.23 $5.23 $6.23 $7.23 $8.23 $9.23Net Hedged TIVO P/L 3-Jan-10 ($1.97) ($1.97) ($1.97) ($0.97) ($0.20) $0.03 $1.03 $2.03 $3.03 $4.03 $5.03 $6.03 $7.03 $8.03 $9.03TIVO Cash Equity HPY 19-Feb-10 -43.0% -31.6% -20.2% -8.8% 0.0% 2.6% 14.0% 25.4% 36.8% 48.2% 59.6% 71.0% 82.4% 93.8% 105.2%TIVO Hedged HPY 19-Feb-10 -22.5% -22.5% -22.5% -11.1% -2.3% 0.3% 11.7% 23.1% 34.5% 46.0% 57.4% 68.8% 80.2% 91.6% 103.0%Prices A/O 01-03-2010, Prices exclude transaction costs.Options trading is not suitable for all investors and may entail risks and uncertainties including the losses in excess of principal.The table above is provided for hypothetical purposes only and contemplates a number of scenarios which do not constitute an alternative to our stated Rating and Price Target on TIVO shares.Please refer to Characteristics and Risks of Standardized Options and Supplements for additional information on options and suitability. http://www.cboe.com/resources/intro.aspxSource: Albert Fried and Company LLC. See important notes, disclosures and disclaimers on page 5-8 before making investment decisions.5
  6. 6. Price ChartDate July 30, 2009 March 4, 2010 May 24, 2010 Oct. 14, 2010 Jan. 03, 2010Rating Market Perform Market Perform Market Perform Market Perform BUYPrice $10.42 $10.18 $17.39 $10.40 $8.77Target $10.00 $16.00 $9.00 $12.00 $12.001) Additional InformationRating Action Initiate Maintain/Reit Maintain/Reit Maintain/Reit UpgradeTarget Action Initiate Raise Lower Raise NoneReport Type Trading Desk Trading Desk Trading Desk Research Research2) Trading desk reports distributed to less than 15 persons are exempt from FINRA rule 2711 See important notes, disclosures and disclaimers on page 5-8 before making investment decisions.6
  7. 7. Analyst CertificationI, Richard R Tullo, herby certify (1) that the views expressed in this report accurately reflect mypersonal views about any or all of the subject securities or issuers referred to in this report and (2)no part of my compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this report. See important notes, disclosures and disclaimers on page 5-8 before making investment decisions.7
  8. 8. Research at Albert Fried & Company LLC © Copyright 2010IMPORTANT DISCLOSURESAlbert Fried and Company produces a variety of analytics and research products, including but not limited to fundamental analysis, equity linked trading desk analytics, quantitativeanalysis, market commentary reports, fixed income, and trade ideas. Certain products may be exempt from FINRA rule 2711. Recommendations contained in one type of analytics productmay differ from recommendations contained in other types of analytics products, whether as a result of differing time horizons, methodologies, or otherwise.Guide to Albert Fried Fundamental Equity Research Rating SystemStock Rating1) BUY, suggests capital appreciation of at least 30% from the price on the initiation date of coverage over the next 12 months2) MARKET PERFORM denotes that a stock is not likely to provide similar gains as BUY over a 12-month period3) SELL suggests a price decline of 30% or greater from the price on the initiation date of coverage over the next 12-month period4) NC, denotes “Not Covered”.About Ratings TransparencyRatings for BUY and SELL rated securities are typically reviewed for a potential ratings and or price target change when the market closing price is within 10% of the price target oninitiation. The review process generally takes 1 to 20 days to complete however: market conditions, geopolitical events, industry regulations as well as other contingencies may influence thetimeliness of the review process.Albert Fried and Company LLC does not provide investment banking services and is not expected to provide investment banking services in subject securitiesDistribution of ratings systemAlbert Fried & Company LLC provides fundamental research on 9 companies, of which 6 (66%) are rated BUY and 3 (33%) are rated Market Perform and 0 (0%) rated SELL.DisclaimersAny estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ materially from the projectionsdescribed in the forward-looking statements. The material contained in this report is for informational purposes only and is not a solicitation, or an offer or recommendation, to buy or sellsecurities mentioned. Neither Albert Fried & Company LLC nor any person involved in the preparation of this publication accepts any liability or responsibility for the accuracy orcompleteness of this publication and none of them makes any representation or warranty in relation thereto. Recipients of this report should conduct their own investigation, confirmationand analysis of the information contained in this publication. Much of the company-specific data and information in this report was obtained directly from the company’s SEC filings,reputable news wires or the company’s management. No recipient should act on the basis of any matter contained in this publication without considering and, if necessary, taking appropriatelegal, financial, and other professional advice upon the recipient’s own particular circumstances. Investors are advised to undertake their own investigation of the merits of investing in theCompanies profiled in this report. Information contained herein is based on sources we believe to be reliable but we do not guarantee their accuracy. Prices and opinions concerning thecomposition of market sectors included in this report reflect the judgments as of this date and are subject to change without notice. Reprints of Albert Fried & Company LLC reports areprohibited without permission.Albert Fried & Company LLC, or persons associated with it may own securities of the issues described herein and may make purchases or sales while this report is in circulation. AlbertFried & Company LLC, policy does not allow any analyst to own shares in any company he/she covers. No employee or household member thereof, serves as an officer or director of acovered company. Albert Fried & Company LLC does not make a market in any securities contained in this report. Additional information is available upon request.Models and Additional Information are Available On RequestAlbert Fried and Company LLC. reserves the right to withhold reports, licensed and proprietary models, methods and analytics from entities including but not limited to persons, institutionsand media outlets which do not maintain active subscription, distribution, clearance, or trading relationships with Albert Fried and Company LLC. and any of its subsidiaries and affiliations. See important notes, disclosures and disclaimers on page 5-8 before making investment decisions.8