TiVo Sharpens Legal Knives For Verizon Patent Trial

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TiVo is gearing up to take on Verizon Communications in court in October -- with the DVR company betting it will win a sizable settlement from the patent litigation -- while it warned investors that higher legal fees from the case would "significantly impact" earnings in the current quarter.

In addition to the upcoming Verizon trial, TiVo has pending litigation involving Time Warner Cable, Motorola and Cisco Systems set to proceed this fall. TiVo reached a patent settlement last year with Dish Network worth more than $600 million, covering the TiVo "Time Warp" patent on simultaneous storage and playback of TV programming, and another with AT&T under which the telco will pay TiVo as much as $300 million.

"While our significant investment in these cases is impacting our expense base in the near term, we believe it is vital to protect our innovation and we are confident that the return on investment will continue to be substantial over time," TiVo president and CEO Tom Rogers said on the company's second-quarter earnings call Wednesday.

For the quarter ended July 31, TiVo added 230,000 net subscribers. It was the company's fourth consecutive quarter of positive subscriber growth, again driven by gains at U.K. cable operator Virgin Media, which surpassed 1 million TiVo subscribers in July. TiVo-owned subscribers declined by 23,000, to 1.06 million, while operator subs increased 253,000, to 1.66 million.

TiVo reported $65.3 million in net revenue for its second quarter of fiscal 2013, up 7% year over year, with a net loss of $27.7 versus a net loss of $19.6 million in the same quarter a year earlier. The net loss was slightly less than Wall street analysts expected, according to Bloomberg, and TiVo shares climbed 5% in after-hours trading.

The company's $64.7 million in operating expenses for Q2 included $12.8 million in litigation expenses, up substantially from the previous quarter. For the third quarter of fiscal 2013, TiVo anticipates service and technology revenues in the range of $57 million to $59 million with a net loss of $27 million to $29 million.

"Litigation costs due to the upcoming Verizon trial scheduled for October 2012 are expected to remain high and to significantly impact net loss and adjusted EBITDA loss in the third quarter of fiscal year 2013," TiVo said in its earnings announcement.

Last Friday, the U.S. Court of Appeals for the Federal Circuit affirmed that Verizon must pay upwards of $260 million or more in future royalties
to interactive TV vendor ActiveVideo Networks for patent infringement. A
lower court had ordered the telco to pay $2.74 monthly per FiOS
subscriber to ActiveVideo.

On the earnings call, TiVo general
counsel Matthew Zinn was asked if the per-sub patent royalty calculated
in the ActiveVideo case had any bearing on TiVo's suit against Verizon.
"Not specifically," Zinn said. "It's a different case, different set of
facts. ActiveVideo's injunction was overturned because they're not a
direct competitor of Verizon. That's a different situation than we are

During the July quarter, TiVo expanded in Europe in a deal with Com Hem, the largest cable operator in Scandinavia. Last week TiVo announced that Alaskan cable operator General Communications Inc. will offer subscribers TiVo's Premiere Q four-tuner gateway DVR, plus the TiVo Mini IP set-top and TiVo Stream, which enables Wi-Fi access to content across tablets and smartphones in the home. GCI also plans to be one of the first operators to use the TiVo software and service in conjunction with Pace's XG1 multi-tuner gateway with integrated DOCSIS and video-transcoding capabilities.

Comcast, which last year terminated its set-top software development agreement with TiVo, has launched the ability to access to Xfinity On Demand for users of TiVo DVRs bought at retail in Boston and the San Francisco Bay Area. Comcast next will make the TiVo offering available in Sacramento, Calif.; Portland, Ore.; and Denver, Rogers said, "we expect multiple more markets to launch this year."

Suddenlink Communications, which offers TiVo DVRs as its primary digital video recorder, recently "had their strongest quarter to date, adding TiVo customers at a faster pace than in prior quarters," Rogers said. With Charter Communications, both TiVo and Charter continue to focus on driving TiVo software to "future set-top box platforms and potentially to other platforms including those that go beyond the set-top box to any device via the cloud," he said.

Meanwhile, on the retail front, next week TiVo plans to begin selling the $130 Stream add-on box. Unlike EchoStar's Slingbox, the TiVo Stream can simultaneously stream or download shows to multiple portable devices without interrupting what's playing on TV. TiVo also recently announced a more affordable four-tuner DVR, the Premiere 4, priced at $250.

Also in the quarter, TiVo announced the $20 million acquisition of marketing-research firm TRA, now called TiVo Research and Analytics, which developed a platform that correlates household purchases with TV viewing patterns. TiVo said the TRA deal is expected to be accretive to adjusted EBITDA in the next fiscal year "once planned synergies are realized" but is expected to reduce adjusted earnings by up to $2 million in the second half of this year.