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TiVo Inc. (NASDAQ:TIVO)

Q1 2010 Earnings Call

May 27, 2009; 5:00 pm ET

Executives

Tom Rogers - Chief Executive Officer

Anna Brunelle - Chief Financial Officer

Naveen Chopra - Vice President of Business Development

Matt Zinn - General Counsel

Derrick Nueman - Investor Relations

Analysts

David Miller - Caris & Company

Tony Wible - Janney Montgomery

Daniel Ernst - Hudson Square Research

Alan Gould - Natixis

Todd Mitchell - Kaufman Brothers

Tuna Amobi - Standard & Poor’s Equity

Operator

Good day and welcome everyone to the TiVo first quarter fiscal year earnings conference call. At this time, I’d like to turn the program over to the Head of Investor Relations Mr. Derrick Nueman. Please go ahead, sir.

Derrick Nueman

Thank you and good afternoon. I’m Derrick Newman, TiVo’s Head of Investor Relations. With me today are Tom Rogers, CEO; Anna Brunelle, CFO; Naveen Chopra, VP of Business Development and Matt Zinn, General Counsel

We are here today to discuss TiVo’s financial results for first quarter ending April 31, 2009. We have just distributed a press release and 8-K detailing our financial results. We have also released a financial and key metrics summary, which is posted on our Investor Relations website. Additionally, we will post a recording of this call later today on the Investor Relations website.

The prepared remarks today should last about 30 minutes and it will be followed by a question-and-answer session. Our discussion today includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements relate to among other things, TiVo’s future business and growth strategies including TiVo’s mass distribution strategy and the timing of additional mass distribution deals, profitability and financial guidance, distribution of the TiVo service domestically with Comcast and Cox and internationally in Australia, New Zealand and other regions.

Growth and innovation in TiVo’s advertising and audience research measurement business, the timing and availability of broadband content and service offerings, such as from Blockbuster, Amazon, SeaChange, Comcast and tru2way, future distribution of TiVo DVRs with Blockbuster, the results of TiVo’s litigation with EchoStar, how TiVo intends to exploit its intellectual property, TiVo’s future marketing spend and related activities, and financial performance.

You can identify these statements by the use of terminology such as guidance, believe, expect, will or other similar forward-looking terms. 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 statement.

Factors that may cause actual results to differ materially include delays in development, competitive service offerings and lack of market acceptance, as well as other factors described under Risk Factors in our public filings with the SEC and our latest 10-K.

Any forward-looking statements we make on today’s call reflect the analysis as of today and we have no plans or duties to update them. Additionally, some of the metrics and financial information provided on today’s call are non-GAAP measures. Please see our first quarter fiscal year 2010, key metric trend sheet for a reconciliation of these items.

With that, I will now turn over the call to Tom Rogers.

Tom Rogers

Thanks, Derrick. Good afternoon, everyone. Let me begin by saying that we started fiscal 2010 and off on the right foot with a very solid first quarter. We recorded our seventh straight quarter of adjusted EBITDA profitability, exceeding guidance.

We also cultivated a host of strategic growth drivers that further distinguish TiVo as the only comprehensive, one-stop-shop approach for linear and video on demand TV, with the most choice for consumers, combining the best way to search and watch traditional television with by far, the largest array of broadband video and music content available right to the TV. On top of this, we maintained our very strong balance sheet with over $200 million in cash and no debt.

While it is difficult to determine when the economic environment will improve of course, we are at the forefront of many significant trends in the media and consumer electronics industries, including the increase of DVR penetration from 30% today to over 50% the next two to three years by most analyst expectations.

The trend in broadband content to the TV, the trends in interactive advertising and its measurement and of course the trends related to search across an infinite array of content straight to the TV. As a result, we remain confident that when you combine our innovation in these areas with our strong financial position. We will successfully emerge from these difficult economic times on very solid footing.

Quickly touching on the EchoStar litigation, we expect a ruling very soon on whether EchoStar should be held in contempt for violating the injunction requiring the disablement of DVR functionality put in place by the District Court after the jury found EchoStar to have willfully infringed our Time Warp patent.

We expect the ruling to also address damages owed to TiVo by EchoStar for continued infringement during the period in which the injunction was stayed prior to the federal circuit upholding the District Court’s injunction and infringement rulings, as well as that period to the present. We remain confident in our position and look forward to a ruling.

During the quarter, we continued to make progress on our mass distribution efforts and have taken an increasingly important role as an innovator for distributors and multi-channel operators that are looking to offer subscribers, the ultimate advanced television viewing experience. In addition to providing consumers with a simple, easy, one stop shop for TV viewing, TiVo continues to fortify its position as the simple, easy, one stop shop for distributors, as well.

We provide the user interface, the search capabilities, the facilitation of content delivery, advertising solutions and audience measurements, all the critical ingredients for an advanced television service; where otherwise the operator would have to try to patch together solutions from multiple sources and vendors, resulting in a clumsy patchwork offering for consumers.

Our work with Comcast is progressing on several fronts and Comcast passed along the following update to us. They are enthusiastic about the TiVo results so far in New England and they are looking forward to launching TiVo soon in Chicago. Beginning this summer in New England, they are planning to launch a new feature called TiVo Online Scheduler that will let customers with the Comcast DVR with TiVo service and Comcast high speed Internet service, manage and schedule recordings from anywhere they have Internet access.

Also as part of Comcast’s all digital transition, Comcast will soon present its customers with the option to use the TiVo HD retail box as an alternative to a digital adapter provided by Comcast. With details to be announced soon and finally, given the positive satisfaction levels in the New England market, Comcast has told us it plans to offer TiVo as the only DVR option going forward and it yet to be announced tru2way market.

Shifting to our efforts for small and medium sized cable providers, our partnership with SeaChange, a leading provider of video on demand solutions, allows operators to quickly deploy our industry leading DVR, while avoiding middleware investments such as tru2way implementation.

These operators can offer a seamless experience that fully integrates the operators VOD service with a complete array of TiVo delivered broadband content, thereby creating an entertainment package that goes well beyond what any of their competitors are able to offer.

To help fulfill the demand we are seeing from this group of operators, we recently entered into a deal with Evolution Broadband, who is a leading reseller of digital solutions to independent cable operators. Evolution has already begun selling our product and has signed its first TiVo customer, Comporium, an independent cable provider in metropolitan Charlotte, North Carolina.

On the international front, we continue to expand our global footprint through strategic alliances with international broadcasters. TiVo’s successful launch and continuing sales momentum in Australia with Seven Network has caught the attention of others in the media industry across the globe, as a means to help protect their competitive position in their own markets. This led to our most recent distribution deal with TVNZ, New Zealand’s largest free-to-air and national broadcaster and the second DVB-T standard country to begin offering the TiVo service.

Moving onto the TiVo-Owned side, we are making considerable strides toward creating a complete one-stop-shop for in-home entertainment that provides users with the best way to search and watch television. TiVo is about getting anything you want, whenever you want it, whether it’s on linear television or an on-demand basis via the richness of video content now available via broadband.

This quarter we teamed up with Blockbuster to add later this year its library of premium digital movie titles to the millions of pieces of content that TiVo already delivers directly to the TV, particularly unique aspect of this content deal is the bricks and mortar component. Blockbuster will also sell TiVo DVRs at thousands of its stores nationwide as well as online, providing TiVo access to a previously untapped retail distribution channel.

As I mentioned last quarter, the demand for high definition remains solid and we’re focused on being at the forefront of HD offerings. To that end, we announced the expansion of our Amazon offering, which now lets viewers download HD titles. In just a short time, the Amazon HD offering has already become a success with our sub base and about 20% of Amazon downloads through the TiVo service are now HD, which is impressive considering HD content only represents a small portion of Amazon’s library via TiVo.

It’s also worth noting that broadband enabled TiVo subscribers have already accessed approximately 50 million downloads and millions and millions of streams to-date. Our relationship with Blockbuster and Amazon HD will only add to the usage of our broadband services.

Additionally, we’ve again kept acquisition costs and marketing spend in check this quarter. As TiVo-Owned SAC was $139, roughly flat compared to the year ago quarter, excluding the impact of the standard definition inventory reserve benefit of approximately $1.6 million.

Our deal with Blockbuster is another example, of how we’re finding ways to utilize our marketing resources much better and more efficiently by shifting marketing expenditures to third parties, who have a stake in driving TiVo’s distribution and therefore taking on less of the acquisition cost for ourselves.

Shifting gears to our advertising and audience research measurement business, this quarter we announced significant progress that certainly did not go unnoticed by the media industry. We will be expanding the sample size of our Stop||Watch rating service to 300,000 TiVo subscribers, from the current 100,000, making it 75 times larger than other existing DVR audience research sample sizes. This increase will enable us to produce ratings data for dozens of additional cable networks, which have until now gone unmeasured due to their lower distribution and viewership.

In addition, we plan to launch Stop||Watch local markets over the course of this summer, enabling us to provide local broadcast networks with accurate, statistically relevant ratings data that they can’t get from other sources and simply can no longer afford to do that. On that note, most people don’t realize that local station ratings are largely still based on a written diary system, which dates back about 50 years, which was recently highlighted in a trade press article to be a highly inaccurate system at that.

As TiVo continues to weave itself into the fabric of the media industry, we are acutely aware the challenges advertisers, broadcasters and networks are facing. Compounded by these difficult economic times and we continue to work with them to provide ad solutions and audience research tools to help make reaching target viewers more effective and impactful for them.

In conclusion, I’d just like to reiterate that we enter the second quarter and the remainder of fiscal year 2010 with considerable momentum. Though we are fully cognizant of the current economic reality, the hard work done thus far has TiVo positioned well for what lies ahead.

To this end, we believe we have a number of potential near term catalysts that will provide substantial momentum for the company going forward. From the court case, which we believe will be resolved in the near future to new avenues of distribution of our standalone box within the cable industry, to new retail marketing opportunities, and further product innovation.

We’ll continue to put significant effort in opening up our innovation lead and distinguishing TiVo as a product in the marketplace that delivers unparalleled amounts of content to the TV, with the fastest and best means of finding it. Over the course of the next many months, numerous additional examples of our continued drive for innovation will be unveiled.

With that, I’m going to turn it over to Anna.

Anna Brunelle

Thank you, Tom. Good afternoon, everyone. I’m pleased with our first quarter results, as we exceeded our expectations on earnings and continued to invest in the elements of our business that will be catalysts for future growth. With that, let’s get into the details.

Service and technology revenues were $48.5 million. Of that, service revenues were $42.1 million and technology revenues were $6.4 million, up from the prior quarter due to increased development work on our mass distribution deployment. Excluding the expenses related to stock-based compensation, cost of service and technology revenues were $13.8 million which included $9.9 million related to cost of service revenues. The service gross margin excluding stock-based compensation was 77%.

Our hardware loss was $4.2 million and consisted of $2.3 million of loss related to net hardware costs, which benefited only marginally from the utilization of approximately $250,000 in standard definition inventory reserves and $1.9 million of costs related to marketing development funds and revenue share from the retail channel.

Operating expenses excluding stock-based compensation as a percentage of service and technology revenues were as follows. Sales and marketing expenses were 12%, basically flat from the year ago quarter. The portion of sales and marketing expenses related to subscription acquisition costs represented 2% of service and technology revenue.

Research and development expenses were 26% of service and technology revenue and G&A expenses were 19%, up from the year ago quarter due to higher expenses related to the EchoStar litigation. Stock-based compensation expenses were $7.1 million. The interest and tax benefit was $190,000 and depreciation and amortization expenses were $2.3 million.

This led to Adjusted EBITDA for the first quarter of $5.1 million and this compared to our Adjusted EBITDA guidance of breakeven to $2 million and to our Adjusted EBITDA of $11.1 million in the year ago quarter. Net loss for the first quarter was $4.1 million which compared to our guidance of a net loss of $6 million to $8 million and a net income of $3.6 million in the year ago quarter.

Our net loss per share was $0.04 for the first quarter. Our net income per share calculation for the quarter was based on 102.3 million shares. The better than anticipated Adjusted EBITDA and net loss was primarily driven by lower operating expenses as we continued to carefully watch discretionary spend.

As stated on our prior earnings call, Adjusted EBITDA and net loss on a year-over-year basis were negatively impacted by higher legal fees related to the February bench trial in the EchoStar litigation, a longer amortization of product lifetime subs, a significantly lower benefit from the reversal of the standard definition inventory reserve and lower revenues from DIRECTV.

Quickly touching on the balance sheet, we continue to generate cash from operations and we ended the quarter with approximately $215 million in cash and short-term investments, which was up $8 million from the prior quarter. Again, it is worth noting that we don’t have any debt.

Now, turning to our first quarter key metrics in line with our expectations, our gross subscriber additions were 37,000 as compared to 48,000 in the year ago quarter. Churn was 1.4% up slightly from both the year ago quarter and last quarter. We did see an improvement in non-lifetime churn as the quarter progressed with April churn significantly lower than churn in February and March.

On a net basis, our TiVo-Owned subscriptions decreased by 30,000 in the first quarter and our TiVo-Owned subscription base ended the quarter at approximately 1.6 million subscriptions. Our MSO broadcaster subscription base declined by 109,000 from the prior quarter which was a lower amount than the past several quarters, although, we experienced growth from Comcast and our international partners, the growth was not able to offset churn from DIRECTV.

Our overall subscription base stands at approximately 3.2 million subscriptions at the end of April 2009. Our TiVo-Owned average revenue per subscription fell year-over-year to $7.65, primarily due to our longer product lifetime amortization period and a larger number of fully amortized product lifetime subscriptions that once fully amortized are non-revenue generating.

At the end of the quarter, we had approximately 215,000 TiVo-Owned product lifetime subscriptions that had reached the end of the revenue amortization period. This represents 32% of our current total product lifetime subscription base which stands at 673,000. TiVo-Owned acquisition costs remained low in the first quarter. Total acquisition costs were $5.1 million or $139 per subscription and were slightly lower than last year when you take into account the benefit from the utilization of the inventory reserve, which significantly reduced SAC in the year ago quarter.

Again, I should reiterate what we said on our last call. We will continue to manage subscriber acquisition expenditures aggressively, but we won’t benefit as much in fiscal 2010 from the release of standard definition inventory reserve, which reduced our acquisition costs by approximately $5 million during fiscal 2009. For example, this quarter we had a benefit of approximately $250,000 compared to a $1.6 million benefit in the year ago quarter.

Before I get into the specific guidance for the second quarter, let me walk you through some factors that are impacting our guidance, which are similar to last quarter. First, the increase in the amortization period for the majority of our product lifetime subscriptions to 60 months will reduce our Q2 service and technology revenues and increase net loss and adjusted EBITDA each by about $700,000 compared to the year ago quarter.

Second, we expect to incur substantially higher legal costs than in the year ago quarter, as we anticipate continued activity in the EchoStar litigation. Third as I stated before, we don’t anticipate significant benefit from the release of the standard definition inventory reserve. Especially, compared to the $1.4 million benefit in the year ago quarter. Finally, we will continue to see declines in our DIRECTV subscription revenue into our new HD DVR is offered by DIRECTV.

With that, for the second quarter we expect service and technology revenues of $47 million to $49 million. Our Adjusted EBITDA to be in the range of breakeven to $2 million and our net loss in the range of $6 million to $8 million.

Finally, although we did not provide specific annual guidance, it remains our goal to be well into positive Adjusted EBITDA territory for fiscal year 2010, despite the current economic pressures and excluding any additional damages that we may receive in the EchoStar litigation. In addition, we expect to receive additional substantial sums from the EchoStar litigation in fiscal year 2010, which will further increase our Adjusted EBITDA profitability.

To wrap up, I’m pleased with our quarter. We continue to manage our business prudently while investing for future growth. With $215 million in cash and short term investments and no debt, we are well positioned to continue to focus on the elements of our business that we believe will drive meaningful growth overtime.

This concludes my remarks. Thank you for your time and we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Miller - Caris & Company.

David Miller - Caris & Company

On the legal side, most of as I think were fairly certain that Judge David Fulsom would rule on this thing by late May. I think you guys had telegraphed in previous discourse that you were looking for sort of a late May ruling, we’re in late May, he hasn’t ruled yet. If you could just give us some sort of understanding as to, what he might be thinking, what’s the delay here and is it because he’s trying to get you guys to work something out on your own or is there something else at hand? Thanks very much.

Tom Rogers

This is Tom. I think it’s been about six weeks since briefing was all done in the case. I think that the timeframe you mentioned was one that we thought it was within the judge’s comments that he suggested when he would try to rule. I think that courts are never very clear about timetables on this thing. We don’t read anything into it. We have nothing to offer by way of insight on timing other than to say that we certainly would expect in a relatively near timeframe that he will in fact rule.

David Miller - Caris & Company

Then Anna, related to that you had mentioned in your prepared remarks that as per the guidance for the July quarter, there will be somewhat of a bump up in the SG&A line due to legal costs. By saying that are you sort of rhetorically telegraphing that Dish will appeal, whatever the ruling is if it’s not in favor of Dish or are you just sort of telegraphing residual legal expenses that you would have had to pay anyway?

Anna Brunelle

No, I don’t think we’re trying to telegraph a particular outcome in terms of making that remark. I think what we’re trying to telegraph is that, legal expenses from quarter-to-quarter can be somewhat unpredictable and that we built into our model, some room there as we expect that there will be additional litigation expense related to the trial regardless of the outcome of the judge’s decision.

Operator

Your next question comes from Tony Wible - Janney Montgomery.

Tony Wible - Janney Montgomery

Just real quickly, what are the prospects for more MSOs to roll out TiVo boxes directly to circumvent some of the technical issues that seem to be keeping the cable MSO boxes from being more pronounced in certain markets?

Tom Rogers

Well, we are quite gratified by the response that we’ve been getting from smaller and mid-sized cable operators since we announced a couple months ago that SeaChange, the leading VOD integrator in the industry would solve the issue of, our retail boxes being able to present local VOD content provided by a cable operator.

As we just talked about we have a reseller that is out there, actively talking to that base. They’ve signed up one customer; believe there will be more to come. We are having discussions with a size range of cable operators in there. The feedback we get is that there is substantial competitive concern about other kinds of distributors coming in with a full array of broadband content and those operators who do not have the ability to invest in tru2way near term and kind of a software only approach to creating a more robust service.

Find what we have to offer as a very interesting way to provision our retail box and turn into it a cable box which happens to create under the model that we are seeing so far. Some attractive per month, per sub fees for us and a way to extend the other strategic attributes that we get with the retail box through a cable operator distributor. So we are finding that set of discussions being one that has some real momentum behind it.

Tony Wible - Janney Montgomery

I believe Chicago is a tru2way market for Comcast. Should we assume that the market that you are talking about rolling out, the new boxes with Comcast will not be Chicago and that Chicago will be a market that gets the software downloaded?

Tom Rogers

No, I don’t want to speak to Comcast in terms of their tru2way markets and all, but beyond Chicago is what we are looking at the Chicago situation should be relatively near term. This will be I think somewhat further down the road in terms of they are going tru2way and then identifying an appropriate market where we can be the primary DVR in the sense of in terms of a new DVR offering.

The only DVR that they would then market newly to customers and that’s gratifying for us because it really does demonstrate Comcast looking at all kinds of ways to find the right formula for TiVo distribution and finding the best path to aggressively roll us out and making that kind of commitment to finding a market where TiVo would be treated on that basis when the tru2way markets are up and going is something we take some real pride in.

Operator

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

Daniel Ernst - Hudson Square Research

If we look across at your the pipeline of new markets you have set to roll out, without naming them from the Comcast and/or other mass market partners, over the next 12 to 18 months, can you map out a scenario where you would take net subs to be a positive event rather than a continual negative or less negative? Is there a scenario over the next 12 to 18 months where subs could go positive?

Then secondly, if we look across the R&D line is in $12 million to $15 million every quarter for sometime. Can you give us a little color on what the focus of those R&D efforts are? Is it mostly on providing the technology to make mass market and your software work on the various providers’ boxes?

Are you looking to now extend and additionally, what TiVo can do or revisit the interface? Is it a lot of changes in the way that consumer media devices have positioned themselves, there’s been a lot of improvement on the competitive front on what they have done with user interface, where you had previously been more of a leader? Thanks.

Tom Rogers

On the subscriber front, since we don’t guide to subscriptions. I’m not going to answer the questions about gains and losses, but just to give you some color there. We do believe that between retail distribution of the standalone box, cable distribution of our retail offering, software distribution of a Comcast type arrangement with TiVo, dedicated boxes that provide TiVo feature sets of DIRECTV, international distribution, be it retail or a modified retail box or through some kind of software approach, that the combination of those things should be contributing to a positive rather than a declining TiVo sub count.

We are obviously in a period right now, where TiVo distribution is challenged in that we have cut way back on retail marketing and are just putting in place some of the relationships that can take a lot of the marketing burden going forward on the retail front. Comcast is in a nascent stage, although with a lot of commitment and enthusiasm by virtue of some of the things we talked about year-to-date to roll that out further, DIRECTV not likely to rollout until early next year.

The international activity continues to build by virtue of what we talked about and yes, we see the combination of all those things contributing without defining a timeframe to positive sub growth outweighing our churn issues here and we certainly hope that will be in a relatively near term timeframe, but again without guiding to sub distribution numbers in anyway, I don’t want to put specific parameters on that.

In terms of the R&D effort, the activity there is many-fold. We are always focused on software development issues related to content delivery, feature issues that relate to the enhancement of the viewing experience, hardware issues that relate to platform delivery, including ways to reduce our manufacturing costs and so we have an ongoing effort that is multifaceted there.

A number of the features, we believe are extremely innovative as we hinted in my comments that are not presently found anywhere in the marketplace and we believe they are well worth the R&D effort to continuing our pioneering and innovation, and they’re clearly has been a shift in R&D activity to some of the non-retail based elements of our product and towards some of the distributor efforts and advertising efforts and audience research efforts, but the combination of those things put us in a position to continue to drive innovation and research and development and that’s not an area where we would certainly look to reduce cost at all.

Operator

Your next question comes from Alan Gould - Natixis.

Alan Gould - Natixis

I’ve got a few questions. First Tom, the MSOs/Broadcasters net decline, as you said it was less than it’s been in previous quarters. Can you give us some color? Is DIRECTV’s decline slowing or is it the additions from international and Comcast that is making that net decline smaller?

Tom Rogers

I don’t want to overdo the trend, but it’s a little of both. I think very interestingly for us, in a very, very tough climate in which we saw all kinds of services where consumers were pulled back. Our churn on the retail front remained fairly constant. On the MSO front it was a combination of those two variables, some increased growth on the various things that comprise that MSO category and some reduction on the DIRECTV churn.

Alan Gould - Natixis

You just said early next year is when the DIRECTV hard drive, hard disc, high-def Def boxes available. When do they start paying you or start marketing it?

Tom Rogers

Well, when I say available, I mean available to consumers and when it’s available to consumers their marketing obligations are part of that. The timeframe there is somewhat dependent on some. What the ultimate feature collection is that gets delivered, so the DIRECTV is pointed to a somewhat a near term timeframe. We’ve pointed to that timeframe in early next year and the marketing though, will commence as soon as it is available to the public.

Alan Gould - Natixis

What’s the status of the Cox roll out?

Tom Rogers

Not a whole lot of change there. The trials continue in the first availability to consumers is in the next two to three month timeframe.

Alan Gould - Natixis

Lastly, noticed there’s been more controversy with Nielsen than ever the last few months. Can you just give us a little more detail in what’s happening with the local Stop||Watch service? The broadcasters having a tough time financially, can they afford to take this? How are you sales going to them and what revenue line is that going to fall into when it becomes significant?

Tom Rogers

Well, it would fall into our advertising and audience research, which is in our service revenues right now.

Alan Gould - Natixis

It’s in the service revenue, okay.

Tom Rogers

Revenue line, when you say that it’s significant. I’m assuming that at a level of materiality we would break those out and be able to talk to them distinctly and we’re not at that point yet. The reception there has really been very strong, particularly around the local product. Where you have the lion share of television stations in this country having nothing more than written diary entries for purposes of audience research and even the people meter markets not having electronic data that measures commercial ratings at all.

So you’re really dealing with a vast amount of the television world. Not having data, even in the form that the currency now exists that provides any kind of credible electronic data that goes to in any data at all in electronic form that provides the commercial ratings measurement.

What we find is that the pressure that the television station, local television station industry is under which is greater pressure than any other part of the, television media sector is one where they are searching for ways to enhance their sale capability of advertising inventory and somehow get out from under those current pressures by having a different basis upon which to present their audience for purchase.

That puts us in a very unique position, given the unique collection of data that we present on the scale between what a local collection, local market to-date provides by way of data under current system versus ours is hugely different in terms of sample size and that is one of the key factors in enhancing what we have to offer.

So we believe there’s a lot of promise there. We have a lot of work to do to turn that into a meaningful cash flow delivering business, but it is one where all the signs in terms of the reception we’re getting are on the right path and when we begin offering the product later this summer. We’re hopeful that we will get-off to a very good start, when it comes too signed up paying clients.

Operator

Your next question comes from Todd Mitchell - Kaufman Brothers.

Todd Mitchell - Kaufman Brothers

Quick question on the tru2way Comcast market, when they go in and do this, are they going to upgrade all of the DVRs in that market to a TiVo interface?

Tom Rogers

That is why we use the word primary because the expectation would be that people who had already purchased a DVR may well continue to use that existing service, but on a going forward basis, they would only offer TiVo. I suppose what you’re suggesting is possible, but we haven’t gotten into that level of detail with Comcast in terms of whether they would convert over existing subscribers to the TiVo services as well.

What we’re gratified to see is that on a going forward basis, they would be offering TiVo only and that would yet add one more piece of the mix beyond the a la carte offering, beyond the bundled offering and other ways that they maybe contemplating to figure out, what is the best possible way to drive TiVo distribution and it’s that kind of marketing flexibility that we think will ultimately get us in the right path in terms of driving this distribution more aggressively.

Todd Mitchell - Kaufman Brothers

I could just follow-up on that a little bit. There’s a financial implication and I realize you don’t want to answer that part of the question, but there is also sort of a technology implication. I guess what I’m getting at is, in the upgrade to tru2way, do they put in a whole stack and on the whole stack would you be part of that stack?

Tom Rogers

The tru2way stack, which they would rollout for their multiple markets, that middleware stack, we are working with Comcast to develop a TiVo application that is truly compatible with the tru2way stack, which is somewhat different than the current middleware that we are operating on in the Boston and New England market and that we announced on a previous quarter, the fact that Comcast’s R&D activity with us involved upgrading TiVo’s application to their tru2way middleware stack.

Todd Mitchell - Kaufman Brothers

One other question, if I could follow-up on a question, Alan was asking about, the customers for your Stop||Watch. Can you without telling us, who they are? You said you’ve gotten traction in the local Broadcasters. Can you sort of qualify or quantify, who these customers are? Is it a local affiliate group or are you hitting individual markets, one-by-one? Is there any sort of smaller Cable Networks in the mix?

Tom Rogers

Well, we are talking to local to smaller cable networks for other reasons, because we provide a way to measure their ratings on a national basis, when they are otherwise too small to be picked up under current means. That’s a separate thrust and a separate set of discussions and yet one more opportunity for us to market unique data.

On the local front, we’re talking to all range of players, from advertising agencies to network owned station groups to large affiliate groups, to independent broadcast stations. We are talking to a wide array of folks, so that the data is fully understood and as I said, later in the summer when the data becomes fully available and we can begin to market it. At that point, we hope to be in a position that we can drive paying clients aggressively, but at this point we are simply introducing people to what will be available.

Operator

Your final question comes from Tuna Amobi - Standard & Poor’s Equity.

Tuna Amobi - Standard & Poor’s Equity

I have a bunch of questions as well. So, first on your deals with the cable had a mass distribution, can you perhaps update us on the conversations that you’re having right now with other operators beyond Comcast and Cox and do you feel that you have enough resources to be able to take on another major cable operator at this time or are you pretty much in kind of a wait and see mode to get Comcast and Cox up and running before you kind of delve into maybe another such mass deal?

Tom Rogers

I am going to ask Naveen Chopra to answer that question for us. Naveen heads up Corporate Development for the company and leads our conversations with cable operators and many of you know him from our Investor Relations front. Naveen.

Naveen Chopra

Thanks, Tom. To answer your question I think there are, without getting into specifics, because obviously many of these discussions are things we will only talk about when they are announced, but there are discussions with cable operators both large and small, as you heard us describe. There have been a number of new opportunities presented by way of the standalone box approach, utilizing SeaChange as a VOD partner.

We continue to see an increased desire from all of these operators to take advantage of the assets that TiVo brings to the table in terms of putting together an experience that provides a very simple, compelling way to navigate linear television, VOD and even more so the growing world of broadband television that I think all operators are trying to figure out how to address.

We’ve also been forthcoming and saying that we’ve been somewhat careful about how aggressively we pursue those relationships in terms of whether our timing is optimal to finalize those in advance of resolution of the EchoStar litigation or to kind of wait until there’s more clarity there.

Tuna Amobi - Standard & Poor’s Equity

I guess one follow-up on that and I’ll move to my next question. Do you have, let’s say for the sake of argument, another top five or top ten cable operator, would you have the resources to tackle that if that were to come along?

Naveen Chopra

Good question. So first of all, keep in mind that with our existing relationships with DIRECTV, Comcast and Cox, we are already covering roughly 35%, 40% of the paid television universe in the United States. So we’ve tackled a lot. The nature of those relationships is typically such that the operator is contributing in a major way to the development effort that is required from funding of that work.

Clearly, a lot of what has gone into the initial deployments is intended to be able to be leveraged with future deals. So, I don’t think it’s entirely an incremental effort as we look at new opportunities, but to the extent that there are incremental resources required. I don’t see that as a major hurdle.

Tuna Amobi - Standard & Poor’s Equity

So switching gears thank you for that answer. On the online channel, what kinds of traction are you seeing there these days and what percentage roughly of your direct sales efforts would you say that online is contributing?

Tom Rogers

Our online sales continue to be a relatively stable part of our overall retail sales, they’ve roughly one-third of sales, which has been relatively consistent overtime.

Tuna Amobi - Standard & Poor’s Equity

On the HD DVR initiative with DIRECTV, any update on timing and I also would appreciate some comment on the accounting implications for those best and existing subscriber on kind of upgrades to the HD DVR? What impact do you think that might have on your existing economics of that user base? How do you think that might impact ARPU and the other metrics?

Tom Rogers

As we said, our expectation is early next year that the DIRECTV new product will be available, on the financial implications of that deal for subscribers taking the new product it’s a much higher sub fee than the current arrangement. Their marketing commitment is much more significant one than under the current deal.

So, the economics of that new arrangement are ones that we think will be important to the company’s financial strength going forward. Those are again, the timeframe for when all that kicks in would be early next year.

Tuna Amobi - Standard & Poor’s Equity

Lastly on the Evolution cable partnership, the deal. I’m just trying to understand, how you think that those kinds of deals would impact? How the economics of those kind of deals, are they similar deals that you made I think a couple years ago with some of the smaller cable operators? Does the additional VOD capability, which the platform provides, does that in anyway affect, how the economics of those deals compare to…?

Tom Rogers

That’s a significant thing here. We had announced an initiative a couple years ago to work with smaller cable operators, who were dealing with the similar concern they have now. How they upgrade their product to be best-of-class, against the satellite and phone company competition and the feedback that we largely got was the absence of VOD integration into our product made it something very difficult for them to market, because the cable industry that size company for a long time has been promoting Video on Demand as a key consumer benefit that satellite did not provide.

So in the last couple months, when we’ve engaged with SeaChange and announced the ability to locally brand the TiVo interface and to integrate the VOD service from the local server, that’s put our ability to serve the strategic needs of those small or mid size cable operators in an entirely different light. The attractiveness is for us that we have a third party marketing these boxes, so we don’t have to absorb the subscriber acquisition costs of these retail boxes.

Again, one of our key thrusts, avoid the burden of substantially additional subscriber acquisition cost. The subscriber fees are on a recurring monthly basis and more attractive than what our Comcast type fee arrangement might be and therefore from a revenue point of view are very attractive mass distribution subscribers do to take on and I think as much as anything, it creates more and more understanding of the distinction between TiVo and a generic DVR.

The biggest confusion that’s been sowed out there in the marketplace about TiVo is that the cable industry generic DVR is the equivalent and that’s obviously been a challenge that we’ve been dealing with for quite sometime.

To the extent, you have cable operators very clearly enunciating the differences between a generic DVR and a TiVo device that gets you anything from wherever you want, where recording maybe part of it, but it’s a whole much broader experience that can do nothing, but good things to amplify the repositioning of our product and why TiVo is distinctive. So, we think it’s an important strategic thrust and yes, it’s very different based on the VOD integration capability.

Tuna Amobi - Standard & Poor’s Equity

One quick clarification, so on the Comcast, are you mentioned that the economics of that, the all in offer versus the up charge that stayed pretty much about the same for TiVo or not?

Naveen Chopra

We get the same fee from Comcast, whether they give the product away or whether they up charge.

Operator

That would conclude our question-and-answer session. At this time, I’d like to turn the conference back to Mr. Tom Rogers for closing remarks.

Tom Rogers

Thank you everybody. Look forward to talking to you soon. Appreciate you’re being with us.

Operator

That concludes today’s conference. You may disconnect at this time.

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Source: TiVo Inc. Q1 2010 Earnings Call Transcript
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