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TIVO > SEC Filings for TIVO > Form 10-Q on 30-Nov-2012All Recent SEC Filings

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Form 10-Q for TIVO INC


30-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and the accompanying notes included in this report and our most recent annual report on Form 10-K filed on March 23, 2012, the sections entitled "Risk Factors" in Item 1A of our most recent annual report on Form 10-K and Part II, Item 1A of this quarterly report, as well as other cautionary statements and risks described elsewhere in this report and our most recent annual report on Form 10-K filed on March 23, 2012 before deciding to purchase, sell or hold our common stock. Company Overview
We are a leading provider of software, technology, in-home, and outside-of-the-home cloud-based video solutions, which are included in such products as DVRs, non-DVR set-top boxes (STBs) and other consumer electronic applications and devices, such as the tablet. The TiVo service redefines home entertainment by providing consumers with an easy intuitive way to record, watch, and control television. We offer features such as Season Pass® recordings, integrated search (including content from both traditional linear television, cable VOD, and broadband sources in one user interface), WishList® searches, access to cable VOD, the ability to transfer content amongst our DVRs and non-DVR STBs and to other consumer electronics devices, access to broadband video content, TiVo Online/Mobile Scheduling and applications on third-party devices such as tablet computers and smartphones (such as iPads, iPhones, and Android phones and tablets). As of October 31, 2012, there were approximately 2.9 million subscriptions to the TiVo service through our TiVo-Owned and MSO businesses. In our TiVo-Owned business, we distribute the TiVo DVR through consumer electronics retailers and through our on-line store at TiVo.com. Additionally, in our MSO business, we generate service and/or hardware revenues by providing the TiVo service on MSO provisioned DVRs and non-DVR STBs through agreements with leading satellite and cable television service providers and broadcasters. We also generate technology revenues through engineering professional services in connection with the development and deployment of the TiVo service to our MSO customers.
Additionally, we generate advertising and audience research and measurement revenues by providing innovative advertising and audience measurement solutions for the television industry. We recently acquired a data analytics company, TRA Global, Inc. on July 18, 2012, which we have renamed TiVo Research and Analytics, Inc. (or TRA). We believe this acquisition is strategic for our data analytics business, establishes new revenue enhancing opportunities, and bolsters our ability to provide unique insights to an industry increasingly seeking alternative ways to measure audience behavior.
We have and continue to engage in significant intellectual property litigation with certain television service and technology providers in the United States to protect our technology from infringement. To date, we have received cash and future payment commitments totaling over $1 billion from intellectual property litigation, including a lawsuit we settled with Verizon Communications, Inc. for at least $250.4 million, during the quarter ended October 31, 2012. We have recorded the portion that related to past infringement as litigation proceeds in the quarter in which the settlements occurred, and the amounts related to future use are recognized by us as technology revenues from the licensing of our technology over the remaining term of the license. We currently have additional intellectual property litigation pending against Motorola, Cisco, and Time Warner Cable.


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Executive Overview
Fiscal year 2013
In the remainder of the fiscal year ending January 31, 2013, we plan to continue to focus on our efforts to build leading advanced television products, enter into new distribution relationships, engage in development work for existing distribution customers, and continue deployment activities for our existing distribution customers. Additionally, we have been and plan to continue to actively protect our intellectual property. We will continue to focus on the following priorities:
•We expect to continue our efforts to increase our subscription base by adding new subscriptions through our TiVo-Owned direct and retail sales with the roll out of our new products, as well as our mass distribution partnerships both in the U.S. and internationally. Our installed base of MSO subscriptions had strong growth in the quarter ended October 31, 2012. We expect this new trend of growth in our MSO subscription base to continue through rest of fiscal year 2013 and into next year with the continued contributions from current deployments and the expected future deployment of additional distribution deals. However, this growth in our installed base of MSO subscriptions will likely be slightly offset by further declines in our TiVo-Owned subscription base.
•We believe that our investments in research and development are critical to remaining competitive and being a leader in advanced television solutions that go beyond the DVR. Therefore, we expect our annual research and development spending in fiscal year 2014 to continue to be significant but to be at lower levels than compared to the fiscal year ended January 31, 2013 as we continue to launch and pursue new technological and product developments such as the continued development of whole-home and multi-screen offerings which include non-DVR STBs and software solutions that extend the TiVo experience to personal computers, tablets, and mobile devices, increasing our operational capacity to handle increased operator deployments, and gaining more efficiency in our distribution efforts.
•We will continue our efforts to protect our technological innovations and intellectual property. As a result, we expect to continue to incur significant litigation expenses for our ongoing patent infringement lawsuits, which include litigation with Motorola, Cisco, and Time Warner Cable.
•We expect to continue our development efforts under our existing MSO deployment agreements. As part of these arrangements, we typically receive some payments upfront and a portion over time that is a recoupment of costs to develop. As such, to the extent that our development costs exceed upfront development fees from such arrangements, but such development costs are recoverable through future guaranteed service fees from these MSOs, we will defer such development costs and start expensing them in our Statement of Operations later upon deployment with the MSO. As of October 31, 2012, we have deferred costs of approximately $30.2 million related to development work, largely related to Virgin, ONO, and Charter. However, despite the deferral of these development costs, we do incur cash outflows associated with these development efforts resulting in potentially higher cash usage in the near term. Also for international MSOs, when related revenues from service fees are received, they are first recognized as technology revenues until the previously deferred costs of development of such arrangements are expensed. This recognition of such associated service fees as technology revenues also negatively impacts the average revenue per subscription ("ARPU") for MSOs' metric until such service fees are later recognized as service revenues, as further discussed below under Key Business Metrics. As a result, we face the risk of unexpected losses if we were forced to recognize these deferred costs early if we don't successfully complete the developments and deployments with the MSO partners or these partners default on future guaranteed service fees or are otherwise able to terminate their contracts with us. Key Business Metrics
Management periodically reviews certain key business metrics in order to evaluate our operations, allocate resources, and drive financial performance in our business. Management monitors these metrics together and not individually as it does not make business decisions based upon any single metric.
Subscriptions. Management reviews this metric, and believes it may be useful to investors, in order to evaluate our relative position in the marketplace and to forecast future potential service revenues. Below is a table that details the change in our subscription base during the last eight quarters. The TiVo-Owned lines refer to subscriptions sold directly or indirectly by TiVo to consumers who have TiVo-enabled DVRs and for which TiVo incurs acquisition costs. The MSO lines refer to subscriptions sold to consumers by MSOs such as DIRECTV, Virgin Media, Cableuropa S.A.U. ("ONO"), RCN, Grande, and Suddenlink, among others, and for which TiVo


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expects to incur little or no acquisition costs. Additionally, we provide a breakdown of the percent of TiVo-Owned subscriptions for which consumers pay recurring fees as opposed to a one-time prepaid product lifetime fee.

                                                    Three Months Ended
                             Oct 31  Jul 31   Apr 30  Jan 31  Oct 31  Jul 31  Apr 30  Jan 31
(Subscriptions in thousands)  2012    2012     2012    2012    2011    2011    2011    2011
TiVo-Owned Subscription
Gross Additions:                30      28       24      32      30      25      27      60
Subscription Net
Additions/(Losses):
TiVo-Owned                     (15 )   (23 )    (29 )   (26 )   (30 )   (43 )   (58 )   (55 )
MSOs                           240     253      235     260     147      10     (30 )  (168 )
Total Subscription Net
Additions/(Losses)             225     230      206     234     117     (33 )   (88 )  (223 )
Cumulative Subscriptions:
TiVo-Owned                   1,042   1,057    1,080   1,109   1,135   1,165   1,208   1,266
MSOs                         1,898   1,658    1,405   1,170     910     763     753     783
Total Cumulative
Subscriptions                2,940   2,715    2,485   2,279   2,045   1,928   1,961   2,049
Fully Amortized Active
Lifetime Subscriptions         208     221      238     253     270     286     307     310
% of TiVo-Owned Cumulative
Subscriptions paying
recurring fees                  54 %    54 %     55 %    55 %    56 %    57 %    57 %    56 %

We define a "subscription" as a contract referencing a TiVo-enabled DVR for which (i) a consumer has committed to pay for the TiVo service and (ii) service is not canceled. We count product lifetime subscriptions in our subscription base until both of the following conditions are met: (i) the period we use to recognize product lifetime subscription revenues ends; and (ii) the related DVR has not made contact to the TiVo service within the prior six month period. Product lifetime subscriptions past this period which have not called into the TiVo service for six months are not counted in this total. Prior to November 1, 2011 we amortized all product lifetime subscriptions over a 60 month period. Effective November 1, 2011, we have extended the period we use to recognize product lifetime subscription revenues from 60 months to 66 months for product lifetime subscriptions where we have not recognized all of the related deferred revenue as of the reassessment date. We are not aware of any uniform standards for defining subscriptions and caution that our presentation may not be consistent with that of other companies. Additionally, the subscription fees that our MSOs pay us are typically based upon a specific contractual definition of a subscriber or subscription which may not be consistent with how we define a subscription for our reporting purposes nor be representative of how such subscription fees are calculated and paid to us by our MSOs. Our MSOs subscription data is based in part on reporting from our third-party MSO partners.
TiVo-Owned subscriptions declined by 15,000 subscriptions during the three months ended October 31, 2012, as compared to a decrease of 30,000 in the same prior year period. This improvement was primarily driven by decreased churn. TiVo-Owned installed subscription base decreased to approximately 1.0 million subscriptions as of October 31, 2012 as compared to approximately 1.1 million as of October 31, 2011. We believe this decrease in total TiVo-Owned subscriptions was largely due to continued pressure on subscription gross additions resulting from increased competition from DVRs distributed by cable and satellite companies as we continued to have fewer TiVo-Owned subscription gross additions than we had TiVo-Owned subscription cancellations. Despite our efforts to improve TiVo-Owned net additions, we expect current trends will likely continue and that we will experience further declines in our TiVo-Owned subscription base in fiscal year 2013.
Our MSO installed subscription base increased by 240,000 subscriptions to approximately 1.9 million subscriptions as of October 31, 2012. The increase in subscriptions is due to subscription growth from partners such as Virgin Media, RCN, Suddenlink, ONO, Grande, and others. We expect this growth to continue. TiVo-Owned Churn Rate per Month. Management reviews this metric, and believes it may be useful to investors, in order to evaluate our ability to retain existing TiVo-Owned subscriptions (including both monthly and product lifetime subscriptions) by providing services that are competitive in the market. Management believes factors such as service enhancements, service commitments, higher customer satisfaction, and improved customer support may improve this metric. Conversely, management believes factors such as increased competition, lack of competitive service features such as high definition television recording capabilities in our older model DVRs or access to certain digital television channels or MSO Video On Demand services, as well as increased price sensitivity and installation and CableCARDTM technology limitations, may cause our TiVo-Owned Churn Rate per month to increase.


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We define the TiVo-Owned Churn Rate per month as the total TiVo-Owned subscription cancellations in the period divided by the Average TiVo-Owned subscriptions for the period (including both monthly and product lifetime subscriptions), which then is divided by the number of months in the period. We calculate Average TiVo-Owned subscriptions for the period by adding the average TiVo-Owned subscriptions for each month and dividing by the number of months in the period. We calculate the average TiVo-Owned subscriptions for each month by adding the beginning and ending subscriptions for the month and dividing by two. We are not aware of any uniform standards for calculating churn and caution that our presentation may not be consistent with that of other companies. The following table presents our TiVo-Owned Churn Rate per month information:

                                                     Three Months Ended
(Subscriptions in       Oct 31,   Jul 31,   Apr 30,   Jan 31,   Oct 31,   Jul 31,   Apr 30,   Jan 31,
thousands)               2012      2012      2012      2012      2011      2011      2011      2011
Average TiVo-Owned
subscriptions           1,050     1,068     1,095     1,122     1,149     1,188     1,238     1,296
TiVo-Owned
subscription
cancellations             (45 )     (51 )     (53 )     (58 )     (60 )     (68 )     (85 )    (115 )
TiVo-Owned Churn Rate
per month                (1.4 )%   (1.6 )%   (1.6 )%   (1.7 )%   (1.7 )%   (1.9 )%   (2.3 )%   (3.0 )%

Included in our TiVo-Owned Churn Rate per month are those product lifetime subscriptions that have both reached the end of the revenue recognition period and whose DVRs have not contacted the TiVo service within the prior six months. Conversely, we do not count as churn product lifetime subscriptions that have not reached the end of the revenue recognition period, regardless of whether such subscriptions continue to contact the TiVo service. TiVo-Owned Churn Rate per month was (1.4)% and (1.7)% for the quarters ended October 31, 2012 and 2011, respectively.
We expect churn to be lower on a percentage basis and on an absolute basis in the fiscal year ending January 31, 2013 as compared to the fiscal year ended January 31, 2012 as a result of a decrease in inactive product lifetime subscriptions and as high definition subscriptions, which tend to have a lower churn rate than standard definition subscriptions, become a larger portion of our base.
Subscription Acquisition Cost or SAC. Management reviews this metric, and believes it may be useful to investors, in order to evaluate trends in the efficiency of our marketing programs and subscription acquisition strategies. We define SAC as our total TiVo-Owned acquisition costs for a given period divided by TiVo-Owned subscription gross additions for the same period. We define total acquisition costs as sales and marketing, subscription acquisition costs less net TiVo-Owned related hardware revenues (defined as TiVo-Owned related gross hardware revenues less rebates, revenue share and market development funds paid to retailers) plus TiVo-Owned related cost of hardware revenues. The sales and marketing, subscription acquisition costs line item includes advertising expenses and promotion-related expenses directly related to subscription acquisition activities, but does not include expenses related to advertising sales. We do not include third-parties' subscription gross additions, such as MSOs' gross additions with TiVo subscriptions, in our calculation of SAC because we typically incur limited or no acquisition costs for these new subscriptions, and so we also do not include MSOs' sales and marketing, subscription acquisition costs, hardware revenues, or cost of hardware revenues in our calculation of TiVo-Owned SAC. We are not aware of any uniform standards for calculating total acquisition costs or SAC and caution that our presentation may not be consistent with that of other companies.


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                                                                   Three Months Ended
                                  Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,    Jul 31,    Apr 30,   Jan 31,
                                    2012       2012       2012       2012       2011       2011      2011       2011
                                                               (In thousands, except SAC)
Subscription Acquisition Costs
Sales and marketing,
subscription acquisition costs   $  1,560   $  2,372   $  1,257   $  1,320   $  2,398   $  2,441   $ 1,233   $  2,214
Hardware revenues                 (21,072 )  (11,129 )  (13,261 )  (16,428 )  (12,970 )  (11,580 )  (6,915 )  (14,436 )
Less: MSOs'-related hardware
revenues                           13,051      6,696      9,268     11,641      8,998      8,079     2,765      4,431
Cost of hardware revenues          23,434     14,431     18,471     20,368     16,817     13,401     8,853     24,702
Less: MSOs'-related cost of
hardware revenues                 (11,841 )   (5,399 )  (10,159 )   (9,412 )   (6,351 )   (6,019 )  (1,795 )   (3,298 )
Total Acquisition Costs             5,132      6,971      5,576      7,489      8,892      6,322     4,141     13,613
TiVo-Owned Subscription Gross
Additions                              30         28         24         32         30         25        27         60
Subscription Acquisition Costs
(SAC)                            $    171   $    249   $    232   $    234   $    296   $    253   $   153   $    227




                                                               Twelve Months Ended
                              Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,    Jul 31,    Apr 30,    Jan 31,
                                2012       2012       2012       2012       2011       2011       2011       2011
                                                           (In thousands, except SAC)
Subscription Acquisition
Costs
Sales and marketing,
subscription acquisition
costs                        $  6,509   $  7,347   $  7,416   $  7,392   $  8,286   $  7,286   $  6,211   $  8,169
Hardware revenues             (61,890 )  (53,788 )  (54,239 )  (47,893 )  (45,901 )  (42,463 )  (40,364 )  (51,618 )
Less: MSOs'-related hardware
revenues                       40,656     36,603     37,986     31,483     24,273     18,691     12,213     14,885
Cost of hardware revenues      76,704     70,087     69,057     59,439     63,773     60,522     58,667     69,033
Less: MSOs'-related cost of
hardware revenues             (36,811 )  (31,321 )  (31,941 )  (23,577 )  (17,463 )  (13,730 )   (8,933 )  (11,296 )
Total Acquisition Costs        25,168     28,928     28,279     26,844     32,968     30,306     27,794     29,173
TiVo-Owned Subscription
Gross Additions                   114        114        111        114        142        147        154        160
Subscription Acquisition
Costs (SAC)                  $    221   $    254   $    255   $    235   $    232   $    206   $    180   $    182

As a result of the seasonal nature of our subscription growth in the past, total acquisition costs have varied significantly during the year. Management primarily reviews the SAC metric on an annual basis due to the timing difference between our recognition of promotional program expense and the subsequent addition of the related subscriptions. For example, we have historically experienced increased TiVo-Owned subscription gross additions during the fourth quarter; however, sales and marketing, subscription acquisition activities occur throughout the year.
During the three months ended October 31, 2012, our total acquisition costs were $5.1 million, a decrease of $3.8 million, as compared to the same prior year period primarily due to lower hardware margin loss which was largely driven by lower per unit hardware loss as a higher percentage of consumers purchased higher end units which have lower or no hardware subsidy. Additionally, we decreased our sales and marketing subscription acquisition spending by $838,000 during the quarter ended October 31, 2012 as compared to the same prior year period. This decrease in total acquisition costs for the quarter resulted in a decrease in SAC of $125 for the three months ended October 31, 2012 as compared to the same prior year period.
During the twelve months ended October 31, 2012 our total acquisition costs were $25.2 million, a decrease of $7.8 million compared to the same prior year period. TiVo's sales and marketing, subscription acquisition costs decreased by $1.8 million, as compared to the same prior year period due to lower incentives for our retailers and less aggressive upfront pricing on TiVo boxes to consumers, which was combined with $6.0 million lower hardware gross margin loss as a higher percentage of consumers purchased higher end units which have lower or no hardware subsidy. The decrease in SAC of $11 for the twelve months ended October 31, 2012 as compared to the same prior year period was largely a result of a decrease in total acquisition costs during the period offset by a lower number of TiVo-Owned subscription gross additions.


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Average Revenue Per Subscription or ARPU. Management reviews this metric, and believes it may be useful to investors, in order to evaluate the potential of TiVo to generate revenues from its subscription base through a variety of sources, including service fees, advertising, and audience research measurement. You should not use ARPU as a substitute for measures of financial performance calculated in accordance with GAAP. Management believes it is useful to consider this metric excluding the costs associated with rebates, revenue share, and other payments to channel because of the discretionary and varying nature of these expenses and because management believes these expenses, which are included in hardware revenues, net, are more appropriately monitored as part of SAC.
We are not aware of any uniform standards for calculating ARPU and caution that our presentation may not be consistent with that of other companies. The inclusion of advertising and audience research measurement revenues in our service revenues has the effect of increasing ARPU above the amounts that are directly attributable to subscription fees received. As such, future revenue estimates based on estimates of future subscription numbers and current ARPU numbers may not be accurate. For example, with the acquisition of TRA in July 2012, expected future growth in our audience research measurement revenues from the acquisition of TRA will have the effect of further increasing this effect on the TiVo-Owned ARPU per month, where all TRA related revenues are reflected. The inclusion of product lifetime subscriptions that have both reached the end of the revenue recognition period and whose DVRs have contacted the TiVo service within the prior six months has the effect of decreasing ARPU as these fully-amortized, active subscriptions no longer generate service revenues yet are included in the denominator of the TiVo-Owned ARPU calculation. Furthermore, ARPU for our MSOs may not be directly comparable to the service fees we receive from these partners on a per subscription basis as the fees that our MSOs pay us may be based upon a specific contractual definition of a subscriber or subscription which may not be consistent with how we define a subscription for our reporting purposes or be representative of how such subscription fees are calculated and paid to us by our MSOs. Additionally, our MSO ARPU per month is impacted by the fact that certain of our deployment agreements may include provisions that affect the aggregate services fees paid to us. For example, an agreement that includes contractual minimums may result in a higher than expected MSOs ARPU if such fixed minimum fee is spread over a small number of subscriptions. Additionally, ARPU for our MSO subscriptions may not be reflective of revenues received by TiVo as in certain cases the cost of development for such MSO customer may be deferred on our condensed consolidated balance sheet until later when related revenues from service fees are received and are first recognized as Technology revenues by us until the previously deferred costs of development are fully expensed. This recognition of service fees as Technology revenues will have the effect of lowering ARPU for certain of our MSO subscriptions until such costs of development are fully expensed even though such MSO subscriptions are included in the denominator of the MSO ARPU calculation.
We calculate ARPU per month for TiVo-Owned subscriptions by subtracting MSOs'-related service revenues (which includes MSOs' subscription service revenues and MSOs'-related advertising and audience research measurement revenues) from our total reported net service revenues and dividing the result by the number of months in the period. We then divide the resulting average service revenue by Average TiVo-Owned subscriptions for the period, calculated as described above for churn rate. The following table shows this calculation:

                                                           Three Months Ended
TiVo-Owned Average Revenue    Oct 31,   Jul 31,   Apr 30,   Jan 31,   Oct 31,   Jul 31,   Apr 30,   Jan 31,
per Subscription               2012      2012      2012      2012      2011      2011      2011      2011
                                                       (In thousands, except ARPU)
Total Service revenues        35,228    32,302    30,621    31,578    32,413    34,016    33,334    34,453
Less: MSOs'-related service
revenues                      (7,526 )  (5,326 )  (3,929 )  (4,472 )  (4,087 )  (4,371 )  (3,962 )  (4,294 )
TiVo-Owned-related service
revenues                      27,702    26,976    26,692    27,106    28,326    29,645    29,372    30,159
. . .
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