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TiVo Inc. (NASDAQ:TIVO)

F3Q10 (Qtr End 10/31/2009) Earnings Call

November 24, 2009 5:00 pm ET

Executives

Derrick Nueman - IR

Tom Rogers - CEO

Anna Brunelle - CFO

Naveen Chopra - VP of Business Development and Corporate Strategy

Analysts

David Miller - Caris & Company

Bridget Weishaar - JPMorgan

Barton Crockett - Lazard Capital Market

Tony Wible - Janney Montgomery Scott

Mark Argento - Craig-Hallum Capital Markets

Brian Klein - Wedge Partners

Chris Grosso - Hudson Square Research

Tuna Amobi - Standard & Poor's

Operator

Welcome to the TiVo third quarter earnings results conference call. Mr. Nueman you may begin your conference.

Derrick Nueman

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

We are here today to discuss TiVo's Q3 earnings, for the quarter ended October 31, 2009. We have just distributed a press release and 8-K detailing our financial results. We have also released a key metric 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 will take about 30 minutes and will be followed by Q&A.

Our discussions today include 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 subscriptions, advertising and research business, profitability, operations and financial performance and guidance, distribution of the TiVo's service domestically with DIRECTV, RCN, Comcast and Cox, internationally with Virgin Media, UK, (7 HD) in Australia, New Zealand. TiVo's current and future service features and product releases, partner initiatives and TiVo's ongoing litigation with EchoStar, AT&T and Verizon.

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

Factors that may cause actual results to differ materially include delays in development and competitive service offerings and lack of market acceptance, as well as other factors described in our risk factors in our public filings and in our latest 10-K and 10-Qs. Any forward-looking statements made today reflect analysis that's made as of today and we have no plans or duty to update them.

Additionally, there are some metrics and financial information provided on today's call that are non-GAAP measures. Please see our third quarter fiscal year 2010 key metric trend sheet for reconciliation of these items.

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

Tom Rogers

Thanks, Derrick. Good afternoon, everyone. Let me begin by saying that TiVo had another solid quarter as we recorded our ninth straight quarter of adjusted EBITDA profitability exceeding guidance.

This quarter we also made significant progress on a number of key business initiatives designed to further drive TiVo’s mass distribution efforts, both in the US and overseas. TiVo just announced strategic partnership with Virgin Media, our official launch earlier this month in New Zealand, and important preparations for domestic roll-outs with DIRECTV and RCN next year.

This is in addition to an expected acceleration in Comcast deployment of the TiVo service next year, and Best Buy’s 2010 marketing initiatives as part of our announced strategic relationship with them.

Our audience research continues to showcase TiVo's understanding of the future of television and remains a vital resource for the media industry, evidenced by our deal with Google we announced today.

Finally, this quarter the United States District Court for the Eastern District of Texas ruled to impose damages and contempt sanctions of approximately $200 million against EchoStar for its continued violation of a permanent injunction. Taking the total damages awarded to-date to approximately $400 million and further underlining the value of our intellectual property.

As you can see, we have laid an important foundation for growth with many of our efforts already beginning to bear fruit. Now, let me walk you through some detail.

To begin, as I said, we announced today a long-term strategic partnership with Virgin Media, one of the largest international cable operators and the UK's single largest cable system. Virgin serves nearly four million customers in the UK, and TiVo will know become the exclusive middleware and user interface provider on its next generation set-top-box platform.

When the new platform becomes available, Virgin subscribers will use the TiVo interface to access what we think will be the UK's most advanced television service package, including a variety of broadband to the TV features. In fact, our market leadership in the development of the seamlessly integrated broadband and linear TV experience was a critical factor in Virgin's decision to partner with TiVo.

Let me provide with you a little more detail about the Virgin relationship, which will give you further color on our enthusiasm for this deal.

First, similar to RCN, we will be the exclusive middleware and user interface on next generation boxes. Second, there are substantial minimum commitments associated with this deal. Third, TiVo will be supplying the complete software stack on the Virgin set-top-boxes, which we believe is a more efficient approach to development than some of the more cumbersome architectures used by other operators and keeps with our strategy to avoid engagements that could potentially tie us up in lengthy development projects without near-term deployment opportunity.

Lastly, this deal also marks the first time TiVo will be providing the interface, not just for DVR platforms, but for traditional, next generation set-top boxes without DVR capability as well. This expanded role further underscores the ongoing evolution of TiVo's technology from the best DVR interface, to the world's leading provider of software for advanced television services. Proceed to unified linear broadband and on-demand content.

This quarter, we also recently marked the official launch of TiVo in New Zealand, underscoring yet another value-added business model that TiVo was employing with international media companies, to help protect them and their competitive market position. The significance here is the TVNZ, the largest free-to-air national broadcaster in New Zealand, is not only heavily promoting the TiVo offering to its subscribers, but is also teaming up with Telecom New Zealand, the country's leading telephony company, which is using its retail outlets as key hubs for the offering.

Both of these most recent international ventures are prime examples of how TiVo is committed to providing the very best in-home entertainment experience regardless of what corner of the globe the television is turned on. As such, we remain focused on key international players worldwide that are looking to apply TiVo technology to accelerate their evolution to next generation services in a highly cost effective manner.

Domestically, we are making marked progress through our partnership with several of the country's leading multi-channel operators, which in the coming year, we anticipate will yield improved results and benefit many TV viewers nationwide.

For starters, the new much anticipated DIRECTV, TiVo HD DVR is on track for launch next year and we believe this will give DIRECTV's 18 million Cox subscribers access to the very best way to experience television.

Furthermore, during the quarter, we also continued our progress with our domestic mass distribution efforts. In particular, we expect to continue to partner with Comcast for another year of development work toward porting the TiVo experience on the Comcast boxes. This development will support increased functionality and ongoing work toward tru2way, which we expect will facilitate TiVo's move into additional markets.

Additionally, Comcast recently reinitiated its marketing efforts across the New England market, now that the vast majority of technical hurdles have been cleared. In particular, Comcast has started running a new TV spot that focuses on the new unique capability to offer the TiVo On-line Scheduler to their subscribers, and recently launched a new series of radio promotions and billboards.

Our mass distribution deal with Cox is also progressing, as the rollout of TiVo has moved out of the testing phase and is in very early stage of deployment in the New England region. We expect to rollout, to pick up speed, and increase in scope throughout 2010.

We also continue our efforts to work with small and medium sized operators that are looking to differentiate themselves from larger competitors in the television market. Last quarter, we announced that RCN shows the TiVo HD DVR product as its primary DVR offering, and we believe it will be the first of other similar deals. We are continuing to make headway on the product development and RCN is on track to rollout the TiVo RCN HD DVR in early 2010.

Speaking about the TiVo relationship, on its recent earnings call, RCN CEO, Peter Aquino stated, and I am quoting here, "We are staying ahead of the competition and expect to set the trend to be one of the first MSOs to make this work. We believe that the RCN TiVo deal is exactly the model of the future."

We are in a number of discussions with other similarly sized cable operators about adopting this model.

Shifting gears to the TiVo-owned side of the business. In terms of our work with Best Buy, we are extremely excited about our strategic marketing relationship that will kick off early next year, as is Best Buy. Out development work to create unique user interface elements for the Best Buy launch is nearing completion and will be timed with the commencement of Best Buy's strategic marketing initiatives early next year.

Additionally, we look forward to working with Best Buy to integrate its recently announced digital content offering into that interface next year.

The space TiVo occupies is where content and distribution meets. Both content and distribution now are being increasingly commoditized as consumers have increasing number of options on both sides of that equation. It is the framing of the viewer experience through the user interface, along with search, coupled with ad solutions have monetized these elements, which we believe is the true unique media value proposition going forward.

The idea that TiVo makes easily accessible millions of options to the television set, beyond what cable and satellite are capable of doing today, is still something that is not understood by a vast majority of television viewers, but a very powerful extension of the great TiVo brand where we believe Best Buy will play a critical role in driving it into consumer consciousness.

To that end, while the ongoing expansion of our global footprint, underpinned by our DVR intellectual property form a valuable foundation for the company. The opportunities presented by broadband connections to the TV, as evidenced by the initiation if BLOCKBUSTER this quarter, the integration of Netflix content in our HD search results, thereby indexing Netflix's titles alongside other titles, as well as another extensions into the mobile work, as evidenced by the customized TiVo services for Blackberry users, which were lit up this quarter. All this creates some very interesting product opportunities for next generation TiVo activity.

TiVo continues to lead the pack in the development and formulation of advanced television features, and we have begun to accelerate the level of research and development investment around various initiatives, which we currently consider the best use of our substantial cash resources.

One small example of these efforts is a new keyboard remote control that we are developing, which builds on the ease of the original TiVo remote control, and enables users to get even more out of the broadband experience that TiVo delivers. We like to describe it as 'The peanut goes pop.'

Switching gears to our research business, TiVo continues to show its deep understanding of the future of the media industry, as we continue to expand our efforts to provide the media world with the advanced television advertising solutions and audience research that can help develop the television business model that will create new opportunities and foster a more immersive advertising experience.

To that end, earlier today, we announced that we entered into an audience research agreement with Google, whereby the company will license and integrate TiVo television viewing data into its measurement of audiences for advertisement sold through the Google TV Ads platform. This agreement will enable Google to draw on TiVo's anonymous second-by-second DVR viewing data, solely for the purpose of measuring ads deployed to the Google TV Ads platform. This deal further validates the value of our granular second-by-second audience measurement data.

Additionally, TiVo was recently selected by the Coalition for Innovative Media Measurement, otherwise known as CIMM to participate in RFP process to determine how TiVo can work together with the group to help foster research innovation in the media measurement space. CIMM is a collection of key buyers and sellers of advertising supported media, which was formed to promote innovation in audience measurement in the US. We are extremely pleased to have been selected for consideration and look forward to the possibility of working with this group to help foster research innovation in the audience research and measurement field.

Moving onto the defense of our intellectual property, we scored another significant win this quarter, when the United States District Court, Eastern District of Texas imposed damages and contempt sanctions of approximately $200 million against EchoStar for its continued violation of a court-ordered permanent injunction, and awarded TiVo its attorney's fees and costs incurred during the contempt proceedings. This brings total damages and sanctions in this case to approximately $400 million through July 1, 2009, and is exclusive of potential further damages and sanctions.

Earlier this month, we presented our argument to the US Court of Appeals for the Federal Circuit and we remain confident in our position that the Federal Circuit will uphold the District Court's finding of contempt and infringement against EchoStar.

In closing, we enter the fourth quarter on solid footing and anticipate further success in the coming months. We continue to put in place critical distribution agreements to bring the TiVo experience to more new homes across the globe, adding to our already significant distribution opportunities

We are at heart a television viewing behavioral company as we seek to leverage our insight into how viewers will really want to consume TV and combine that critical knowledge with software and hardware expertise that makes TiVo a unique combination of media and technology company.

We are aware of and managing the downward trend in standalone subscribers and continue to employ effective cost control measures until we have our distributions lags and key marketing partnerships fully in place, to be able to benefit from what TiVo and third-party initiatives can do in a months ahead. With an eye toward tomorrow, our research capabilities continue to showcase our knowledge of the future of television and help spur innovation, as the television media industry transitions into an extremely challenging digital world.

We've done incredible amount of work toward planting the seeds for growth across all areas of our business, which we believe will really begin to come to life in the coming year.

With that, I will turn it over to Anna.

Anna Brunelle

I am pleased with our third quarter results. It was our ninth straight quarter of adjusted EBITDA profitability. We exceeded our expectations on earnings and made significant progress in our efforts to increase TiVo’s distribution.

With that let’s start with our balance sheet. Our cash position increased to $245 million, up $40 million over the year ago quarter and $7 million from the previous quarter. We also generated approximately $2 million of cash from operations this quarter, bringing cash generated from operations to $11 million year-to-date.

Note that our cash position does not include the approximately $300 million in damages and sanctions awarded from our EchoStar Litigation for the period of September 2006 through June 2009, which is currently being appealed by EchoStar. We continue to remain confident in our position.

Before I move to the income statement, I quickly want to address, a DIRECTV reporting issue that DIRECTV recently informed us about. They have advised us that they found an error in their billing systems which caused them to over report their TiVo subscriptions to us for the past 18 or more months, resulting in an overpayment.

Both DIRECTV and TiVo took steps to audit DIRECTV's billing data. Enabling DIRECTV and TiVo to reach agreement on the amount overpaid and owed by TiVo to DIRECTV. In accordance with TiVo’s accounting policies, we recorded a one-time reduction of 1.8 million to our MSOs service revenues this quarter. This also reduced adjusted EBITDA and net income by 1.8 million

Additionally, this collection also resulted in a one-time reduction of approximately 146,000 subscriptions from our MSOs/Broadcasters subscription base.

With that let's get into the details for the quarter. Service and technology revenues were $47.1 million, of that service revenues were $37.7 million; technology revenues were $9.4 million, up from the prior quarter due to increased development work on our mass distribution deployment.

Total stock based compensation expenses for the quarter were $6.1 million and details for each line item can be found in our earnings press release. Excluding the related stock based compensation expenses, cost of service and technology revenues were $15 million, which included $9.7 million related to cost of service revenues.

Our hardware loss was $4.6 million and consistent of $2.8 million of loss related to net hardware cost and $1.8 million of cost related to marketing development funds and revenue share paid to the retail channel.

Operating expenses excluding stock based compensation as a percentage of service and technology revenues were as follows. Non-stock sales and marketing 11%, subscriber acquisition cost 3%, R&D 28%, and G&A 18%. In addition to stock based compensation expenses adjusted EBITDA also excluded interest and other income of about $300,000 and depreciation and amortization expenses of $2.2 million.

This led to a net loss for the third quarter of $6.7 million, which compared to our guidance of a net loss of $8 million to $10 million. This compared to a loss of $900,000 in the year ago quarter, after excluding the $100.6 million net gain from the EchoStar litigations, which included litigation proceeds, interest and related taxes.

Our net loss per share was $0.06 for the third quarter. Our net loss per share calculation for the quarter was based on approximately 108 million shares.

Our adjusted EBITDA for the third quarter was $1.4 million, compared to guidance of negative to $2 million to breakeven.

Now, turning to our third quarter key metrics. In line with our expectations, our gross subscriber additions were 34,000 as compared to 44,000 in the year ago quarter. Churn was 1.7%, up compared to the prior and year ago quarters. The increase was driven by a higher level of churns from our older platforms, often done at the time customers upgrade to a HDTV sets.

We continue to see minimal churn from our newer platforms and we are having moderate success upgrading our customers with older boxes to our newer platforms. We'll continue to focus on those efforts and will have more flexibility to make compelling upgrade offers next year, as our plans call for us to take additional costs out of our hardware bills.

On a net basis, TiVo-owned subscriptions decreased by 45,000 in the third quarter and our TiVo-owned subscription base ended the quarter at approximately 1.5 million subscriptions. Our MSO broadcaster subscription base declined by 123,000 from the prior quarter, in line with the pattern we have seen over the past several quarters, when taking into account the 146,000 subscription adjustment due to the DIRECTV reporting issue.

However, we expect to see a positive change in our mass distribution trends next year after Comcast moves in additional markets, RCN goes live and the deployment of our new DIRECTV TiVo HD DVR commences. Our overall subscription base stands at approximately 2.7 million subscriptions at the end of October.

Our TiVo-Owned average revenue per subscription fell year-over-year to $7.65, primarily due to our longer amortization period and a larger number of fully amortized product lifetime subscriptions that once fully amortized are non-revenue generating subscribers.

At the end of the quarter we had approximately 237,000 TiVo-owned product lifetime subscriptions that had reached the end of the revenue amortization period. This represents 36% of our current total product lifetime subscription base, which stands at 651,000.

TiVo-Owned total acquisition costs were $5.8 million and SAC was $171, roughly flat with the second quarter.

Before I get into the specific guidance for the fourth quarter, let me walk you through some factors that impacting our guidance.

First, we expected that our technology revenues will be few million lower than in Q3. As we've stated previously, technology revenues fluctuate significantly quarter-to-quarter. However, while we anticipated this coming quarter, we expect technology revenues to step up in the following quarter due to development work for current partners as well as our new partner Virgin.

Second, we expect to incur the typical seasonally higher retail selling and marketing cost related to the holiday season.

Third, we continue to expect legal expenses to be significant due to our litigation with EchoStar, AT&T and Verizon.

Finally, we have increased our research and development budgets, as we believe there are significant opportunities for TiVo around our ability to provide advanced television services. We will announce details about some of these development efforts in the months ahead. For the time being, we believe this is the best use of our cash resources, enabling us to accelerate our business and product opportunities for 2010 and beyond.

With that, for the fourth quarter we expect service and technology revenues of $43 million to $45 million, our adjusted EBITDA to be in the range of negative $5 million to negative $7 million, and our net loss in the range of negative $13 million to negative $15 million.

To wrap up, I am pleased with the quarter and the progression of our business, we have a lot to look forward towards 2010, with Comcast, DIRECTV, RCN and Best Buy all putting more shoulder behind TiVo, and from the increasing momentum in our international and audience research businesses.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from the line of David Miller with Caris & Company.

David Miller - Caris & Company

Couple of questions, on the Virgin Media deal Naveen, I guess you are on perhaps you’re probably best qualified to answer this. We were under impression that the broadband set of customers there with Virgin Media is a lot more than four million. When you guys say four million in the press release, do you mean four million triple play or I guess they call it quadruple play customers? Is it 10 million total customers or am I thinking about this the wrong way?

Naveen Chopra

This is Naveen. So to answer your question, we have been primarily focused on Virgin Media's video base which as you probably know is a little under 4 million subscribers. I believe they have a total market of roughly 10 million homes in the UK, which is significant portion of the UK base and I think as you pointed out, they have a broadband footprint that slightly exceeds their video base today.

I think that you know there’s probably different ways of phrasing exactly which pieces are broadband and which pieces are video and which pieces are triple played, but we’ve been most focused on the video footprint.

David Miller - Caris & Company

Then as a follow-up, clearly there seems to be pent-up demand for this TiVo, DIRECTV combo box that you know what appears as if everything seems to be on schedule there for rollout and call for spring 2010. Under the current agreement that you have with DIRECTV with their contract, looking at their contract that they have with you, are they allowed to use TiVo as a promotional hook in order to get people to switch from cable over to DIRECTV or is that just not allowed given your relationship with Comcast and Cox?

Tom Rogers

This is Tom. No limitations on their ability to use TiVo or to package TiVo in a way that best drives their business. They have significant marketing obligations under our new distribution arrangement with them, and we are looking for them to do what they need to do to move TiVo forward, but of course their business is well.

Operator

Our next question is from the line of Bridget Weishaar with JPMorgan.

Bridget Weishaar - JPMorgan

First I was wondering if you could provide any update into the AT&T and Verizon litigation. I realize it's early, but want to know if there is anything going on there. Secondly, I wanted to get your thoughts, now that you have presented your appeals in the court. I know the most likely scenario in your mind is that they decide in your favor, but if you have any insight into alternatives if that does not happen, what are alternative outcomes of that proceeding?

Tom Rogers

Well there are limitations on just what we can say on the litigation front. We don't have any particular update on AT&T and Verizon. Those are recently filed cases as you know and filed in the Eastern District of Texas in those small parts, because of the success that that we've had in that court.

On the outcome front, I would just generally say, we went into the hearing on November 2nd, in front of the Court of Appeals for the Federal Circuit, with a high degree of confidence, nothing that came out of those court hearing changed our feeling of confidence at all. Yes, there are outcomes other than an outright win on all elements that might involve partial wind.

I'm not going to speculate as to what those possibilities are, but there is a range of possible outcomes. We remain highly confident though that the positions that we took in our brief will prevail.

Operator

Our next question is from the line of Barton Crockett with Lazard Capital Markets. Please go ahead with your question.

Barton Crockett - Lazard Capital Market

I wanted to ask for a little bit more color if we can about the Virgin deal, and really a few things that might be more disruptive. One, can you give us a sense of the timing if this would start to roll out, and also a sense of how it would flow into your financials. Would it be per subscriber, per month fee like we see with DIRECTV or would it be flat kind of technology revenue as they deploy, and also the duration of this deal, how long does the contract last?

Tom Rogers

Well, their current expectation is to get the product out sometime by the end of 2010. There are technology revenue aspects of the development work here as there are with most of our mass distribution undertakings.

Going forward once deployment occurs there are per sub per month revenue aspects of the deal. We aren’t disclosing the term of the deal, but it is a multi-year arrangement that provides a very substantial commitment from us to them and them to us over a meaningful period of time.

I would say that it is as the press release indicated, an exclusive arrangement, so their next generation boxes TiVo will be the exclusive user interface and middleware provider, and I think key to understanding this opportunity of linear and broadband and an advanced television service delivery in the UK market is what a unique offering that Virgin has through the BBC on-demand content. The on-demand content of the BBC, which Sky for technological reasons does not offer is really something that has proved popular there and the kind of focus on on-demand delivery that our product can have can really make that pop.

So, beyond the specifics of the question that you posed Barton we think there are some great ways that this is a product can really make the most of some nice assets that Virgin has amassed.

Barton Crockett - Lazard Capital Markets

To understand in terms of timing and magnitude are you expecting that you’re going to see a per-sub, per month fee actually for every subscriber on that system and if so how long would it take to get there, and if not, can you size the penetration that you expect?

Tom Rogers

Well, those go to questions that are beyond our ability to answer and at some point Virgin may want to provide projections of that sort, but the deal is one that gives us per-sub fees and recurring per-sub fees and we anticipate that there will be a significant opportunity for them to penetrate the market once this offering is available.

Barton Crockett - Lazard Capital Markets

I'll just ask one other question on a separate subject and then step aside. On Comcast, can you just tell us is it still a truck roll or is that a software download, as they are pushing it more in New England and as you look at other markets.

Tom Rogers

Well, the delivery of the service is designed, as you know, as a software download. They were having substantial technical difficulties with certain homes, which was undermining their ability to market it. Most of those technical difficulties have been resolved. So, marketing has just begun to be step back up.

It is something that as the smoothness of installation continues that it clearly will not involve an ongoing truck roll. I think for the time being, as they are continuing to asses the improvements in installation that have developed recently, they may still be putting a install around the scene as they continue to make sure that things are going well, but obviously this is designed for the longer term to involve no installation presence of a service provider and allow it to be done on an automated basis.

Operator

Our next question is from the line of Tony Wible with Janney Montgomery Scott.

Tony Wible - Janney Montgomery Scott

Tom I was hoping to get a little color on the remix for the MSOs. I know that on the pro forma adjusted basis you guys were close to $0.90 per month on the quarter, but you got a lot of deals coming on board and I assume they are at various rates. The $0.90 level that you saw this quarter, is that more of a mix shift within the DTV base or was that a function of also seeing some more Comcast cable contribution and how should we kind of think about those reads on the weighted average basis going forward?

Tom Rogers

Well, the predominant number of subs in that MSO base are DIRECTTV subs and under the old DIRECTV contract. The sub fee was in that general area that you are pointing to and that's going to be the reason that it primarily weights in that direction. There are other components of sub fees in that mix, some of which are at higher levels, so we've obviously engaged in new distribution deals going forward that provide very substantially increased fees from that level from various MSO distribution contract.

I don't want to project for you what that will be going forward, since we don't break out that element, but the fees that we have entered into with other operators shouldn't be one that governs the long-term projections on what that per sub fee would look like.

Tony Wible - Janney Montgomery Scott

Just a couple of questions on Comcast, are we going to see Comcast in Chicago in 2010, and has Comcast addressed some of the technical issue that you guys see in the New England market, in these other markets proactively?

The last part of the Comcast question is, will you guys be supporting Comcast on-demand, online effort?

Tom Rogers

Well, the rollouts for next year are a combination of them looking for TiVo to be ported in to their tru2way markets as there tru2way capability rolls out, along with some additional markets that will not be a part of the tru2way roadmap. I think there is some fluctuation in some of the thinking as to when certain markets will be tru2way versus others and without commenting on the specific market you asked about I think they maybe accessing richer markets that are best suited for continued roll out of TiVo in its current form versus roll-out of TiVo as it can be ported to tru2way which as the press release indicates is something they are going to continue to heavily fund for next year. So I think the overall point is that 2010 additional roll-outs are very much part of their game plan, and porting for tru2way is very much part of their game plan for TiVo.

On the online availability of content, we're obviously mostly focused on broadband distribution of content through the TV, and to the extent the television is a part of that offering there will be increasing ability for us to frame and serve those Comcast needs. The online distribution per se for computer consumption is not something that we are focused on right now.

Tony Wible - Janney Montgomery Scott

Well, you have a search feature like your standalone box with the [server] search that will be able to pick up the online content that might not be available on the VOD systems today?

Tom Rogers

Well, you are presupposing in that question, the availability of that content for the television set, and that involves policy issues that I think Comcast is heavily thinking about. So I don’t think I want to comment on that further.

Operator

Our next question is from the line of Mark Argento with Craig-Hallum Capital Markets. Please go ahead with your question.

Mark Argento - Craig-Hallum Capital Markets

Question, first of on your Best Buy relationship in particular; I know you had mentioned in the press release about some other additional content that they are putting out that’s going to be available on the box. Is there any [rough] shares on the content side with the relationship of Best Buy.

Tom Rogers

We have not disclosed the nature of the economics of the Best Buy relationship, but I’ll simply say that we like they are heavily incented not only get more TiVos in the homes, but to make sure that they support Best Buy digital services in the best possible way.

Mark Argento - Craig-Hallum Capital Markets

I know you also talk about you guys are kicking up your R&D spending here as you are rolling out some of these new initiatives or some new partners. We think about, when you guys talk about best use of capital, how do you think about capital allocation and you had return on capital?

Is there a specific rate of return you’re looking for under capital, because you guys are going to have a situation here assuming you come out on top of with some your litigation here?

You’re going to come in with a lot of capital and you are thinking about the point it. What are some of the criteria you guys look at when making those capital allocation decisions?

Naveen Chopra

We look at number of criteria and also look at how we believe that how various return on capital approaches will affect the overall shareholder value here in terms of perceived value of company going forward. We have assessed as we’ve indicated before a range of options for the use of cash from consideration of cash dividends to shareholders to acquisitions that might further our interest in a way that go beyond what our owned development activity may drive, and all of those assessments continue.

Specifically with respect to increasing the R&D, we have looked hard at what is out in the marketplace and relative to what we are prepared to do immediately. Some increased investment in some key undertakings, which we believe will accelerate our product offerings and therefore our revenue in ways that we have greater control over in terms of ultimate return on capital than some of the more speculative uses of those capital that we continue to asses.

It looks like in modest amounts; we are not talking about large amounts of our cash here, but in my estimates incremental expenditure on R&D looks like it provides the best return on capital consistent with the increasing perceived shareholder value. So, we think this will payoff for us in 2010 and beyond.

Operator

Our next question is from the line of Brian [Klein] with [Wedge Partners]. Please go ahead with your question.

Brian Klein - Wedge Partners

Just a few questions; first I was wondering if you could talk a little bit about the dynamic on your service revenues, that has been declining for a bunch of quarters and yet next year clearly you’ve got some things in place, get [RedRC] and DIRECTV, possibly you can find the way with Comcast. I mean do you think that service revenue trend could reverse in calendar 2010?

Tom Rogers

Well. Certainly, we are geared towards doing that. For the time being we have been largely dealing with three elements of that trend. One is the ongoing decline that’s been fairly steady, of DIRECTV revenue, not having had for a number of years now DIRECTV product, and as DIRECTV subscribers opt for the DIRECTV HD offering, we have not had an offering to be able to attract those subscribers. Obviously, next year, we are looking to face that, and hopefully that will begin to reverse that piece of the service revenue trend.

We've also been hit with the increased amortization of our lifetime subs, both lifetime subs that are fully amortized, coupled with the increase in the amortization period of lifetime subs. We are not fully through the impact of that yet. That will be somewhat more heavy next quarter and particularly, as we hit fourth quarter given when those subscribers were originally acquired, that impact tends to be felt. We do believe that the standalone subscriber trend once we are in the (inaudible) marketing relationship, which will begin to play out next year, where we don't think we could be in better hands from a strategic relationship point of view to be able to drive standalone sales.

We do think also that those trends can begin to be reversed. That is not something that will take effect in any meaningful way for this holiday season, because it's dependent on some future development that we want to have for Best Buy before they really light up their promotion and marketing undertakings. Once that's in full swing, that too should begin to well reverse those trends in 2010, at least that's what we are working toward.

Brian Klein - Wedge Partners

Anna, on SAC trends, next quarter and possibly looking a bit into next year, clearly you mentioned a little bit higher R&D costs, little bit higher litigation cost, but assuming you can fill up on the SAC side on just sort of holiday promos and other activities, I mean you think it would stay higher?

Anna Brunelle

I do think our SAC trend, as we look forward to this fourth quarter, as Tom said, we're holding our power dry on some additional sales and marketing until the relationship with Best Buy really kicks off next year. So I am not expecting a large increase in SAC in the fourth quarter.

Tom Rogers

I think what you may have been referring to is this somewhat increased selling expense of hardware for the holiday season, but our SAC expenses as a percentage of overall expense were 3% in the quarter. You can see we are really managing down our marketing expense in terms of the acquisitions of new subs at this point and really trying to keep our powder dry, relative to a whole bunch of distribution relationships which we think take route in 2010, and be in a position to use our resources then to drive our subscriptions forward.

Operator

Our next question is from line of Daniel Ernst with Hudson Square Research.

Chris Grosso - Hudson Square Research

This is Chris Grosso, dialing in for Daniel Ernst. My first question, following on your Google announcement today, we were wondering are you yet approaching the point where you're existing and current advertising audience research revenues could be classified as meaningful contributors to earnings?

Tom Rogers

Well, they aren’t material yet or we'd be disclosing them, I would say that every additional validation we get of the importance of our data, we had two recent ones, one is the Google announcement.

Of course, the other CIMM the major industry cooperative inviting us a small group of possible research players to help them develop a more advance set of metrics to govern the industry. we are pushing all that along and I would say the science point to the importance of that being extremely meaningful, in the meantime the level expense that we are putting toward that is in and of itself Not something that rises to a material level. So, I think we are maintaining the right level of investment relative to the revenue yield at this point, but we do believe overtime this will be a significant contributor.

Chris Grosso - Hudson Square Research

Then also similarly following on your Virgin announcement, we wanted to know if you're existing international deals in places like Mexico and Australia are meaningful contributors to your gross subscriber editions?

Tom Rogers

Well, there are international subscriber editions. They are in the MSO broadcaster numbers. I would say that Mexico is not contributing that much toward those numbers, as compared to Australia, which is continuing to produce nicely. The Mexican product its probably one that is in need of an HD offering in order to bring that up to some better levels of growth going forward.

The Australia product, which is an HD base product is continuing to deliver as we hoped for and we've just lit up New Zealand and not only lit up New Zealand with the way broadcaster is in the case of Australia, but partnered with the leading telephone company, and we believe that will create dynamics to further accelerate that growth.

Operator

Our next question is from the line of Tuna Amobi with Standard & Poor's. Please go ahead with your question.

Tuna Amobi - Standard & Poor's

First on the DIRECTV reporting issue, can you provide some more color on how that came about, what was the trigger even that kind of brought that to light and how long that had been pending?

Anna Brunelle

Yeah. DIRECTV contacted us during the quarter to let us know that their internal audit procedures had discovered an error in their billing system, and they communicated that to us. So, we worked together, we send a team out to look over their records, and eventually we were able to result the discrepancy and come to an agreement, hence the reduction in revenue this quarter.

Tuna Amobi - Standard & Poor's

Are there any kinds of independent ongoing kind of checks from your side in terms of the periodic subscriber numbers or some kind of process to kind of avoid such discrepancies?

Anna Brunelle

We have the right to audit DIRECTV's data, and we do that from time to time. However, we tend to focus our audit procedures on under reporting of revenue, and this happened to be an over reporting that they notified us about, prior to us going out to audit.

Tuna Amobi - Standard & Poor's

Separately, this is for Tom. So, on DIRECTV I mean I'm sure you have heard there a new guy there that was just named the CEO. Do you have any kind of sense as to his background, what he brings, his philosophy in terms of your existing relationship. How that might be affected, have you reached out to him yet? I know it's kind of a little early. What's your view here as to how this relationship might evolve with Michael White coming on board in January?

Tom Rogers

I don't know him. I had a good close relationship with Chase Carey, and I hope to develop a strong relationship with him. He obviously comes from what I've read from a terrific consumer marketing background, which I imagine would be a great set of experiences for what DIRECTV needs to do and what we want to do in conjunction with DIRECTV, so look forward to sitting down with him and hope to do that in the not too distant future.

Tuna Amobi - Standard & Poor's

Lastly, are there any meaningful development revenues that you expect, given the Comcast? I think you said they’ll go on for about another year, how does that factor at all into your revenue outlook in any meaningful way?

Tom Rogers

In the sense that as Anna mentioned, technology revenues are going to be down in the fourth quarter, relative to this quarter. So that explains some of the revenue guidance that we pointed to, but because of the combination of Comcast and our newer undertakings like Virgin coupled with some of the ongoing projects, we would expect technology revenue to tick back up over the course of the year, given the number of projects we have. So in that sense it would impact things.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for Q&A. I'll now turn the call back over to Tom Rogers for closing remarks.

Tom Rogers

Thank you very much. You know as we have pointed to before, the number of companies that are involved in our ecosystem just continue to expand, and with Virgin Cable one of the largest cable operators outside of United States obviously what we announced with Google, what we pointed to in term of activity with BlackBerry, [RIM] over the quarter.

We continue to see that what we are doing, putting together all the pieces of advanced television offerings both for the consumer and the B2B side of equation, seem to be in increasing demand, and along the way we increased our operating cash actually over the quarter which wasn't something that popped from the press release.

When you put aside the pattern proceeds from last year, our operating cash increased for the quarter and its increased for the first nine months of the year, and we've gotten our cash positions to an enviable $245 million before you consider the impact of what we hope will be the Court of Appeals upholding of the additional $300 million or so that the District Court awarded us.

So strengthened financial position from a cash point of view, strengthened third party relationships from a strategic point of view, and as we look at being able to fuel these various distribution relationships in 2010 we consider things on a good footing.

So, thank you everybody for joining us on a holiday week. Wish everybody a happy Thanksgiving, and we'll talk to you soon.

Operator

Ladies and gentlemen, this does conclude today's TiVo third quarter earnings results conference. We thank you for your participation. You may now disconnect. Ladies and gentlemen today’s conference call has ended. You may now disconnect.

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Source: TiVo Inc. F3Q10 (Qtr End 10/31/2009) Earnings Call Transcript
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