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Executives

Derrick Nueman - Investor Relations Executive

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

Naveen Chopra - Chief Financial Officer and Senior Vice President of Corporate Development & Strategy

Analysts

David W. Miller - B. Riley Caris, Research Division

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Richard Tullo - Albert Fried & Company, LLC, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Todd T. Mitchell - Brean Capital LLC, Research Division

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

James C. Goss - Barrington Research Associates, Inc., Research Division

Daniel Ernst - Hudson Square Research, Inc.

TiVo (TIVO) Q2 2014 Earnings Call August 27, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TiVo Second Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Derrick Nueman, TiVo's Head of Investor Relations. Sir, you may begin.

Derrick Nueman

Thank you, and good afternoon. Welcome to TiVo's second quarter fiscal year ending January 31, 2014, earnings call. With me today are Tom Rogers, our CEO; Naveen Chopra, our CFO; and our General Counsel, Matt Zinn.

We just distributed a press release and 8-K detailing our first quarter financial results. We also posted a first quarter key metric trend sheet on our Investor Relations website that included, among other information, a reconciliation of non-GAAP measures discussed in today's call. You may also access a recording of this call on our website over the next week. Our comments today should take about 30 minutes, followed by a question-and-answer session. Our discussion today includes forward-looking statement about TiVo's future business, products and growth strategies. We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements as described in our Risk Factors and our reports filed with the SEC. Any forward-looking statement made on this call reflects our analysis as of today, and we have no plan or duty to update them.

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

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone. TiVo has now reached a very important milestone. After making significant progress over the last several years amidst scrutiny for not being net income-profitable, TiVo has now achieved the milestone of sustained net income profitability. As a result of the latest litigation settlement, which produced significant increased licensing revenue well into the future along with substantially increased cash resources, coupled with tremendous focus on the innovation front as demonstrated by the highly acclaimed Roamio launch and continued growth of our MSO subscription base, TiVo has reached a brand-new chapter in its financial performance that puts the company on an entirely new trajectory.

Beyond this very important milestone, TiVo also had a very strong quarter. We delivered the highest quarterly net income in the company's history of $268.9 million. We had a 42% year-over-year increase in Service & Technology revenue and $115.4 million in adjusted EBITDA. Our products continue to gain global reach and as a result, we increased our MSO revenue by 58% from a year ago and total subscriptions now stand at 3.6 million, a 33% improvement over the last year. We settled pending litigation with Motorola and Cisco for $490 million, which further underscores the significant value of TiVo's technological innovations.

Our cash position now stands at approximately $1 billion, even after $60 million in stock repurchases. We just launched TiVo Roamio to a highly positive acclaim, the best on one [ph] approach to live, recorded, On Demand and over-the-top television and a solution that gives consumers the content they want on any screen wherever they are. And the National Academy of Television Arts and Sciences recently awarded us our fourth Emmy award, this time for technical and engineering achievement for personalized recommendation engines for video discovery.

So what's leading to this success? We have focused heavily on improving our financial position and balance sheet while at the same time driving an operating business that has made very substantial forward progress in the last several years. Because of our product offerings as well as our leadership role in the marketplace, we are well positioned to drive our operating business even further forward now that major litigation has been settled.

Driving innovation has been a key. TiVo has developed the unique solution for combining universal search across all content sources with the delivery of video content anytime, anywhere, in a way that contributes real differentiation to an industry where domestic and international pay-TV operators are facing increased competition and heightened demand for advanced television services and television viewers are looking for a better experience.

To this point, we recently launched TiVo Roamio, and our innovation was widely acclaimed. Walt Mossberg, for instance, of the Wall Street Journal stated, "While streaming is the big news here, it's worth pointing out that even without it, TiVo could be considered the Holy Grail of set-top boxes." VentureBeat said, "If you're looking for the best TV viewing experience that money can buy, the TiVo Roamio is it. And Light Reading reported that, "the high end of the product line puts cables notion of TV Everywhere to shame."

Some of the reasons why Roamio was so positively received include consumers being able to enjoy built-in streaming to tablets and smartphones, both inside the home and, very soon, out of the home. This means consumers will be able to enjoy their favorite recordings and cable channels anywhere in the world, making TiVo the first cable product to provide consumers access to the recorded content as well as Linear TV on mobile devices wherever they are in the world. Additionally, Roamio has up to 6 tuners; up to 450 hours of HD programming; a faster, more streamlined user interface and an all-new app platform, as well as the best features of any television experience on the market today.

We expect Roamio to positively impact the trajectory of our retail business in the back half of the year and, from an economic standpoint, we anticipate the Roamio models to deliver hardware margin improvements. Further, many of these innovations and features are already being leveraged in our cable operator deployments, exemplified by many of these features now being deployed in the Pace XG1 gateway, and we've created the ability to adapt all this innovation to a cloud-based IPTV environment, which you'll hear more about over time.

Further, from a innovation standpoint, we continue to move through the 3 stages of our product development focus: to organize, to mobilize and to personalize. The combination of these 3 factors creates a unique product that brings together the ability to: first, access your recordings wherever you are; second, access content on multiple televisions in the home or out of the home via tablets and smartphones; and third, access popular streaming services like Netflix, Hulu and YouTube, along with all the near channels in 1 box. This gives viewers the capability to make sense of all the chaos through the very best search and discovery functionality across both linear and over-the-top content and personalize your viewing experience by immediately viewing their favorite channels, shows and preferences the instant they turn on the TV.

Our efforts to make personalization a reality have been recognized in the industry as TiVo was just awarded the 2012-'13 Emmy award for technical and engineering achievement for personalized recommendation engines for video discovery. As further proof of our personalization capabilities, this past quarter, our What To Watch Now feature launched on the iPad and just launched on our set-top box platforms as well. Dynamic tuning went live, which all -- allows more television sets to be used in a whole-home experience. We refreshed many of our content apps, and we continue to improve our core functionality.

As a result of innovations like the ones I just described, our operator business continues to grow nicely. We've added almost 1 million new TiVo subscriptions from our operator relationships during the last year, and we expect to continue our strong subscription growth as Atlantic Broadband, Cable ONE, Com Hem, GCI and Midcontinent and Mediacom have all either recently gone live or close to launching a TiVo solution. The operators that have embraced people are, by and large, seeing stronger competitive positions and improved operating metrics including increased customer satisfaction, lower churn and higher revenue per subscriber.

For example, Suddenlink recently stated on its most recent earnings call that it had 135,000 TiVo subscriptions and that its preliminary data shows that customers with one or more TiVo units churn less and spend more on programming from their On Demand library. Additionally, Liberty Global's U.K. property, Virgin Media, continues to see progress with its TiVo offering. It recently reached 1.7 million TiVo subscriptions or 44% of its TV base. In Spain, ONO saw another quarter of strong results from its TiVo offering as it ended the second calendar quarter with more than 210,000 TiVo subscriptions or 25% of its pay-TV base.

Additionally, further underpinning the value of the TiVo experience, we are finding that the more embedded we are with operators, the more products and functionality they want from TiVo. As a result, we've been successful at driving broader engagement with many of our distribution partners. With the launch of TiVo mini, our multiroom client, we've strong subscription growth from several of our operators. We're now focused on adding to our multiscreen offering and our TV Everywhere portal, starting with Atlantic Broadband and RCN in the U.S. and Com Hem internationally, which we believe will allow us to quickly gain meaningful deployment ahead of the set-top box replacement cycle.

The Com Hem launch is particularly exciting for us. The offering just soft launched and will be followed by a much more aggressive marketing push towards the end of the year. Beyond the subscription growth potential, this launch is a meaningful strategic milestone for TiVo as it represents our first integration with an IPTV provider. We plan to showcase this implementation to a variety of other IPTV operators including international telcos, which we believe broadens the market opportunity for our products and services beyond the cable arena, which has historically been our focus. In addition, Com Hem will include our most robust TV Everywhere solution to date with both linear and VOD content being delivered via TiVo applications on the set-top box iOS and Android tablets and smartphones and through a web browser. This highlights our ability to offer the TiVo experience to virtually any type of video delivery platform and on different types of devices.

Moving on to our audience research and measurement business, TRA. We continue to provide invaluable insights for advertisers and brands by analyzing the relationship between viewing and purchase activity. Over the past few quarters, we added several new networks and advertisers, among them a large cable network that is particularly focused on how linear television viewing coexist with Netflix and other OTT services. Further, we're working towards opportunities to broaden relationships with several other existing clients, especially through our cross-media product.

On the intellectual property front, as I mentioned earlier, we settled our ongoing litigation with Motorola and Cisco for $490 million, bringing the total from awards and settlements related to the unauthorized use of our Time Warp and certain other patents to $1.6 billion in damages and consideration. This outcome is significant and it materially strengthens TiVo's balance sheet. To that end, at the end of the second quarter, TiVo had more than $1 billion of cash and short-term investments. This included the impact of $60 million or 5.4 million shares worth of stock repurchased in second quarter. Going forward, we will continue to focus on the optimal use of capital to drive incremental shareholder value.

In conclusion, we are very pleased with the significant progress we have made in our operating business and are excited about the prospects that are in front of us. While our stock price does not currently reflect the true value of our operating business, we are confident that increased subscribers from current distribution, incremental distribution opportunities, a stronger retail business, a growing media business and a very strong cash position of approximately $1 billion will position us well to achieve significant adjusted EBITDA growth along with projected double-digit adjusted EBITDA margins in fiscal year 2014. As we have previously indicated, this should drive adjusted EBITDA profitability even when including the impact of our most recent settlement.

As we look to the next fiscal year, without providing guidance, the combination of the roughly $70 million in additional licensing revenues and the reduction of litigation expense of about $30 million per year will provide us with a foundation to exceed adjusted EBITDA of $100 million. This would be close to a $200 million swing over a 3-year period when adjusting for onetime litigation cash damages gains and speaks volumes relative to the new financial footing the company is on. With that, let me turn it over to Naveen.

Naveen Chopra

Thank you, Tom, and good afternoon, everyone. As Tom said, Q2 was an important quarter in the continued evolution of TiVo's business. In light of that fact, I'd like to offer a broader description of future growth drivers which capitalize on our progress today. Before doing so, I'll cover the specifics of this quarter's results and walk through our guidance for Q3, then we'll come back to discuss the longer-term opportunity.

In addition to settling our patent litigation with Cisco and Motorola for $490 million, Q2 saw a continued progress across several other parts of the business. We grew Service & Technology revenue 42% year-over-year to $77 million and reported our highest ever net revenue of $100 million. Total subscriptions increased 33% year-over-year, and MSO revenue increased by 58% over the year-ago quarter. Together with the settlement, these milestones led to adjusted EBITDA of $115.4 million and record quarterly net income of $268.9 million. Before the impact of the settlement, adjusted EBITDA would have been $1.2 million and revenue would have been $70.9 million, both of which would have exceeded the high end of their respective guidance ranges.

I'll discuss key drivers for the quarter in a moment, but let me quickly run through specifics on the accounting of the settlement, which obviously has a big impact on Q2 numbers. We received a $490 million in cash upfront from Cisco and Google, which increased our cash and short-term investments to over $1 billion. From an accounting standpoint, this settlement breaks into 3 components: First, past damages of $108.1 million, which was recognized as litigation proceeds in the second quarter. Second, $752,000 relating to interest on the past damages, which was also recognized in the second quarter; and third, $381 million in future licensing revenue, of which approximately $6 million was recognized in the second quarter and roughly $18 million will be recognized in each quarter through Q2 of fiscal year 2019, with the remaining portion recognized thereafter. And finally, litigation spend was $10.7 million in the quarter, which was at the high end of our expectations. This includes the impact of both legal expense and internal litigation-related bonuses but in this case, there were no contingency fees to outside counsel on the settlement.

Beyond the settlement, this was an important quarter for both our service provider business and the TiVo-owned businesses. We began deployments under several of our recently signed deals and completed the development and launch planning for TiVo Roamio, our next-generation TiVo-owned platform.

MSO sub growth continued through the addition of 230,000 MSO subs in the quarter, which was down from the prior quarter as we saw a seasonal slowdown in new additions from our European partners, while overall subscribers year-over-year increased by almost 1 million. Our domestic growth was consistent with the prior quarter. In fact, Suddenlink had its best quarter-to-date. And additionally, GCI and Midcontinent went live in Q2, and we expect Cable ONE, Mediacom, Atlantic Broadband and Com Hem to ramp in Q3 and beyond.

On the Retail business, the focus of the quarter was preparing for the launch of TiVo Roamio, which led to slightly lower gross additions and increased year-over-year subscriber acquisition expenses as we incurred some slightly increased marketing-related costs in preparation for the Roamio launch and recognized a $500,000 inventory reserve on excess TiVo Premiere parts. SAC was also impacted by a higher per unit hardware loss due to what we believe is a temporary mix shift toward lower-end SKUs and at less attractive hardware margins. While these factors caused per subscriber acquisition cost to increase, total acquisition cost in Q2 were 20% below the year-ago period. More importantly, we expect the SAC trend to reverse with Roamio, where all of our SKUs will now have better hardware margins than the comparable premiere SKUs.

Q2 also saw significant changes on in our balance sheet. We ended in the quarter with approximately $1.03 billion in cash and short-term investments, which was up due to the Cisco-Motorola settlement and positive cash flow from operations, as this was the quarter in which we received our annual $33 million payment from Dish. The cash inflow was offset by stock repurchase activity. As you know, we doubled our repurchase authorization to $200 million following the settlement. We also increased the pace of repurchases during the quarter, taking advantage of litigation-driven stock price volatility to repurchase $60 million of stock or roughly 5.4 million shares through open market repurchases at an average price of approximately $11. The $60 million of repurchases utilized about 15% of our net cash balance at the beginning of Q2, bringing the combined value of open market employee stock repurchases to almost $129 million since the board authorized our buyback. We will continue to evaluate the pace of our stock repurchases and remain highly focused on deploying cash to drive long-term shareholder value.

Now a couple of housekeeping items that show up in the Q2 numbers. For EPS purposes, our diluted weighted average shares outstanding increased by 19 million this quarter, from 119 million to 138 million. As GAAP guidelines require use of a fully diluted share count when net income is positive where historically net income has been negative and GAAP requires us to use the lower based share count number. The roughly 20 million share difference between the two primary reflects the inclusion of our convertible debt and in-the-money options in a fully diluted calculation. Additionally, our repurchase activity in the second quarter reduced diluted shares by 2.5 million, and we expect further reductions as the full 5.4 million Q2 share repurchase is incorporated next quarter.

The second housekeeping item is the recognition of our deferred tax assets, which led to a gain of approximately $167 million in the quarter. Now that the company is on track to deliver sustained net income profitability, we're required to release the valuation allowance on our deferred tax assets pursuant to GAAP rules. Going forward, we expect our income statement to reflect a very low tax rate for the remainder of fiscal year 2014. In fiscal years 2015 and beyond, we expect our GAAP-effective tax rate to roughly align with statutory federal and state rates. From a cash tax perspective, we expect our cash tax expenses to be much lower than the GAAP-effective tax rate for several years. Utilization of the deferred tax assets we recognized this fiscal quarter will account for most of this difference between cash and GAAP tax expense in these periods.

Now getting to our third quarter guidance, we expect Service & Technology revenues of $80 million to $82 million, the midpoint of which is a 33% increase from the $61 million we reported for last year's third quarter. Driving the increase is a full quarter of Cisco Motorola revenue and continued growth in MSO revenue. This will be partially offset by lower NRE revenue as the second quarter included significant revenue recognition related to a development milestone on one of our deployments, which will not occur in the third quarter. We expect adjusted EBITDA to be in a range of $20 million to $22 million and net income to be in a range of $6 million to $8 million. Our adjusted EBITDA improvement is driven by the growth in MSO and licensing revenue as described above and a significant decrease in litigation spend.

In Q3, we expect the adjusted EBITDA growth to be tempered somewhat by slightly inflated operating expenses related to the launch of new products including our new Roamio platform. Still, we expect that the longer-term operating expense trends will improve despite some volatility from quarter-to-quarter.

On a full year basis, excluding the revenue benefit and expense reductions related to the Cisco Motorola settlement, the results we posted in the first half of the year and the positive trends we see in the business will drive it to our previously articulated goal of adjusted EBITDA profitability for full fiscal year 2014. Though we don't provide guidance beyond fiscal '14, it's worth noting that the combination of our operational gain so far this year, a full revenue -- a full year of revenue recognition for the Cisco Motorola settlement and litigation cost savings gives us a foundation to deliver adjusted EBITDA in excess of $100 million next year.

And before taking questions, I wanted to return to the topic of long-term growth drivers and describe some of the mechanics of how we expect to drive growth in our business. We have a product that is helping pay-TV operators create more compelling video services that are vital in an increasingly competitive landscape that might see new entrants beyond the current cable, satellite and telco players. There is no doubt that a strong user experience is critical to survival in such a market. This dynamic has been a major factor in our recent traction with service providers and has put us in a position where we have now signed deals with operators serving approximately 10 million subscribers where TiVo is being deployed on an exclusive or primary basis. This 10 million number excludes deals with tier 1 operators like DIRECTV and Charter where we're either a secondary option or the specifics of when and how TiVo products might be deployed are still being resolved. Of the 10 million homes, we currently have a penetration of roughly 25% and believe that current rollout trends provide a path for us to possibly double or triple that penetration, adding another 2.5 to 5 million subs.

We're also heavily focused on adding new distribution deals. Over the past year, we've announced 6 new deals with operators serving roughly 3 million subscribers in the U.S. and abroad. In the U.S., our focus has been on the mid-tier operators where it's clear where they won't build an in-house solution and need a highly capable partner. While we've established ourselves as the leading player in this market, we think significant upside remains as we've only signed about half of the market to date and expect to bring more operators on board in the future. In terms of the larger operators, some are choosing to develop an advanced television solution themselves and are spending significant capital doing so without the guarantee of a good user experience. Others, we hope, will ultimately decide to follow the path of mid-tier operators. The good news is that this is all upside as we aren't banking on any of these larger domestic operators to drive growth in a profitable operating business.

Looking abroad, we believe the opportunities are significant. In addition to our focus on signing additional deals in Western Europe, we're having conversations with operators in Latin America and other regions where service providers are also seeking to differentiate their offerings in an increasingly competitive environment. We believe there are tens of millions of homes we can address in Western Europe and many more beyond.

Obviously, the other key ingredient in sizing the economic potential of the subscriber growth dynamics I just described is ARPU. On this front, it's worth pointing out that our mid-tier domestic operator deals typically have ARPUs well above the average we report in our 10-Q. And internationally, ARPU is typically lower than the reported average but varies based on the size of the operator as well as the specific pay-TV market. As we drive new subs with these ARPUs and clear fixed deployment cost, not only do we see strong revenue growth from our MSO business but we believe we'll see significant margins on incremental MSO subs. Beyond driving value from the operator business, we believe, over time, both our advertising and research business will also be strong contributors.

Finally, our focus on the Retail business remains, finding way such as launching Roamio to maintain current revenue and cash generation while providing a platform to rapidly deploy innovation that can be adopted by our service provider customers as well.

Put all this together, along with an efficient capital allocation, and we believe that we have a business that has very strong prospects and a stock that can trade at a valuation well above where it is today. To conclude, we had a strong quarter, which has set us up for a strong fiscal '14 and fiscal '15. We're well-capitalized and growing nicely in a growing market, and we look forward to making TiVo an even bigger part of the television universe in the quarters and years to come. With that, let's now take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Miller of B. Riley & Co.

David W. Miller - B. Riley Caris, Research Division

Naveen, in light of the acquisition of Virgin by Liberty Global, I mean what are these guys at Liberty telling you with regard to future TiVo-branded deployments in other parts of Western Europe other than the U.K.? Intuitively, you would think that they've looked at what Virgin Media has done with you guys and it's nothing short of spectacular. Simple logic just dictates that they would obviously want to replicate that throughout some of their other systems in mainland Europe, but they obviously have this Verizon -- excuse me, Horizon product that they're deploying as well. And I'm wondering what they told you, any kind of color you can give towards the notion that they would perhaps abandon their Horizon product and favor your products instead.

Naveen Chopra

David, thanks for the question. So on Liberty Global and Virgin, as Tom mentioned in his remarks as well, we feel very good about the dialogue there in large part because as they've now gotten their hands on the steering wheel, I think they are becoming more and more aware of the level of work and effort and success that TiVo and Virgin have created together, and they see that as more and more important ingredient of the overall Virgin growth story. And we're obviously very excited about that, and we also are very conscious of the fact that we have to continue to execute and deliver ongoing growth and ongoing innovation for Virgin. Obviously, part of our motivation in doing that is to try to find ways to extend the success of Virgin to other parts of Europe and other Liberty Global properties would be great. I think it will be premature at this point to speak about any specific plans on that front, and that's probably something we would let Liberty speak to anyway. But obviously, something we'd like to see happen and hopefully if we can continue moving forward at Virgin, it may open up those kinds of opportunities.

Thomas S. Rogers

We have a strong, regular and ongoing dialogue, and it's only a positive relative to our relationship with Liberty Global in the past. So we look at their change of ownership of Virgin as something that has certainly helped our relationship with Liberty Global. One thing I want to just correct, I think I misstated something when I was speaking to fiscal year 2014 that we're currently in. I said as we previously indicated we should drive adjusted EBITDA profitability even when including the impact of our most recent settlement. I meant to say even when excluding the impact of our most recent settlement. Obviously, that has a very different meaning.

Operator

Your next question comes from Brian Fitzgerald of Jefferies.

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

When you look at Com Hem, you have your first IPTV integration, you're rolling out the mini with multi-room client functionality, your TV Everywhere portal, how extensive can the platform be? Can we expect to see TiVo functionality, TiVo platform baked into the new gaming consoles? And then a quick follow-up, Naveen, can you remind us what's left in the repurchase authorization?

Thomas S. Rogers

On the first front, our goal is to be able to allow the TiVo service to be received through whatever devices operators would like them to be received. And yes, that does include gaming consoles that some operators believe would be helpful, particularly for second set purposes in homes. As you know, our platform has been driving towards finding cheaper ways for operators to have whole-home solutions than they currently do. We've been successful on that, successful in trying to provide multiscreen options that the operators haven't had and, of course, with what announced with Roamio out-of-home capability. So the extensibility of the platform is something that continues. And what we've done with Com Hem in terms of an IPTV implementation only will continue to drive that capability forward. So all of that has been an important part of our operator roadmap. Naveen on the...

Naveen Chopra

Yes, so the question was how much is left on our repurchase authorization. Obviously, that's something that the board looks at on that ongoing basis. But in terms of what's formally been approved at this point, we had a total authorization of $200 million, of which, about $106 million remains. And we'll continue to evaluate that as we make progress on share repurchases.

Operator

Your next question comes from Mike Olson of Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

I just had 2 quick ones. I think Tom mentioned an annual reduction of $30 million in litigation spend, would that be $30 million off of a $40 million kind of normal run rate based on the $10 million or so per quarter that we've seen in the last couple of quarters? I guess, in other words, is your expectation that annual litigation is going to be in that $10 million range. And then secondly, you mentioned both new operator adds and growth within existing customers are focused for future growth, which makes sense. It seems that new customers have been a bit limited in recent quarters, is that a function of kind of seasonality and when deals get done or is it typical slow-moving MSO decision-making or what other factors could be impacting the lack of kind of recent new MSO deals?

Thomas S. Rogers

In terms of litigation expense, yes, I said we would see a reduction of about $30 million per year. That's off of what our litigation has been running in the last couple of years in the mid-30 range or so. So that is a very substantial reduction in terms of our ongoing litigation expense. In terms of new deals, we're deeply involved with discussions with a number of operators. There's really no one factor that I would point to there other than these decisions take a while, and we continue to drive the conversations forward as deliberately as we can. I would say that there's certainly focus on CapEx issues as it relates to the hardware side of the implementation of advanced TV, meaning some issues that don't directly relate to the software solutions that TiVo brings to the table and, in some cases, that part of the equation has created longer deliberations than we would like, but we are finding that there's really no operator who does not believe they are going to have to come to terms with implementing advanced TV, and we certainly haven't seen anybody else around who is getting the kind of accolades from operators who have rolled it out in terms of what the TiVo solution has meant to them, and that's certainly helping us with their colleagues.

Operator

Your next question comes from Richard Tullo of Albert Fried.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Great job on the presentation today, guys. I thought it was very clear, but I'm a little dumb. So what is going to be, on a go-forward basis, the total royalty revenues per quarter?

Thomas S. Rogers

Going forward, the quarterly revenue will be about -- an additional 18 from the most recent settlement, and we were running at about 23 prior to that. So about just over 45...

Richard Tullo - Albert Fried & Company, LLC, Research Division

45, okay.

Thomas S. Rogers

$41 million.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay, very good, yes, $41 million, that's right. Second point, R&D expense, it sounds like you have some opportunities that you would like to capitalize on, you're getting some traction in the spend. We've been running a bit above the historical rate over the last couple of years. We do assume that the R&D spend is going to stay at this quarter's level for the remainder of this year? And is there any relief from R&D spend contributing to that roughly $100 million number that is in, not guidance but outlook?

Thomas S. Rogers

Well, first thing to note is probably that looking at the second quarter, our R&D was down a few million dollars year-over-year. We do continue to expect that, overall, R&D for this year will be down over last year. We are certainly looking to continue a trend of finding ways to operate more efficiently and continue to innovate at a high level but at a reduced level of R&D. The foundation for next year that I pointed to, that we believe will allow us to exceed $100 million in EBITDA next year, is a function of the additional licensing revenues of $70 million and the reduced legal expense of about $30 million. We weren't pointing to anything else about our operating performance on either the expense or the revenue front in talking about that, since we have not set our budgets for next year at this time.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Fair enough. And just kind of 1 philosophical question. I cover Netflix, okay? The stock is probably generating 1/5 of the EBITDA you guys are generating or will generate. Your revenue is growing faster. I think management is doing a lot of the right things to create shareholder value here. What do you think needs to be done to transfer the shareholder value creation that's been so manifesting the improvement in the balance sheet to the actual share price?

Thomas S. Rogers

Well, I can tell you we're not going to get into the production of original programming. I think that we obviously are disappointed that the share price does not better reflect our operating business. We're certainly very much hoping that being able to answer a question that, since I've been at the company, has been asked over and over again. So when does TiVo get to sustained profitability? Now that we can answer it and answer it in a way I think provides a great roadmap in terms of the progress the company's made, we're hoping that the operating business will get valued in a way that we think is more fairly reflective of the progress we've made and certainly the sub performance, the year-over-year growing almost by 1 million subs; the ability to continue to show the innovation that we're capable of, which the reception of the Roamio product, I think, showed in a huge way; the fact that we're launching between the second quarter and the third quarter, I think, 6 new operators who are launching with us and with that additional sub deployments behind them, we've got a lot that were showing now in terms of the operating performance of this company. And I think, over time, that will be better understood and then reflected in the stock price.

Operator

Your next question comes from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

I think that last question was excellent, and I wonder if the issue here is that now you've got 140 -- I'm sorry, $40 million a quarter, $160 million a year in pure IP licensing really. And that there's this sense that, that just comes to an end at some point, that you're not really an IP licensing engine, you're actually a service provider, or, are you? And then I know in the past, Tom, you've talked about an IP licensing company as well. So as we think about the growth, how should we think, in the long term, how should we think about the IP licensing, does it come to an abrupt halt? If it continues, what is the engine for its continuation?

Thomas S. Rogers

Well, I'm not going to paint any picture of guidance on the IP front. Obviously, we've been heavily litigating a small portion, a very small portion, of our overall patent portfolio and in resolving what was the pending actions and being able to get the licensing revenue from that and out from the immediate litigation expense that it involved, it has drove an understandable level of revenue going out for a number of years. There is, as the tables indicate, revenue that continues beyond the 2018 time frame. There's a substantial patent portfolio there that we believe has ongoing value. How we demonstrate the value of that over time will be seen and shown, but the fact that we are an operating company focused on innovation, getting the kinds of reception and reviews we've got on our most recent product, I think, indicates that we are capable of continuing to drive substantial intellectual property and there's no doubt for technology companies, such as ourselves, in the media space. There's substantial value that's been proven over time that flows from being able to create additional intellectual properties. So while we are -- hugely focused now on driving operating value, more subs, more operator deals, I wouldn't discount our intellectual property value.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay. And then on -- you talked about CapEx being a constraint on some of the MSOs proceeding. And I have mentioned that is -- in reference to Charter, in particular. Can you provide any granularity around the process at Charter and time line for deployment?

Thomas S. Rogers

No, I don't really want to speak to any operators' plans, that's for the operators to do. I will say that a number of operators are focused on the combination of gateways and the role that gateway hardware plays in advanced television rollouts, some are looking at legacy boxes and how certain implementations of the UIs such as ours would be aided by various technology providers to allow them to appear on legacy boxes, some are hugely focused on IPTV implementations, some of which might involve thinner hardware in the home that allows for a different kind of hardware implementation than other more traditional QAM-based implementation. So there are a lot of issues of complexity there that I do think are adding to the time lines for how operators are reaching their decisions. But at the end of the day, it's all about getting a consumer a great quality user experience and there are very, very few companies that have demonstrated the chops to be able to develop for the operator world and implement for the operator world a great user experience that can be used in QAM and IPTV and that's the thrust of why we think we distinguish ourselves from other players.

Operator

Your next question comes from Todd Mitchell of Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

Just real quick. So next year's fiscal '15 guidance of $100 million in EBITDA includes $150 million from DISH, Verizon, AT&T, Cisco and Motorola? Is that the right number for us to work with in terms of those?

Thomas S. Rogers

Well, the first thing to note is we're not giving guidance. We're providing a view of the foundation we have based on new licensing revenues and the reductions in litigation expense, but I didn't want that to turn into a guidance number. Naveen?

Naveen Chopra

Yes, I think in terms of the approximate number, that's probably -- it's probably a little higher than that, but that's a reasonable number to plug in on licensing side.

Todd T. Mitchell - Brean Capital LLC, Research Division

Okay. And then in terms of the run rate for R&D at $100 million, can you give us any idea kind of what the big buckets are within that $100 million?

Thomas S. Rogers

Well, the big buckets are a combination of deployment-related activity for operators and feature development activity that relates to ongoing innovation, as well as the support and maintenance elements of what we have provided in the field today. When it comes to innovations, the combination of work-related multiscreen personalization, IPTV, additional content and apps and social TV as well as some elements related to advertising really are the major buckets within the innovation fold that we are spending most of our money on.

Todd T. Mitchell - Brean Capital LLC, Research Division

So I guess what I'm trying to get at is when you said -- your first statement was kind of the -- relating to deployment. Is that deployments on existing customers or customers that you would hope to win in the future who may want to take a different technology approach?

Thomas S. Rogers

A lot of the current expenditure relates to actual implementations of deals where operators are putting TiVo into the field and the activity that we have to support that. Once we've done an implementation, there's obviously ongoing maintenance and support of that activity as well. And certainly, we are constantly innovating, some of which did not relate specifically to the answer on the innovation buckets I gave you about operator desires for how user experience may be delivered in the future and, certainly, there is some expenditure in that direction.

Todd T. Mitchell - Brean Capital LLC, Research Division

Would you consider opening up your stack and putting a TiVo UI on the RDK, if that would get you a major MSO win in the U.S. or if Liberty Global was to adopt a standard similarly?

Thomas S. Rogers

Well, I think the RDK is a positive development in a sense that anything that would make it easier for TiVo to integrate more universally into operator hardware intended for operator deployment, integration into middleware that would make our application work more readily able to be developed at lower cost, all of that is interesting. We know there have been efforts in the past to create some kind of uniform or unified middleware approach by the industry that have not been successful, and we're hopeful that this time, that particular effort would get greater traction and would lead to easier, less expensive integration for a player like us.

Todd T. Mitchell - Brean Capital LLC, Research Division

And on Com Hem, you've said in the past that it would be -- you expect the take rates on Com Hem similar to ONO, do you still feel that way?

Naveen Chopra

Yes, we're feeling good about Com Hem. It's in early stages right now. They actually just announced today that they've got 45,000 people who have preregistered for the service, which is pretty similar to kind of the level of preregistration that Virgin had and, obviously, Com Hem is a smaller operator. I think they deserve some credit for driving some interest. And obviously, we're excited about launching the product with them.

Todd T. Mitchell - Brean Capital LLC, Research Division

Last question, on your comments on your buyback, you mentioned that you had spent 15% of the previous quarter's cash balance. Is there anything we should read into that as the amount of, basically, capital within your balance sheet that you would be willing to dedicate to repurchases?

Naveen Chopra

No. The main reason we framed it that way was because the additional $490 million that we received from the most recent settlement, we didn't actually get the cash until the last few days of the quarter. So we did not want to create the impression that the buybacks were small by any means. I think, relative to the cash that we had, we were quite aggressive.

Operator

Your next question comes from Barton Crockett of Lazard Capital.

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

I wanted to follow-up on one of the comments I think, Naveen, you made about ARPU. You said, I think, that the international ARPU is below the 115 or so you have on MSO that you reported in this quarter, but that domestic is above. I was wondering if the gross profit contribution is similarly better in the U.S. than it is Internationally or if you could provide some color on why there's that differential?

Naveen Chopra

Good question, Barton. Let me actually expand a little bit on the ARPU comment and then I'll hit on the gross margin one as well. I mean, the thing to be careful with the ARPU comment, internationally, is that there is a high degree of variability there that reflects all sorts of different terms that are negotiated around exclusivity and volume discounts and things like that. So keep that in mind as you look at the specifics of the numbers. That being said, the gross margin dynamics are probably flipped around. Meaning, in the U.S., on a percentage basis, gross margins, certainly, once we get beyond the fixed, upfront cost, are a little bit lower because we play a much bigger role in the delivery of the actual service, meaning, the boxes are running off our data center, we pay for bandwidth costs, things of that nature. With our international deployments, all of that infrastructure is hosted by the operator and, therefore, our direct cost of service tends to be significantly lower than it does here in the U.S.

Thomas S. Rogers

Remember, Barton, the domestic MSO R&D activity, geared toward getting an operator launched, we have down 200,000 to 300,000 range for a new operator, which is obviously well below what the R&D cost are when we launch an international operator.

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

Okay. And then on the ARPU that you reported this quarter, can you give us some clarity on how much of that is skewed by operators not yet providing subscription revenues but including their subs in the subscriber tally?

Naveen Chopra

Yes, I mean, as we've said before, you've got some competing factors going on, and I assume you're referring to the MSO ARPU?

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

Yes.

Naveen Chopra

And in that case, you've got DirecTV where you've got more revenue than subs. And on the other hand, you've got ONO and Virgin where you've got a lot more subs and no revenue showing up in the calculation. In terms of the sequential trends on ARPU, you saw a small decrease there, which I think was driven mostly by the increase in Virgin and ONO subs without any corresponding revenue. We did get a little help on that number this quarter from Ad and ARM and a couple of extra days in the quarter as well.

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

Okay. I'm kind of -- going to ask 1 last question, if I can. The cash balance at $1 billion, relative to your market cap of $1.5 billion, how much cash do you guys really need? I mean, what would be you're target cash level do you think?

Thomas S. Rogers

We've never put a number out there in terms of a target cash level. But obviously, we've been highly cognizant of the fact that there are opportunities to increase shareholder value through a buyback program. And last quarter, we were fairly aggressive in pursuing that. We have never indicated, ultimately, what's the level of cash to retain on the balance sheet, but we're highly mindful of the fact that relative to our market cap and relative to our current operating needs, we have a lot of cash there.

Operator

Your next question comes from Jim Goss of Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I've got a couple also. First, it seemed like you're indicating a renewed interest in the hardware side of the business, which I think you've been backing away from a little bit, and I presume that has something to do with the Roamio boxes and going back to one of the prior sort of comments regarding interoperability, I'm wondering how that plays a role in the whole hardware deployment as a business itself.

Thomas S. Rogers

Well, I'm not sure renewed interest in the hardware is the right way to put it. I think we've always known that for purchases of our retail business, hardware plays an important role. You need the hardware embodiment in order to offer it to users and certainly, we put into Roamio a number of hardware features including memory storage and a number of tuners that were very well received and marked a stark contrast from the previous series of TiVo and the hardware used there, but it's part of the package on the retail front. On the operator front, increasingly, we are integrating our software into other people's hardware, the Pace offering in the United States has gotten increasing traction in terms of our software and their hardware and something that both we and operators have been pleased to see. Overseas, we only integrate into third-party hardware. So we have maintained our thrust of looking at third-party hardware capability is where our software would reside for the operator business.

Naveen Chopra

One thing I would add to that, which has obviously started to become more apparent over the last couple of quarters and showing up in the financials, is that the volume of hardware that we are shipping as a kind of combined hardware and software solution to the MSOs has obviously grown substantially, and we have some operators that like to do that on a third-party platform, but we also have a substantial number that utilize our retail platform and I think it really is an illustration of the fact that if you can offer an end-to-end solution to these operators, that they can launch quickly, that doesn't require a lot of complexity and integration, whether it's on your own platform or somebody else's, there is tremendous value in that, and that's something that we think is a great asset for us.

Thomas S. Rogers

And I'd reiterate what Naveen said before which is, when it does come to the Roamio product, the hardware margins on all the SKUs are improved relative to our previous retail product.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. You also made a comment about Tier 1 players like DIRECTV and Charter and you'd be a secondary option in those areas. And with the Liberty involvement in both Charter and Virgin, you're talking a little about the potential to expand in some of the European markets, but do you think you have a greater chance of playing a bigger role in Charter domestically because of that link?

Naveen Chopra

I should be very precise about the comments on Charter and DIRECTV. So DIRECTV, we're a secondary option. Charter, we don't know what their approach will be. As Tom mentioned in his response from one of the earlier questions, we'll have to wait for them to speak to that. But in terms of the Liberty involvement there, hard to say. Obviously, we hope that success in the U.K. will breed opportunities elsewhere, whether it's with Liberty or anyone else that's obviously a highly visible deployment for us, but nothing specific to speak of.

Thomas S. Rogers

Right now, we look at them as separate companies that are -- got separate management, and we have very separate discussions going with both of them of a very detailed nature, but they are very much separate companies.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. lastly, if -- do you have enough on your plate geographically right now or are you thinking of moving in any of the Asian markets?

Naveen Chopra

We are focused on growth in a variety of markets, so I'd certainly would not say that Asia is off the table by any means, but in terms of opportunities that we think are nearer term, obviously, Western Europe and Latin America are our places where we have more to leverage in terms of existing relationships and the ability of those operators to take advantage of things that we've already done in other markets.

Operator

We have time for one more question. Your final question comes from Alan Gould of Evercore.

Naveen Chopra

Operator why don't you take the next person in line?

Operator

Our final question now comes from Daniel Ernst of Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

Tom, if you look at the pipeline of things, you have made discussions. In the last year, you mentioned you added 6 operators addressing about 3 million, and you added 1 million new MSO subs. So you think that's a pace that you can keep up when you had 6, 7, 5 other new operators that address 2 million, 3 million, 4 million year in and year out, certainly, for next year, what you have in your plate today and can you -- will MSO subs, based on what you have on your plate today, equal to be less than or even be more than the 1 million you've added over the last year? That's sort of one question. And then, Naveen, just everyone sort of -- I hate to beat a dead horse, but on this sort of forward-looking model, where you say, there's in excess of 100 million EBITDA, but 160 of that is actually coming from where I might've considered discontinued ops, that was the effort to monetize patents from people that weren't playing nicely. And so you took it to court and they settled, and you have 160 million impact directly coming from that. What's not being discussed is actually there's a cash component of that, which I think is around 80 million, is that about right? And then just a housekeeping, DISH pays once a year, their alimony payment about 33 million. Did you get that in the July quarter or is that still to come for the current fiscal year? And then last, back to Tom, people have sort of trying to get at what you're going to do with the $1 billion. Is anywhere in your thinking something transformative, an acquisition, a merger, somewhere where TiVo becomes a lot different than it is today?

Thomas S. Rogers

Well, starting with that one, I think a lot of what we've done has been transformative. As I've said, we've been asked for a long time when is TiVo going to be profitable on a sustained basis than it is. And a couple of years ago, people said you got no chance of being a real player with the cable industry, and we deal now with 10 of the top 20 MSOs, and are making more of a splash overseas in terms of an advanced television experience than anybody else with cable. And I think the fact that both our financial and our operator profile have moved as dramatically as they have while we continue to demonstrate our ability to innovate and put together product in a way that nobody else is, I think we have -- we've substantially transformed the company. In terms of putting capital to use towards transformation beyond the investments that we've clearly made in R&D along the way, as we've said before, we feel we need to evaluate things that are brought to us, we feel we have a responsibility to shareholders to assess whether there are things that might be transformative that we can do with that capital. We've been extremely conservative in that regard. We've certainly shown no interest in things that would be financially dilutive or things that wouldn't be truly strategic. And as a result, to date, we have not seen anything that we would consider to be the right answer there, although we do consider things that are brought to us by any number of investment banks on a regular basis because we believe we have the responsibility to do so and if we found the right thing, we would not hesitate to drive an answer that would deploy that cash in a way that would substantially grow value for shareholders. On your question on the pace of additional subs through the pipeline. I think one way to look at that is, when you take away the distribution agreements we have with Tier 1 guys where we might not be the primary or exclusive player in their advanced television realm, we have about 10 million households and we've, today, probably penetrated 25% or so of -- or about 25% penetrated of those 10 million households is one way to look at it. So we have substantial additional upside, we think, within the existing operator world we have. There are a number of players in the Tier 2 world that we have not yet entered into deals with, but we think we are very much part of the lead [ph] consideration for them making that decision. So that certainly gives us additional opportunity towards the kind of the trajectory you were suggesting, and there's a major world of international opportunity that exists out there that we believe we offer a number of ways to appeal to that operator set that give us additional pipeline capability there. And you put all 3 of those together and we see substantial additional subs, over time, contributing major sub fees to the overall model.

Naveen Chopra

And Dan, with respect to a couple of your questions on cash and the EBITDA, so a few specific numbers for you. The DISH payment was received in Q2. That's a $33 million payment a year going through 2018. The revenue and the -- or I should say, the timing of the cash and the timing of the revenue across all the settlements do differ a little bit. We've included a chart in the press release that details that out. So there's -- and what you'll see in that chart is there's still about $390 million worth of cash tied to kind of the guaranteed component of the settlement yet to be received. There's also some upside on a few of those based on how many subscribers they ended up actually deploying. The 100 million number that we've described, as kind of the extrapolation of where we are today, was not intended to suggest that it's done on the back of the service fee revenue, that's obviously a combination of significant step-up in licensing revenue. And I think part of the reason that we said it could be well in excess of that is because, obviously, you would factor, on top of that, growth in the operating business, which, since we don't provide guidance that far out, is not something we're quantifying at this point.

Operator

I would now like to turn the floor back over to Mr. Tom Rogers.

Thomas S. Rogers

Thanks, everybody, for joining us. In conclusion, I would just like to reiterate that TiVo has got a whole new financial trajectory with a foundation to exceed $100 million in EBITDA next year. Great new innovation that we are continuing to trot out, as the Roamio reception clearly demonstrates. Continued sub progress, hosting almost 1 million new subs year-over-year and continued progress with our operator partners where, as I've said, between Q2 and Q3, we're looking at about 2 -- I mean, 6 new launches that are being put in place. So that all adds up to a new chapter for TiVo and our development and our progress, and there's much more to come. Thanks again for joining us.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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