San Jose, Calif.-based TiVo is one of the pioneers of digital video recorder (DVR) technology, which allows TV viewers to record shows to a hard drive and to pause live programming.
The company has reached an agreement to sell to up $14 million in common stock to Acqua Wellington North America Equities Fund over the next 14 months. TiVo can use the proceeds to raise cash as working capital.
Under the agreement, TiVo can ask Acqua Wellington to purchase TiVo stock at a discount between 3 percent to 5.4 percent of market value. Although TiVo will receive funding, the company said in a filing with the Securites and Exchange Commission that existing shareholders face the risk that the value of their stock will be diluted.
The news of the funding comes on the heels of strong holiday sales of DVRs using TiVo's technology, according to a report last week from Thomas Weisel Partners analyst Gordon Hodge.
Hodge found that TiVo-based DVRs were sold out at online retail sites Amazon.com, BestBuy.com, CircuitCity.com, Walmart.com, 800.com, Spiegel.com, Tweeter.com and Sonystyle. He also checked with 25 Best Buy, Circuit City and Good Guys retail stores and found that 19 were sold out of TiVo-based DVRs.
Hodge wrote that such sales could mean strong subscriber growth for TiVo following the holiday season. Hodge also reiterated a "buy" recommendation for TiVo's stock and expects the company to have 90,000 additional subscribers by the end of January.
"We believe that consumer demand for the product has been spurred by strong word-of-mouth about the service, as well as lower price points and rebates," Hodge wrote. "We believe this is positive for TiVo as it indicates strong consumer demand for the product."
As of Oct. 31, the company had about 280,000 subscribers to its DVR service.
TiVo licenses its technology to hardware makers, such as Philips, Sony and Thomson. Then when consumers purchase a machine, they pay TiVo a monthly, or lifetime, subscription fee.
TiVo is in a state of transition as it tries to focus more on licensing its technology to hardware makers than on accumulating consumer subscriptions. This year, the company made significant headway in its licensing efforts, signing a seven-year deal with Sony, as well as a distribution deal with cable giant AT&T.
The new funding source through Acqua is important for TiVo. In the nine months that ended Oct. 31, the company had burned through $95.9 million in cash. And as of that date, the company had $62.8 million in cash and cash equivalents left.
Not all analysts see TiVo's future as bright.
"Given the evolving competitive dynamics and the change in TiVo's business model, it appears likely that the company's subscription business will be much smaller than we previously anticipated," Ty Carmichael, an analyst with Credit Suisse First Boston, wrote in a Dec. 17 report. "Although the revision in the company's business model is appropriate in light of the capital market environment and changing industry landscape, it creates uncertainty about the magnitude of the company's cash-flow generating potential."
Carmichael downgraded TiVo shares from a "buy" to a "hold" but remained bullish on digital video recorders and commended TiVo's management for drastically improving the company's operating efficiency over the past 12 months.