Company profits climb, but subscriptions fall

TiVo Inc. managed consecutive quarters of profitability for the first time ever despite eroding subscriptions, demonstrating that the pioneer in digital video recorders is on track in reducing marketing expenses and subsidies.

Yet Wall Street remained cautious on whether TiVo could keep having solid quarters. TiVo shares fell in extended trading Wednesday after the company said its revenue in the current quarter will fall short of analysts’ expectations.

TiVo’s subscriber base has been dropping steadily because of increased competition from generic recorders from cable and satellite operators and the loss of a key distribution deal with satellite TV provider DirecTV Group Inc.

To offset declining revenue, TiVo has looked to cut subscriber acquisition costs.

The company has reduced or eliminated subsidies on TiVo boxes, particularly with high-definition recorders, thereby generating higher margins on hardware.

It has also partnered with cable operators, content providers and retailers to let them market TiVo “so we’re not reliant totally on our own marketing resources to do that,” TiVo Chief Executive Tom Rogers said in an interview.

Average subscriber acquisition cost was $135 in the fiscal second quarter, which ended July 31, slightly up from $116 in the previous period and significantly lower than the $758 in the year-ago period. TiVo said it now has 3.6 million subscribers, compared with 4.2 million a year ago.

Hardware sales increased 88 percent, contributing to an overall 4 percent gain in revenue to $65.2 million. But the breakout for services and technology, which excludes hardware sales, was $53.5 million – below the nearly $55.4 million analysts polled by Thomson Reuters were expecting and short of the $56.5 million in the same period last year.

Still, the Alviso, Calif.-based company reported $2.9 million in net income, or 3 cents per share. TiVo had posted a loss of $17.7 million, or 18 cents a share, in the same period last year, and analysts had expected a loss of 2 cents per share in the past quarter.

For the six months ending July 31, TiVo had $126 million in revenue, up 2 percent from the same period last year. It posted $6.6 million in net income, or 6 cents per share, compared with a loss of $17 million, or 17 cents per share, in the year-ago period.

The company said its revenue for services and technology will be at $49 million to $51 million in the current quarter. Analysts polled by Thomson Reuters had expected $57 million, close to the $58 million posted in the third quarter of 2007. TiVo also said it expected a net loss in the range of $7 million to $9 million in this quarter.

Shares in TiVo dropped 23 cents, or 2.9 percent, to $7.73 in extended trading. Before the earnings report the stock had risen 5.7 percent to close at $7.96.

During a conference call, interim Chief Financial Officer Cal Hoagland said TiVo will face increased expenses in the current quarter, including holiday-related marketing and costs related to an ongoing patent battle with Dish Network Corp. A Sept. 4 court date has been set as TiVo seeks to collect on the $94 million it has been awarded in damages.

Analyst Mark Harding of the Maxim Group said TiVo management typically “has guided below expectation and then decidedly exceeded” it when posting actual results. He said TiVo’s finances look positive, though questions remain on how much marketing TiVo should be expected to do in the holiday season given its pledge to reduce those costs.

TiVo said distribution partner Comcast Corp. has expanded a TiVo package to Connecticut, beyond an initial deployment in Massachusetts and New Hampshire. Rogers said full marketing should begin this year, allowing TiVo to boost subscribers while Comcast bears much of the marketing expenses.

Deployment by another cable partner, Cox Communications Inc., should also begin by year’s end, while Seven Media Group has introduced TiVo to the Australian market.

“Over time, the subscriber growth will be much more a function of cable and international distribution deals,” Rogers said.

Meanwhile, the company said it is working with Best Buy Co. stores in six markets to bundle TiVo with new high-definition televisions. And it announced a deal to automatically record shows recommended by Time Warner Inc.’s Entertainment Weekly magazine, similar to one with the Chicago Tribune to record shows recommended by the paper’s TV critics.

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