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TIVO > SEC Filings for TIVO > Form 10-Q on 2-Sep-2014All Recent SEC Filings

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Form 10-Q for TIVO INC


2-Sep-2014

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 14, 2014, 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 14, 2014 before deciding to purchase, sell or hold our common stock. Company Overview
We are a global leader in next-generation television software services and innovative cloud-based Software-as-a-Service solutions that enable viewers to consume content across all screens in-home and outside-of-the home. The TiVo experience provides an all-in-one approach for navigating the 'content chaos' by seamlessly combining live, recorded, on-demand, and over-the-top (e.g. NetFlix, Hulu, YouTube) television into one intuitive user interface with simple universal search, discovery, viewing and recording from any device, creating the ultimate viewing experience. We distribute our software, technology, and services through an increasing variety of consumer electronic applications and devices, such as television set-top boxes with and without DVR functionality, smartphones, and tablets. We offer a full whole-home solution that includes 4-Tuner and 6-Tuner DVRs/gateways, non-DVR IP set-top boxes (STBs), and software to enable streaming to mobile and tablet iOS devices (with Android devices coming in the future) through features such as What to Watch Now, Season Passョ 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, 2014, there were approximately 4.8


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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, in some cases 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.
On February 14, 2014, we acquired Digitalsmiths Corporation, one of the Pay TV industry's most broadly adopted cloud-based search and recommendation services. We believe this acquisition will broaden our product and service portfolio and increase our opportunities among Pay TV operators, consumer electronics manufacturers, and content providers. Additionally, we generate advertising and audience research and measurement revenues by providing innovative advertising and audience measurement solutions for the television industry.
We are focused on enhancing long-term shareholder value, and will continue to evaluate opportunities to grow our business organically and/or through acquisitions. On August 26, 2014, we announced that our board of directors had authorized a new $350 million share repurchase program to replace the prior authorization that had $85.8 million remaining. This new $350 million share repurchase program expires on January 31, 2017, with $100 million in initial share repurchases under this new program intended to be completed in the fiscal year ending January, 31, 2015. As of July 31, 2014 we had purchased a total of 17,939,094 shares of common stock under the prior program at a weighted average price of $11.94 per share for an aggregate purchase price of $214.2 million. 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 2015
In the fiscal year ending January 31, 2015, 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. Additionally, we have been and plan to continue to actively protect our intellectual property. We will continue to focus on the following priorities:
標e expect to continue our efforts to increase our subscription base by adding new subscriptions through our mass distribution relationships both in the U.S. and internationally as well as our TiVo-Owned direct and retail sales with the roll out of new products, such as our TiVo Roamio product line (an all-in-one approach to live, recorded, on demand, and over-the-top television). We expect to further grow our MSO subscription base during the fiscal year ending January 31, 2015. However, we expect that net subscription growth in our installed base of MSO subscriptions will likely be slightly offset by further declines in our net TiVo-Owned subscriptions.
標e believe giving operators a choice of hardware platforms is critical to attracting new MSO customers, and driving increased penetration in current MSO customers to increase our MSO service revenues in the long term. As a result, we expect MSO hardware revenues and margins to likely decline in future quarters as U.S. MSO customers transition to third-party hardware such as Pace and other products which can support our TiVo service. Although we lose hardware margin in the short term from decreased hardware sales, we believe we gain additional subscribers through MSOs that would not otherwise be willing to sell the TiVo service.
標e expect to see revenue growth from our acquisition of Digitalsmiths. Digitalsmiths currently has business relationships with seven of the top ten U.S. Pay TV operators as well as various consumer electronics manufacturers and content providers. Most of these relationships are at the early stages of deployment and we expect increased penetration will drive further growth. Additionally, we are focused on signing additional distribution customers for Digitalsmiths both in the U.S. and internationally as well as launching new Digitalsmiths' products and services in the future.
標e 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 2015 to continue to be significant but to be at lower levels than the fiscal year ended January 31, 2014 as we continue to launch and pursue new product developments


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including enhanced cloud-based services such as network DVR, a more personalized user experience, expanded mobile applications, out-of-home and expanded multi-room streaming capabilities, data analytics, and a variety of back-office enhancements which increase our operational capacity to handle more operator deployments.
標e will continue our efforts to protect our technological innovations and intellectual property. However, we expect our litigation expenses to be significantly lower during the fiscal year ending January 31, 2015 as we have no material ongoing patent enforcement actions.
標e 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 the recovery of such development costs through future service fees from these MSOs is reasonably assured, 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, 2014 we had deferred costs of approximately $22.6 million related to development work, largely related to Com Hem, ONO, and Charter Communications Operating, LLC (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. Based on the contractual commitments or recent MSO activities, full recovery of the deferred costs must be reasonably assured. 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
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 and Households. Management reviews these metrics, and believes they 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 Subscription lines refer to subscriptions sold directly or indirectly by TiVo to consumers who have TiVo-enabled devices (such as a DVR or TiVo Mini) and for which TiVo incurs acquisition costs. The MSO Subscription lines refer to subscriptions sold to consumers by MSOs such as Com Hem, ONO, RCN, Suddenlink, Virgin,
among others, and for which TiVo expects to incur little or no acquisition costs. Additionally, we provide a breakdown of the average subscriptions for the quarter, the total MSO households and the MSO average households for the quarter, the number of fully amortized active lifetime subscriptions, and percent of TiVo-Owned


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Subscriptions for which consumers pay recurring fees as opposed to a one-time prepaid product lifetime fee.

                                                       Three Months Ended
(Subscriptions and           Jul 31,  Apr 30,  Jan 31,  Oct 31,  Jul 31,  Apr 30,  Jan 31,  Oct 31,
Households in thousands)       2014     2014     2014     2013     2013     2013     2013     2012
TiVo-Owned Gross Additions:      27       32       49       33       20       24       35       30
Net Additions/(Losses):
TiVo-Owned                      (20 )     (9 )      6      (21 )    (26 )    (22 )    (13 )    (15 )
MSOs                            283      341      313      295      238      277      222      240
Total Net Additions/(Losses)    263      332      319      274      212      255      209      225
Cumulative Subscriptions:
TiVo-Owned                      937      957      966      960      981    1,007    1,029    1,042
MSOs                          3,867    3,584    3,243    2,930    2,635    2,397    2,120    1,898
Total Cumulative
Subscriptions                 4,804    4,541    4,209    3,890    3,616    3,404    3,149    2,940
Average Subscriptions:
TiVo-Owned Average
Subscriptions                   946      961      962      974      994    1,018    1,035    1,050
MSO Average Subscriptions     3,727    3,420    3,072    2,775    2,514    2,261    2,011    1,771
Total Average Subscriptions:  4,673    4,381    4,034    3,749    3,508    3,279    3,046    2,821
Total MSO Households          3,391    3,172    2,912    2,664    2,410    2,222    1,980    1,782
MSO Average Households        3,283    3,036    2,785    2,535    2,318    2,104    1,884    1,668
TiVo-Owned Fully Amortized
Active Lifetime
Subscriptions                   159      161      171      169      176      181      194      208
% of TiVo-Owned Cumulative
Subscriptions paying
recurring fees                   49 %     50 %     50 %     51 %     52 %     52 %     53 %     54 %

We define a "subscription" as a contract referencing a TiVo-enabled device such as a DVR or TiVo Mini for which (i) a consumer has committed to pay for the TiVo service and (ii) service is not canceled. Each TiVo-Owned Subscription represents a single TiVo-enabled device (as defined above) and therefore one or more TiVo-Owned Subscriptions may be present in a single household. MSO Subscriptions are a count of the number of devices that connect to the TiVo service and one or more devices may be present in a single household. Subscriptions do not include soft-clients (i.e. iPad application or web portal) or digital tuning adapter users. 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.
We define a "household" as one or more devices associated with the same contract or customer number. We currently do not report TiVo-Owned households as we currently receive incremental revenue for each new TiVo-Owned Subscription in the TiVo-Owned business whereas, in some cases, our MSO customers pay us on a per household basis.
We calculate average subscriptions for the period by adding the average subscriptions for each month and dividing by the number of months in the period. We calculate the average subscriptions for each month by adding the beginning and ending subscriptions for the month and dividing by two. We calculate Average MSO Households for the period by adding the average households for each month and dividing by the number of months in the period. We calculate the average households for each month by adding the beginning and ending households for the month and dividing by two. We are not aware of any uniform standards for defining subscriptions or households and caution that our presentation may not be consistent with that of other companies. Additionally, the fees that our MSOs pay us are typically based upon a specific contractual definition of a subscriber, subscription, household or a TiVo-enabled device which may not be consistent with how we define a subscription or household for our reporting purposes nor be representative of how such fees are calculated and paid to us by our MSOs. Our MSOs Subscription and MSO Household data is dependent in part on reporting from our third-party MSO partners.
TiVo-Owned Subscriptions declined by 20,000 subscriptions during the three months ended July 31, 2014, as compared to a decrease of 26,000 in the same prior year period. The improvement in net TiVo-Owned Subscription losses of 6,000 subscriptions was largely related to increased gross subscription additions. The TiVo-Owned installed subscription base decreased to 937,000 subscriptions as of July 31, 2014 as compared to 981,000 as of July 31, 2013. We believe the 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


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distributed by cable and satellite companies as we continued to have fewer TiVo-Owned Subscription gross additions than TiVo-Owned Subscription cancellations.
Our MSO installed subscription base increased by 283,000 subscriptions during the three months ended July 31, 2014, to approximately 3.9 million subscriptions as of July 31, 2014. The increase in cumulative MSO Subscriptions of 1.2 million subscriptions as of July 31, 2013 is due to subscription growth from a variety of partners including Com Hem, ONO, RCN, Suddenlink, Virgin, and others. This subscription growth is largely related to international MSO subscriptions though domestic MSO subscription growth has increased as a contributer. We expect continued growth in our MSO installed subscription base through continued growth from existing distribition and as additional MSO 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)               2014      2014      2014      2013      2013      2013      2013      2012
Average TiVo-Owned
subscriptions             946       961       962       974       994     1,018     1,035     1,050
TiVo-Owned
subscription
cancellations             (47 )     (41 )     (43 )     (54 )     (46 )     (46 )     (48 )     (45 )
TiVo-Owned Churn Rate
per month                (1.6 )%   (1.4 )%   (1.5 )%   (1.8 )%   (1.5 )%   (1.5 )%   (1.5 )%   (1.4 )%

TiVo-Owned Churn Rate per month was 1.6% and 1.5% for the quarters ended July 31, 2014 and 2013, respectively. The increase in our Churn Rate per month is a result of slightly higher number of subscription cancellations combined with a lower average TiVo-Owned subscription base, as compared to the same prior year period. 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


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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.

                                                                    Three Months Ended
                                   Jul 31,    Apr 30,    Jan 31,    Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,
                                     2014       2014       2014       2013       2013       2013       2013       2012
                                                                (In thousands, except SAC)
Subscription Acquisition Costs
Sales and marketing, subscription $  1,212   $  1,505   $  6,038   $  2,628   $  1,996   $  1,859   $  3,471   $  1,560
acquisition costs
Hardware revenues                  (25,232 )  (21,058 )  (22,301 )  (35,597 )  (23,104 )  (20,786 )  (23,129 )  (21,072 )
Less: MSOs-related hardware         20,234     15,896     12,634     25,759     20,103     16,002     16,834     13,051
revenues
Cost of hardware revenues           22,524     19,764     23,163     33,017     21,957     18,496     21,847     23,434
Less: MSOs-related cost of         (14,805 )  (11,961 )   (9,650 )  (20,530 )  (15,384 )  (11,079 )  (11,036 )  (11,841 )
hardware revenues
Total Acquisition Costs           $  3,933   $  4,146   $  9,884   $  5,277   $  5,568   $  4,492   $  7,987   $  5,132
TiVo-Owned Subscription Gross           27         32         49         33         20         24         35         30
Additions
Subscription Acquisition Costs    $    146   $    130   $    202   $    160   $    278   $    187   $    228   $    171
(SAC)



                                                                  Twelve Months Ended
                                Jul 31,     Apr 30,     Jan 31,     Oct 31,    Jul 31,    Apr 30,    Jan 31,    Oct 31,
                                 2014        2014        2014        2013        2013       2013       2013       2012
                                                              (In thousands, except SAC)
Subscription Acquisition
Costs
Sales and marketing,
subscription acquisition
costs                         $  11,383   $  12,167   $  12,521   $   9,954   $  8,886   $  9,262   $  8,660   $  6,509
Hardware revenues              (104,188 )  (102,060 )  (101,788 )  (102,616 )  (88,091 )  (76,116 )  (68,591 )  (61,890 )
Less: MSOs-related hardware
revenues                         74,523      74,392      74,498      78,698     65,990     52,583     45,849     40,656
Cost of hardware revenues        98,468      97,901      96,633      95,317     85,734     78,208     78,183     76,704
Less: MSOs-related cost of
hardware revenues               (56,946 )   (57,525 )   (56,643 )   (58,029 )  (49,340 )  (39,355 )  (38,435 )  (36,811 )
Total Acquisition Costs       $  23,240   $  24,875   $  25,221   $  23,324   $ 23,179   $ 24,582   $ 25,666   $ 25,168
TiVo-Owned Subscription Gross
Additions                           141         134         126         112        109        117        117        114
Subscription Acquisition
Costs (SAC)                   $     165   $     186   $     200   $     208   $    213   $    210   $    219   $    221

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, 2014, our total acquisition costs were $3.9 million, a decrease of $1.6 million, as compared to the same prior year period. This decrease was primarily due to decreased sales and marketing subscription acquisition costs of $784,000. This decreases in sales and marketing subscription acquisition costs was the result of significant promotions in the prior year period that were not present in the current period. Also reducing the total acquisition costs was the decrease in the hardware gross margin loss of $851,000 which is a result of the better margins attained on our current product offerings.
During the three months ended July 31, 2014 our SAC decreased by $132 to $146 from $278 in the same prior year period. This decrease in SAC was largely a result of the decreased total acquisition costs combined with the increased subscription gross additions for the three months ended July 31, 2014 as compared to the same prior year period.
During the twelve months ended July 31, 2014 our total acquisition costs were $23.2 million, an increase of $61,000 compared to the same prior year period. This increase was largely related to a decrease in the hardware gross margin loss of $2.4 million offset by an increase in TiVo's sales and marketing, subscription acquisition costs of $2.5 million, as compared to the same prior year period. The lower hardware gross margin loss was largely driven by increased hardware unit sales with improved economic margins on the Roamio DVRs. The decrease in SAC of $48 for the twelve months ended July 31, 2014 as compared to the same prior year period was largely a result of an increase in the number of TiVo-Owned Subscription gross additions.


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TiVo-Owned 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 service revenues. 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. We calculate TiVo-Owned service revenues by subtracting MSOs'-related service . . .

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