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TiVo (NASDAQ:TIVO)

Q3 2013 Earnings Call

November 28, 2012 5:00 pm ET

Executives

Derrick Nueman - Investor Relations Professional

Thomas S. Rogers - Chief Executive Officer, President and Director

Anna Brunelle - Chief Financial Officer, Principal Accounting Officer and Vice President

Matthew Zinn - Chief Privacy Officer, Senior Vice President and General Counsel

Naveen Chopra - Senior Vice President of Corporate Development & Strategy

Analysts

David W. Miller - Caris & Company, Inc., Research Division

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Eric Wold - B. Riley & Co., LLC, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Daniel Ernst - Hudson Square Research, Inc.

Alan S. Gould - Evercore Partners Inc., Research Division

Todd T. Mitchell - Brean Capital LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TiVo Third Quarter 2013 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Derrick Nueman, Head of Investor Relations. You may begin your conference.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to TiVo's third quarter ending October 31, 2012 earnings call. On the call today with me are Tom Rogers, CEO; Anna Brunelle, CFO; Naveen Chopra, SVP of Business Development and Corporate Strategy; and Matt Zinn, our General Counsel.

We just distributed a press release and 8-K detailing our third quarter financial results. We also posted a third quarter key metric trend sheet on our Investor Relations website that includes, among other things, information on a reconciliation of non-GAAP measures discussed on today's call. You may also access a recording of this call on our website during the next week.

Today's remarks should take 20 to 30 minutes, followed by a question-and-answer session.

Our discussion today includes forward-looking statements about TiVo's future business and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements, as described in our Risk Factors in our reports filed with the SEC. Any forward-looking statements made on the call today reflect our analysis as of today, and we have no plans or duty to update them.

With that, I'll now turn over to call to Tom.

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone.

We had a strong third quarter, marked by a meaningful execution across all areas of our business. It has become clear that TiVo's financial model is strong and getting stronger as we enter into a new phase of our financial profile. To this point, we anticipate that these positive operational and financial trends will continue. And as a result, for the fourth quarter of fiscal 2013, we will be profitable on adjusted EBITDA basis excluding litigation spend. And in fiscal 2014, we believe as of now, TiVo should be adjusted EBITDA-profitable for the full year, including litigation expense. I will speak more specifically about our financial roadmap in just a few moments, after going through our highlights from the past quarter.

We delivered 18% year-over-year Service & Technology revenue growth and adjusted EBITDA and net income exceeded guidance, even after adjusting for the significant positive impact of our $250 million litigation settlement with Verizon. Our subscription base continues to grow rapidly. Total subscriptions increased 44% year-over-year as our existing deals with pay-TV operators brought TiVo to more and more homes, leading to year-over-year MSO service revenue growth of 84%, compared to 22% growth in the second quarter. In addition, we signed new operator partnerships and continue to build our data analytics business.

Now let's go into some detail about what drove our success this quarter.

Pay-TV operators around the globe currently find themselves in a fiercely competitive environment. They're dealing with pressures that are affecting not only subscriber growth but retention and revenue generation from subscribers as well. Pay-TV operators are being forced to adapt their offerings to accommodate the growing ways in which consumers want to access video content. As a result of these competitive pressures occurring around the world, operators need quickly-implementable and cost-appropriate solutions to remain competitive and provide their subscribers with a superior television viewing experience. As we continue to prove, TiVo is the best answer.

Because we are the best answer, more and more operators are looking to TiVo for a solution. We currently have distribution relationships with 9 of the top 21 cable operators in the U.S., including the 3 new operator relationships we recently signed. The first is with Mediacom, the eighth largest cable operator in the U.S.; and the second is with Midcontinent Communications, an operator with approximately 300,000 customers. Finally, we announced a deal with Cable ONE, the 10th largest cable operator in the U.S. For Cable ONE, given its past experiences, it was critical for them to select a partner with a proven track record of execution.

These deals further increased the potential for TiVo to reach more homes and to drive further meaningful financial upside.

We expect to significantly leverage our priority investments and previous cable deployments to implement TiVo quickly with minimal incremental development cost. These deployments will commence utilizing TiVo hardware, and then move to a 6-tuner hybrid QAM IP gateway set-top box that we are currently developing with Pace, which will further reduce costs for each respective operator.

Moving on to our existing deployments, we are continuing to see impressive subscriber growth. In fact, several of our partners beyond Virgin Media have achieved double-digit percentage penetration of their total subscriber footprint with TiVo, as our product has become a key differentiator for their offering, which in addition to helping bolster customer acquisition, is reducing churn rates and improving revenue per subscriber.

In the U.K., Virgin Media continues to improve its pay television net additions, which are accelerating while its primary competitor is experiencing decelerating net additions. TiVo is now being enjoyed by more than 1 million Virgin Media subscribers and growing, representing 30% of their base.

For the next phase in our relationship with Virgin Media, we recently announced we are extending TiVo beyond the set-top box by delivering live TV and video-on-demand through an IP network from a cloud to a variety of devices, which present the content through the TiVo interface. Virgin Media has recently introduced an app for iOS devices, as well as a web portal that will give subscribers access to live program viewing on tablets and smartphones, thousands of hours of on-demand content on computers, plus the ability to remotely manage their TiVo service all through the TiVo interface. One of the unique aspects of TiVo is the versatility to deliver a QAM-compatible solution, a full cloud-based IPTV experience or even a hybrid of these 2, as we are doing with Virgin Media.

In Spain, despite a challenging economic environment, ONO had its best quarter of TiVo subscription growth to date, almost doubling its TiVo subscription base for the third consecutive quarter. As important, ONO has seen roughly half the churn rate from TiVo households that it sees from non-TiVo households. In Scandinavia, we remain on track to launch our first IPTV implementation with Com Hem next year, which will allow Com Hem to offer both -- and TiVo both in its traditional form and directly from a cloud to connected devices without the need for a set-top box.

We believe this cloud implementation will further increase the appeal of TiVo to pay-TV operators across the globe and will allow these operators to offer a superior television experience without the need to incur significant CapEx from set-top box purchases.

In the U.S., our efforts with small and midsize cable operators continue to yield strong results as we delivered our strongest aggregate net subscription additions to date. With the announced launch of our non-DVR IP set-top box, TiVo Mini, with several operators and our streaming to the tablet solution which launched this quarter, TiVo Stream, as well as other planned products for next year, we believe that we are well positioned to drive similar results across all our partnerships with one of the most comprehensive whole-home solutions available anywhere.

In terms of the accolades we are receiving for Stream, Will Richmond at VideoNuze said, "In my opinion, the new TiVo Stream device actually has a bona fide killer app: the ability to wirelessly download recorded programs from a TiVo Premiere DVR to an iOS device for offline, high-quality playback. I've been using Stream mainly for this purpose for the past month and have absolutely fallen in love with the device."

On the TiVo alone front, the business continues to stabilize as this quarter, we posted our best net subscriber performance in almost 4 years and our lowest absolute churn in approximately 6 years. This quarter, we also saw an increased percentage of sales of nonsubsidized higher-end devices with larger hard drives and more tuners, which have significantly lower associated subscription acquisition costs.

Looking ahead, we are planning on reallocating the subsidy dollars gained from this hardware mix shift to marketing programs and believe we can gain subscription additions while not significantly increasing acquisition costs from the levels we've seen over the last year. To that point, we've commenced a relationship with Tim Tebow as our brand ambassador that will bring an interesting new focus to the many differentiated attributes of the TiVo product.

In addition, our Comcast TiVo offering continues to be well received by subscribers and has been expanded from 2 to 12 markets by Comcast, bringing TiVo to not only San Francisco and Boston, but Philadelphia, Pittsburgh, Indianapolis, Miami, Minneapolis, Northern New Jersey, Portland, Seattle, Sacramento and Denver. We've also expanded our retail distribution to Walmart, the largest domestic retailer, which provides opportunity to drive incremental sales. The lower churn, better messaging, a mix shift to higher-end products, more distribution, as well as continued product innovation, we believe the prospects to drive stronger financial results for this part of the business are as good as they've been in some time.

We also continue to build our data analytics business, growing new revenue-enhancing opportunities and bolstering our ability to provide unique insights to an industry that is increasingly seeking alternative ways to measure audience viewing behavior. We are quickly integrating the capabilities of TRA, now rebranded TiVo Research and Analytics, into our existing measurement services and are providing brands, advertisers and networks with invaluable insights into not only actual commercial viewership but also insights and analytics that link that viewing with actual purchase activity.

Further, we expect our research and analytics business to provide a solid contribution to our long-term profitability due to anticipated revenue growth and a strong margin profile. This past quarter, overall, the end's research and analytics revenue increased by double-digit percentage on a year-over-year basis.

Additionally, our intellectual property was once again validated this quarter, as we settled our patent litigation with Verizon. We are guaranteed at least $250 million from the settlement, bringing the total consideration and damages from our intellectual and property enforcement to date to more than $1 billion.

We remain confident that the successes we've had defending our innovation positions TiVo favorably in our ongoing enforcement actions and we believe Verizon only further strengthens our hand.

Before I turn the call over to Anna, I wanted to provide some further commentary on our evolving financial profile.

As you can see, we have made significant progress in many pieces of the business, which when taken together, we expect should allow us to achieve adjusted EBITDA profitability, including litigation expense, next year and beyond. Again, that should be including litigation expense. This would be a key milestone for us as the lack of sustained profitability has historically been one of, if not the greatest, concern for TiVo investors. We are now turning the corners as we see it and expect to continue improving profitability as the various growth initiatives we have been investing in over the years bear fruit.

Going beyond next year, we see the potential for a significant additional upside. Progress in our service provider business is a critical component to our growth trajectory. And indeed, our record of deals won, as well as our successes with current partners demonstrate that we are a compelling choice for operators selecting next-generation platforms. In fact, we believe we're just scratching the surface of a big global opportunity. For example, we currently have deals where TiVo is offered as the primary next-generation platform with many Tier 2 U.S. operators. And there are still 4x as many homes as we have under current Tier 2 distribution deals that we can address with new Tier 2 operator deals. And this is before any upside in servicing Tier 1 operators such as Charter. Outside the U.S., the opportunity is even bigger where we're looking to replicate the successes of Virgin Media and ONO in a potential market of more than 400 million pay television homes. In fact, the combination of our progress to date and the opportunity ahead means the percentage of total company revenue coming from service providers should more than double over the next 2 fiscal years.

With respect to the bottom line, we see what is currently a negative contribution to adjusted EBITDA from the service provider business evolving into a positive contribution over the next 2 fiscal years. This would represent a very substantial improvement over the current fiscal year, with continued acceleration from there. If you add all of this to retail business, which is being -- which is seeing stabilization due to lower churn and potential sales upside, as well as the cost structure that should come down long term due to lower R&D spend and lower litigation costs and the upside we spoke about in our research business, we believe we are well positioned to drive significant long-term adjusted EBITDA growth even without counting the potential for further IP litigation upside.

In conclusion, this was a quarter marked by across-the-board progress in our business. Many of our operator deals are in full swing and are bringing the TiVo experience to hundreds of thousands of new homes. We signed important new distribution deals and secured a valuable litigation settlement with Verizon, and we continue to build the strategic position in the audience research measurement and advertising arena. We believe that these trends should drive continued improvement of our financial results and should lead to a significant milestone, adjusted EBITDA profitability, even including litigation expenses in our next fiscal year. And with that, I'll turn it over to Anna.

Anna Brunelle

Thank you, Tom, and good afternoon, everyone.

The third quarter was another solid one for TiVo as we outperformed our adjusted EBITDA and net income guidance, grew Service & Technology revenues by 18% year-over-year and grew our subscriber base by 44% year-over-year.

Before getting into the details of the quarter, let me quickly go over the components of the $250 million Verizon settlement. Past damages were $78.4 million plus $600,000 of interest income, both of which were recognized this past quarter. $171 million relates to the ongoing license fees of which we recognized $2.4 million in Q3, and we expect to recognize $5.7 million in Q4. The ongoing license component will increase on an annual basis, and we expect to recognize $25.2 million in licensing revenue in our next fiscal year. Finally, similar to AT&T, there is potential for upside beyond the $250 million settlement value, depending on Verizon's subscriber growth.

Now let's get into some of the details from the quarter. Service & Technology revenues were up $61 million, up almost $7 million from last quarter; a 41% sequential growth in our MSO service revenue; a full quarter of TRA contribution; and $2.4 million of Verizon licensing fees drove the sequential increase. Our cost of Service & Technology revenue was $17 million, which resulted in a gross margin of about 72%.

Net hardware loss was $2.4 million, which was significantly smaller compared to both last quarter and the year-ago quarter due to a mix shift to higher-end boxes, where we have a positive hardware margin.

Operating expenses were $59.6 million, reflecting a meaningful decrease in litigation and R&D spend. The reductions in R&D during the third quarter equate to annualized savings of roughly $5.5 million. Additionally in operating expense, we recognized that the $78.4 million in nonrecurring litigation proceeds relating to past damages from the Verizon settlement, which I just discussed.

Interest and taxes and other expenses were roughly $1.4 million, which included about $800,000 in state taxes and $600,000 of interest income relating to the Verizon settlement. This led to a net income for the third quarter of $59 million or earnings per share of $0.49 on a basic basis and $0.44 on a diluted basis. This used a basic share count of approximately 119 million shares and a diluted share count of about 139 million shares. Third quarter adjusted EBITDA was $71.9 million and even excluding the impact of the Verizon settlement, we would still have exceeded both our adjusted EBITDA and net income guidance. Also, it is important to note that excluding the onetime past damages and litigation expense, we would've been adjusted EBITDA-positive.

Turning to the balance sheet. We ended the quarter with approximately $625 million in cash and short-term investments. On the buyback, we repurchased approximately 552,000 shares of our stock at an average weighted price of $9.94. We continue to evaluate the potential for a more aggressive buyback, given our significant cash position and improving adjusted EBITDA profile.

Now turning to our third quarter subscription metrics. As noted earlier, we grew our total subscription base by 44% year-over-year to almost 3 million subscriptions, and we are seeing an increase in contribution from our U.S. partners, as well as ONO in Spain. As expected, MSO ARPU increased this quarter to $1.42, which was driven by the increase in MSO service revenue as we begin to recognize the vast majority of DIRECTV revenue as service revenue. TiVo-Owned ARPU increased as well to $8.79 and this was driven by mostly higher research revenues, and to a lesser extent, by new subscriptions averaging almost $12 per month.

Now getting into our fourth quarter guidance. We expect Service & Technology revenues of $63 million to $65 million, adjusted EBITDA, including litigation expense to be in the range of negative $2 million to negative $4 million, and our net loss in the range of negative $15 million to negative $17 million. And excluding litigation spend, we expect to post positive adjusted EBITDA. With that, let me provide a bit of detail on assumptions included in our Q4 guidance.

First, we expect the sequential revenue increase to be driven by increased MSO revenue and a full quarter of Verizon licensing revenue, offset by slight declines in TiVo-Owned revenue. Second, though we anticipate higher sales and marketing spend due to the holidays and our efforts to promote our differentiated product, we expect that SAC will be lower on a per unit basis compared to the fourth quarter of last year due to the mix shift to higher-end SKUs and stronger gross adds. Third, we expect R&D spend to be further reduced in the fourth quarter. More specifically, per our prior guidance, we continue to expect to spend $5 million less in R&D in the second half of fiscal 2013 than we did in the first half. Fourth, we expect our litigation spend to remain at elevated levels and to be only slightly lower than the $9.5 million we spent during the third quarter as we expect to incur material expense related to the claim construction hearing that took place yesterday in the Motorola case, as well as from significant discovery activity in all of our cases.

Finally, as Tom detailed, given current operational trends, we should achieve adjusted EBITDA profitability for fiscal year 2014 even when including our litigation spend, which we expect will remain at elevated levels given ongoing litigation, and we expect continued improvements in our net loss. Positive adjusted EBITDA would be a significant milestone for us and we believe we are on the right path towards long-term sustained growth and significant profitability.

With that, let's now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Miller from Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

Just a few questions. Matt, if you're on, any thoughts from the claim construction hearing yesterday? Any surprises, just general thoughts? Did -- was -- did Judge Gilstrap say anything about a trial date? I know you guys were talking about maybe next May on your last call, but that was kind of a moving target. Any thoughts you're willing to share? And then, Anna, if you have it, what was the TRA revenue number in the quarter? And then I have a follow-up.

Matthew Zinn

It's Matt. So we thought the claim construction went well yesterday. No surprises as far as we were concerned. The judge indicated that he was going to try to issue a claim construction order before the Christmas holiday and trial is still scheduled for May.

David W. Miller - Caris & Company, Inc., Research Division

Okay. And the TRA revenue number?

Anna Brunelle

Yes, we don't give a specific guidance on TRA. We don't break it out separately, but it was in line with our expectations and it's also part of the trend towards a stronger revenue number that we guided towards in Q4.

David W. Miller - Caris & Company, Inc., Research Division

Okay, fair enough. And then, Naveen, if you're on, I know these European deals require unique architecture just hence the higher R&D expense. I know what the newer ones you're dealing with, cloud-based IPTV. As Com Hem goes online in the first half of next year, can you talk about the flow of overall R&D expense for fiscal '14? Should it be sort of first half-weighted and not as heavy in the second half? Or should it be fairly consistent quarter-over-quarter?

Naveen Chopra

Obviously, we can't provide any further guidance on the specific R&D beyond what we have. But with respect to the dynamics around where Com Hem takes us from an R&D perspective, I see the value perhaps more on the revenue side. That deal, as we've described in the past, opens up 2 very important opportunities for us. One, the ability to serve operators who are looking for much more of a cloud-based solution. And secondarily, the entire world of telco-delivered video, which is something that historically TiVo has really not been a part of, but is obviously a rapidly growing sector. So I think there's huge efficiencies, great return on the R&D investment we're making there because of those revenue opportunities. And with respect to R&D expense, we've always said that the more deals we do, the more leverage we have off the R&D, and Com Hem's obviously a part of that dynamic as well.

Operator

Next question comes from Brian Fitzgerald of Jefferies.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

You gave some color -- now that you're deployed with many partners, can you give some color on the opportunity to improve ARPU on perhaps selling and maybe on some of your longer and more matured deals? Maybe some color around what the upsell potential or funnel looks like there?

Thomas S. Rogers

This is Tom. Without going to specifics of an ARPU calculation, I'd say overall, what we are finding is, as we are engaged by a partner to provide the initial levels of R&D for their advanced television offering, they tend to want more additional applications, further upgrades, further devices that get integrated into their service. And with that, there are often additional opportunities. Sometimes operators are paying a certain amount that's a higher amount to incorporate some of that additional work so it's contemplated from the outset but it's a pay as you go and there, we increase the revenue opportunities fairly quickly as that happens. So I would say overall, the deeper the engagement we have, the more opportunity there is for additional revenue as things not originally contemplated by the statement of work at put in place.

Derrick Nueman

One thing I would add to that, Tom, is that one of the themes we are seeing across many of our operator engagements is the idea that while they typically started with TiVo as a solution for advanced next-generation platforms, there's an increasing desire to standardize that experience across their footprint, which is not something we typically factored into our projections but something we see as possibly interesting upside in the future. Although, no specific plans to speak of there yet.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Great. And then one other quick one, in terms of the sales funnel for pipeline, do you see the amount of time it's taking to close deals? Any color on whether or not that's contracting or expanding as you roll out into some of these additional MSOs?

Thomas S. Rogers

Generally, I'd say that the time frame has not change. I think each MSO goes through quite an extensive process about its needs, increasingly joining the question of the user experience and advanced television UI, with the question of next generation CapEx questions. As the cloud-based opportunities become more apparent, that part of the analysis becomes more significant. And with that, coupled with the kind of first-time through relationships that this represents in terms of the comprehensiveness of the customer offering and what I was just speaking to a minute ago, the contemplated ongoing needs for reliance on what we do to make these relatively extensive conversations that are not quick to go through. But having said that, we feel very good about the number we have gotten through.

Operator

Your next question comes from Tony Wible of Janney.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Can you go through where you stand on kind of the smaller MSO market opportunity between both what you've signed to date and kind of what you see remaining out there? What I'm trying to get a sense of is what do you see as kind of the target aggregate opportunity of subs from those deals that you signed of the smaller MSOs, and how much do you think of that is still remaining within the U.S.?

Thomas S. Rogers

So when you speak with Tier 2 cable operators, those are guys of a pretty wide span of size, some may be a smaller, some are clearly very healthy midsize operators in terms of their size. We announced 3 new ones in the quarter, as you know, over the course of the last few months. And all of those contribute nicely in terms of our overall footprint, Mediacom, Cable ONE and Midcontinent. We now have 9 of the top 21 U.S. operators who are engaged with us for purpose of their advanced TV offering. I would say, having said that, there are probably 4x as many U.S. Tier 2 operator subs available for potential with us relative to what we have already signed. So there's a very significant additional opportunity that still stands ahead of us in terms of the operators of the smaller and midsize range.

Derrick Nueman

Tony, this is Derrick. I would also add that we've driven pretty good penetration with some of these small Tier 2 guys like RCN and Grande. But there's still a lot more room we can go with these guys. So I think between, as Tom said, new deals and sort of what we have today, I think we can drive a whole lot more subs.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Got you. And a quick modeling question. Is there any MSO revenue that will be rolling off of the technology line in the near future that we need to just keep an eye on for modeling, meaning stuff that rolls off of the tech line that falls into services going forward? I know you mentioned DIRECTV on the statement.

Thomas S. Rogers

Well there certainly will be operators who we are currently recognizing as tech revenue that will become service revenue over time. I'm not going to speak to individual operator situations but clearly has work we have completed gets matched with revenues and then beyond that begins to be booked into the Service revenue category, and with that, you'll see the growth that comes from it.

Operator

Your next question comes from Eric Wold of B Riley.

Eric Wold - B. Riley & Co., LLC, Research Division

A couple of financial questions. I guess first one, on next year with a kind of preliminary guidance for EBITDA positive, including litigation, I think you mentioned that the litigation expense remain elevated next year, as it is in Q4. Can you give us a sense on this relative to Q4, are you expecting kind of a greater quarterly run rate than that $7 million to $9 million or in the similar range?

Anna Brunelle

We haven't said anything publicly looking out that far into the future. But I think we've said that I think in Tom's comment, that we expect elevated levels continue throughout the conclusion of the cases that are currently on file.

Thomas S. Rogers

I think the key is there, is just to reiterate what we said is from where we see it now in terms of how things are coming together, that we are very much looking -- that we should be profitable when you include that litigation and given the fact that we do expect that litigation to continue to be elevated because we do have significant cases in front of us, we're certainly feeling good about the opportunity for us to turn the corner in terms of EBITDA breakeven and beyond, which we think is a very important milestone for the company.

Derrick Nueman

Yes, I mean, Eric, and then just to give you a sense, in Q2 we have a trial with Motorola Scotus. In Q3, we have a claim construction with Cisco. So I mean these things aren't different from what we've seen over the last in a while.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay, perfect. And then one last question, looking at Com Hem on track to have the kind of IPTV implementation next year without set-top boxes, assuming that goes smoothly and goes well, kind of look that by other MSOs, what is the likelihood of something like that could be utilized by some of the MSOs here in the U.S.? Either ones that you are recently signing or have yet to be signed as well, maybe some of the legacy ones that haven't done that so far?

Matthew Zinn

Well from a technology perspective, obviously, something that we think can be highly leveraged in terms of the likelihood that operators here in the U.S. adopt that approach, is a slightly more complex if it gets into the heart of a lot of the issues that are being worked out today between programmers and distributors in terms of different ways that content can be sent to the home and where it can get stored and how it can get consumed. And those issues are a little less tense outside of the United States. So our view is that we expect to have the most compelling offering, ready to go in the market as operators begin getting their commercial situations to a point where the rate is deployed in that mode.

Operator

Your next question comes from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

Tom, you earlier talked of collaborating with Pace on a solution, I think you said bring down the cost of deployment for your MSO customers. Can you, am I correct? And can you elaborate a little bit, please, and I have got a follow-up.

Thomas S. Rogers

Yes. As you know, we've been integrating our software into various providers. We started that program overseas, integrating in Cisco and Samsung boxes. The Pace offering in the United States is one that a number of our MSO customers are very interested in. Some will begin their rollout of TiVo with our hardware. But clearly, there was a view that Pace as a major manufacturer could have a high-quality lower cost hardware solution than our TiVo hardware represents. And when married with our software, gives operators a great hardware/software combination at a lower cost, which we're quite happy to see since our involvement with hardware for operators has generally not involved any margins.

Paul Coster - JP Morgan Chase & Co, Research Division

Does this have any bearing on the rollouts at Charter?

Thomas S. Rogers

Well, Charter is going through evaluation of its hardware strategy and its whole CapEx approach to advanced television and they're considering a number of hardware solutions and we're in a position, I think, to be able to provide our UI and overall software regardless of where they go in that regard.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay. And my follow-up question is really related to your 2-year outlook. I might have missed this, but when say that you expect the MSO business to double, can you just elaborate on what it is you're expecting to double? And how profitably this business can be in the medium to long-term?

Thomas S. Rogers

Well, what we said really was that in the current fiscal year, the operator business has been a significantly negative contributor to EBITDA and over the next 2 years, that will turn around and it will become a positive contributor to EBITDA due to a lot of progress. And obviously, older deals contribute more than newer ones we're signing up to be getting to roll out later in that time frame. But what we're trying to do is not only give a sense of what we think should be next year the overall company adjusted EBITDA, even taking into account the elevated levels of litigation expense being a situation for us that's profitable. But within that, taking a look at the MSO businesses and the expense that you would allocate to the MSO businesses and being a position to look at that over the next 2 fiscal years as being a positive contributor within that and that's a major delta there and with that delta, one of the reasons that we see accelerating EBITDA growth.

Paul Coster - JP Morgan Chase & Co, Research Division

But no long-term business model guidance at this time?

Derrick Nueman

Yes, I would also clarify that we're not saying that MSO revenue would double. The statement that we were actually making was that MSO revenue as a percentage of total revenue will more than double, which although when you put specific numbers around that, you can get some indication of the magnitude then.

Operator

Next question comes from Barton Crockett of Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I was wondering about one of the statements you made in your -- the suit with Motorola, that you thought that they could owe you billions of dollars in damages. I was wondering if you could give us a little bit of clarification of how you get to the conclusion that they could owe you more than $1 billion in damages, given that you're getting awards that we can see some from service providers and make a good profit from the DVR option and you're making a very large claim from someone in the hardware business where the margins are lower. So I think there's some confusion about how you got to and I was wondering if you could talk us through that.

Matthew Zinn

Well, we can’t go into too much detail but damages components have 2 parts. One is the reasonable royalty and you can see what kind of numbers we've gotten in our settlements on reasonable royalty and we would certainly be seeking a lot more than we've gotten in pretrial settlements in an actual trial. And number two, there is a large lost profits component to this business. We, it's is our view that Motorola took away an awful lot of business that TiVo would've otherwise gotten if it were not for Motorola's infringing conduct here. And Motorola has produced, I believe, over 20 million set-top boxes -- DVR set-top box in the United States since its inception. So some of those are either now licensed through AT&T and Verizon, but the vast majority of the set-top boxes are not licensed. So the numbers can add up pretty quickly and get rather large.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then Tom, just stepping back on a bigger picture question. As people -- the use of cloud-based video from things like Netflix and Amazon Prime is really kind of skyrocketing, are you seeing any evidence that people's interest in and willingness to pay for or usage of DVR that, that this is starting to mature or slow?

Thomas S. Rogers

No, we are not seeing any indication of that. I think that certainly the amount of streaming viewing is increasing and the demographics increased [ph] more than others. But there is a vast amount of current content that people want to have available on an On Demand basis, that is simply not available as easily through streaming sources that they prefer to have as a DVR. They're obviously likely to be less reliance on recording going forward and more reliance on On Demand as On Demand libraries grow and our view is, we frame the entire experience regardless of whether the event's coming from linear VOD over-the-top or recorded and will that shift in how people want to access their On Demand content is really not one that we think is a fundamental driver of our business in any way.

Operator

Your next question comes from Daniel Ernst of Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

Tom, I have 2 questions about the retail side of the business. One thing that has struck us over the holiday in fall TV shopping season is that TiVo is kind of back at retail with some very prominent displays, typically with screens set up under demo reels and versus just being a box on a shelf, like I think you had been the last couple of years, just sort of back in the center. But alongside of that, typically, has been a semi-competitive product being Roku which is purely an Internet product and so I think that, that success that they've had demonstrates that there's some demand for a pure internet product. Would you consider a pure Internet product as a, not as a replacement for it, but as a side business, or an adjunct to your current expertise and in software and in streaming technology and so in brand and retail distribution? And then I have a follow-up question along those lines.

Thomas S. Rogers

So we're always evaluating our product mix and a way to provide the best television experience and without specifically commenting on that product, I will say that we provided for the cable operator, the TiVo Mini, which is a non-DVR related offering and so there's nothing SAC remote [ph] by any means in terms of our product offering is it relates to tying it to DVR. I will say that the people who have pursued the broadband only box approach have generally not demonstrated business models yet, which are very attractive relative to the -- how those are offered. And I'd also say clearly from all of our research that the multiple box, multiple remotes, not knowing what's coming from what source and therefore, not knowing how to easily access or search for the content you want, certainly not well-served by having something that only provides broadband sources when the overwhelming amount of television is still coming in from non-broadband sources. But the direct answer to your question, we're always in the learning opportunities for TiVo can best serve customers and so we don't reject any concept out of hand.

Daniel Ernst - Hudson Square Research, Inc.

Got it. My second retail question is kind of a flipside of all of that. While I understand and see you can model that the ROI on a sub past a certain number of months is profitable, but there's still a cost to adding that sub well above the near-term revenue. And so to put it in kind of blunt terms, you spent $5 million in the quarter to add 30,000 subscribers and $5 million is a lot of money. I know you have a good balance sheet now but just looking at the cash flow opportunity of the business, can you sort of comment on what the thought process is around investing $5 million on 30,000 subs at a time when you're getting such great growth from businesses where you're not subsidizing the box?

Thomas S. Rogers

Well, couple of things there. First, the individual retail subs are net present value positive, so you're right, there is some upfront cost to acquiring those subs although I will note that the subscription acquisition cost in the quarter was considerably down in the $170 range. I will say that we're also finding substantial opportunity in a component of that cost being reduced, which is the hardware subsidy and the hardware subsidy as we move into DVR, TiVo units that either have more tuners or more memory or both are being offered at prices that don't have the kind of hardware subsidy component that has traditionally burdened the business. And we also see some significant differentiation of what we're doing that this increasingly perceptible by the consumer. Not only the multi-tuner aspect what we do being unique as a cable offering, but what we do with TiVo Stream and being able to create easy mobility of recordings or iPad viewing in the house, is giving us a sense that redirecting some of that improved hardware margins for messaging, the Tim Tebow piece of that, is obviously one way to create that focus is somewhere I think where we can increase the drive of potentially some higher volume on the retail side. So it's profitable where it is. We think the hardware mix gives us further opportunity, the ability to focus on the attributes and how we've gone about choosing a player, so to speak, to help us do that, gives us all some sense that there's opportunity there.

Derrick Nueman

And Adam, just to be clear, we did spend $5 million but we expect a return on a total MPV base is something that's multiple is more than that. But again, it is a short-term loss, but long-term, this is very profitable for the model.

Operator

Your next question comes from Alan Gould with Evercore Partners.

Alan S. Gould - Evercore Partners Inc., Research Division

I've got a few questions. First, the churn, the 1.4% number is a very impressive number. Should we assume that it's going to stay at that level or continue to drop? Was the improvement due to the fact that a lot of the old SD boxes are out of the system and you're just left with more HD boxes and customers that are less likely to churn?

Thomas S. Rogers

Yes, that was a factor. I wouldn't say that we are without ongoing fluctuation in that churn number going forward. Part of that is seasonal with respect to when customers signed up. But certainly, as the older units come out of the base and the churn on the HD broadband units is considerably less, we do get improvement from that.

Alan S. Gould - Evercore Partners Inc., Research Division

So we should expect that number to stay low or continue declining? Or was it -- I'm not sure how much was seasonal versus how much was structural?

Thomas S. Rogers

Well, they're both components there. I would say there is some continuing fluctuation in those numbers. But overall, the lowering of the base of the older DVR certainly helps bolster the churn number.

Anna Brunelle

This is Anna. I would just add that it is the best churn rate we've seen in quite some time, though we had good churn rates the last 2 quarters prior to that. So I do think we're seeing the trend as Tom said around the HD subs giving us a better churn rate. That being said, we don't want to be too predictive of that continuing indefinitely in that timing as Tom said of the boxes coming on does provide an opportunity for fluctuation. And then frankly, this the first quarter we've been that low, so I think we need to do give it some time to see if it continues.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. I was wondering if you give us an update on the timing of the Charter rollout? Should we assume it's sometime first half of fiscal year '14?

Thomas S. Rogers

We're going to let Charter speak to that. As I've said, they've indicated they're in the middle of their hardware CapEx reviews and Rutledge, the CEO of Charter, has indicated the importance of TiVo rolls in their plans going forward and as they go forward, we hope to make good on all of that.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And in the timing of the 6-tuner box that you're working with Pace on, do you know when that's going to be completed?

Thomas S. Rogers

Probably next year.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And Anna, should we assume that all the VMED revenue is still in tech revenue in this past quarter seeing as you didn't call it out as otherwise?

Anna Brunelle

That's correct.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And then following a little bit on Dan's question. You did highlight in the press release that the high-end standalone box, there is no upfront costs on it. What's the NPV on a relative base of the low-end standalone box versus the high-end standalone box? And would it make sense possibly to just eliminate the low-end and just go to the high-end box?

Matthew Zinn

It's an advantage, Alan, of having multiples SKUs because a lot of people are electing for the better box, but we'd produce a lot more volumes with multiple SKUs.

Thomas S. Rogers

We're seeing some of that happen naturally with increased collection of the higher-end box. Part of the answer to your question is a function of various retail environments that you're in and the demographics of the retail environment that you're there but we certainly are moving in the direction to have less reliance on lower-end and subsidized boxes.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. Last question, more of a general or an industry question. Tom, I heard a quote of yours that you were saying 65% of TiVo customers were fast-forwarding through commercials. Is that the number? And the implications of that towards the industry and further rollouts of your product?

Thomas S. Rogers

I think that what I was probably referring to was highest-rated broadcast primetime content. And when it, in record mode, the rough percentage of commercials that are fast-forward through, which is a very big number, tends to be that the most highly rated broadcast programming has the greatest increase of fast-forward rate. I think it clearly indicates that people are getting more and more comparable with commercial avoidance, then it goes to another part of our business, which is how you create advertising inventory in this environment that is a commercial people will watch as opposed to avoid. And we continue to embed those advertising solutions in our software as we pull it out to the cable industry and we believe while the network business has not been highly focused on, the importance of that, we think the importance of that will become clearer over time.

Operator

Your final question comes from Todd Mitchell of Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

Just 2 quick questions here. First, quantitatively or qualitatively, could you talk about the cost of bringing on a new U.S. MSO? What exactly that entails and what's the slope on that? And secondly, can you talk about, in your gross margin, in the ONO versus -- business versus operator business, sort of what's the difference there and how that makes your trend over the long term?

Matthew Zinn

So Todd, on the first question, in terms of the cost of bringing on a new domestic operator, I think we've spoken of this qualitatively over the course of the year and really try to stress the point that it is becoming quite efficient for us and I think that's been reflected in the momentum around winning some of these new deals. Obviously, both we and the operators like a technology platform that can be deployed at low cost, which typically translates to being deployed quickly as well. So we're at a point now where for the vast majority of these operators, assuming they're not trying to customize features, we can deploy in probably somewhere in the 3- to 6-month range, in some cases, even shorter than that. And that tends to mean a very modest level of upfront investment for them. I don't want to put numbers on that because, obviously, there's some difference from the deal to deal depending on other arrangements we have with the operator. But it has become really very affordable for operators of even relatively small-scale.

Todd T. Mitchell - Brean Capital LLC, Research Division

And on the gross margin?

Matthew Zinn

And your question on the gross margin was comparing gross margin in the TiVo-Owned versus non-TiVo-Owned?

Todd T. Mitchell - Brean Capital LLC, Research Division

Yes.

Matthew Zinn

Yes. We obviously don't break that out explicitly. I think the best way to think about it is in the operator business, once we get past those initial development costs, which in many cases are funded in large part by the operator, the margins are very good for us because we bear very limited costs of revenue. Most of the support is handled by the operator and so it's a very efficient business in that sense. The retail business as you know out of the revenue that we get on a monthly basis, we have more significant costs around running our own data center, doing the direct customer support, billing, et cetera. So that's obviously smaller from a margin perspective.

Operator

This concludes the allotted time for today's question-and-answer session. I would like to turn the floor back over to Mr. Tom Rogers for any closing remarks.

Thomas S. Rogers

Well thanks for joining us. We really feel very, very good about this quarter from a litigation point of view, from a strategic cable operator point of view, from our overall financial point of view. We didn't get to talk about the fact that this quarter represented the highest net revenue number for the quarter that we've ever done at TiVo. It was also the highest Service and Technology revenue number we've ever done for the quarter at TiVo. It was also, speaking to a question of gross margins, it was the highest gross margin number that we've ever done at TiVo. So a lot of financial milestones moving toward what, as we said, next year should be an additional very substantial financial milestone with the continued track record that we have on the litigation front and the continued leadership that we've demonstrated on the winning cable deals. We feel very much as if the combination of those things are coming together in a way that the growth for shareholders that we can provide should be quite good. Thanks, everybody, again for joining us.

Operator

Thanks. This concludes your conference. You may now disconnect.

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