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TiVo (NASDAQ:TIVO)

Q3 2014 Earnings Call

November 26, 2013 5:00 pm ET

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

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

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

Daniel Ernst - Hudson Square Research, Inc.

Rob Sanderson - MKM Partners LLC, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Todd T. Mitchell - Brean Capital LLC, Research Division

Alan S. Gould - Evercore Partners Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to TiVo's Third Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Derrick Nueman. Please go ahead, sir.

Derrick Nueman

Thank you, and good afternoon. I'm Derrick Nueman, TiVo's Head of Investor Relations. Welcome to TiVo's Third Quarter Fiscal '14 Conference Call. With me today are Tom Rogers, CEO; Naveen Chopra, our CFO and SVP of Business Development; and our General Counsel, Matt Zinn.

We have just distributed a press release and an 8-K detailing our third quarter financial results. We also have posted a third quarter key metric trend sheet on our Investor Relations website that includes, among other things, a reconciliation of non-GAAP measures discussed on today's call. You may access a recording of this call during the next week.

Our prepared remarks will last about 30 minutes, followed by a question-and-answer session. Our discussion today includes forward-looking statements about TiVo's future business, product 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 filed reports with the SEC. Any forward-looking statement made on the call reflects our analysis as of today, and we have no plans or duty to update them.

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

Thomas S. Rogers

Thanks, Derrick. Good afternoon, everyone. This was another solid quarter for TiVo, as Service & Technology revenue grew 34% year-over-year, adjusted EBITDA was $23.8 million, exceeding guidance. And we saw TiVo's subscriptions rise to approximately 3.9 million in total, a 32% increase year-over-year, driven by a strong quarter of close to 300,000 MSO additions, our strongest cable distribution results to date.

Further, we continue to increase our operator distribution reach, signing a deal with Blue Ridge Communications. We also launched our first IPTV implementation with Com Hem, highlighting our ability to offer the unique TiVo experience through virtually any type of video delivery platform and on numerous types of devices. And Atlantic Broadband recently launched our multiscreen offering. In addition, TiVo Roamio continues to be well received both by consumers and the press, with Roamio driving year-over-year increases in TiVo-owned gross additions at lower subscription acquisition costs. We also continued to focus on innovation as we recently launched Out-of-Home Streaming on Roamio boxes.

But before I get into the detail behind all of this success, because some of the results we are seeing out of the MSO world, perhaps this is an appropriate quarter to discuss what we're seeing in terms of the future of the television industry. Frankly, it shouldn't take a poor performance from a top operator that covers the 2 major media markets in the country for many to finally realize that content, video and the user experience are major drivers of the industry going forward. The players that don't invest in their video product will underperform, a thesis that we have been asserting for years, and the reason we have spent so much time and effort building the very best video experience available. What we do is not easy. And what others have found out, very difficult to match. TiVo offers the only whole-home, multiscreen solution for cable operators today, which is critical as these operators are facing strong competition from the satellite and telco players. We are the only cable set-top box for consumers that integrates linear channels with over-the-top streaming of content, allows for content from the set-top box to be streamed in and out of the home, and more and more of our product offerings are moving to the cloud, which gives us greater opportunities to engage with operators who want the benefits of the TiVo service with additional flexibility on the user interface. The TiVo service is a broad user experience. And there are many elements and features that are cloud-based and can contribute to the user experience beyond the UI itself.

We have seen operators put their primary thrust behind the distribution of broadband, while deemphasizing their marketing of the video package. And cable is beginning to pay a price for not having found the right balance for marketing video and broadband and for not highlighting how video benefits flow from broadband connectivity. TiVo serves at the intersection of broadband and video, an area that has been underexploited and where significant upside continues to exist for cable. Further, it is clear we're moving into an era where the television consumers' expectations are becoming more sophisticated, and the amount of content and how it can be consumed has grown increasingly chaotic. Therefore, the operator needs to develop a better experience quickly. We're seeing significant advancements in the development of the whole-home platform, integration of broadband and linear and movement to the cloud. However, what is often missing is an experience that is unique to each consumer.

TiVo, through its advanced television solutions, is allowing operators to not only provide the distinctiveness of the TiVo user experience in framing television viewing, but that distinctiveness is continuing to significantly grow through greater personalization. And personalization to us means providing people with the ability to get what matters most as quickly as possible with the most relevant choices for them. TiVo's commitment to delivering a unique, personalized TV viewing experience has been recognized across all audiences, even earning a 2012-'13 Emmy Award for Technical and Engineering Achievement for Personalized Recommendation Engines for Video Discovery. We also have plenty more developments on personalization that we will be releasing over the next year and believe that this will be a key driver to future operator deployments for TiVo.

To date, what's been most interesting is that the mid-tier players, the operators that have fewer resources and less capital, realized early on that it would take a better experience to keep them competitive. Many of them partnered with us, and the result has been, when compared to the top players, that they are outperforming. This is probably most striking when you compare RCN versus Time Warner Cable. RCN is focused on offering a leading video experience with TiVo. And its subs, both video and broadband, have done much better. While Time Warner Cable, while -- which while much bigger, lost 300,000 video subs and, for the first time ever, lost broadband subs. We're seeing partners beyond RCN outperform and think it highlights TiVo's contributions as operators focus on maintaining and growing the revenue generating units across all product offerings. These results are further reason why our MSO partners continue to push TiVo aggressively.

Our success to date has come as a result of TiVo's ability to constantly evolve through innovation, whether this evolution is in the context of the retail product or for our MSO partners. Over the last several quarters, we have made significant progress on our 3 stages of product development focus: organization, mobilization and personalization. The combination, of which, makes for a very unique product offering. TiVo Roamio is the embodiment of this innovation and continues to garner positive critical acclaim. As Gregory Schmidt of The New York Times said in his review of Roamio, "TiVo knows what television lovers want."

Over the quarter, we continue to enhance the Roamio platform and recently launched Out-of-Home Streaming on our top Roamio boxes and our TiVo Stream device, which allows users to stream and download live TV and their favorite recorded content to their smartphones and tablets. Additionally, the TiVo Roamio platform will include the Opera TV solution in the near future, which at its launch, will enable over 100 apps built on HTML5, and will include ones focus on entertainment, sports, weather, gaming, news and more. Further, this solution is expected to make it easier for content publishers to get apps onto the television and allow our MSO partners to bring more content to their subscribers.

In addition, TiVo Roamio Pro and the TiVo Mobile iOS experience were named CES Innovation Honorees. The Roamio product suite also helped to drive TiVo-owned gross subscription addition growth during the quarter, 10% year-over-year and 65% as compared to the second quarter. These subscriptions came in at a lower acquisition due to better hardware economics, which is something we also expect to continue during Q4. Based on current trends, we expect to see accelerated year-over-year growth rates for TiVo-owned gross additions in the fourth quarter due to continued momentum and increased marketing efforts.

As a result of our ability to innovate, evolve and enhance our product offering, our operator business continues to grow very nicely. During the quarter, we added approximately 300,000 MSO subscriptions, almost 25% better than last quarter's growth. And roughly 80% of the increase in quarter-over-quarter net adds of close to 60,000 was driven by MSO providers other than Virgin. This acceleration over both the second quarter and the prior year's quarter led to our strongest results since we've launched our cable operator activity. Additionally, our recently launched deployments have broadened the contributions to our sub growth, which are now coming from many operators. For example, Com Hem, Sweden's largest cable provider recently begun rollout of the TiVo IPTV solution and is now marketing it across its entire footprint. Early results have been positive, and we look forward to seeing significant growth in our Com Hem deployment going forward. Additionally, Virgin Media and ONO in Spain continue to rapidly deploy TiVo, which now covering -- with TiVo now covering nearly 1/2 of the subscribers at Virgin Media and 1/3 at ONO. Virgin Media also announced in September that it is offering access to Netflix to its TiVo subscribers. This is the first time an over-the-top offering such as Netflix has been accessible by subscribers through a pay-TV platform, and the market really took note of the potential growth opportunity that broadband TV presents through cable. Additionally, working with TiVo, Com Hem is expected to be the second pay-TV operator in the world to offer Netflix in December. We have the technology to allow multiple over-the-top providers to be seamlessly integrated into the cable operators' experience, which allows the operator to develop a broad portfolio of over-the-top content without being dependent on one provider. In the U.S., our momentum continued with strong results across multiple deployments. And Atlantic Broadband, owned by Montréal-based Cogeco Cable, which serves more than 250,000 customers, recently began its TiVo deployment and announced that it will be the first U.S. provider to deploy Roamio.

Additionally, we announced yet another mid-tier operator deal with Blue Ridge, a top 20 cable service provider based in Pennsylvania that had selected TiVo to exclusively provide a next-generation whole-home television solution and user experience for its advanced TV offerings across TV, web and mobile platforms.

At the International Broadcasting Conference this quarter, we highlighted some of our upcoming innovations, including our Network DVR prototype, which will not only help operators transition storage from the set-top box to the cloud, but will, more importantly, help them better manage content in a cloud-based TV Everywhere world as they deliver new features and increase personalization of experiences onto even more devices. While much of the TiVo service is already in the cloud, including features such as search and the TiVo recommendation engine, bringing our DVR capabilities into the cloud as well, will provide operators with a flexible, comprehensive solution that covers how current television is delivered today to a future, fully cloud-based offering and almost everything in between.

In terms of our audience research and measurement business, TRA recently announced new deals with P&G, dunnhumbyUSA and Simulmedia. The P&G deal is especially exciting as it expands the scope of our relationship by providing, in conjunction with comScore, one of the largest single-source cross-media solutions that anonymously matches media exposure from millions of households of TV, online, video and banners with actual purchase behavior from those same households. We believe our deal with P&G, a very top consumer product advertiser on television, is a validation of TRA's approach to helping make TV advertising buying more efficient and effective, and highlights the value TRA can drive for its consumers. In addition, dunnhumbyUSA has been increasingly recognized as a uniquely valuable source of purchase data, and our partnership represents a solid opportunity to take advantage of an evolving data marketplace.

Capital allocation continues to be one of the key areas of focus for the board and management team, as we look at ways to deploy capital beyond the current $200 million stock repurchase authorization. We continue to evaluate strategies to return capital to shareholders, as well as opportunities to acquire and invest in businesses that will build long term shareholder value. We are mindful of the responsibility to properly deploy capital in a timely fashion.

Before I wrap up, I want to speak about fiscal 2015. Our view of next year hasn't changed since last quarter when we said that, without providing specific guidance, the combination of a full year of Cisco and Motorola licensing revenues and the reduction of litigation expense should provide us with a foundation to exceed adjusted EBITDA of $100 million. Further, I would add that in addition to the factors I just mentioned, we expect to benefit from additional MSO gains and further reductions in our R&D spend.

With that, I will conclude by saying that we executed well this past quarter, delivering strong financial results, adding MSO and retail subscriptions, driving new distribution and continuing to bring to the market innovative product features that we believe will define the future of the television industry. Together with further R&D cost reductions and smart capital allocation, we are confident that we are setting the stage for strong future performance.

And with that, I'll now turn it over to Naveen.

Naveen Chopra

Thank you, Tom, and good afternoon, everyone. I'm going to provide some additional color on the Q3 results, including a quick update on capital allocation and wrap up with a comment on expectations for future quarters.

Simply stated, we executed well in Q3. Service & Technology revenue grew 34% year-over-year to a record $81.7 million, which was at the top end of our guidance range. Further, we posted adjusted EBITDA of $23.8 million and net income of $12.5 million, both of which exceeded their respective guidance ranges.

Our better-than-expected bottom line performance was primarily the result of upside on hardware margin from better-than-anticipated MSO hardware sales, but was also aided by the transition to our Roamio product line in the TiVo-owned segment, which, as we've discussed before, allows us to achieve improved hardware margins on sales of hardware through both our retail and direct channels. We expect MSO hardware margin to taper significantly in future quarters as many of our operator partners begin deploying the TiVo service on third-party hardware, such as the Pace XG1 gateway. While this negatively impacts hardware margin, this transition is an important ingredient in driving long term subscriber growth for TiVo.

Speaking of subscriber growth, subscriber metrics were also very strong this quarter. As Tom noted earlier, our MSO subs grew by approximately 300,000, which is the largest quarterly gain we've had from cable distribution efforts to date. This drove an 11% year-over-year increase in MSO revenue, which was a slower growth rate than prior quarters, but one we expect will improve significantly next quarter as Virgin Media revenue starts to be recognized as service revenue versus technology revenue, and as we continue to benefit from additional subscriber growth.

ARPU saw a sequential decline, but this was primarily due to a weak quarter in our advertising and research business as compared to Q2. We expect advertising and research revenue to recover and, therefore, we expect ARPU to increase in Q4. Q3 was also a very important quarter for the retail business. We are pleased with the launch of Roamio, which helped drive a modest increase in year-over-year gross adds. Our marketing efforts for Roamio will be much more substantial in Q4 as we look to leverage early traction, while also carefully managing our overall subscription acquisition expenses.

Lastly, on the TiVo-owned front, I should point out that this quarter's increase in churn was due to a nonrecurring churn event affecting about 12,000 subs that were part of a unique legacy deal with Healthcast involving our older standard definition TiVo boxes. Excluding the impact of this onetime event, our TiVo-owned churn rate would have been consistent with the prior several quarters.

Moving to the balance sheet. We ended the quarter with approximately $1.03 billion in cash and short-term investments, roughly in line with where we ended last quarter. Our 10b5-1 plan did not execute in the quarter. And as always, we expect to assess changes to the plan in the context of our overall capital allocation strategy, keeping in mind that we have approximately $100 million remaining under our current $200 million repurchase authorization. Capital allocation continues to be one of the key areas of focus for the board and management team, and we continue to evaluate a range of alternative capital allocation strategies as we look at the best return on investment for our shareholders. These could include potentially increasing the return of capital to shareholders, making investments in the business and for acquisitions. In fact, a combination of these strategies may well make sense.

Now getting into our fourth quarter guidance, we expect Service & Technology revenues of $83 million to $85 million, the midpoint of which is close to a 30% year-over-year increase from the $65.7 million we reported in last year's fourth quarter. In addition to IP revenue growth, Q4 is expected to benefit from an acceleration in year-over-year MSO revenue growth, driven by a partial quarter of Virgin revenue recognized as service revenue.

We expect adjusted EBITDA to be in the range of $16 million to $19 million and net income to be in the range of $2 million to $5 million. Impacting adjusted EBITDA and net income relative to Q3 is about $4 million to $5 million in incremental marketing spend, consistent with our earlier comments regarding support of the Roamio launch and the potential to increase the level of TiVo gross adds -- TiVo-owned gross adds. Adjusting for these expenditures, our Q4 guidance is roughly in line with Q3 results despite the lower expected hardware margins we discussed earlier.

As we look to Q1 and subsequent quarters, we expect to see adjusted EBITDA improvements driven by our various growth initiatives, as well as lower seasonal marketing expenditures. However, to the extent that we are able to successfully drive incremental TiVo-owned subs and prudent acquisition costs, we may decide to extend the marketing push beyond Q4, which would likely affect short term adjusted EBITDA, but drive increased long term profitability levels.

Finally, as highlighted earlier, we continue to believe that the combination of our operational gains so far this year, a full year of revenue recognition from the Cisco/Motorola settlement and litigation cost savings, give us a foundation to deliver adjusted EBITDA in excess of $100 million next year before the impact of any revenue growth or potential operating expense improvements, which are being determined as we complete our FY '15 budgeting process. So to wrap up, we had a strong quarter, positions us well for a strong fiscal 2015 and beyond.

And with that, we'll take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Fitzgerald of Jefferies.

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

As you look at your -- Com Hem launching Netflix in December, can you help us think about the traction with both that as an earlier stage, international Netflix offering and also with the functionalities that are coming with the Roamio Opera TV? And then really quickly, if I could, when you look at the TRA deal with both P&G and Simulmedia, as more and more video advertising gets targeted and programmatic, how do you feel about the traction and the opportunity there? Can you give us a sense for how large the TRA piece can be over time?

Thomas S. Rogers

Sure. On the Netflix front, as many of you probably know, Netflix has had studio restrictions in its library agreements that have prevented it from being distributed through boxes owned by MSOs in the United States. Generally, those restrictions don't apply internationally. So Netflix is available for international distribution through a cable operator. Our view has been that the merger of linear television and streaming over-the-top TV is where the future of television is, and Netflix has clearly risen to the level of a must-have on the over-the-top side. And I don't think consumers feel as if they have a full package of options until Netflix is included. So we were very happy to be the implementers of Netflix in the first cable package in the U.K. and what will be a further implementation in Scandinavia. I think in the U.S., operators have had a mixed view of Netflix over the last few years. But increasingly, we're hearing operators wanting to include Netflix in their distribution. And to the extent those restrictions get worked out, we'll be in a position to help our partners implement on that front. I do think, broadly, whether you're talking about the kind of content we'll be able to implement through the Opera approach or other streaming content, that we're dealing with a world of infinite choice. And the only consumer solution that makes sense is one box and one remote and one user interface and, very importantly, one way to search and have recommendations and have customized personalization throughout. And in order to do that, it's really not a function of the amount of choice you have. We think that choice will be close to infinite from a consumers' point of view. What we think is critical is obviously how that's being framed and brought to the consumer to make it easy to get at. And that's what we think there'll be increased demand for as those streaming content services through operators increase. On the P&G front, a very important deal. Obviously, P&G, one of the very top consumer product advertisers. This offering was one that we and comScore put together jointly for P&G. A really unique set of data covering the television world, the Internet world and purchasing information, all being able to be put together on a single home basis, which provides, by far, the best roadmap for advertisers in determining how to get the best return on investment for their advertising approach. And the expansive deal that we entered into with P&G, we think, is validating of the kind of information that we've been providing. The fact that we and comScore were able to team together in providing it, we thought was a very important step for the industry as well. And we think that while the industry, the TV industry had been very slow going to more granular set-top data, very slow going to purchase data mixed with that set-top data as the key guide to how expenditures ought to be conducted, we think it's inevitable that, that process will accelerate, and that we're in the right place with the right product in it. And it gives us real hope that with that, our audience research business can grow way beyond where it is today.

Operator

Your next question comes from the line of Heather Bellini with Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

I was wondering if you could talk about the strength that other MSO subs of the footprint that you have available. What's your penetration and how should we think about what you think is a realistic penetration of your sub base? And also I might have missed it, but MSO ARPU came down sequentially and year-over-year, how should we think about this? Is this the beginning of a trend? Or is there something onetime in nature we need to think about?

Thomas S. Rogers

Okay, well, on the MSO footprints front, the MSOs that we are actively engaged with today cover about 10 million subs. We're about 25% penetrated of those 10 million subs. We think the opportunity, given the success that they've had with the rollouts and the operational metrics that they've seen from it, we can double or triple that opportunity going forward. Obviously, the subs we're dealing with today, we think, in some respect, skims the surface of the opportunity in the broader operator world, internationally speaking, in terms of operators who are going to need some advanced TV solution. So we look beyond our existing footprint when we think about our opportunities and the penetrations that can result from those opportunities. The ARPU decline on the MSO front, really, a couple of things to note there. First, Virgin and ONO subs, both of which are growing nicely, are in our subscriber MSO numbers, but the revenues associated are not in the sub revenue number yet. As Naveen stated, we'll begin to see some of the Virgin sub revenue being included in revenues, sub revenues for next quarter. Also, had a little bit of the audience research business I was just speaking about, move some revenues into next quarter from the last quarter, and that caused some ARPU decline on the MSO front as well, although we expect that revenue on the audience research front to pick up next quarter. So that's basically the ARPU story.

Naveen Chopra

I think, I would just add, I think the important point is, we don't expect ongoing decline there. I think that the trends that Tom was pointing to imply that we expect some improvement in that next quarter.

Thomas S. Rogers

If you -- the overall MSO revenue was up, of course, and considerably up when you look at the guys that we are just actively engaged with. So the MSO revenue trend there is strong.

Operator

Your next question comes from the line of David Miller with B. Riley & Co.

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

Naveen, just a housekeeping question on the guidance. If you assume the same inputs for the fourth quarter as the third quarter, on like depreciation and stock-based comp and all that stuff, the net income guidance looks very conservative. Or stated in another way, I mean if you're guiding to adjusted EBITDA, between $16 million and $19 million, net income should be more like $3 million or $6 million, or if like, and if you really want to be technical, $3.5 million to $6.5 million. You're guiding there between $2 million to $5 million. Is there something funky going on with taxes in the fourth quarter, or just anything weird going on with the pre-s [ph] or stock-based comp in the fourth quarter? Any color you could provide would be great.

Naveen Chopra

Yes, so the macro answer is actually -- if you think about Q3 guidance on net income was $6 million to $8 million and we beat that substantially on the basis of the upside on hardware. And so we really look at Q4, on -- relative to Q3 as basically being fairly flat relative to Q3 with the additional, with I should say, plus an adjustment for the increased marketing expense in Q4. So said differently, if you took out the hardware upside on Q3, we probably would have been in that 6 to 8 range on net income and then adjust for some additional marketing expense in Q4, and that's how you get to our -- the guidance we provided of $2 million to $5 million.

Derrick Nueman

And David, this is Derrick. In Q3, our net income also benefited from a $2 million tax benefit. So when you back that out, instead of being at $12.5 million, it would have been more like $10.5 million.

Operator

Your next question comes from the line of Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

1

A couple of questions, if I might. First, Tom, as you're probably aware, there is some news this week that Intel is attempting to exit their online TV efforts, and there was a number floated on Bloomberg of $500 million, which given that they neither have subscribers nor content deals is an interesting number. But putting that number aside, it sounds like what they really have is a platform to offer Internet-based television in a multichannel format. If an operator came to you with the appropriate licenses, would TiVo also be an appropriate platform to provide such a service in the U.S. or elsewhere? In other words, why would need an Intel solution if there's a TiVo solution that works well at scale? Is there something different about what they have versus what you have? And then, Naveen, just a housekeeping question on what was cash flow from operations in the quarter? Because I had trouble reconciling it with the data that I had here.

Thomas S. Rogers

Well, on the Intel front, I know nothing about the process that they're going through. But given what I think they have, I kind of hope they get $500 million for it, because the implied valuation for what we have would become vastly beyond where we are today. I think the key thing about the Intel closing down its pursuit is that it was attempting to provide a full-service of linear and over-the-top content using the broadband pipe of the cable operator in direct competition with the cable operator. And we said for a long time, we see immense complexity with anybody doing that, and appropriate responses by the cable industry in providing a price point for the consumer that would make that very difficult, particularly given the cost of programming for a start-up player like that. And while some were skeptical of our analysis of that along the way, as it looked like Intel was building toward that launch, I think that analysis has proved correct. Our main goal is to work with cable operators, and we've -- as we've long said, chose cable operators as our most strategic partners, because they do have the unique robust broadband pipe, which is critical for the future of television, in terms of how important broadband distribution of video through those pipes are going to be, and they have the program rights of linear and VOD and putting those together, along with DVR elements, whether those DVRs are in the home or in the cloud, provide the most comprehensive way for a subscriber to get access to content. If an operator asked us to put together an IPTV-based linear and streaming package for distribution by cable operator with our user experience as the basis for putting it together, we already do that, that's effectively what we've delivered for Com Hem. And we think very much, we have the ability to be much most successful working with cable operators than trying to work around them as Intel was attempting to do. Naveen?

Naveen Chopra

Yes. So on the question on cash flow from operations, probably couple of things to point to. From a, kind of pure GAAP perspective, cash from operating activities is a little under $2 million. I think what's probably more helpful is just to give you the bridge from EBITDA to cash in the quarter. So we had roughly $24 million on adjusted EBITDA. About $27 million of that was recognition of deferred revenue. About $4 million of cash was used for stock repurchase and then the $2 million from operating activities. So netting all that together, you get about somewhere between probably $5 million and $6 million of cash used in the quarter, against the $24 million of EBITDA.

Daniel Ernst - Hudson Square Research, Inc.

1

Got it. And promise -- a quick follow-up on your commentary about working with cable operators. I mean, I thought your sort of poignant example of the growth of an RCM versus a decline in subs at a time when cable is interesting, and we've always felt that you did have the operating system for the future of TV, that really you're a software company with a lot of hardware knowledge that cable operators would find attractive, and certainly that's been the case abroad with small operators here. Why is it that large operators like Time Warner Cable still are -- have trouble finding that value with -- in you?

Thomas S. Rogers

Right. Well, as we've pointed to before, I think there are a fair number of large operators where the issue of control, which has always been a theme within the cable industry, has played out as an issue of continuing importance. I think at some point, control of certain elements is going to have to give way to being best of class and most innovative and certainly, the kind of video subs that [indiscernible] are suffering. I think the industry is just going to have to accelerate its efforts to have the highest quality of video offering possible. But certainly, some of those control elements that third -- that tier 2 players and some large operators abroad have said, "Look, control here isn't the issue. It's getting the best advanced television possible in place." And where those decisions have been made, we've tended to win the business. I'd say that I think that there are going to be some tier 1 operators who, and a very small number of that, who can make very substantial investments, which will carry them through with enough innovation for some period of time, that those internal R&D efforts on the part of those tier 1 operators will mean that is their primary path. But I really see, over time, that being a very limited group, and I think that mindset will be under constant challenges. People who really specialize in this effort and can innovate faster than others in the marketplace provide to other operators a superior service. And I just don't see it being sustainable, that somebody in suburban Anchorage, Alaska can have a vastly better advanced television experience than somebody in the media capital of the world, living in Park Avenue and 60th Street, in terms of the quality of today's cable service for them.

Operator

Your next question comes from the line of Rob Sanderson with MKM Partners.

Rob Sanderson - MKM Partners LLC, Research Division

A couple of questions for me. Just -- can we drill a little bit deeper on the advertising and revenue contribution, how much can that fluctuate quarter-to-quarter? And why the push this quarter? We really haven't seen a lot of Q3 seasonality in the past. And then just probably on that, how is it split between stand-alone and MSOs? And then I have a follow-up.

Thomas S. Rogers

We don't breakout the split between TiVo-owned and MSO advertising and ARM revenue. But that can be somewhat lumpy, depending on the size of the deals that may be coming along in any given quarter and how far previous deals that have been done extend into a current quarter. We -- it does provide some fluctuation for us. We think it is a separate business, and we point it out as a separate variable, separate factor in looking at ARPU. So it's understood that it is not the core element of our subscriber revenue base that is fluctuating in the same way. And that could continue. But as I've said, as we see, hopefully, more deals along the lines of the P&G deal, that we can see the continued strength in that business.

Rob Sanderson - MKM Partners LLC, Research Division

It takes time, so. Virgin, Naveen, can you help us a little bit more on the accounting change there? Specifically, what -- the impact on EBITDA and ARPU, and do you expect that transition, will you have 1, 2 or 3 months of the new way of looking at that revenue at the quarter?

Naveen Chopra

So I guess just, for -- in terms of the basics, the accounting of Virgin today is all in tech revenue. And for the most part, the revenue and the cost tend to offset. That flips during Q4, because we reach a point in the overall life of the agreement where we have recouped whatever investments we made in product development. And I probably can't speak to the exact point in time during the quarter where that will happen, it definitely won't be the full quarter that we get. I think probably something around half or maybe less of the quarter, we'll see the benefit of that in Q4. In terms of the impact on EBITDA and ARPU, I think you'll see a noticeable impact in ARPU, because so far, we've been getting all of the subs and none of the revenue counting toward ARPU. The EBITDA impact will also be material, but I think you'll see more of it in the subsequent quarters after Q4.

Operator

Your next question comes from the line of Mike Olson with Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

I just had one question. Could you kind of give us a ballpark flavor, I know you don't want to give kind of specific, go-forward quarterly guidance outside of Q4, but just what kind of ongoing MSO sub ads should we expect in coming quarters? You have a very strong quarter number, as far as number of ads this quarter. I'm guessing it would be over-aggressive to assume that kind of number going forward, but is there a reason to think of kind of the average of what we've seen over the last several quarters as a reasonable or not reasonable range?

Thomas S. Rogers

Well, we haven't guided to -- we don't guide to sub numbers. We do see our sub, our MSO partners in a number of cases accelerating their plans, a number have just begun to roll out. Some are deals we've just done, so that will certainly grow over time. Probably the most helpful explanation to reiterate on the point we made earlier is that, of the growth that we had sequentially, which was about 25% in terms of sub growth, about 80% of that incremental growth was from non-Virgin sources. Virgin's obviously, continues to be a strong contributor, but the size of the contributions coming elsewhere are beginning to grow. And we take that as very positive and we see, as I've said, many factors for why that will continue.

Operator

Your next question comes from the line of Tony Wible with Janney Capital Markets.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I was hoping we could clear up just a few of the financial comments, did you guys mention that R&D is expected to be down in '15, in your $100 million, your commentary? And then also, obviously, a lot of questions around the ARPU, and I kind of fully appreciate the moving parts there. But can you guys provide a normalized ARPU number, if you kind of adjust it for the advertising issue in the V Med, [ph] just so everybody's on the same page, with kind of ramping next quarter? And then, lastly, what is the assumed tax rate or tax benefit that you have in the 4Q guidance?

Thomas S. Rogers

On the R&D front, we haven't guided in -- to R&D in FY '15. We have said that R&D will be lower this year than it was last year as an ongoing trend in the model. We believe that R&D reductions will be something we continue to move toward as a goal, but we have not identified R&D change relative to FY '15. I think that in the overall trajectory of the business that we pointed to last quarter, in terms of having a foundation for at least $100 million, we were pointing to the increase in license fees and the decrease in litigation revenue, but R&D was not part of that equation. Naveen?

Naveen Chopra

Yes, so Tony, I think if we caught them, your other 2 questions were: One, kind of what's the normalized ARPU that one should expect; and then the other was, what tax benefit, you said Q4, but on this -- were you really asking about Q4 or were you trying to get...

Anthony Wible - Janney Montgomery Scott LLC, Research Division

No, I got the guidance for the coming quarter, what's the tax benefit or expense that you're implying, because you burned up a lot of your tax assets with the litigation. And then, on the ARPU, is more just for this quarter, so we can get, I guess, The Street on the same page as far as kind of what's a normalized ARPU base to build off of, now that Virgin Media, which is obviously a huge component there of the skewing of the number as that converts in the coming quarter.

Naveen Chopra

Right. We have not guided to specific ARPU in the coming quarters, and I probably don't want to put a number out there, other than to say we do expect the MSO ARPU to increase next quarter. You've obviously seen some volatility over the last few quarters, and I think if you looked at kind of the average over the last year or so, that's probably a pretty good indicator for where things would trend. Obviously, the exact number will depend a little bit on timing of sub adds and where they come from and things like that. On the tax question for Q4, from a GAAP tax perspective, we will continue to utilize the tax asset that was created last quarter, in conjunction with the settlement. So it's kind of neutral, relative to this quarter, from a tax perspective.

Operator

Your next question comes from the line of Todd Mitchell with Brean Capital.

Todd T. Mitchell - Brean Capital LLC, Research Division

My question has to do with your technology base. It seems to me, basically, you've built up a turnkey TV Everywhere platform. And across the world, the MSOs are shifting to this sort of service profile, and you can -- beginning to see those that have, are having differentiated results from those that haven't. However, it seems to me, if I look at the largest MSOs in both in North America and in Europe, they're driving a procurement strategy, which is based largely on moving away from proprietary technologies and basically, turnkey solutions, end-to-end solutions, more towards an open-source technology, more towards plug-and-play solutions. And my question is, is where does TiVo fit in that world? Do you still keep yourself in integrated solution, and look to do only business with the smaller MSOs? Do you look to perhaps break up your solution and work with some of the bigger MSOs, licensing parts of your technology platform to them? I mean, would you be willing to do a deal with a bigger MSO for your over-the-top aggregation platform, if it didn't have your guide? And how do we think about the TiVo's business model going forward?

Thomas S. Rogers

Well, it's a very good question, because clearly, there -- the evolution of how this is going to develop going forward has changed somewhat from how advanced TV first began to roll out. It was the early adopters, so to speak, very much looked at advanced television as new boxes with new software, new chip capability, and that was the important necessary ingredient of how an advanced television solution would be rolled out. As cloud and IPTV potential has developed, what has been valued increasingly, in terms of what TiVo brings to the table, is the TiVo service, what we in some ways call the TiVo mind, the elements that render the experience meaningful, where the UI that we deliver is one element of that, but customization, personalization, all kinds of search, all kinds of features that give what we do the comprehensive robustness across a management of content sources that is as broad as it is, is really built into our service offering, as you say, increasingly moving to a service profile. And so if there are large operators, as I was speaking about before, who have particular interest in control and when they think of that, they do largely think of control of the UI, we are certainly in a position that we could offer the TiVo service elements that are highly valued to a larger operator's user interface. The integrated solution is one that has been most sought to date, but as the views of how this is going to evolve and the importance of what we offer in it, certainly, the potential for that kind of opportunity exists for us.

Naveen Chopra

Todd, I would add to Tom's comments that the trend of more and more of the intelligence and processing going into the cloud, benefits us in terms of being able to hook that into other user interfaces. It also helps us at the other end of the market where, as we spoke about, our IBC demonstrations, we've been able to show the use of very low-cost CPE devices that can harness the power of that TiVo service, which I think, or I hope, will create some opportunities for us in markets where it historically has not made sense for the operator to deploy multi-hundred dollar set-top boxes. So I think there's a benefit both at the tier 1 and the other side of the market.

Todd T. Mitchell - Brean Capital LLC, Research Division

And if we think of sort of the elements of the service platform, I think the broad investment base kind of sinks at the UI, because that's what they can see, and has sort of differentiated service platforms based on the UI, but is there a way that you could perhaps tackle for us, how you cognitively break down, kind of the things that you do in your service platform. You mean, you've got it, you've got the upfront UI, you've got, a back-end office that manages an On Demand platform or interfaces with an On Demand platform, but what are the elements -- one of the things I think TiVo does very well is aggregating multiple libraries. I mean, is that a value-added element, and how should we -- can you give us kind of a way to think about that, the way the components of the service profile work?

Thomas S. Rogers

Yes, I mean, it's probably a fairly lengthy thing to describe in specifics, but let me give you some examples of the kinds of things that are encapsulated in the service that we think are particularly unique around TiVo. One you hit on, which is, what we call the meta data pipeline, which is an increasingly sophisticated set of tasks that has to happen to seamlessly integrate content from all sources, and manage how that information is presented and be aware of where all the different assets are, and where they can be distributed, where they can be viewed, things of that nature. So there's a lot of intelligence that has to go into that. There is a significant component of it that relates to personalization, which is done on a variety of levels, everything from putting the collections and things together for a browse experience, to backhauling some very sophisticated, very granular data that can be fed back into the system to help drive the recommendation engines. There's a very sophisticated search capability that is all hosted in the service. I think it's generally been acknowledged that it's probably the most capable search experience in the video world today. So those are probably just scratching the surface from a technology standpoint. There's many layers that go into enabling those types of capabilities, but I think what's exciting is that those are all things that are increasingly available, independent of the specific box.

Naveen Chopra

And I put audience research and certain advertising capabilities that are managed through the intelligence of the service and the NDR and DVR capabilities that we demonstrated recently, as people were increasingly interested as to how our solution would work here. And I think people were really struck by how we showed that the storage of where things are in the cloud is the easy part. It's not whether you can record and store in the cloud. The hard part, the value-added part is within a world of VOD assets and streaming content assets, how do you manage the content from an NDVR point of view, how does it relate to what you can do in terms of catch-up TV, what you have rights to in terms of certain recordings of being in -- having certain characteristics to them versus others, and that content management function within an NDVR world is a very important part of what our service offering will be as well.

Derrick Nueman

Operator, we have time for one more question.

Operator

Your next question comes from the line of Alan Gould with Evercore.

Alan S. Gould - Evercore Partners Inc., Research Division

Tom, for you. I appreciate your vision of the future of TV. You specifically said the operator needs to deliver a better experience quickly. Now we could have said that a year ago as well. Has there been anything that's changed, any tipping point that will -- that you're detecting if the operators are going to start moving more quickly? And then for Naveen, the buyback, I know it's -- as relative to your 10b5 rules, but it was $60 million last quarter, $20 million a quarter before that and only $4 million this quarter, even though the stock price wasn't that much higher this quarter. I was wondering if you could just explain why it dropped so much.

Thomas S. Rogers

Well, Alan, on the first question, I think you're right, that you could have said the same thing a year ago. I think the adoption of over-the-top services has gotten to be that much more significant. There are any number of points of evidence we could all point to on that, and why an industry that has always been known for having the most choice, I don't think can continue to operate effectively in the video world if there's a sea of first rate choice that develops around it. And Netflix and others getting original programming that's getting critical acclaim and rating is a key example of that. I think also, very importantly, you have some players out there, that satellite and telco operators in the video space, that are gaining subs at the expense of cable operators. So while many pointed a year ago to cable's biggest threat being the over-the-top, and people cord-cutting, it's really an issue that others in the operator space are taking those subs and the cable operator has the ability to jump over the experience offered by those competitors by really merging its Broadband and Video businesses and the unique VOD elements that they've developed. And I think it becomes even more obvious that the right answer is to do that, in light of the competitive situation that they've most recently faced. On the buyback front...

Naveen Chopra

Yes, Alan, on the buyback, the 10b5 plan did not trigger this quarter. The reason, without getting into too much detail, the way the plan's set up, there are some limitations on how much can be acquired in any given period of time. And we got pretty aggressive under that at the -- and the last quarter, and unfortunately, those time frames are not -- they don't line up with our fiscal quarter. So that was really the main reason that the plan didn't trigger during Q3.

Operator

We have reached our allotted time for questions. I would now like to turn the conference back over to Tom for any closing remarks.

Thomas S. Rogers

Thank you. Well, the EBITDA and net income performance speaks for itself. But just to reiterate, a quarter of record Service & Technology revenue, a quarter of record gross profit, which was up 62% year-over-year, a record EBITDA, one that -- taking out onetime litigation settlement quarters, and record subs since we began our cable thrust. So a lot of upward performance that we're quite pleased with, and I really do believe we are in the right place at the right time, and riding what is going to be the enormous tide of advanced television adoption. Thank you very much for joining us, and we'll keep you posted.

Operator

Thank you for participating in today's conference. You may now disconnect.

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Source: TiVo Management Discusses Q3 2014 Results - Earnings Call Transcript
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