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TIVO > SEC Filings for TIVO > Form 10-Q on 30-Aug-2013All Recent SEC Filings

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Form 10-Q for TIVO INC


30-Aug-2013

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 15, 2013, the sections entitled "Risk Factors" in Item 1A of our most recent annual report on Form 10-K and Part II, Item 1A of our quarterly report on Form 10-Q filed on May 31, 2013, 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 15, 2013 before deciding to purchase, sell or hold our common stock.
Company Overview
We are a leading provider of software and service technology that enables distribution and management of video content through set-top boxes with and without DVR functionality, and an increasing variety of consumer electronic applications and devices, such as smartphones and tablets. The TiVo service redefines home entertainment by providing consumers with an easy intuitive way to record, watch, and control television. We offer a full whole-home solution that includes 4-Tuner and 6-Tuner DVRs/gateways, IP STBs, and streaming to mobile and tablet iOS devices (with Android devices coming soon) with features such as What to Watch Now, Season Pass® recordings, integrated search (including content from both traditional linear television, cable VOD, and broadband sources in one user interface), access to broadband video content, TiVo Online/Mobile Scheduling and applications on third-party devices such as tablet computers and smartphones. As of July 31, 2013, there were approximately 3.6 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 through agreements with leading satellite and cable television service providers and broadcasters on MSO provisioned STBs (both through TiVo supplied and third party supplied STBs) and other devices. 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 acquired a data analytics company, TRA Global, Inc. on July 18, 2012, which we have renamed TiVo Research and Analytics, Inc. ("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 viewing behavior across a variety of platforms.


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We are focused on enhancing long term shareholder value, and will continue to evaluate opportunities to grow our business organically and/or through acquisitions. In June 2013, the Board increased TiVo's share repurchase authorization from $100 million to $200 million and extended the authorization until August 29, 2015 as a continuing part of our overall capital allocation strategy. During the second quarter ended July 31, 2103 we repurchased $60 million or 5.4 million shares of its stock.
We have engaged 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 technology revenue payment commitments totaling over $1.6 billion from intellectual property litigation.
Executive Overview
Fiscal year 2014
In the remainder of the fiscal year ending January 31, 2014, we plan to continue to be focused on our efforts to build leading advanced television products, enter into new distribution agreements, engage in development work for existing distribution customers, and continue deployment activities for our existing distribution customers. As such, 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 new products, such as our recently launched TiVo RoamioTM product line (all-in-one approach to live, recorded, on demand, and over-the-top television), as well as our mass distribution partnerships both in the U.S. and internationally. We expect to further grow our MSO subscription base through the rest of fiscal year 2014. However, we expect that growth in our installed base of MSO subscriptions will be slightly offset by further declines in our TiVo-Owned subscription base.
•We believe that our investment in research and development is critical to remaining competitive and being a leader in advanced television solutions. 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 the fiscal year ended January 31, 2013 as we continue to launch and pursue new product developments including, without limitations, features like enhanced cloud-based services, a more personalized user experience, expanded mobile applications, out of home streaming capabilites, and a variety of back-office enhancements which increase our operational capacity to handle more operator deployments.
•We will continue our efforts to protect our technological innovations and intellectual property. However, we expect our litigation expenses to be significantly lower for the remainder of the fiscal year ending January 31, 2014 as we have recently settled our patent infringement lawsuit, with Motorola Mobility and Cisco.
•We expect to continue our development efforts under our existing MSO deployment arrangements. 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 reasonably assured to be recovered through future 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 July 31, 2013 we had deferred costs of approximately $30.7 million related to development work, largely related to Com Hem AB ("Com Hem"), Cableuropa S.A.U. ("ONO"), and Charter Communication Operating ("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 until such service fees are later recognized as service revenues, as further discussed below under Key Business Metrics. Based on the contractual commitments or recent MSO activities we are reasonably assured that the deferred costs are fully recoverable. However, we face the risk of unexpected losses if we are 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


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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 devices and for which TiVo incurs acquisition costs. The MSO lines refer to subscriptions sold to consumers by MSOs such as DIRECTV, Virgin, ONO, RCN, Grande, GCI, and Suddenlink, among others, and for which TiVo 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
                             Jul 31  Apr 30   Jan 31  Oct 31  Jul 31  Apr 30  Jan 31  Oct 31
(Subscriptions in thousands)  2013    2013     2013    2012    2012    2012    2012    2011
TiVo-Owned Subscription
Gross Additions:                20      24       35      30      28      24      32      30
Subscription Net
Additions/(Losses):
TiVo-Owned                     (26 )   (22 )    (13 )   (15 )   (23 )   (29 )   (26 )   (30 )
MSOs                           238     277      222     240     253     235     260     147
Total Subscription Net
Additions/(Losses)             212     255      209     225     230     206     234     117
Cumulative Subscriptions:
TiVo-Owned                     981   1,007    1,029   1,042   1,057   1,080   1,109   1,135
MSOs                         2,635   2,397    2,120   1,898   1,658   1,405   1,170     910
Total Cumulative
Subscriptions                3,616   3,404    3,149   2,940   2,715   2,485   2,279   2,045
Fully Amortized Active
Lifetime Subscriptions         176     181      194     208     221     238     253     270
% of TiVo-Owned Cumulative
Subscriptions paying
recurring fees                  52 %    52 %     53 %    54 %    54 %    55 %    55 %    56 %

We define a "subscription" as a contract referencing a TiVo-enabled device 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 TiVo-enabled device 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 dependent in part on reporting from our third-party MSO partners.
TiVo-Owned subscriptions declined by 26,000 subscriptions during the three months ended July 31, 2013, as compared to a decrease of 23,000 in the same prior year period. This net decline was primarily driven by a decrease in gross additions. TiVo-Owned installed subscription base decreased to approximately 1.0 million subscriptions as of July 31, 2013 as compared to approximately 1.1 million as of July 31, 2012. We believe year over year 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 have TiVo-Owned subscription cancellations. Our MSO installed subscription base increased by 238,000 subscriptions during the three months ended July 31, 2013, to approximately 2.6 million subscriptions as of July 31, 2013. The increase in cumulative MSO subscriptions of almost 1.0 million subscriptions as compared to the 1.7 million cumulative MSO subscriptions TiVo


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had as of July 31, 2012 is due to subscription growth from a variety of partners such as Virgin, RCN, Suddenlink, ONO, Grande, GCI, Midcontinent, and others. We expect continued growth in our MSO installed subscription base as additional distribution deals launch.
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, CableCARDTM installation issues, and CableCARDTM technology limitations, may cause our TiVo-Owned Churn Rate per month to increase.
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       Jul 31,   Apr 30,   Jan 31,   Oct 31,   Jul 31,   Apr 30,   Jan 31,   Oct 31,
thousands)               2013      2013      2013      2012      2012      2012      2012      2011
Average TiVo-Owned
subscriptions             994     1,018     1,035     1,050     1,068     1,095     1,122     1,149
TiVo-Owned
subscription
cancellations             (46 )     (46 )     (48 )     (45 )     (51 )     (53 )     (58 )     (60 )
TiVo-Owned Churn Rate
per month                (1.5 )%   (1.5 )%   (1.5 )%   (1.4 )%   (1.6 )%   (1.6 )%   (1.7 )%   (1.7 )%

TiVo-Owned Churn Rate per month was 1.5% and 1.6% for the quarters ended July 31, 2013 and 2012, respectively, as subscriptions associated with our high definition DVRs, which have a lower churn rate as compared to subscriptions associated with our older standard definition DVRs, become a larger part of the TiVo-Owned subscription base. 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.
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
                                      Jul 31,     Apr 30,    Jan 31,    Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,
                                        2013       2013        2013       2012       2012       2012       2012       2011
                                                                    (In thousands, except SAC)
Subscription Acquisition Costs
Sales and marketing, subscription    $  1,996   $   1,859   $  3,471   $  1,560   $  2,372   $  1,257   $  1,320   $  2,398
acquisition costs
Hardware revenues                     (23,104 )   (20,786 )  (23,129 )  (21,072 )  (11,129 )  (13,261 )  (16,428 )  (12,970 )
Less: MSOs-related hardware revenues   20,103      16,002     16,834     13,051      6,696      9,268     11,641      8,998
Cost of hardware revenues              21,957      18,496     21,847     23,434     14,431     18,471     20,368     16,817
Less: MSOs/Broadcasters-related cost  (15,384 )   (11,079 )  (11,036 )  (11,841 )   (5,399 )  (10,159 )   (9,412 )   (6,351 )
of hardware revenues
Total Acquisition Costs                 5,568       4,492      7,987      5,132      6,971      5,576      7,489      8,892
TiVo-Owned Subscription Gross              20          24         35         30         28         24         32         30
Additions
Subscription Acquisition Costs (SAC) $    278   $     187   $    228   $    171   $    249   $    232   $    234   $    296



                                                               Twelve Months Ended
                              Jul 31,    Apr 30,    Jan 31,    Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,
                                2013       2013       2013       2012       2012       2012       2012       2011
                                                           (In thousands, except SAC)
Subscription Acquisition
Costs
Sales and marketing,
subscription acquisition
costs                        $  8,886   $  9,262   $  8,660   $  6,509   $  7,347   $  7,416   $  7,392   $  8,286
Hardware revenues             (88,091 )  (76,116 )  (68,591 )  (61,890 )  (53,788 )  (54,239 )  (47,893 )  (45,901 )
Less: MSOs'-related hardware
revenues                       65,990     52,583     45,849     40,656     36,603     37,986     31,483     24,273
Cost of hardware revenues      85,734     78,208     78,183     76,704     70,087     69,057     59,439     63,773
Less: MSOs'-related cost of
hardware revenues             (49,340 )  (39,355 )  (38,435 )  (36,811 )  (31,321 )  (31,941 )  (23,577 )  (17,463 )
Total Acquisition Costs        23,179     24,582     25,666     25,168     28,928     28,279     26,844     32,968
TiVo-Owned Subscription
Gross Additions                   109        117        117        114        114        111        114        142
Subscription Acquisition
Costs (SAC)                  $    213   $    210   $    219   $    221   $    254   $    255   $    235   $    232

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 July 31, 2013, our total acquisition costs were $5.6 million, a decrease of $1.4 million, as compared to the same prior year period. This decrease was primarily due to lower hardware margin loss of $1.0 million which was largely driven by lower per unit hardware loss which was largely driven by lower per unit hardware loss as our average selling price to consumers increased and diminishing impact of higher hard disk prices resulting from flooding in Thailand. Additionally, we had a decrease in sales and marketing subscription acquisition spending by $376,000 during the quarter ended July 31, 2013 as compared to the same prior year period.
During the three months ended July 31, 2013 our SAC increased by $29 to $278 from $249, which included $33 relating to an inventory reserve on excess parts. This increase in SAC was a result of the decreased subscription gross additions for the three months ended July 31, 2013 as compared to the same prior year period.
During the twelve months ended July 31, 2013 our total acquisition costs were $23.2 million, a decrease of $5.7 million compared to the same prior year period. TiVo's sales and marketing, subscription acquisition costs increased by $1.5 million, as compared to the same prior year period. This increase was more than offset by a $7.3 million lower hardware gross margin loss which was largely driven by lower per unit hardware loss as our


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average selling price to consumers increased and diminishing impact of higher hard disk prices resulting from flooding in Thailand.
The decrease in SAC of $41 for the twelve months ended July 31, 2013 as compared to the same prior year period was largely a result of a decrease in total acquisition costs during the period.
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 our subscription base to generate revenues from a variety of sources, including service fees, advertising, and audience research measurement. Investors 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. Furthermore, ARPU for our MSOs may not be directly comparable to the service fees we may 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. For example, an agreement that includes contractual minimums may result in a higher than expected MSO 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 sheets 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. Additionally, the ARPU for subscriptions generated from different MSOs may vary significantly as a result of these factors and other factors such as the size of such MSO's subscription base and the existence of financial guarantees and exclusivity commitments from certain MSOs and the specific contractual definition of a subscriber in each such agreement.
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 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    Jul 31,   Apr 30,   Jan 31,   Oct 31,   Jul 31,   Apr 30,   Jan 31,   Oct 31,
per Subscription               2013      2013      2013      2012      2012      2012      2012      2011
                                                  (In thousands, except ARPU)
Total Service revenues        34,930    34,062    35,574    35,228    32,302    30,621    31,578    32,413
Less: MSOs'-related service
revenues                      (8,673 )  (8,083 )  (8,374 )  (7,719 )  (5,502 )  (4,086 )  (4,622 )  (4,237 )
TiVo-Owned-related service
revenues                      26,257    25,979    27,200    27,509    26,800    26,535    26,956    28,176
Average TiVo-Owned revenues
per month                      8,752     8,660     9,067     9,170     8,933     8,845     8,985     9,392
Average TiVo-Owned
subscriptions per month          994     1,018     1,035     1,050     1,068     1,095     1,122     1,149
TiVo-Owned ARPU per month    $  8.81   $  8.51   $  8.76   $  8.73   $  8.36   $  8.08   $  8.01   $  8.17

The increase in TiVo-Owned ARPU per month for the three months ended July 31, 2013 as compared to the same prior year period was due primarily to an increase in our audience research measurement revenues associated with our acquisition of TRA combined with a lower subscription base in the three months ended July 31, 2013 as compared to the same prior year period.We calculate ARPU per month for . . .

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