Tivo and the Potential Irrelevance of Intangibles

Steve, I wanted to ask you about Tivo. The company has about $300 million market value (or less after considering their cash balance), 3 million happy subscribers, unique technology and a strong brand. And it seems a logical takeover target for Apple and others.

Does it make sense to look at their fundamentals, when there are so many other intangibles in their favor?

That's a great question. 

1) First, one should look Tivo's cash burn rate (cash / negative cash flow per some period) and make a forecast when they are going to run out of cash. (See below for the Excel file example.)

2)  Next, explore if their are any likely opportunities for the company to raise more cash to provide it with some breathing room.  In these cases when the company is desperate, it's hard to raise financing on terms favorable to shareholders.  If the company does raise cash, it's probably going to be done through some convertible preferred stock or bond offering that could be dilutive to current shareholders.

3)  If Tivo can't figure out a way to convert its intangible value into real cash flow and revenue growth before it runs out of cash, then its intangible value will be largely irrelevant. 

4) If bankruptcy is in the cards, perhaps then it will be able to sell off rights to its brand in bankruptcy court. While the brand could live on, the company would be dead.

5) If Tivo is indeed hemorrhaging cash while competitors are taking share, one should question how truly valuable those intangibles are.  There is nothing to prevent Apple or others to wait until it files for bankruptcy before acquiring Tivo.  I'm not so sure Apple needs to acquire Tivo.  I'm not a branding or brand valuation expert by any means, but intuitively I think that Apple's brand is strong enough without Tivo.  If Apple has too much cash on its balance sheet and hasn't figured out ways to use that cash, then maybe it's a possibility it would acquire Tivo. 

Om Mailik, PVR Blog and a number of others are discussing possible ways Tivo can save itself. I haven't looked at Tivo's financials, so I'll let some one else provide a more detailed response.

Here is an example of a simple cash flow burn rate model.

Comments

[Luca]

I think TiVo is the perfect example of apparently valuable intangible assets that are really not worth much:
- despite its size and enthusiasm, TiVo's subscriber base does not generate enough cash flow to make the company viable (and a large chunk of it is controlled by DirecTV);
- while very popular, its brand could not be any more diluted, since it's a verb widely used with any DVR;
- its technology competes with open source products.

My guess is that in bankruptcy TiVo's assets will not be worth much.

[Parkite]

Was just looking at your spreadsheet.....There is an "*" after mkt value of investments, off b/s. What does the "*" refer to? Also, aren't these investments held on the b/s at fmv vs. historical cost? Perhaps, I am not up to date on my acct. Thx. Parkite

[Stephen Castellano]

Hey thanks for your comment. I'm not a forensic accounting expert, but I know a fair amount. And if I get stuck with something I just ask an accounting Ph.D. for advice.

So, to answer your question:

1) The asterisks on the spreadsheet do not mean anything. I should have removed them before I posted the spreadsheet; they're only left-over from remnants from an earlier model I developed.

2) "Off-balance" sheet isn't the right terminology. I suppose I should have changed it to read something like, "unrealized value difference between historical cost and marked to market value of long-term investments." But it was just easier to write "off-balance sheet," but you're right, that nomenclature is misleading.

To explain, if you have "long-term" investments recorded at historial cost on the balance sheet at $10m, but for some reason you actually think they could be liquidated rather easily, in the short-term and at a much higher value like $100m, it probably makes sense to put in an entry to take that into account.

I've updated the spreadsheet so hopefully it is clear. Thanks for your comment.