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TiVo Inc. (NASDAQ:TIVO)

February 27, 2013 4:20 pm ET

Executives

Naveen Chopra - Chief Financial Officer and Senior Vice President

Unknown Analyst

Okay. We're on, great. I'll get my legal obligation out of the way. Please note important disclosures including my personal holdings disclosures and Morgan Stanley disclosures all appears in the handout available in the registration area and on the Morgan Stanley public website. I'm pleased to welcome back to our conference, Naveen Chopra from TiVo, although he has been promoted since last year, so congratulations on that. He's the CFO at TiVo now. Naveen's responsible for TiVo's financial operations as well as formulating TiVo's overall strategy and expanding distribution of the TiVo service. He's been in corporate development and marketing roles over his course of his career there. Naveen, thanks for joining us.

Naveen Chopra

Thank you. Thanks for having me, great to be back. Great event.

Unknown Analyst

So nice and well-timed, you reported results yesterday after the close. Why don't I just give you a chance at the outset here to kind of tell the audience what the key takeaways were from your perspective on Q4 and your Q1 outlook?

Naveen Chopra

We appreciate you guys scheduling the conference around our earnings call.

Unknown Analyst

No problem.

Naveen Chopra

It's very convenient. It was a great end of the year for us. It was our Q4, the end of our Q4 '13, which was a very strong quarter. A couple of notable milestones actually, highest revenue quarter for TiVo in the company's history. We closed our overall subscriber base across the $3 million mark during the quarter. Obviously a lot of that comes on the back of progress we have made over the last few years with a number of pay television providers who are now major distributors of our service.

One of the key metrics that shareholders look at with respect to that part of our business also performed very well, which was growth. And the service provider-related revenue was up 88% year-over-year. So I think we are finally, have been able to put some financial results on paper that reflect the story that we've been telling people and where we see the future opportunity for our business. So that part was very strong in terms of looking forward.

We reaffirmed a picture that we think that, the quarter before, the most notable portion of that is that we believe that this fiscal year, we should be able to achieve adjusted EBITDA, profitability including our litigation expenses, which would represent significant improvement on the bottom line versus where we've been previously. And I think giving investors confidence that we're able to stick with that trend line has been very important in supporting some of the flat performance you've seen of late.

Question-and-Answer Session

Unknown Analyst

Great. I think another maybe key point that I'm sure you touched on yesterday but it's been in the news a lot, we had your friends at Liberty presenting over this week and, at least from my perspective, had nice things to say about you guys and Virgin. But can you update us now given that announcement on how your relationship with Virgin is and sort of the roadmap in that market for you guys?

Naveen Chopra

Sure. Well, I'm glad to hear that Liberty has good things to say about us. We've always had tremendous respect for Liberty's management team. I think what they've done in Europe is extremely impressive. We're also gratified that they clearly saw a lot of value in the Virgin Media property, which we like to think that we've been a big part of, helping in hand over the last couple of years. Obviously, TiVo is now deployed to roughly 1/4 of the subscriber base at Virgin media, so it's a very big part of that. It's a extremely important partnership for us. And I think our success there has, in many ways, spoken for itself. We understand, based on what Liberty has indicated, both publicly as well as the info they communicated to Virgin and to us, that they recognize the value of TiVo in that market but they expect continue taking advantage of the assets. And for that, I think in combination with the success we've had to date, makes us feel pretty good that it's kind of business as usual. We've got a lot of opportunity ahead of us in the U.K. and I expect to continue pursuing that as aggressively as we can. And as we said, I think the liberty guys are second to none. They have been very forward-thinking in terms of the maturation of the cable industry across Europe. And I think they can be great partners for us, going forward.

Unknown Analyst

Great. Well, I'm going to take a step back and have you tell us about your vision for the set-top box businesses globally and where we're headed. This conference, we've had a lot with MSOs here, Time Warner Cable this morning, we talked about X1 and some of the next-generation set tops migrating to IP, TV Everywhere. There's a lot of stuff going on. What's the TiVo kind of vision for that and then what does that mean for your business?

Naveen Chopra

Well, I think the simple answer that we've learned, having been engaged with operators around the globe and of all shapes and sizes, is that there are some things that are consistent across all of those operators. But the way in which they are going to approach addressing those goals or those challenges varies a lot from one operator to another. The consistent part is that they all recognize that they need to have a significant upgrade in the consumer experience that there are some potential competitive threats looming on the horizon for them. I'm not sure that those are incredibly short term issues for them, but I think they see a lot of long-term trends are going. And they realize that they need to improve their product offering in order to make sure that they're adequately positioned. Now where things begin to differ a lot, depending on whether you're looking at an operator in the United States, whether you're looking at one in Europe, whether you're looking at a small operator or a large operator, cable operator or satellite operator, really comes down to how they are going to go about doing that. And there are some operators who believe that the fact that the most cost-effective way of solving that problem is to utilize consumer electronic devices and to figure out how to distribute their content, their service, into a device that's already in somebody's home and that already can support a very robust software environment. There are other operators who have looked at that and have to acknowledge that the reality of what they would need by way of infrastructure in their network to do that is really beyond their grasp, and they need something that is more moderate in terms of investment. And they are still very -- therefore, very committed to set-top boxes and QAM-based distribution, things of that nature. And we have seen other operators who believe that they don't need to do a whole lot in terms of the CapEx regardless and that there are ways to upgrade or modify software on existing plants and existing infrastructure in order to create a better consumer experience. So the consistency is everybody wants a better experience, they want functionality to enable our multiscreen video product. They want to embrace the world of over-the-top content in a controlled fashion. They want an experience that is more personalized, more social and frankly, they want something that's more dynamic, that can be more innovative and can change more at the pace of what we see happening in the mobile world and what has traditionally happened in the pay television world. But there's a lot of different ways we can implement it and the good news for us is I think we'd been able to prove that we can play ball with those operators, regardless of the specific implementation approach.

Unknown Analyst

What do you think about TiVo's position with some of those larger operators? We've heard from Charter, who's a customer of yours, I think it was yesterday, that they had started putting together after a while. But they talked about actually being able to roll out cloud-based guides on a lot of their legacy set-tops. What does that mean for your business? And does the move to the cloud and sort of more software generally versus hardware, to deliver to the customer, is that a positive for an opportunity for TiVo?

Naveen Chopra

It's absolutely an opportunity for us. I mean, if you think about what we've said, I mean, we are fundamentally the guys who build the consumer experience, pitches together all the different components of what the operators need to put their video products in front of the customer. We're the navigation, we provide the metadata, and we provide a lot of the intelligence for helping people find what they want about the intelligence for providing a consistent experience from one screen to the next, et cetera. So we are very much advocates of moving more and more functionality into the cloud, frankly because it means more devices that are interacting with our service. It typically means a less complex and therefore, faster ability to deploy our service in a new environment, with a new customer. So from that perspective, it couldn't happen fast enough. And we've also been making major investments in the cloud for the purposes of our own software over the last few years. So it's very consistent with the direction that we've been steering our own technology. That said -- and Charter is a great example of an operator who has embraced that approach quite aggressively. We have other operators in other markets who still look at the world very much through the eyes of a set-top box. And therefore, are making plans to develop the next-generation set-top box and are quite confident that they will continue to have a lot of set-top boxes deployed for a while. But as we said, I think we have a great role to play in all those cases. And I think some of the things that people like Charter are doing are very innovative and we are excited to have an opportunity to be part of it.

Unknown Analyst

Great. I wanted to ask you a little bit about the competitive environment. I know you compete with a lot of internal development, which is always a part of the story. But even since the conference last year, the world view has gone through some pretty big strategic shifts. NDS was acquired by Cisco. How does the landscape look to you now and how is TiVo positioned versus other options for operators?

Naveen Chopra

Yes. As we said, in some ways, there has been a lot of change. I would say in terms of what we see in the market and what's affecting us, there perhaps has not been as much change as one might think. We still, as you mentioned, in some ways compete with, for a handful of operators, an internal development option that they have. But the reality is, as the software work here is becoming more significant, the number of operators that can tackle that independently is getting smaller and smaller. It is becoming something that requires, in some cases, hundreds of millions of dollars to be invested on an ongoing basis if you look at what take a Comcast or a Time Warner has invested in, in those types of solutions by doing it internally or BSkyB in Europe. The numbers are just not digestible for the vast majority of operators out there. So for those operators, they are in a position of partnering with someone like ourselves in Europe and, yes, has obviously been a very significant player. Rovi has had a somewhat of a legacy position here in the United States. I think while there's been some consolidation among those players over the last -- the course of the last year, we have not seen it really make much of a difference in terms of the operator mindset. I think at the end of the day, the operators are still very focused on where can they get the best product and where can they get a vendor or a partner that they believe can get that product to market quickly and then continue to innovate on it in rapid fashion. And I have not seen anything that's come out of a combination of any of the set-top providers and software providers that has changed where we sit in comparison relative to where we were a few years ago, which is -- we're viewed as probably the fastest, most innovative guys out there.

Unknown Analyst

You mentioned R&D and the required spending to be a player in this business. What's your -- what's the TiVo management team outlook around R&D development and the spending levels going forward and where are you spending -- where you're investing your money?

Naveen Chopra

We touched on this a little bit on our call last night and it is an important point because it's a careful balance for us. I mean if you heard my prior comments that, for us, a critical competitive advantage is making sure that we do have the mantle of innovation with respect to delivering a solution for operators that we can move faster than the competition. And so we are historically cautious about anything that constrains our R&D capability. That being said, we have also made some investments over the course of the last couple of years that really took our R&D expense up significantly. And we -- our plan at the time, and we communicated those expenses this way, was to bring those down as we got past some fundamental infrastructure work that needed to be done, as well as some major deployments that we thought could then be leveraged at lower cost further down the road. And our expectation is we have some of the benefit of that last year. We had a modest reduction in R&D expense in the back half of fiscal '13. Our expectation is that over the course of fiscal '14, we will also capture some reductions. I think that'll be somewhat volatile from quarter-to-quarter, so we don't really look at it on a quarterly basis. We're more focused on the full year. But we expect that R&D will continue to be our largest event. If we're a successful company, that's the way it should be. And there will always be new technologies, new product offerings, new customer opportunities that make sense for us to invest in. We've been spending a lot over the last couple of years developing a whole home experience, making our software more portable to go beyond a proprietary TiVo platform, which is obviously, where our business started. But if you look at where most of our subscriber growth has happened over the last couple of years, it's really been on other people's platforms. So those have been -- have occupied a lot of our work over the last year or 2. Going forward, some of that will continue. I think there's a lot more to be done in the multiscreen environment. We'll also start to increase our investments in the mobile arena. I think you'll see increased investment in shifting technology and intelligence into the cloud, increased investment in the -- bringing social components into the television experience. I'm very careful in saying that because our vision of the world is not based on kind of television, but it is more the metadata from people, social network, and what that -- how can that be used to improve the television viewing experience. And so those are all dramatically areas that I think we'll continue to invest in as well as hardening the -- our deployment capability with various operators. As I'm often reminded by our operations team and we've gone from a world where we were basically supporting one customer, that was ourselves. Now we've got well over a dozen customers scattered around the world. And those are customers that have made a major commitment to TiVo and we got to continue to have the infrastructure in place to deliver a great consumer experience [indiscernible].

Unknown Analyst

Let me ask you about a couple of particular products in the investment areas. I want to ask about measurement, which is a big theme at this conference from all the -- certainly from all the media companies. The ones who have ratings erosion, love your data. The ones that don't are happy with Nielsen, they'll be happy to -- surprised to hear that. Yes, tell us about measurement, and then I'll ask about TiVo Stream as well. But on the on the measurement front, you've made some investments there. What's the opportunity for TiVo and how important is that piece of the business to your strategy?

Naveen Chopra

Yes. Well, we've always believed that there's a fundamental opportunity around measurements that TiVo provides, which is the ability to measure viewing of television advertising in a much more objective way than what has historically been done by any of them and I'm sure it's come up in other conversations. But we've got billions of dollars of television advertising that are created on the basis that by measuring a small sample of people who are watching a television program, you can use that as a proxy for how many people are watching a commercial. And I think anyone who actually thinks about that realizes that it’s a pretty bad assumption and that, in reality, the sample size is too small and that the people who watch the show are generally not also watching the commercials. And so our approach, using the technology in our software and the set-top boxes, and to say we can actually measure how many people are watching a commercial by doing second-by-second measurement. And by having a large population of boxes, we can come up with something that is really measuring how many people are watching commercials, not to mention the fact gets taken into account, prime shifting and all the things that have created a different television landscape today than what we had 10 years ago. And so we've been creating those products. We've been actively selling them for a couple of years and it's small but, I think, a business that has a lot of potential for us going forward. This year, we acquired a company that allowed us to further expand on our proposition there that they not only doing measure, advertising itself but we can actually figure out other people who watch the particular commercial, how many of those people then went and purchased the product over some period of time after viewing that commercial. So it's a true full circle of measurement. You can look at the effectiveness of the advertising not just in terms of how many impressions you actually created but in terms of what kind of response you get, which is all part of the goal that I think the industry, as a whole, has of figuring out how to make television advertising as efficient, as measurable as what has been developed online. Obviously, television has some very unique properties in terms of the immersiveness and the kind of emotional appeal you can make through that medium. And it needs the kind of measurement that you can get out of online media, and that's a big part of what we're able to put forward with that part of the equation.

Unknown Analyst

What's the roadblock to getting your measurement product get embraced by the industry? Because everyone has their own -- tends to have issues with the Nielsen system to get -- really has not shown any cracks in terms of share loss and real size. Are the agencies, going towards slowing it down?

Naveen Chopra

Our view is that it's certainly a -- it's a long term gain. It's not one that we don't spend a lot of time telling people, look, next year, we're going to revolutionize the world of television measurement. It is one that will be somewhat gradual. But I think we're seeing a number of things starting to change where alternative measurement approaches are starting to become more relevant. And you can't tackle it, which is one part of the ecosystem. It's not a matter of just going after the agency. So we have customers at our network, where we've been able to show them how alternative measurement can help them capture advertisers that maybe they wouldn't otherwise have been able to really have much of a justification for selling into. But the agency is irrelevant. And we're actually starting to go interestingly and perhaps most importantly direct to advertising, where we can go in and we can sit in front of the CMO or the CFO of advertising and we can say, look, we can finally tell you exactly how efficient your advertising is, and what you need to do to fix it. And that's proven to be quite successful for us, as well. But it will be a gradual process. I suspect that several years, will be kind of a secondary source of data. And hopefully, over time, we become a more primary carrying business.

Unknown Analyst

I think if you come out and say that there's no one is skipping ads and everyone's ratings are up, you'll have a lot of friends.

Naveen Chopra

We may have a lot of friends, but we would be telling a very inaccurate picture of the reality of television.

Unknown Analyst

Before we open up to the audience. I'll you ask that if you could just wait for a microphone, or if you raise your hand, have a question. Can you talk about the TiVo Stream product and maybe the TV Everywhere approach you're taking broadly?

Naveen Chopra

Well, TiVo Stream, for those of you who don't know, is a little adapter that we launched last year that allows you to even connect it into your home network and it allows you to view the shows from your DVR on a variety of mobile devices. You can do that streaming form, but somewhat uniquely it also allows you to side-load the content on your mobile device and take it with you. So it's really the only way that, for instance, the cable customer today can really download shows off their DVR, put them on a mobile device and take them on the road. The significance of that from an industry perspective is really more around a lot of the challenges that operators have had trying to figure out how to deliver what they know consumers want, which is the ability to watch their shows on whatever device they are, wherever they are. And that's been challenging in terms of securing those rights through programmers. There are obviously, some operators who have the heft and the leverage to make more progress in capturing those rights. We've seen particular success with some of the smaller operators who have said, I'm not sure I'm going to be able to capture those rights. And so TiVo Stream is a very robust way of delivering what their consumers, what their subscribers want without having to go through a very complicated set of live discussions because it's a personal product that the consumer has put in their own home to receive that product. So we've seen a very strong response from it. Suddenlink, as one example, is an operator that has really embraced it and begun marketing it quite aggressively. And we're optimistic about the potential for that going forward.

Unknown Analyst

All right. Why don't we see if we have any questions in the audience? One over there. Mike [ph], just wait for the mic, if you can.

Unknown Analyst

Can you talk about -- more about who your targets [indiscernible] cable operators, either in the U.S. and international, whether it's been Suddenlink or Charter? How do you think about the size of your market opportunity now? If it's not the Comcast of the world. So if can you give us some color on that?

Naveen Chopra

Sure. We've tried to be quite explicit that in the domestic market, our focus is on the Tier 2 segment and below. In terms of size, I think about that as comprising somewhere on the order of 10 million to 15 million homes in the United States. And I think our opportunity is, over time, all of that. We've done deals with operators today who represent about 1/4 of that space. So I think we have a lot of opportunity in front of us both in penetrating the subscriber base as the operators that are currently customers. Then we also have 75% of that market that is not yet a TiVo customer. And so that's a great opportunity for us. Going outside of the United States, there are -- it's a much more fragmented market. There are a very small number of large operators who are developing in-out solutions and therefore, virtually anyone who is looking for a partner to help them develop their video platform is a potential customer of ours. Yes, there's about 400 million pay television homes outside of the United States. A lot of those are in markets where the economics of the business are not all that attractive. But I think there's easily 100 million to 200 million that are in markets in Western Europe, rapidly growing markets in Latin America and some of the more favorable markets in Asia, where we can achieve some meaningful success. And we've taken it in stages. We had a -- we've had an intense focus on Western Europe over the last couple of years, where we've been able to use Virgin Media as an example of the success we can create for an operator. That has certainly garnered the attention of operators, not just in Western Europe but in other parts of the world as well. And we are now investing more in pursuing deals in those geographies as well.

Unknown Analyst

Great.

Unknown Analyst

You've have a follow-up, Mike [ph]?

Unknown Analyst

[indiscernible]

Unknown Analyst

We got one up there.

Unknown Analyst

Going back to your comments on moving more intelligence into the cloud -- I guess as we go on for a question, are we moving to a set-top box-less world? And what does that mean to TiVo? And are you indifferent, given your evolution from hardware to software?

Naveen Chopra

I'll answer the first part of that, excuse me, second part of that first. We are different. In fact, we're developing. As part of the solution, we're going to be launching with an operator in Scandinavia later this year, the ability to have a TiVo experience without a set-top box, whether you have all the capability of the TiVo interface and all the power of the discovery tools, the recommendations, all those kinds of things. But the contents is stored on a server in the cloud. So we are very neutral or, in fact, to some extent, we advocate the transition to doing more and more in the cloud. The thing you have to keep in mind is that where operators will fall in terms of whether they embrace that approach or not is highly dependent on the right environment. And in places where the operators are able to get the rights to this, store all the content in the cloud and to deliver it via IP, is a very elegant solution and one that we are very big fans of. But the reality is, there are still many markets and many operators who I think are several years away from being able to do that. And therefore, you will still also continue to see growth of a more traditional approach utilizing a set-top box with some combination of local and cloud-based storage.

Unknown Analyst

And the world of no set-tops, do you expect that to come?

Naveen Chopra

I think long term, it's inevitable. Whether that's 5 years away, 10 years away or 15 years away, is much more difficult to answer.

Unknown Analyst

Right. Maybe I'll ask one last one before we run out of time. We can't have a TiVo conversation without talking at least about the litigation, given the history of the company. Have you shifted your strategy now focusing more on the vendors than the operators? And maybe update us on the litigation expense and the outlook for that piece on the P&L.

Naveen Chopra

So overall strategy, no major change actually. And we -- we're obviously, very focused on continuing to protect our intellectual property. We believe that we -- we have a birthright in the invention of the DVR, and we intend to make sure that we are fairly compensated for that, where we are unable to have commercial relationships with people who are deploying DVR technology. The fact that we are now in litigation with Motorola and Cisco is really not of our own choosing. Our strategy is still very much to focus on the part of the equation where a lot of the value is being generated from our intellectual property, which tends to be the operators. In this particular -- or both of these particular cases, we were actually brought into the litigation by the set-top vendors. So Motorola filed a declaratory judgment against TiVo that forced us to address, through litigation, the question of whether their products infringe our intellectual property or not. And we've ended up in a similar situation with Cisco. But the fact that we ended up in litigation through that course has not changed the fact that our primary focus is on the operator. In the case of Motorola, Time Warner will be a defendant in that upcoming case as well.

Unknown Analyst

Okay. Well, listen. We're out of time. Naveen, thank you very much.

Naveen Chopra

My pleasure, thanks for having me.

Unknown Analyst

Thanks, everybody.

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