TiVo Posts First Profit but Warns of Loss

TiVo Inc. on Wednesday eked out its first quarterly profit, but the pioneering maker of digital video recorders warned that it expected to plunge right back into the red. Shares fell 9% on the news.

This is a key year for TiVo, whose recorders allow users to pause and rewind live television. Although TiVo users are rabidly enthusiastic, its core technology has been duplicated widely by cable and satellite companies that offer generic recorders to subscribers, prompting some analysts to question whether it can survive.

With TiVo’s stock price stagnating and its cash reserves shrinking, the company pledged this year that it would be profitable by year’s end as it ratcheted back spending on marketing and collected monthly fees from subscribers.

But in a shift in strategy, TiVo’s new chief executive, Tom Rogers, said the company would advertise heavily to boost subscriptions. As a result, the company said it would lose $20 million to $25 million in the current quarter.

“This quarter proves that this business is able to break into profitable territory ahead of schedule,” Rogers said in an interview. “But going forward, we have chosen to drive a path toward growth.”

Alviso, Calif.-based TiVo posted second-quarter net income of $240,000, or break-even on a per-share basis, on revenue of $39.3 million, contrasted with a loss of $10.8 million, or 13 cents, last year. Sales fell 1%.

Analysts polled by Thomson Financial had expected a $3.5-million loss on sales of $40.7 million. TiVo shares, which gained 27 cents to $6.12 in regular trading, fell to $5.57 after hours after the earnings release.

Of TiVo’s 3.6 million subscribers, 2.3 million come from DirecTV Group Inc., the El Segundo satellite TV company. But that relationship hit a bump when DirecTV said two weeks ago that it would stop marketing TiVo’s service in October. It plans to unveil its own product.

In a contract that ends February 2007, DirecTV is required to offer TiVo to customers who request the service but is not obligated to promote it.

“I have fully digested that DirecTV is going a different route,” Rogers said. “We’re moving on.”

Rogers said the company would make up for the loss of DirecTV in coming months by wooing customers at retail stores and by pursuing deals with other cable and satellite companies. The company announced that CableVision Systems Corp. agreed to test-market TiVo to new customers who switch to its service from satellite TV.

TiVo has nearly $104 million in cash reserves, down from $106.3 million in January.

Rogers said subscriber growth might be hampered by the company’s limited inventory.

“We are too far down the pike relative to the holiday season to order enough inventory to satisfy the demand we might expect,” he said, adding that the decision to heavily promote TiVo’s product came after the company had arranged its product orders for the year.

Analysts said Rogers’ job was not going to be easy.

“They’re in a difficult position,” said Rob Sanderson, an analyst with American Technology Research. “On the other hand, they’ve got a great product, loyal subscribers, and they’re the innovation leader in this space.”