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TiVo searches for an edge in Digitalsmiths deal

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NEW YORK ( The Deal ) -- Digital media company TiVo  said Wednesday it had agreed to acquire cloud-based content search company Digitalsmiths for $135 million in cash.

Durham, N.C.-based Digitalsmiths' cloud-based software allows users to search content and generates personalized recommendations on mobile and gaming consoles.

The company does business with seven of the top 10 television service providers in the U.S., including Time Warner Cable  , Dish Network   , and DirecTV , reaching a total of 64 million U.S. homes. Though only about 10% of those customers use Digitalsmiths' services, the company said it expects the number to rise to about 50% over the next several years.

"Digitalsmiths contributes expertise, data opportunities and approaches that complement and extend TiVo's extensive work in advanced television to customers seeking search, recommendations and portability," said TiVo CEO Tom Rogers in a statement.

TiVo CFO Naveen Chopra added in a phone interview that TiVo has been working to transform itself from a direct consumer company to a software provider to other cable companies. He said TiVo will fund the acquisition with cash from its balance sheet.

Chopra declined to say if Digitalsmiths ran an auction process.

The target, founded in 1998, has venture capital backing from 406 Ventures, Aurora Funds , Chrysalis Ventures , Cisco Systems  and Technicolor Holdings .

TiVo was one of the first companies to introduce digital video recorders, or DVRs. The company faces steep competition from cable companies that provide their own DVR service, as well as Apple  AppleTV and Google's Chromecast.

For its fiscal third quarter ended Oct. 31, TiVo reported a net income of $12.5 million and an adjusted Ebitda of $23.8 million compared to a net income of $59 million and an adjusted Ebitda of $71.9 million through the same time period one year ago. TiVo blamed the drop on losing subscribers to competition.

Though San Jose, Calif.-based TiVo has lost market share to competitors, Chopra said it has generated over a $1 billion in cash derived mostly from lawsuit settlements with competitors, including Dish Network, Verizon Communications   and Google regarding intellectual property use.

Barclays plc analyst Kannan Venkateshwar wrote in a research note that the deal could "prove to be an attractive acquisition over time" as Digitalsmiths' business volume grows.

"As demonstrated by some of the recent growth in [video on demand] and electronic sell-through of movies at companies like Comcast  (which is a notable company missing from Digitalsmiths' customers), content discovery is key to more transactions, which in turn should help support business models like Digitalsmiths," Venkateshwar wrote.

He noted that TiVo's customer base does not overlap with that of Digitalsmiths, providing TiVo access to additional relationships.

TiVo said it expects to complete its latest acquisition by the end of the first quarter.