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Executives

Derrick Nueman – IR

Tom Rogers – CEO and President

Anna Brunelle – VP and CFO

Naveen Chopra – SVP, Corporate Development & Strategy

Matt Zinn – SVP, General Counsel & Chief Privacy Officer

Analysts

Tony Wible – Janney Montgomery Scott

Bridget Weishaar – JP Morgan

Barton Crockett – Lazard Capital

David Miller – Caris & Company

Alan Gould – Soleil Securities

Todd Mitchell – Kaufman Brothers

Mark Argento – Craig-Hallum Capital

Tuna Amobi – Standard & Poor's

TiVo Inc. (TIVO) F4Q10 (01/31/10) Earnings Call March 8, 2010 5:00 PM ET

Operator

Welcome to the TiVo fourth quarter fiscal 2010 conference call. I would like to turn the call over to Derrick Nueman, Head of Investor Relations.

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, SVP of Business Development and Corporate Strategy; and Matt Zinn, General Counsel.

We are here today to discuss TiVo's financial results for its fourth quarter ending January 31st, 2010. We have just distributed a press release and 8-K detailing our financial results. We have also released a financial and key metric summary, which is posted on our Investor Relations website.

Additionally, we will be posting a recording of this call later today on the Investor Relations section of our website. Our remarks today should take about 30 minutes and will be followed by a question-and-answer session.

Our discussion today includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements relate to, among other things, TiVo's future subscription, advertising, research businesses, profitability, operations and financial performance and guidance, including future marketing, R&D and other operating expenditures, distribution of TiVo's service domestically with DIRECTV, RCN, Comcast and Cox, and internationally with Virgin Media UK, Seven HTS in Australia and New Zealand, TiVo's current and future services and product releases, partner initiatives, and TiVo's ongoing litigation with EchoStar and AT&T and Verizon.

You can identify these statements by the use of terminology such as guidance, believe, expect, will or similar forward-looking terms. We caution you not to place undue reliance on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from these forward-looking statements.

Factors that may cause actual results to differ materially include delays in development, competitive service offerings, and lack of market acceptance, as well as other factors described in the risk factors in our public reports filed with the SEC including our latest 10-K and 10-Qs. Any forward-looking statements made on this call reflect analysis as of today and we have no plan or duty to update them. Additionally, some of the metrics today are non-GAAP measures. Please see our fourth quarter year 2010 key metric sheet for a reconciliation of these items.

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

Tom Rogers

Thanks, Derrick. Good afternoon, everyone. This past year was a significant one for TiVo. We made a tremendous amount of progress toward our goal of building on our leadership position in advanced television. We put a significant amount of efforts behind creating a whole new HD user experience that takes our vision of integrating traditional and broadband TV content to unparalleled levels.

We put in place key distribution relationships in the U.S. and internationally that leveraged those efforts and because advanced television solutions are increasing in importance for these providers in a new world of television consumption and because we offer so much more than the DVR, the deals we established in fiscal 2010 incorporate more predicable deployment commitments underscoring the importance of TiVo to our distribution partners.

On the retail front, we established a broad-based strategic relationship with the largest consumer electronics retailer in the world, a relationship that goes way beyond the availability of TiVo products at retail. And as we begin this new era for TiVo, going way beyond the DVR, by no means – by no means have we forgotten our legacy in the DVR business and the importance of our intellectual property and the important job we have in protecting it.

And as you all know, in a major victory for TiVo on that front, just a few days ago the United States Court of Appeals for the Federal Circuit in Washington fully affirmed the U.S. District Court for the Eastern District of Texas' finding of contempt of its permanent injunction against EchoStar, including both the disablement and infringement provisions, regarding EchoStar's ongoing infringement of our Time Warp patent.

This ruling paves the way for TiVo to collect the previously awarded approximately $300 million in damages and contempt sanctions for EchoStar's continued infringement through July 1st, 2009, bringing the total awards related to this case to date to about $400 million. We will seek additional compensation for continued infringement for the period after July 1st of 2009 and we will continue our efforts to protect our intellectual property from further infringement.

This year was also about continuing to be financially prudent as our advanced television and distribution strategies continue to play out. We recorded our second consecutive full year of adjusted EBITDA profitability and increased our cash position by $37 million over the course of the year, bringing us to approximately $240 million in cash with no debt.

We move forward on all of these actions with the understanding that the future of television isn’t simply about a set-top box or a guide or a user interface or millions of content choices, but is also about putting all of that together into an easy and intuitive user experience and creating the elements necessary for the media industry to build a business model around it. Thus making certain that the advertising and research components of our business continue to develop, which is a critical – which is critical to making sure that B2B side of television can keep pace with all of our consumer advances.

As you likely saw, TiVo once again reinvented the TV viewing experience when last week we unveiled TiVo Premiere built on our next-generation TiVo user interface, which seamlessly converges broadband and linear TV with a stunning new look and feel. With this launch, we have successfully moved way beyond the original DVR company route to the company that has created the one-box solution, your DVR, your cable box, your movie box, your web box, and your music box, all in one box and solving for how consumers and distributors deal with presenting infinite amounts of content.

In creating this new experience, we used our vast knowledge gained over the last 10 years of how viewers want to watch television. And with an eye toward future innovation, we built our new platform on Adobe Flash, making it the prominent use of Flash in any set-top box.

One of the great benefits of building on this standard is that we believe it sets the stage for robust future development, potentially enabling TiVo and a third-party development community to introduce new applications that can be quickly and easily implemented. Suffice it to say our new platform is in Phase I of what we believe to be many more phases yet to come.

TiVo Premiere and the broader integration of our new platform will play a significant role in our strategic alliance with Best Buy at retail. The introduction of this product has been at the heart of the launch of the new Best Buy relationship and will be the basis of Best Buy commencing its substantially increased level of marketing and merchandising of TiVo products throughout its retail stores and online.

Commenting on this alliance, Mike Vitelli, President of the Americas for Best Buy, said, quote, "This is an important step toward achieving our shared vision to transform the digital home entertainment experience and redefine customer service. Through TiVo we can continue to strengthen relationships and interact with our valued customers even after they leave our stores, which is invaluable in a rapidly evolving digital media environment. Cable companies do a great job of connecting customers to content, but TiVo takes the complete digital experience to the next level," end quote.

The new product will also help advance our broader mass distribution efforts. We have already exposed operators to TiVo Premiere and how it can be utilized in their own environment. With this launch, we are demonstrating that we have a retail offering that can be put in consumer hands, while developing for the operator environment in the same time frame. This is in contrast to when TiVo wants the DVR at which time we were not aligned with the cable community and was not until several years later that we struck deals to take our great innovation and distributed through cable.

Here, we have really looked to make sure that alignment exists as much as possible in the same time frame and is a key part of how TiVo's distribution can be broadened. This offering is set against an industry backdrop where others are either taking operators head-on with an over-the-top only device or don't have a retail business that demonstrate that they actually have an offering that they can get to the marketplace, which is proven to work.

Our solution allows distributors to bring together traditional and broadband content on the TV without disintermediating the cable or satellite operator like so many specialty devices on the market due today. In fact, now that we have introduced this platform, both Virgin Media and RCN will use that as the inspiration of their own future advanced television offerings. The press reports of RCN taking the lead here resulted in the leading cable trade to report and I'm quoting, "TiVo Neutron Aims To Blow Away Other Set-Top Boxes," end quote.

To clarify, Neutron was TiVo's internal code name for Premiere part, which launched last week. Our solution for RCN, which is a company which covers major markets including New York, Chicago, Boston, Philadelphia, and Washington D.C., will be launching soon and as a result, RCN customers will have full access to a universal cable box, a vast collection of content from broadband sources, a significant cable-provided VOD library, and a diverse music jukebox in one user interface.

RCN is the first of what we hope will be many examples of how operators, which are the leading packagers of video and broadband services but have struggled to integrate those in a meaningful way directly to the TV, will embrace TiVo's advanced television solution as the cost-effective, highly effective answer to this challenge, while at the same time being able to differentiate themselves from other competitors in the television market. Most importantly, it gives them the edge they need to create even stickier customers.

RCN's CEO, Peter Aquino, who has also joined us at our launch event last week, expressed his excitement for the new solution saying, quote, "We are proud to be leading the cable industry in the adoption of this groundbreaking approach to advanced television. TiVo will bring a whole new way for our subs to experience television with TiVo's DVR and broadband television offerings. I'm very pleased to report that based on our field test results, we will begin to roll out TiVo as our primary advanced box in all of our markets, one by one, in the second quarter of this year." Playing off of another operators tag lined, Peter said, quote, "This is big, this is even bigger."

TiVo's impact on the future of television is being felt overseas as well where operators' decisions about DVR deployment and broadband television are often being made in the same time frames and where TiVo finds itself in the unique position of being a company that can provide a full range of software and hardware answers that meet the entirety of the needs of distributors.

The critical role TiVo is playing in solving for these issues globally is best described in a recent Financial Times article where Neil Berkett, CEO of Virgin Media stated that he, and again, I'm quoting the Financial Times here, quote, "wants Virgin's agreement with TiVo to allow it to offer a breadth of video content that rivals can't match, from traditional or linear television to YouTube clips." Adding to that, quote, ''Building the TiVo application is the most important thing we do in 2010 going into 2011," end quote.

It's important to know that Virgin has selected TiVo to help it compete against the most well-known multi-channel distributor outside the United States, BSkyB. On the heels of the Virgin deal, we are seeing an increasing amount of interest from international operators.

In fact, earlier today, we announced a relationship with Conax, a leading global provider of security/conditional access solutions for digital TV and content distribution to operators covering over 100 million households in over 80 countries.

Many of the pay TV operators who utilize Conax's security systems are in the process of selecting next-generation hybrid platforms that meld linear and broadband content and our relationship with Conax puts TiVo in the pole position to be the software provider for these platforms. Through this deal, we will be working to optimize TiVo's software and service for use on Conax-enabled set-top boxes, which will make it faster and cheaper for operators to deploy our solution.

Our strong relationships with Best Buy, Virgin, RCN, and now Conax are some examples of how TiVo is applying its industry-leading innovation to technology beyond the DVR. Now, we fully understand that by tackling implementation on both of the retail and mass distribution front simultaneously, we are engaging in a higher level of R&D, which only increases as broader international opportunities present themselves.

Also, I want to point out that Cox continues to progress in its New England market and an aggressive development activity continues for both Comcast and DIRECTV. As you can see, not only do we provide an approach for retail, we also provide multiple approaches in meeting the needs of mass distributors. Notably, an RCN-type approach of both our box and our software, a Virgin Media and DIRECTV-type approach, which builds our software into a dedicated box provided by a third party, and our Comcast-type approach of adding a software upgrade to a preexisting box.

In short, we believe we are the only company going at all environments at all boxes in all ways. We believe that our progress to be a leader in advanced television to date can't be measured on current subscription count, but rather by the opportunities in front of us, Best Buy, Comcast, Cox, DIRECTV, RCN, Virgin, and we are working towards many others, both in the U.S. and globally.

Admittedly, we would have preferred some of these opportunities to have led to a more rapid deployment by now, but we are dependent on the pace of technological development necessary for TiVo's solutions to be introduced. What we like about some of the more recent deals we have done is our ability to make progress without the degree of dependencies that some of our earlier domestic deals have involved.

In closing, we look at the year ahead with confidence, knowing that we are in a strong financial position, that we have successfully protected our IP in a very meaningful way, that we believe that the host of key growth drivers we have set in place with cable and satellite operators and our retail alliance will begin to bear significant fruit in the future.

As a company that is putting unparalleled products into the marketplace and setting the standard for what consumers should expect from their television experience, we believe we have once again radically redefined television viewing, which is no small feat and we believe this will have a considerable impact on the future of both our retail and mass distribution businesses. As we enter a new decade, we are eager to embark on a new era for TiVo.

And with that, I will turn it over to Anna.

Anna Brunelle

Thank you, Tom. Good afternoon, everyone. I'm pleased with our fourth quarter results as we exceeded our expectations on both revenue and earnings. Let's get right into the detail.

Starting with our balance sheet, our cash position continues to be strong as it increased by $37 million in fiscal year '10 to $245 million. This does not include the approximately $300 million in uncollected damages and sanctions awarded from our EchoStar litigation through July 1st, 2009 or any damages after that point from further infringement of our Time Warp patent. Our strong balance sheet is a good indication of our solid financial footing and will serve us well as we continue to focus on ways to enhance shareholder value.

Turning to the income statement, service and technology revenues were $45.3 million. Of that, service revenues were $38.4 million; technology revenues were $6.8 million, down $2.5 million from the prior quarter as expected. Total stock-based compensation expenses for the quarter were $6.2 million. Excluding the related stock-based compensation expenses, cost of service and technology revenues were $14.5 million, which included $10.6 million related to cost of service revenues.

Our hardware loss was $4.8 million and consisted of $2.9 million of loss related to net hardware costs and $1.9 million of costs 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-SAC sales and marketing, 13%; subscription acquisition cost, 4%; research and development cost, 36%, increasing in line with our expectation as we move to accelerate our investment in advanced television services; and G&A, 17%.

Additionally, we had interest income of $426,000 and a $1 million tax benefit. This led to a net loss of the fourth quarter of $10.2 million, which compared to our guidance of net loss of $13 million to $15 million. This compared to a loss of $3.6 million in the year-ago quarter. Our net loss per share was $0.09 for the fourth quarter. Our net income per share calculation for the fourth quarter was based on approximately 109 million shares.

Adjusted EBITDA loss for the fourth quarter was $3.3 million compared to guidance of an adjusted EBITDA loss of $5 million to $7 million. In addition to excluding stock-based compensation, interest and taxes, our adjusted EBITDA excluded $2.3 million in depreciation and amortization.

The better-than-expected net income and adjusted EBITDA were driven by higher service and technology revenue, as well as lower-than-anticipated marketing and legal spend.

Now, turning to our fourth quarter key metrics, in line with our expectation, our gross subscription additions were 46,000 as compared to 59,000 in the year-ago quarter. Churn increased to 2.6% and almost all of the increases fell into two buckets, lifetime subscribers that became fully amortized and no longer connect to our service and subscribers that had three-year commitments expire.

Virtually all of the subscribers in each of these categories had older hardware platforms that did not provide the features that are proving critical to our future marketing effort. As an example, we see very little churn in our HD base. We are improving the level of subscribers who are taking advantage of our upgrade program.

On a net basis, our TiVo-owned subscriptions decreased by 72,000 in the fourth quarter and TiVo-owned subscription base ended the quarter at approximately 1.5 million subscriptions. Our MSO/Broadcasters subscription base declined by 59,000 from the prior quarter, an improvement over the trends we've seen in prior quarters. This was driven by lower DIRECTV churn and subscriber increases across all of our other mass distribution platforms, both domestically and internationally.

As we've said before, we fully expect to see a full inflection in this part of our business once deployments with DIRECTV, RCN, and Virgin are live and after Comcast moves beyond New England. Our overall subscription base stands at approximately 2.6 million subscriptions at the end of January and we had approximately 279,000 TiVo-owned product lifetime subscriptions that had reached the end of the revenue amortization period, representing 45% of our current total product lifetime subscription base.

Our TiVo-owned average revenue per subscription was $7.58, a slight decrease from the prior quarter and TiVo-owned total acquisition costs were $7.5 million, while SAC was $164, slightly less than the prior quarter.

Finally, we are forecasting improvements to SAC given the improved economics of our new hardware. Before I get into the specific guidance for the first quarter, let me walk you through some factors that are impacting our guidance.

First, as Tom discussed, we are tackling distribution efforts on two fronts, retail and operators around the world. As we discussed in some detail last quarter, we are investing more in R&D in fiscal 2011 given the many opportunities we see in front of us. Second, our marketing spend will increase from Q4 due to the launch of TiVo Premiere and our other distribution efforts, but will be somewhat offset by improved hardware margin. We will remain prudent in any marketing efforts we undertake.

Third, we are budgeting higher legal expenses in both Q1 and fiscal year '11 versus the prior year as we've extended our legal actions beyond EchoStar to AT&T and Verizon. Finally, it should be noted that we are engaged in investing in each of these areas more significantly for the near term and that we are still in the process of assessing how to best utilize our current cash position to maximize shareholder value.

With that, for the first quarter, we expect service and technology revenues of $41 million to $43 million and we expect adjusted EBITDA to be in the range of negative $9 million to negative $11 million and our net loss in the range of negative $19 million to negative $21 million. Net income is being significantly impacted by higher stock-based compensation expense related to recent increases in our stock price.

To wrap up, I'm pleased with the quarter and the progression of our business. I believe the investments we are making in R&D and litigation will drive positive returns and ultimately lead us to increased distribution.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first –

Tom Rogers

Operator, while you are queuing up, let me just make a couple of remarks while everybody are getting their questions together. I just want to dispense with the formalities of laying out the quarter as we did and just take note of the fact, yes, it was a fine quarter. But last week, we had one hell of a week. I mean, we really between the launch of a whole new approach to consumers understanding TiVo and the win at the Appeals Court level, really put two major trends in our business miles forward last week.

And the emergence of distribution deal dynamics that can take advantage of pushing forward that new product look and feel of TiVo, coupled with the obvious major change in the perception of our intellectual property and both of those occurring in the same time frame like that, we couldn’t ask for a better week in terms of people understanding the momentum that TiVo can have going forward strategically.

So I didn’t want the formalities of this session to not put an exclamation point where it obviously deserves to be. And with that, operator, we are ready for the first question.

Operator

Your first question comes from the line of Tony Wible with Janney Montgomery Scott.

Tony Wible – Janney Montgomery Scott

Hey, good afternoon. I was hoping we could actually focus on DIRECTV and that deal, is that something that’s likely to come in the first half of 2010 or the second half? And then the other thing is the new international deals you have at Conax, is that a revenue share deal? And lastly, just congratulations on the victory.

Tom Rogers

Thank you, Tony. DIRECTV is very much moving along on the development front. It's something that we are looking toward implementing the latter half of the year. It is something that we obviously believe that between the new deals that it provides in terms of marketing commitments and minimums and increase sub fees, while also allowing us to move forward into the full HD realm of DIRECTV's box world with a national distributor that can sell to any consumer anywhere in the United States has a lot of prospect, but time frame wise, we are focused on the latter part of the year.

Tony Wible – Janney Montgomery Scott

And on the new international deals, is that a revenue share?

Tom Rogers

Well, I'm not going to comment on the specifics of the economics between us. What it really is, is a deal enabler with other distributors, of which Conax has many, many relationships covering about 100 million television households in about 80 countries extensively in Europe and India, very strong in their home markets of Scandinavia that really allows for the integration of a critical piece of any mass distributor software portfolio conditional access with what we do in a way that allows for a much faster implementation and in our mind, better overall deal dynamics for us as we engage wit the ultimate distributors. I don't think I'll go beyond that.

Tony Wible – Janney Montgomery Scott

Well, I'm going to try to push the envelope here. If it – is that a deal where you control the pricing or are they buying wholesale and kind of reselling at retail?

Tom Rogers

We control the pricing with deals with the ultimate distributor.

Tony Wible – Janney Montgomery Scott

Okay. Great, thank you.

Operator

Your next question comes from the line of Bridget Weishaar with JP Morgan.

Bridget Weishaar – JP Morgan

Hi, congratulations on your quarter. I wanted to dig a little bit more deeply into the improvement you had in the losses in the MSO part and the ARPU increase. Could you just give us a little bit more of an idea, if you rolled out into new markets with individual partnerships and what led to this? And then as a follow-up to that, how long do your existing MSO partnerships agreements last and at what point can you renegotiate the pricing of them? Thanks.

Tom Rogers

Well, our major MSO relationships that we've entered into are fairly long term. We do not specify the time frames on those, but the ones that have been material enough to file are long enough time frame that it's fair to say they go out for quite some time.

We have been quite mindful of the fact of not moving forward on a wide of distribution fronts until the Court decision had clarified itself and I think it was a prudent judgment to take on the number of distribution development deals that we did prior to that and we obviously have a improved perception of our intellectual property and we would look other distribution deals going forward in light of that.

In terms of your question on the MSO front, Anna, you want to handle that?

Anna Brunelle

Well, I can take the question. We don't typically break out the components of our MSO/Broadcasting subscriber base.

Bridget Weishaar – JP Morgan

Okay. And can you just give me an idea, is there flexibility in these partnerships for pricing increases as they last such a long term or just in general, I know you can't give a specific number, but how should we think about the pricing of these partnerships?

Tom Rogers

Well, every partnership is different. They – for instance, the DIRECTV deal was done with a clear understanding that the per-sub rate would substantially increase from what the previous per-sub rate was along with other key economic elements of the deal. There tend to be in some cases better pricing as volume changes in the deal, but – and there are other factors that can open up the underlying pricing of the per-sub economic. Beyond that, I don't think I want to characterize it, because every deal and every distributor has its differences.

Bridget Weishaar – JP Morgan

Great. Thanks so much.

Operator

Your next question comes from the line of Barton Crockett with Lazard Capital.

Barton Crockett – Lazard Capital

Great. Thank you for taking the question. I was wondering if we could step back for just a second and try and address something that – you probably don't want to go too far on this road, can you talk about whether there has been any interaction with Dish since the decision last week or with any of the other majors with them you don't have a deal like Time Warner or AT&T and Verizon?

I mean, I know that Dish said on their earnings conference call before the decision that they seem to have good feelings about you as a company, but a disagreement on the value of what you are providing – a business disagreement and I was just wondering if there has been any follow-ups since then that you can address.

Tom Rogers

Well, it was interesting to read that EchoStar made warm and fuzzy comments about us on their earnings call, but beyond that I don't think I want to characterize the nature of any communications with any companies. We don't do that under any circumstances and I wouldn't begin to do that now.

Barton Crockett – Lazard Capital

Okay. And then switching gears, to follow-up on Bridget's question on the MSO line, I mean, in particular, the ARPU there seem to grow a lot sequentially to $1.20 and can you address in any more detail why that was and the sustainability of it, was it kind of an accounting – I think, that's not really sustainable or is that kind of a run rate that we will be building on into next year? And then did – yes, I'm sorry. I'll leave it there. Go ahead.

Tom Rogers

I'm not going to parse the individual components of that, but I will say it wasn't a one-time phenomenon.

Barton Crockett – Lazard Capital

Okay. And then you are guiding for a sequential increase in R&D and G&A. Is the idea that whatever number we see kind of in the first quarter is what we would look out for the balance of the year or is that something that's going to be unusual in the first quarter and maybe different later in the year?

Anna Brunelle

Well, I think if you are looking at G&A expense moving forward, I think probably the biggest component that would be on anyone's mind would be legal expense and to date, we have been able to successfully protect our IP in a meaningful way and we've also extended those legal actions beyond EchoStar to Verizon and AT&T. We think protecting our IP is the right thing to do and will ultimately benefit our shareholders financially.

So I think the heart of your question really comes down to depending how the suits play out. Legal expense could vary, but overall in Q1, we are expecting that cost to be up due to those additional actions.

Barton Crockett – Lazard Capital

Okay. And then just a last question here. With the standalone churn up so much at – about 2.6% I think, is that a number that is kind of the run rate going forward into the first part of this year or is it something that for some reason would be different you think going forward?

Anna Brunelle

I think it would be different going into the first part of this year. We had a large block of subscribers who were lifetime subscribers who became fully amortized and rolled off in the fourth quarter. So as a result, I wouldn't expect that to reoccur in Q1.

Barton Crockett – Lazard Capital

Okay. All right, I'll leave it there. Thank you.

Operator

Your next question comes from the line of David Miller with Caris & Company.

David Miller – Caris & Company

Yes. Hey guys, congratulations on the very clean legal win. We are excited. A few questions. Naveen, on the RCN deal, you had mentioned, I think, in communications sort of it passing over the last maybe two or three quarters that you had thought the RCN deal would likely force Comcast to work out its middleware issues for that deal and with the RCN deal sort of kicking in very soon here, has Comcast worked out those middleware issues? And then I have a couple of follow-ups.

Naveen Chopra

Hey David, I'm not sure I would directly link RCN and Comcast middleware issues quite that way. I think we certainly have acknowledged and believed that what we are doing with RCN provides many operators and it may well be the Tier 2 operators a path to greatly accelerate their deployment of advanced services like the TiVo Premiere experience that we showed earlier this week and that RCN participated in.

David Miller – Caris & Company

Right.

Naveen Chopra

And in terms of exactly how Comcast may choose to address similar product or look to bring that to market, I think they have made some comments directly about that over the last week or so and that's probably all we should say on that.

David Miller – Caris & Company

Okay, great.

Tom Rogers

Well, just to add to Naveen's comments and this isn't Comcast-specific by any means, I think the fact is that the approach that RCN is adopting using our box and our software provides a fast way into the marketplace for a cable operator with a whole broadcast cable, broadband integrated approach. And I think true to a generally maybe proceeding at a slower pace than the large operators had originally anticipated and I think the contrast there will certainly be something that raises the visibility of an approach like ours as a faster path to deployment.

David Miller – Caris & Company

Okay, great. And then do you guys have an exact date for the launch of the brand new HD DIRECTV TiVo combo box? And if you do, I assume it has dual tuner capability and can you talk about just what kind of storage features are inside that box?

Tom Rogers

Well, the exact retail launch date will be early April, very early April. We haven't set indicator what the exact date is. Orders are being taken now.

Naveen Chopra

Well, he was asking about the DIRECTV.

Tom Rogers

Oh, I thought the retail product. No, we have not indicated a date on the launch of the DIRECTV product.

David Miller – Caris & Company

Okay. And then finally, on AT&T and Verizon litigation, I know you guys are – there is only so much you can say, but can you say whether or not you have Court dates for those cases and are you keeping the same legal counsel for those cases or have you switched legal counsel?

Tom Rogers

We have Matt Zinn on the phone, our General Counsel. Matt, you want to address that?

Matt Zinn

Sure. We have a couple of dates. On February 9th, the AT&T case was reassigned to Judge Folsom.

David Miller – Caris & Company

Right.

Matt Zinn

And on February 24th, the Verizon case was reassigned to Judge Folsom and there is a scheduling hearing on April 8th in both the AT&T and Verizon cases. So that's the – those are the dates we have to date. Those dates can always change if counsel is not available for one reason or another. We have – in terms of counsel, we have one set of counsel on the AT&T case and another set of counsel on the Verizon case. The AT&T case has the same counsel we've had on the EchoStar case.

David Miller – Caris & Company

Right, because of the Microsoft position. Okay, wonderful. Thank you very much.

Operator

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

Alan Gould – Soleil Securities

Thank you. I've got two questions. First, Matt, can you refresh our memory, how long it would typically take for the Circuit Court of Appeals to decide whether or not to accept an en banc hearing and then if they did choose to take an en banc hearing, how long would it take for them to roll in an en banc hearing?

Matt Zinn

Well, EchoStar normally has 30 days to file their petition for en banc review and then the Court would take a few weeks typically to decide whether to take it or reject it. If they take it, then you are basically looking at a whole another appeal cycle. So that’s quite a few months.

Tom Rogers

Matt, you want to address the rarity of the Court of Appeals taking a – in reviewing a case en banc?

Matt Zinn

Yes, an en banc hearing is a hearing by the all Judges on the Federal Circuit, rather than just the three-Judge panel. En banc hearings are rare and ordinarily appropriate only when consideration by the full Court is necessary to secure or maintain uniformity of its decisions or when the proceeding involves the question of exceptional importance.

And while cases rise and fall on their own facts and circumstances, the hearing en banc is unusual, akin to the Supreme Court granting cert. I think the statistics over the past couple of years are they are somewhere on the order of 270 requests for en banc following the issuance of a panel decision and only about 10 were granted. Again, not every case is equal, but it's fairly unusual for the Court to rehear something.

Alan Gould – Soleil Securities

Matt, is the fact that there was a split-decision in this case, does that have any impact on the likelihood of getting an en banc hearing?

Matt Zinn

I think it depends on who you ask. Some people will say yes, some people will say no because all of the issues have been considered by Judges and laid out very clearly.

Alan Gould – Soleil Securities

Okay. And then a totally separate issue, I know that it's come up already about the ARPU at the broadcast went up to $1.20. If I remember correctly, the new DIRECTV contract doesn't kick in until February 15th. So can you tell us what contract – was there any contract that kicked in for the first time in this quarter? Did the Virgin contract kick in this quarter for the first time?

Tom Rogers

I don't think we are going to parse the underlying contributors to the MSO revenue line. That's not something we do and it's, as I said, not a one-time event.

Alan Gould – Soleil Securities

Okay, thank you.

Operator

Your next question comes from the line of Todd Mitchell with Kaufman Brothers.

Todd Mitchell – Kaufman Brothers

Yes, thank you for taking my question. My question goes back to the Conax deal. My understanding, they are a CA provider and so, I just don't quite understand what this deal is and their ramifications. Does this mean that basically you are now certified to sell sort of DVR, DVR replacements into network operators that use their CA or is there a CE component to this as well? I don't quite understand that. If you could specifically –

Tom Rogers

Naveen?

Naveen Chopra

Yes. So I think, Todd, Tom give you the very big picture of kind of strategically the role that we both play in terms of how we actually are taking this relationship forward. The way to think about it is that for us to develop the platforms that many of these significant operators in Europe, Asia, Latin America are looking to deploy requires a significant amount of integration with the conditional access system.

We've done that with several other providers, both domestically and in some international markets in the past. Conax has been a big player there, it's used by many of these operators and that integration is one of the more complex and time-consuming elements of bringing one of these products to market and so there is a lot of efficiency to be gained by tackling that independently and not having to get it tied up in a big middleware development, deployment, and reporting effort.

So it's really about how do we accelerate the development of a platform. That platform could be provided by any one of several players including some of the major set-top suppliers that you would expect to see at a satellite, cable or Telco operator in the international market.

Todd Mitchell – Kaufman Brothers

Okay. So in many ways, this is kind of a continuation of this trend where we have seen where CA and middleware and application are vertically integrating on the stack so this is like you and them are kind of like an NDS and MediaHighway or OpenTV and Kudelski kind of having preset partners for ease of execution?

Naveen Chopra

I would view it a little differently in the sense that I think the operators are looking to start from the solution that ultimately makes a difference to their business, which is the consumer application that they put forward and I think they are saying to us, "give us the simplest, fastest and least expensive way of getting that in front of our customers," and we believe that having direct integration with all of the various components of that solution enables us to do that. So that's been the motivation.

Todd Mitchell – Kaufman Brothers

Okay. So – and this is the last – so ultimately, should we think of this as – in terms of TiVo's long-term future, some of the – you more thinking that the biggest opportunities for growth are overseas and that the model in the future is closer to, say, a Virgin model where you provide the whole stack for both DVRs and non-DVRs and are a default as opposed to some of the North American licensing arrangements you have?

Naveen Chopra

I don't want to put a kind of relative comparison against those, but I think as you well know and we've said previously, the international opportunity is one that we think is very significant. There will continue to be a number of forms that the product takes from a technical integration perspective, but we definitely see what we are doing in terms of the services we enable for the operator as becoming more and more core to their offering and therefore, people are looking to TiVo as a highly, highly strategic partner for them.

Tom Rogers

Increasingly, time to market is becoming a major issue for operators, both domestically and internationally. Operators are looking at situations where there are over-the-top providers that they understand and undermine their markets, specialty devices out there that don't integrate their linear offering and if they are going to get ahead of the curve of alternative ways to distribute content to the television set that include broadband, the speed with which a particular solution can do that for them is a big deal. So this clearly helps on that front.

Beyond that, from a TiVo perspective, we really think our ability to facilitate a technological path down any number of possible approaches is a real advantage for us. We can get to retail with a retail device, we can get our hardware and software bundle together and have that distributed a la, the RCN approach, we can build our software into Virgin and have a third-party box be the basis of integration ultimately of what we bring to market, or we can do what we are doing with Comcast and take an already deployed box and upgrade the software that's in it by being downloaded.

And as we look at the various paths that we have to creating broader distribution, we look at each of them for ways that we can expedite the time to market for each of those paths and this is one critical way of doing that within the international market.

Todd Mitchell – Kaufman Brothers

Okay, thank you. And last thing, on the – I'm going to ask this ARPU question once again. Assuming your U.S. customers, there has been no real change in the footprint or the contract or the go-to-market, can we assume that this change in the broadcaster ARPU had something to do with the international customer?

Derrick Nueman

Todd, we are not going to take that question because we don't want to give details of what our partners are doing.

Todd Mitchell – Kaufman Brothers

Okay. Good quarter, guys.

Derrick Nueman

Thanks, Todd.

Operator

Your next question comes from the line of Mark Argento with Craig-Hallum Capital.

Mark Argento – Craig-Hallum Capital

Hi guys, good afternoon. When you think about increasing R&D expense, is that tied to the business – new business that you have in the pipeline like some of these new partnerships or is that in new products that you hope to sell to new customers? I'm just trying to get a better understanding of the magnitude of the move in the R&D spend going forward.

Tom Rogers

It's really a combination of those. Clearly, some of it relates to R&D development on an increasing number of distribution opportunities we see. Other of it is product development that does not directly relate to that activity and we see the combination of those things being well worth increased investment for purposes of growing the company overall and the overall scheme of our cash and the cash that we are going to have from the Court ruling; it's not a huge amount of that cash, but it is a significant increase in our current R&D path that we think is going to accelerate our growth opportunities on both of those fronts.

Mark Argento – Craig-Hallum Capital

Okay. And then when you think of some of the customers that you already have licensing or business relationships with like Comcast, Cox, DIRECTV, RCN, so on and so forth, in those contracts, is there some type of a – like a time to market clause and I'm just trying to better understand kind of the incentive other than of course the – a better product, a more competitive product using the TiVo interface and technology, but kind of trying to better understand the time to market here so we can get a little bit gauge when we really should start to see some of these kind of what I call Tier 1 relationships start to hit the income statement.

Tom Rogers

Well, these deals have statements of work attached to them, which very much define development and schedules and there are marketing relationships, which describe the deployment activity that follows once the product is accepted and ready to go. So they are highly detailed agreements that do set forth a lot of this.

In the case of Comcast, there have been long-discussed technology infrastructure issues, which have gotten in the way of what were the best laid plans of both Comcast and through Comcast to us to have earlier deployment than we've seen and we are now seeing, of course, a whole new wave of technology deployment in the tru2way area, which Comcast is funding the translation of TiVo into tru2way and so there are clearly some revised thinking as to how we deploy in as a rapid a time frame as possible against those technology changes that are now occurring.

But the general answer to your question is, yes, the agreements contemplate specific ways in which the market will be attacked in certain time frames.

Mark Argento – Craig-Hallum Capital

Great. Thank you very much.

Operator

Your next question comes from the line of Tuna Amobi with Standard & Poor's.

Tuna Amobi – Standard & Poor's

Thank you very much. It's Tuna Amobi. I wanted to seek some clarification on an earlier comment about en banc hearing. Perhaps Matt can provide some more color with respect to whether en banc hearing – whether the decision to grant an en banc hearing or even its outcome does have any effect whatsoever on whether the case actually makes the Supreme Court docket or not.

Matt Zinn

No, it's a separate – it's a completely separate thing. If en banc is denied or if EchoStar loses an en banc hearing, they can petition for a cert at the Supreme Court.

Tuna Amobi – Standard & Poor's

Okay. And you are still of the view that such petitions are rarely granted at the Supreme Court level. Is that still your take?

Matt Zinn

Certainly.

Tuna Amobi – Standard & Poor's

Okay. So switching gears here, I guess, on – with regard to your guidance on adjusted EBITDA, is there any scenario that's conceivable where perhaps you guys don't generate the same amount of positive adjusted EBITDA for the full fiscal year and if that's not the case, what are the potential swing factors that we should be looking at – looking out for?

Anna Brunelle

We don't guide to full-year numbers. So that's not a question that I'm ready to take at this time.

Tuna Amobi – Standard & Poor's

That's a question; actually I'm sure you understand we get a fair amount from investors. I mean, you have been doing some really good things and – the win, et cetera. But I think that – kind of in terms of a modeling that that would be a little bit helpful when we can get more color on that.

But let me switch gears to service and technology revenue. Does your guidance assume any meaningful – in terms of meaningful revenues from ARM and specifically with regard to the Google deal? When should we expect any kind of meaningful economics to be generated from that and some of the other stuff that you are doing with the networks?

Anna Brunelle

Well, with regard to our ARM revenues, we've discussed previously that when they become a larger net component our revenues to break them out separately that we will go ahead and discuss them. But today, that's not something we are discussing either.

Tuna Amobi – Standard & Poor's

With regard to the Google deal, what's your time frame in terms of when that could begin to be a factor? And maybe Tom can also chime in here.

Tom Rogers

Well, we don't discuss the revenue potential of specific ARM deals. I will say that we are finding that the ARM revenue is growing. It is something that is a significant part of the industry landscape as parts of the television industry grapple with the lack of meaningful data to be competitive with audience metrics that exist in other media, namely the Internet. And as we continue to create more and more audience restructuring-based product that can deal with specific elements that there are holes in the current landscape from the other major providers.

So we are in discussions with many in the audience realm. We have announced the Google deal. We thought that was a key validation from somebody who knows an awful lot about the value of detailed audience metrics and driving advertising-based businesses. But beyond that, I can't give you much help.

Tuna Amobi – Standard & Poor's

Okay. And on SAC, so as you think about your outlook for SAC, I think you talked about the potential benefits of hardware margins. But I think one of the things you've talked about in the past is the – also the third-party marketing costs.

So as you look at your SAC over a maybe a longer time frame, I think you – do you ever get to a time where you conceivably have double-digit SAC as opposed to your current triple-digit? And one of the reason I – one of the reasons I ask is it seem like your MSO – while your MSO additions are approaching an inflection point, it seems like the TiVo-owned is kind of going the other way. So at some point, you kind of face more questions about balancing SAC spending compared to unit growth.

So how do you think about that whole concept of how much you can continue to spend on SAC and a TiVo-owned channel given the – it seem like the trends are not kind of improving as might have hoped?

Tom Rogers

Three trends really to look at on the SAC side. One, we will be spending somewhat more money to support the launch of the Premiere product. Two, one of the key reasons we entered into the strategic deal with Best Buy was to be able to have major third-party marketing support for what we would be doing going forward, which obviously is something we look at as a way to be able to hold our SAC expenses in check. And three, the improved manufacturing economics of TiVo Premiere allow the hardware components of SAC to improve.

The combination of those things, we think, is – puts us on a good trajectory on the SAC side. In the fourth quarter, you saw some SAC movement, which was not necessarily indicative of SAC trends going forward in that there was a fair amount of expenditure that was geared toward upgrade of existing subscribers into HD units away from their single-tuner standard definition unit.

And that translation – or I should say that transfer from a subscriber with an SD unit to a High-Def unit didn't involve creating a growth sub, but nonetheless a certain amount of marketing expenditure toward the upgrade process and therefore the SAC number was reflected in a higher form than would have been the case otherwise. And with that, I think – Anna, anything to add to that?

Tuna Amobi – Standard & Poor's

That's helpful. So just quick last housekeeping question. Does Microsoft jumping into this have any impact whatsoever on the case? What does counsel make of Microsoft's involvement?

Tom Rogers

Matt, you want to address that?

Matt Zinn

Yes. Microsoft is defending its customer AT&T as far as we can tell. And really, whatever Microsoft doesn't have any bearing on whether the AT&T products and services that are the subject of our complaint infringe the patents that we have asserted.

Tuna Amobi – Standard & Poor's

Okay, I appreciate it. Thank you very much.

Derrick Nueman

Tom, do you have any closing comments?

Tom Rogers

I appreciate everybody spending time with us today. As I said, last week was a great week and the combination of increased IP validation and the launch of a new product with the underlying distribution dynamics that we've laid out here today, we think, set up some very substantial opportunity over the course of this year and we've entered a new era for TiVo. We are excited as hell about it. We will be talking to you more along the way. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: TiVo Inc. F4Q10 (01/31/10) Earnings Call Transcript
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