Formerly TiVo Corp (TIVO) (merged in 2020)

Asset Class: US Stock (Sector: Information Technology / Industry: Software)

Original Investment Thesis (12/2017):  When I bought this company’s stock, I liked several things about it.  They are a product of an acquisition of TIVO (by ROVI…then keeping the TIVO name).  This was in late 2016—valued TIVO at $1.1b. They expect $100m in synergies from the merger (65% of which in initial 12 months).  $800m in revenue and expects it to be $1b in next three years.  9 of 10 top pay-tv providers use their software.  They are in a patent lawsuit with Comcast (the 10th) and winning (based on initial rulings).  25mm US Households.  Moving into Latin America.  International will be strong.  Viewer analytics and advertising model.  Morningstar calls them a narrow moat company.  They are a patent patrol company with 6,000 patents.

Update (9/29/2019): On the chopping block.  This investment was a mistake.  Nothing has worked out at all.  The company has been in constant turmoil ever since I bought it.  They’ve lost a brand-new CEO and been reviewing ‘strategic alternatives’ for several quarters.  The business has flatlined, they’ve been losing money.  When I went through all my stocks in early February 2019 and did my upgraded analysis on each of my companies, I realized I would never have bought this company at all based on the new information I looked at.  So live and learn.  This has been a bad investment.  I could easily cut my losses and move on (and probably should).  That said, they do cash flow and the stock is beat up pretty badly.  They have a CEO now and should start moving the business forward at this point (unlike for the past 2 years).  I think it is undervalued and at some point, there will be something besides bad news in this name and it will return to a better valuation.  They also might even sell part of the company like they’ve been trying to do for 2 years which might create some additional value.  I think it is a waste of time and energy and money but maybe they know more than me (highly likely since most people do).  At some point I will likely exit this position.  So, not my favorite investment, but no need for a fire sale.

TIVO (TiVo Corp) – Annual Reassessment

February 2019

I’ve owned this stock for a little over a year and just completed my annual reassessment on it (using tools I’ve updated significantly since I purchased this stock).  I’ve attached a PDF that has my analysis in case anyone else might find it useful:tivo-annual-reassessmentDownload

I purchased this stock back in December 2017 at $15.45.  These are my thoughts after reviewing this when I completed my initial purchase in 2017:

  • PRO #1 – Acquisition of TIVO (by ROVI…then keeping the TIVO name) was in late 2016—valued TIVO at $1.1b. They expect $100m in synergies from the merger (65% of which in initial 12 months).  $800m in revenue an expects it to be $1b in next three years.
  • PRO #2 – New CEO just bought $1m in stock at $17.60. He was also awarded 1.2m shares (vesting over the next 3 years).  New CEO’s stock grants are tied to stock price performance.  Must reach $28.
  • PRO #3 – 9 of 10 top pay-tv providers use their software. In a patent lawsuit with Comcast (the 10th) and winning (based on initial rulings).  25mm US Households.  Moving into Latin America.  International will be strong.  Viewer analytics and advertising model.  Morningstar calls them a narrow moat company.
  • PRO #4 – They are a patent patrol company with 6,000 patents.
  • CON #1 – Shares rallied this morning because of rumors of a takeover from a private equity firm. Rumor is $20 per share. I’d rather this not happen so I could just own it.  If it does happen that is a 30% premium over now.  They’d be stupid to take the deal (no one at TIVO has reviewed said deals or commented on them publicly).
  • CON #2 – Has a 53% debt to equity ratio (which is not rock bottom but not terrible and with the valuation acceptable).

So, the morning after I completed my initial analysis and I decided to buy this stock rumors of a sale started cropping up.  No comment from the company.  Later they started saying the stock’s value was not being recognized and they were undergoing a “strategic alternative review”.  The new CEO came in and quit fairly quickly.  I’m not sure what that is all about but I doubt it is good.  I guess he figured out pretty quick he was not going to get to his $28 price target for his stock grants anytime soon under any exit scenario.  The current interim CEO (and I believe the former CEO) has committed to stay in the role until the strategic alternative review is completed.  I don’t believe they are even looking for a replacement until they decide what their options are.

I’m completing this analysis a few days ahead of the 4th quarter 2018 results.  The company has been in a “strategic alternative” review for the better part of a year. No one seems to be terribly interested in the company “due to the unique nature of the business”. They are not providing business outlook estimates based on this so the shareholders who they are working to maximize value for are flying blind.  They said during the 3rd quarter results that they expected to have this process wrapped up for the Q4 results.  So, if they are true to their word, we should know in a few days what they expect to do with that.  Based on my review I would be perfectly fine with someone coming in and buying this company and taking it off my hands.  There are a few reasons.

As soon as I read PRO #4 I should have immediately left the building.  If we are relying on lawyers as a strategy to run the business we are not in a good business. Ha!  I get the concept of fighting to keep your intellectual property rights from being violated or outright stolen but lawyers cost a lot of money and fighting legal battles with the likes of Comcast I’m sure is not inexpensive (nor fun).

The other reason is the company’s ROIC and ROE…oh my!  Get me outta here!  These boys haven’t turned but one positive ROE in the past decade and their return on invested capital is zilch!  They are not generally profitable on an EPS basis (although that is supposed to improve…but no guidance so who knows) their shares outstanding and debt level is a constant roller coaster which is very hard to figure out what they are doing there.  The only thing that is a major positive for me is the large gross margin (although they are falling fairly rapidly) and the very decent free cash flow (in spite of no regular earnings).  So, this company is not a fire sale emergency for me but it is not a company I would put money into today.  All this was dug up in the enhanced analysis that I do now (this spreadsheet).  The 65% certainty I’m calculating on this is not a business that I’d invest in going forward and one I wouldn’t even hold long term.  That said I’m going to wait and see what happens on this week’s earnings call.  Perhaps they wrap things up as planned and some private equity buyer comes in and takes this company off the market.  If that doesn’t happen, I’d expect the price to get whacked and it if does happen I’m not expecting a huge premium over the current price.  I really only need to get back to $15ish to break even and if I can break even on this stock, I’d call it a successful year.  If none of that happens, I’ll likely just hold onto this until I can replace it with something else (it is my smallest position at this point anyway).  So not an emergency but I’d like to move along from this company.  Bye Felicia!

I’m sharing my analysis here.  If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72

Published by deanorolls

Well, if I told you that you wouldn't need to go to my website...now would you?!?!

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