TIVO INC TIVO
February 24, 2011 - 6:17pm EST by
mojoris
2011 2012
Price: 10.02 EPS n/a n/a
Shares Out. (in M): 117 P/E n/a n/a
Market Cap (in $M): 1,200 P/FCF neg neg
Net Debt (in $M): -235 EBIT 0 0
TEV ($): 950 TEV/EBIT n/a n/a

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Description

 
Event Type: Binary Litigation

 

Timing: 1-100 days

 

Trade Idea(s) for Tivo, Inc. v. EchoStar Corp. en banc:

·       Long TIVO via call spreads ahead of an en banc ruling with DISH

·       Alternatively, express TIVO via call fly on valuation range settle

·       Multiple decision iterations are possible; however outcome probabilities yields material up/down from current price

·       Trade expression via option structure implemented to limit $ risk as probability skew is more balanced than 2009/2010 en banc (55%/45% in favor of TIVO vs. 75%/25% prior).

 

Situation Overview

The litigation saga between TIVO and DISH dates back to 2004 where TIVO filed a suit claiming patent infringement on 9 patents, largely pertaining to its “Time Warp” technology (whereby you can record one program while watching another).  The District Court of Texas has returned positive verdicts on three occasions for TIVO, each decision appealed (and largely upheld) in federal appeals court.  We are now at the finality of the case, as oral arguments for a final en banc hearing occurred in late 2010 and a ruling is expected any day now.

 

The en banc will decide two points: (i) Infringement and (ii) disablement.  A positive infringement ruling equates to ~ $700m to Tivo.  Disablement equates to ~ $200-$400m ($2-$3 box) on legacy boxes plus a likely licensing arrangement going forward (under a broad disablement ruling).  The panel may also split their decision which we believe has a better than 50% probability.   In the event DISH wins, we see downside to Tivo in the $6.50-$8.50/share range fundamentally (however it may settle higher over time, closer to $8+-) as no future licensing agreement is reached and no penalties are captured.  This scenario will result in appeal by Tivo which would start another multi-year clock on a final outcome.  A full victory for Tivo equates to $18-$21/share on an overshoot with a reasonable valuation of ~ $16-$18/share.

 

Timing:

As outlined below, the TIVO/DISH litigation has been ongoing since 2004.  Final oral arguments were presented in November 2010.  From various legal precedents, the average from argument to decision on patent cases involving appeals is ~ 4 months (late March/early April).

 

Brief History:

Litigation between TIVO and DISH began in 2004 (key event timeline below).  To date, TIVO has prevailed both at the District and Federal level.  The case, now at its finality, remains tied to a 9 member en banc panel which will rule on infringement (DISH infringes TIVO’s patents) and disablement (DISH disabling boxes that utilize TIVO patents).

 

·       1/2004: TIVO filed a complaint against DISH in US District Court (EDTX) alleging infringement of its “Time Warp” technology in DISH’s DVRs.

·       4/2006: Jury ruled in favor of TIVO awarding $74m in damages and ruled DISH willfully infringed the patent.

·       9/2006: District Court issued an Amended Final & Permanent injunction that prohibited DISH from using certain DVRs.

·       10/2006: US Court of Appeals for the Federal Circuit  stayed the district ruling pending appeal.

·       1/2008: US Court of Appeals for the Federal Circuit upheld the District court ruling for 2 of the 9 patents at issue (software patents) and upheld full damages for the period up to 9/8/2006.  The 7 remaining patents (hardware related) were reversed and remanded for further proceedings.

·       10/2008: DISH made its initial damages payment to TIVO related to infringement up to 9/8/2006.

·       2/2009: District court held hearings related to DISH’s claims that it had developed a workaround on its DVR’s from 9/8/2006 and hence no further damages were required. 

·       6/2009: District court found DISH in contempt of its permanent injunction regarding disablement and infringement of its installed DVRs.  The Court awarded TIVO $103m for the period from 9/8/2006 – 4/2008.

·       7/2009: US Court of Appeals for the Federal Circuit stayed the District court ruling on appeal from DISH.

·       9/2009: US District Court (EDTX) awarded TIVO contempt damages with its permanent injunction in the form of a $2.25/sub during the period 4/18/2008 – 7/1/2009 (~ $200m). 

·       11/2009: 3-member en banc panel heard oral arguments on DISH appeal

·       3/2010: Majority of en banc panel rules in favor of TIVO, however Radar (now chief judge of federal circuit court) dissented calling for a new trial.

·       5/14/2010: US Court of Appeals for the Federal Circuit granted DISH’s request for a rehearing en banc. 

·       6/8/2010: Patent & Trademark Office ruled

·       11/9/2010: Enbanc oral arguments presented.

 

The chart below adequately speaks to the binary nature of this final hearing on TIVO’s underlying value. Not sure if it shows up on VIC.

Scenario Analysis:

Three scenarios exist on an en banc ruling.  NOTE: This analysis only pertains to DISH litigation (no outcome expectation with potential pending cases with T, VZ, MSFT).  

TIVO Valuation

 

 

 

(Dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

LAST_PRICE

TIVO shares outstanding

 

114.2

TIVO options outstanding

 

12.8

Weighted average exercise price

 

$7.71

TIVO share price

 

TIVO Equity

$10.02

Diluted shares

 

 

117.1

TIVO restricted units

 

 

4.8

Weighted average exercise price

 

$7.77

Diluted shares

 

 

118.2021

 

 

 

 

 

 

Market cap of TIVO

 

 

1,184.4

Net debt

 

 

 

(235.1)

Enterprise value

 

 

949.3

 

 

 

 

 

 

Current cash damages

 

 

309.0

Additional cash damages

 

0.0

Total cash damages

 

 

309.0

 

 

 

 

 

 

Tax rate on cash damages

 

10%

 

After-tax damages

 

 

$278.1

 

 

 

 

 

 

Implied enterprise value

 

 

671.2

Cash per share

 

 

$4.34

Implied Revenue Multiple

 

         3.3

 

 

1.     TIVO wins on disablement and infringement.  Agreement reached on go-forward license agreement at ~ $2.50/box.  Including additional compensation for prior infringement, we assign a fair value of ~ $16-$18/share with a likely overshoot to $18-$21.

 

Damages

 

 

 

 

 

 

 

 

 

 

9/06-4/08 Award

 

 

103.0

 

9/8/2006

 

 

 

 

Court royalty rate

 

 

$1.25

 

4/18/2008

19.6

 

 

 

Time period (mos)

 

19.6

 

 

 

 

 

 

 

Implied DISH DVR subs

 

4.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional time period (mos)

 

14.3

 

4/28/2008

 

 

 

 

4/08-7/09 Award

 

 

206.0

 

7/1/2009

14.3

 

 

 

Attorney fees

 

 

 

0.0

 

Implied subs

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional time since hearing

 

20.1

 

7/1/2009

 

 

 

 

Additional damages

 

289.1

 

2/23/2011

20.1

 

$2.45

 

 

 

 

 

 

 

 

 

 

 

 

 

DISH Royalty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011E

 

 

 

 

 

 

DISH DVR Subs

 

 

4.6

 

Growth rate of subs

 

5.0%

 

 

TIVO royalty rate

 

 

$2.50

 

Range of $1.50-$3

 

 

 

 

Time period (mos)

 

12.0

 

 

 

 

 

 

 

Additional revenues

 

139.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licensing margin

 

 

95%

 

 

 

 

 

 

Additional EBITDA

 

132.1

 

 

 

 

 

 

Tax rate

 

 

 

40%

 

Assumes NOLs are lost with damages

 

 

 

Licensing earnings

 

79.3

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

Additional Subs

 

 

2.4

 

 

 

 

 

 

Additional revenues

 

72.0

 

 

 

 

 

 

Additional licensing earnings

 

41.0

 

 

 

 

 

 

NPV Analysis on DISH royalty

 

 

 

 

 

 

 

 

Discount rate

 

12.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

2012

2013

2014

2015

2016

2017

2018

 

DVR Subs

7.0

7.4

7.8

8.1

8.6

9.0

9.4

9.9

 

EBITDA

200.5

210.5

221.0

232.1

243.7

255.9

268.7

282.1

 

Earnings

167.1

126.3

>132.6

139.3

146.2

153.5

161.2

169.3

 

DCF

149.2

100.7

94.4

88.5

83.0

77.8

72.9

68.4

734.8

NPV

700.6

 

TIVO patent expires in July 2018 (50% capture of 2018)

 

 

NPV per share

$5.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Damages/Share

$2.45

 

Assumes $2.25/sub

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uneffected TIVO Px

$9.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$17.37

 

 

 

 

 

 

 

 

  

2.     TIVO wins on disablement, loses on infringement.  TIVO appeals.  Compensation received for prior disablement violation of ~ $290m ($2.50/sub, range of $1.50-$3.00) or ~ $2.50/share on an unaffected price of $9.  $10-12 value range, but removes an overhang so sentiment should improve.

3.     TIVO loses on disablement and infringement. TIVO appeals.  Stock trades $6.50-$8.50 (~ 2x revenues).

We assign 55% probability of a TIVO victory in some form (scenarios 1&2), 45% probability of a total loss (scenario 3).  These probabilities reflect (i) TIVO’s prior success in validating the merits of its patents and DISH infringement and (ii) a moderately weaker patent position stemming from DISH’s PTO ruling in June 2010.  While the PTO and Federal Court represent two entirely separate issues as a matter of case law, the PTO ruling nonetheless instills a level of workability within its framework of successfully finding a workaround. 

Exit Catalyst:

En banc ruling.  1-100 day timeline. 

Catalysts / Overhangs / Risks not considered:

·       Other patent disputes with Telco carriers

·       Earnings to be released in early March

·       Microsoft dispute: (http://www.bloomberg.com/news/2011-02-24/microsoft-case-against-tivo-to-be-reviewed-by-u-s-trade-agency.html?cmpid=yhoo)

·       Settlement with DISH

·       Sale of the company

 

Catalyst

Tivo, Inc. v. EchoStar Corp. en banc decision  
 
Timing 1-100 days
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