TiVo's CEO Presents at Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference (Transcript)

| About: TiVo Inc. (TIVO)

TiVo Inc. (NASDAQ:TIVO)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 04, 2013 10:10 am ET

Executives

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

Unknown Analyst

Good morning, everyone, and thanks for joining us for this discussion with Tom Rogers, the Chief Executive Officer and President of TiVo, where Tom also serves as a Director.

During his intellectual career, Tom has held and continues to hold a variety of leadership positions across well-known private equity, media and communications companies, including NBC, where, among other achievements, he founded the CNBC cable network and established the MSNBC joint venture with Microsoft. Tom spent time as the Chairman of Teleglobe International, an international telecommunications provider; was the Senior Operating Executive for Media and Entertainment for Cerberus Capital; and served as the Chairman and CEO of PRIMEDIA, a targeted media company with more than 200 magazines and 400 websites.

Today, TiVo remains a market leader in providing broadband, television services and products. The company has unique content access capabilities that are channeled through set-top boxes, as well as tablet computers, mobile phones and other screens. TiVo also provides innovative advertising and audience measurement services for the entire media industry.

This was a significant growth year for the company. Service and technology revenue grew by 24% over the last year. And total TiVo subscriptions grew by an impressive 38%, led by Virgin Media in the U.K. and new deals with cable operators, including Com Hem, Cable ONE, Midcontinent, Mediacom and GCI.

In defending TiVo's intellectual property and market position, Tom and his team have won numerous judgments for damages and consideration from third parties, which amounts to more than $1 billion to date. Last, but not least, TiVo continued to define the future of television through the launch of innovative new services, including the whole-home and multiscreen TiVo offerings.

I'd like to thank Tom for joining us. And also with us today is Derrick Nueman, the head of the company's investor relations efforts.

So we'll have a short sort of question-and-discussion period and then we'll have opportunity for the audience to ask some questions too. And so we'll just kind of dive right in. So thank you for joining us, Tom.

Thomas S. Rogers

Thank you. Had we known when we started MSNBC that the sequester thing was going to play out like this, we would have figured out how to fast-forward through it and gotten to the punch line of no deal a lot sooner but we didn't know at the time.

Unknown Analyst

Well, we're certainly familiar with the discussion. So thank you very much. So Tom you had a great year. And obviously, the momentum continues to build and you recently announced results. Can you take us through some of the highlights of the most recent quarter?

Thomas S. Rogers

Well, we had a good quarter. We had a good year. We ended up with the highest service and tech revenue in the history of TiVo, the highest net revenue in the history of TiVo, the highest gross profit in the history of TiVo. We hit the 3 million sub mark. We had MSO revenue that was up 83% year-over-year. The combination of our various strategies came together, and I think, we have been measuring ourselves on EBITDA x litigation and trying to drive to profitability, excluding our litigation costs, which in the fourth quarter we did. We were profitable to the tune of just short of $8 million of EBITDA x litigation and now we've shifted the focus to EBITDA profitability including litigation, which, as you know, is still a very high cost element for us. But based on what we're seeing by way of trends, we think we should be EBITDA profitable, even including litigation, going into next year. So coming out of the year strong, starting the new year strong, and we feel as if we have a lot of continuing growth trends that are going very well for us.

Unknown Analyst

Great. From a big picture perspective, how would you describe TiVo's market position today and what things are you most excited about when you look forward?

Thomas S. Rogers

Well, what I'm most excited about is that our ability to continue to lead as innovators in the next-generation television, advanced television space is there. We continue to be able to come forward with things that put us ahead of the competition. And what we've been able to do is to take that leadership role in innovation, the customer-facing, framing the TV experience for the customer, and combine that with something that is no less challenging, equally difficult, that is weaving the complex software into the infrastructure of operators here and around the world, so that we can bring that experience to life through the MSOs that control more of television viewing subs than anybody else in the world. And that combination of the customer viewing experience and the ability to make it a practical solution deployable by operators around the world has put us in a position of being the leaders in providing advanced television to the cable television industry and that is something 2 years ago nobody would have thought TiVo would be able to say, that we had been flatly rejected by the cable industry as the providers of DVR. They had decided to embrace generic solutions rather than our branded TiVo approach. Obviously, we've been enforcing our intellectual property to make up for some of those issues over the last few years. But to have taken that notion that we started with, the original DVR, how do you give people an on-demand experience that navigates and menus their viewing options in a way that is elegant, simple and easy. And apply that to the burgeoning world of on-demand television, where people can get anything they want whenever they want it, and still frame the experience in a way that's highly personal and highly relevant and do so in a way that operators would want to embrace us to the point that we become the leaders in providing advanced television for the cable industry. That's been the transition of TiVo over the last couple of years and that's why you see the financial metric trends that you do.

Unknown Analyst

On TV viewership and viewer habits, ad skipping, on demand, TV away from the home and in the home, what do you see are the key trends that will play to your strengths going forward?

Thomas S. Rogers

Well, the key strength is people increasingly want, as I said, any content wherever they are, whenever they want it. And so that puts recorded television still into the mainstream. But on demand is satisfiable through streaming and downloading, as well as recording. And the recording option is one way for people to do it and it's one piece of the equation of what we provide. The ability to get that television on the tablet, get that television on the laptop, get that television in or out of the home, those are all parts of the comprehensive set of elements that you have to be able to provide. You would think that the contributions that we've made in that regard would be ones that others might have. But today, we are still the only cable solution that if you want to get your recordings through your iPad and watch them somewhere else in the home, as I do every morning when I shave by taking my iPad into the bathroom with me, or you're taking a trip and obviously, the things you care most about are the things you record and you want to take them with you. To be able to do that with TiVo Stream is an innovation that is not available through any other cable provider. And so those are the kinds of things when you think about TV Everywhere and you think about solutions that provide a way for people to think about television being more personal, more relevant to their day-to-day lives that we are continuing to execute on.

Unknown Analyst

Changing gears to your MSO relationships. Obviously, you've had tremendous success to date, and in particular, in international markets. What are the keys to success in driving penetration of the TiVo service with your MSO customers and how similar are they in their approach to your service?

Thomas S. Rogers

Well, the domestic side of things, there's a lot of similarity, and we've been able to show that we can not only be a reliable partner but a fast partner, and cable industry domestically in the United States has not been known to move at lightning speed. Technological innovation in cable has tended to be far more glacial than what you'd expect, quite frankly. Yet we've been able to go from deal to implementation now with people who have had very run-of-the-mill legacy cable television offerings and bring them up to having an advanced television offering, deal to implementation of 4 months, which is lightning speed in the cable industry. And we've been able to do it for the most part, couple of hundred thousand dollars of development costs, meaning we have created enough uniformity to how this can be done domestically so that we have a very efficient, very tried-and-true, very fast deployment. And we've got 9 of the top 21 cable operators in the United States now who have embraced TiVo solution for advanced TV and we've obviously been focusing primarily on the Tier 2 operators and we probably have only penetrated operators covering about 25% of the subs in that Tier 2 population, so we have a lot of potential room to continue to grow there. Internationally, we've had some terrific success in some very disparate situations. You have the Virgin/BSkyB situation, which has been one where BSkyB has long dominated that video marketplace. Cable was always the also-ran. We come into the market, put together an entirely new viewing experience, Virgin does an excellent job promoting it, drive it to the point that they got about 1.4 million subs in 18 months of real marketing focus, and with that, have totally changed the competitive dynamic in the marketplace, so that in the last quarter, it looked like Virgin was adding on a net-add basis about 2.5x the rate of new subs that BSkyB was. And that's a real change in terms of the competitive dynamics we've seen there. But then you go to a market like Spain, obviously, huge macroeconomic problems, all kinds of issues on disposable income and consumer spending, and ONO had its best quarter yet with TiVo and is continuing to put up some real numbers on the board there. And so we're seeing that even in challenged markets if you put the right combination of the TiVo look and feel together with a high-speed broadband product and the right DVR offering, you can really make some headway even against challenging situation. The third European situation that we think will be a great calling card for us, given the number of the issues that cable operators are dealing with in terms of CapEx expense, is the IPTV implementation we're doing in Scandinavia for the largest cable operator there, Com Hem, which will give operators the ability to take their content wrapped in the TiVo user experience and not have to have a set-top box in the middle of what they do, even though Com Hem will. It provides a way to think about how you implement advanced TV without the expense of the -- of a major set-top in the middle of the home as a condition of doing that. And with that, we think it'll open up a lot of operators to the notion of how this can be done a little less expensively in the international context where we haven't quite gotten to the kinds of cheap implementations that we're doing for the U.S. operators.

Unknown Analyst

And on the transactions that you're doing with the MSOs and the agreements, are they moving over time in TiVo's favor as you show the success that operators have had in deploying your advanced television solutions?

Thomas S. Rogers

There's clearly a momentum factor here that we were -- the first couple of operators that we dealt with, they were taking a real shot. We had no experience dealing with all the issues that operators have to deal with. People -- Virgin said to us, "We don't -- you think you guys really know what you're getting into here?" This is really hard stuff and a lot of companies have tried it and not been successful at it. And now we have so many proven implementations both in the QAM world and soon in the IPTV world that whether you want a traditional set-top box implementation or you want an IPTV implementation that involves no set-top box at all or any number of flavors in between, we're going to be able to demonstrate we're a tried-and-true proven player. That's -- folks that have been in this game a long time, Rovi for one, OpenTV, Nagra for another that many people thought had the inside track on advanced television just because they had been the legacy players involved in the set-top box user interface worlds for a long time. And even players like that have found it extremely challenging to put together what it takes to really have operator confidence in next-generation TV.

Unknown Analyst

On your intellectual property and on your spending for research and development. Obviously, your patents have some expiration dates that we can see, and you spend very heavily on research and development. Can you tell us a little bit about how you budget R&D, what areas you're focused on and how that feeds back into your intellectual property base?

Thomas S. Rogers

Well, we budget R&D pretty heavily, some would say too heavily, but we've been bringing that cost down over the last year. We came out of the year at a lower run rate on R&D than we started the year. It's a little lumpy for us. We projected it'd come up a little bit in the first quarter of this year and then continue to go down later in the year. We have a heavy load of new operator developments that we're engaged with. Our intellectual property, obviously, flows from being a cutting-edge player putting a lot of money into R&D. So we're constantly looking for those interesting areas, potential chokepoints that give you a technology advantage as we innovate and invent along the way. The patents that you mentioned -- Time Warp patent expiration in the 2018 time frame is one of many, many patents we have, a broad patent portfolio, most of which have expiration dates that go well beyond the 2018 time frame and cover an array of things that go beyond what the Time Warp patent covers. So we feel we have a strong intellectual property position going forward, but obviously, right now, we're in the position of establishing how formidable that is, and we've taken on some pretty big players and shown as you indicated by having over $1 billion of settlements to date that even off of a tiny slice of that intellectual property portfolio, we've got a lot of firepower with it.

Unknown Analyst

On the evolution of your business model over the past 10 years or so, you've moved from more of a retail hardware-oriented model into today, arguably, you're much more of a software company with recurring revenues. How much further do you think the business can move toward software-as-a-service or television as a service? And is that something that you focus heavily on?

Thomas S. Rogers

Well, we are overwhelmingly a service-based company. Retail customers pay us for the service, cable operators look to us to provide a software service. And the service elements of that, what it takes to have the Knox [ph] center and the components of backing up that service so that multibillion-dollar companies can be reliant on us 24/7 for the ongoing uninterrupted provision of the guts of their customer service is a big part of the transition of TiVo from a retail company to a service provider company. It's been -- not only have we had to take the retail service elements we've always had, but to really ground and establish those with far more backup capability now that we're servicing operators the way we are. But hardware is an important piece of the equation in that what it gives us the ability to do is innovate really quickly because we own our own platform, and it connects to the operator business in a number of ways, but one way which is particularly important, is we've been embraced by the industry now in part because we're viewed as having the kind of DNA that makes us an innovator, and they like the fact that we are operating at the cutting-edge in the consumer electronics marketplace coming up with things that are the next feature that consumers seem to care about or we think consumers would care about. Getting it out in the market and introducing it and having merged our code so that our retail and operator offerings now are on a similar code base that gives us the ability to then immediately provide those same innovations on the operator side. They feel it reaffirms their embrace of the TiVo brand, which they put smack in the middle of their user interface, and the speed with which they get developments as they come to the marketplace is right away as opposed to the way that the traditional cable vendor model has worked, which has dramatically lagged behind what's going on in the marketplace, and the vendors tend to have been much slower as opposed to lead, cutting-edge innovators.

Unknown Analyst

Having experienced some of those user interfaces, I think I understand.

Thomas S. Rogers

It's been a clunky world out there for a long time.

Unknown Analyst

Of your new products and services and features that customers are using today, do you follow customer usage? And which do you think are getting the most traction at this stage?

Thomas S. Rogers

Well, we follow customer usage really closely. And more than follow it, we collect every second of data that comes through every one of our boxes, and we monitor exactly what's going on in terms of streaming and use of applications. And it's not only -- goes to the heart of what we are, which is a TV behavior company. We're different than a lot of cable vendors out there, because we are really all about doing the kind of behavioral research with television viewers to see what it means to have ease and simplicity and convenience and the ability to get what you want when you want it. Increasingly, that ingestion of data and being able to determine what's going on is at the heart of where the next level of features of TiVo will take us. Because when you start bringing in social data, what are people's friends and family watching, what about their recording history versus their viewing history, and putting all of that together so you can create a dashboard of immediately actionable viewing options whenever somebody turns on the TV and says here's the universe of 8 million things that TiVo is importing to your television, but that's unusable, and the fact that we've created the ability for you to get anything and get it anywhere, that's great. But I'm going to watch television now. I need to make an instantaneous decision. It needs to be very relevant and immediately actionable. What is it that I care about, and I want you to tell me, and that use of data to customize and massage the elements of an immediate television viewing experience is where the next edge for us will come in the marketplace. And you are seeing an awful lot of what I will call broadband TV-enabling devices that simply allow things to get to the TV, but filtering in a way that turns that into something that is truly personally relevant to the individual user is a whole step level of functionality beyond what, I think, most in the marketplace are going to be able to do.

Unknown Analyst

And are you at a position now in your development where you're doing that to the person or is it generally still to the household viewing habit.

Thomas S. Rogers

Right now, an awful lot of that is to the household. It will definitely be something that we drive to the person, because obviously, what I watch and what my daughter watches are 2 totally different worlds.

Unknown Analyst

Tom, with all that information you're capturing, you've shown some goals that you've accomplished in the media measurement space. That's a business that could have tremendous opportunity. Can you talk a little bit about your efforts there and any new success points?

Thomas S. Rogers

Well, that's the other piece of the data equation. So you need that data, we think going forward, to really be able to determine how to create the consumer product in a way that makes it most usable for the TV viewer, then you have the potential use of that same data -- not potential because we're already selling it. How do you use that data to allow an advertiser to be far more effective with their marketing expenditure? And as David Poltrack, the head of -- longtime head of research for CBS, said at a conference very recently, the world of demographic data, kind of broad 18-to-49, "this is what people care about" data driving the determinations of how marketing dollars are spent is going to be hugely eclipsed by purchasing data. What broad swatches of people in demographic groups may be inclined to do versus other groups is nowhere near as informative and nowhere near as actionable as here's what you watched and here's what you will buy and when we know that, the ability to match an advertiser with that household and say, "Wow, I know where the purchase -- the swing purchaser between my product and a competitor's product is showing up, and I know that's where I most care about aiming my dollars, to that swing purchaser. Why am I spending it over here because there's a demographic that sounds similar when the purchasers are actually over here." And we've shown to the P&Gs, the Krafts, many other advertisers, that the return on their marketing investment dollar is significantly different when you are governed by granular data that shows you the path toward understanding where those viewers that you really want to reach are showing up. With -- the ability to do that comes from being able to pull data from a mass selection of set-top boxes, which we pull from all of our boxes in the field. And then being able to know the purchase data coming out of those same homes and matching that in a way that is privacy compliant, truly anonymous, and a company that we acquired about 6 months ago called TRA, which, as I've said, we only acquired them because their initials were TRA which could be easily translated into TiVo Research and Analytics so we could seamlessly drive that merger, has pioneered the technology to show how that can be efficiently done, and we've been continuing to get some traction with advertisers as this whole shift is going on.

Unknown Analyst

It's almost like a concierge of one-on-one between the advertiser and the viewer.

Thomas S. Rogers

It is one-on-one data that informs decisions that are not one-on-one, but ultimately, another part of our business, which is the delivery of interactive advertising, which has been a nascent business for us, but as that becomes an addressable business and you can actually not only send in our active ads, but send addressable interactive ads to an individual home, you're absolutely right.

Unknown Analyst

I know we've got about 9 minutes left. I'd like to ask you one question, which I think we would get from our audience, but that's -- you've built up a lot of cash. You have a lot of cash flow from your litigation settlements and your commercial agreements. How do you think about that building cash balance and what are some things that you may end up doing in the future?

Thomas S. Rogers

Well, we have, obviously, developed a large cash balance at the end of the quarter. I think we had $627 million. We have an authorized buyback program of $100 million. We got a lot of input that it would be better to put that on an automatic path so that there was ability with all the blackout periods that we deal with to have a 10b5-1 acquisition capability that could operate. We put something in place that was intended to avoid -- we've had a nicely rising stock over the last quarter or so. And we wanted to make sure that we were smartly acquiring stock and not doing so at peak, so we came up with a mechanism to buy based on trailing price and -- average trailing price, and it -- because of the performance of the stock in the last quarter, it didn't end up buying anything. We think we will have a mechanism in place that will end up purchasing some stock, but nonetheless, we are highly focused on that path to driving shareholder value. I have to say that we continue to evaluate acquisitions because with the cash we have, we -- it's hard for investment banks not to come to us with any thought they have and shop every opportunity they have. And we do look at them and we do assess them, and it's important for us, actually, because it does keep us highly attuned to particularly the smaller companies' innovations going on in the marketplace to always check what we're investing in relative to whether there's something out there that could accelerate us. But quite frankly, other than TRA and one other small acquisition we've made, we just really haven't found anything that is going to accelerate where we are. And we have a pretty high standard in terms of conservative use of our cash in that direction. Nonetheless, I think it's an important exercise and we're just continuing to go down the other path, which is putting in place the right mechanisms to make sure we can drive shareholder value with repurchases, so a combination of those things I think define our current state of mind.

Unknown Analyst

Great. Tom, if it's okay, I think we'll take a few questions from the audience.

Thomas S. Rogers

Terrific.

Unknown Analyst

A question here.

Unknown Analyst

Tom, you still have -- you have a pretty big R&D line. Could you give us a sense sort of how much of that is in connection with just meeting the contractual obligations to your partners' deployments, integration, things like that? And how much is new projects, research like in marketing and analytics, things like that, that could -- on which you could earn a future return different than -- as coming from those existing agreements?

Thomas S. Rogers

Well, it's a combination of the 2 for sure. Although, some of the specific R&D done for partners we get reimbursed through NRE payments. I think it's fair to say almost all of the innovation gets driven across our retail and our operator elements, although some of the highly customized work we do for certain operators is what the NRE payments are for because a lot of that isn't necessarily reusable. We look at that R&D as the lifeblood of the leadership position that we've been able to obtain in the operator sphere. And so in a sense, our 9 out of top 21 cable operators in the United States has been in no small part a function of the fact that they see that we're willing to continue to invest heavily in the business and continue to be an innovation leader. We have brought that down. As I said, I think we'll, over the course of the year, continue to bring that down again. It also masks certain other R&D investment that we're doing, for instance, in the audience research space, which as we're improving EBITDA and bringing down overall R&D spend, we're picking up R&D spend in certain other places. And I would expect that to continue. The -- we were in a situation for a while where we were having to make separate R&D spend on our retail business from our operator business. And the return on that for each was much more complicated for us to determine, and having merged our code basis and been in a position where R&D investment, for the most part, benefits all aspects of the business, I think we're in a far stronger position just on that, but it is something we continue to work on slowly bringing down.

Unknown Analyst

I think we have another question in the front.

Unknown Analyst

Tom, the biggest problem with innovation in this market is the fact that a lot of the set-top boxes don't get replaced often and the install base is a box that is 5, 6, 7, 8 years old. Can you talk about what your product can do if there is a product already out there in your lab that could function on boxes that are 3, 4, 5, 6, 7 years old? Or are you more focused on developing a product for the next 5 or 10 years? I mean...

Thomas S. Rogers

Clearly far more focused on the latter. But we are working with a couple of operators on legacy box issues and how to get some elements of the advanced television interface, even though it's constrained by the kind of chips in those boxes and the processing speed in those boxes. But we are working on some solutions to legacy. We have a legacy, so to speak, in that area. And the original work we did with Comcast was all about how do we port a software solution to truly old legacy boxes and get them to function in a different way, and we proved we could do that, so we're not a stranger to that the equation. That is a transitional issue, and therefore one of limited R&D focus for us, but it is one, nonetheless, that we do know certain operators are focused on. And that really goes to the heart of the bigger issue, which is a lot of operators are focused on that because they know they want to get to an advanced television footprint that covers all their boxes over time. And they'd prefer for that next major investment that they make be in the IPTV realm, where they can have a cloud-based solution where you aren't having to think about a major rollout of CapEx in the home as part of solving for that equation. And if they get a little more time with legacy boxes that they're able to get an advanced television look and feel of some sort, and then put most of their energy into skipping a generation of boxes and going into an IPTV realm, the likes of which we're developing for Com Hem, which is, what I said, you don't have to have a set-top box in that configuration. You can, but you don't need to. And that opens up a world of lower CapEx potential yet very high-yielding service capability by being able to develop the broadband linear mix and all the features that flow from it but not necessarily having to pair it with new generation hardware at the same time. And what we've proven is that we can work in various ways. We already distribute to other people's boxes, so it doesn't -- we're not in the business of having any anchor to our plan if it's somebody else's box. We don't really care where the storage is. It can be in the cloud, it can be in the home. We don't really care where the equipment comes from, be it an iPad or be it a smartphone that somebody says, as long as we're being paid for that home, what somebody brings to it -- what we care about is that it is the totality of an experience that we've been able to configure that the operator understands can take them through the multiple chapters of the transition that this involves, and that's where we focus our effort.

Unknown Analyst

Great. Well, I believe that brings us to the end of our time for our session with Tom. I'd like to thank you very much for coming and Derrick for being here with us. And thank you, everyone, for sitting in.

Thomas S. Rogers

Thank you.

Unknown Analyst

Have a great day.

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