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TiVo (NASDAQ:TIVO)

F1Q11 (Qtr End 04/30/2010) Earnings Call

May 25, 2010 5:00 pm ET

Executives

Anna Brunelle - Chief Financial Officer, Principal Accounting Officer and Vice President

Tom Rogers - Chief Executive Officer, President and Director

Derrick Nueman -

Matthew Zinn - Chief Privacy Officer, Senior Vice President, Corporate Secretary and General Counsel

Analysts

Bridget Weishaar - JP Morgan Chase & Co

Edward Williams - BMO Capital Markets U.S.

Tony Wible - Janney Montgomery Scott LLC

Barton Crockett - Lazard Capital Markets LLC

David Miller - Caris & Company

Tuna Amobi - S&P Equity Research

Daniel Ernst - Soleil-Hudson Square Research

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the TiVo First Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Derrick Nueman, Head of Investor Relations. Sir, you may begin your conference.

Derrick Nueman

Thank you, and good afternoon. With me today are Tom Rogers, CEO; Anna Brunelle, CFO; Naveen Chopra, SVP of Business Development, Corporate Strategy; and Matt Zinn, General Counsel. We are here today to discuss TiVo's financial results for the first quarter ending April 30, 2010. We have just distributed a press release and 8-K detailing our financial results. We have also released a financial and key metrics summary, which is posted on the Investor Relations section of our website.

Additionally, we will post a recording of this call later today on the Investor Relations section of our website. The prepared remarks today will last about 30 minutes and then be followed by a question-and-answer session.

Our discussion today includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, TiVo's future Subscription, Advertising and Research businesses; profitability, operations and financial performance and guidance, including future marketing, R&D and other operating expenditures; distribution of TiVo service domestically with DIRECTV, RCN, Comcast, Cox; internationally with Virgin Media, Seven HTS in Australia and New Zealand, TiVo's current and future features and product releases, partner initiatives, such as our upcoming TiVo-enabled Best Buy Insignia-branded television and our integrated advanced television solution with Conax and Technicolor, formerly known as Thomson; and TiVo's ongoing litigation with EchoStar, AT&T, Verizon and Microsoft.

You can identify these statements by the use of terminologies such as guidance, believe, expect, will or other forward-looking terms. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements. Factors that may cause actual results to differ materially include delays in development, competitive service offerings and the lack of market acceptance, as well as other factors described in Risk Factors in our public filings filed with the SEC, including our latest 10-K and 10-Q. Any forward-looking statements made on this call reflect analysis as of today, and we have no plans or duties to update them.

Additionally, some of the metrics and financial information provided in today's call include non-GAAP metrics. Please see our first quarter fiscal year 2011 key metric trend sheet for a reconciliation of these items. With that, I will now turn over the call to Tom Rogers.

Tom Rogers

Thanks, Derrick. Good afternoon, everyone. Before getting into detail from our quarter, let me quickly touch on the EchoStar litigation. As you know, EchoStar was granted an en banc review, which means that all the judges at the Federal appeals court will now review the case. This is a bit disappointing, of course, because the en banc process will take many more months to complete. But it's very important to note that the court's order granting en banc review does not raise issues relating directly to the fact of our case against EchoStar. Instead, it identifies some general questions of patent law and policy that the Court evidently decided to consider and clarify on the back of our case. Those questions mainly involve what legal standards should apply where, as in our case, a patent holder has procured an infringement verdict and an injunction, but then the infringer claim to have modified its product in some way that avoids the patent.

The issue is when the district court that heard the first case can address the infringer's design-around claim in a rapid, shortened hearing process in order to decide whether the infringer has violated the original injunction. As opposed to acquiring the patent holder to file a whole new lawsuit about the supposedly modified product.

Of course, TiVo's position has been and continues to be that district court has to have the ability to do that in the case like ours, because otherwise, deep-pocketed defendants, like EchoStar, would be able to avoid an injunction and run out the clock on a patent just by making minor changes to a product that was already found to infringe, making the patent holder file another new infringement case and show on until the patent expires. The result was substantially weakened patent since harm innovation by stripping away the benefits of enforceability of patent, while imposing all of the transaction costs on the patent holder in the court.

We can understand why the full Court of Appeals wants to think through the rules in this important area in a systematic way, although we're sorry that they picked our case to do it. But the district court in this case carefully considered the evidence about EchoStar's reported software modification and issued a very well-reasoned decision, explaining why they were insignificant and why EchoStar was in contempt of the original injunction on two independent ground. We believe the facts of our case present an enormously compelling case as to why it would completely undermine the patent system, to easily allow defendant to get a new trial, when only very slight or trivial changes have been made.

We are confident that once all the appellate judges consider the relative law and policies and take an equally careful look at the facts of our case, we will prevail again, as we ultimately have in every other stage of this case. We will, of course, keep you updated as the case progresses.

With that, TiVo kicked off the fiscal year on a strong note, exceeding our revenue, net income and adjusted EBITDA guidance for the first quarter, and maintaining our strong balance sheet of over $255 million in cash, which grew by $11 million in the quarter and no debt. We continue to aggressively drive our long-term growth initiatives in the U.S. and internationally through strategic partnerships that further distinguish TiVo as the leader in advanced television solutions and bring the TiVo experience into more homes through more distribution partners.

With the recent launch of our next-generation user interface, TiVo has established itself as so much more than simply a DVR company, redefining the future of television consumption and highlighting an unmatched ability to deliver a superior viewing experience through customizable software and set-top box solutions to meet the varying needs of both consumers and operators alike.

Today, in addition to being a universal cable box, TiVo also provides an intuitive platform for search and navigation of content across television, whether stemming from traditional channels, or broadband or VOD. As a result, we are seeing increased interest from operators looking for a comprehensive one-stop-shop solution that addresses the ongoing shift in how viewers are consuming video content.

Now I'd like to spend a few minutes discussing some of the specifics of our distribution efforts this quarter. First, RCN commenced the rollout of TiVo as its primary DVR set-top box offering in its Washington, D.C. market in early May. New York City is in the early stages of deployment, and Boston, Chicago, Philadelphia and Lehigh Valley are set to follow quickly. We're extremely pleased with the speed at which the RCN implementation made it to market, and we believe RCN is providing a blueprint on how to quickly and efficiently deploy an advanced television solution that encompasses traditional linear, on-demand broadband and DVR viewing seamlessly into one interface.

Speaking on the rollout, RCN's CEO, Peter Aquino, stated, "Many of our customers in Washington, D.C. and New York City who have recently signed up or upgraded to the RCN TiVo Premiere HD DVR have gone viral on social websites and expressed their enthusiasm about the enhanced user experience. We are extremely excited that our customers are proactively providing very positive feedback. These early signals begin to validate our strategy and provide the confidence to advance the deployment of Boston, Chicago this summer. I believe that the RCN experience will pave the way for other operators who'll consider Analog Crush combined with TiVo Premiere as a great way to deliver the best all-digital HDTV video product and service available."

It's also worth noting, given the recent consumer electronics announcement, U.S. distributors are becoming more focused than ever on solutions that help them get broadband to the television set integrated with their linear channels and on video-on-demand, and we are only one of a couple solutions currently available for the purposes of them doing that in a quick and efficient manner.

In terms of our relationship with DIRECTV, aggressive development activity continues and we expect the launch of that product by the end of the year. On the international front, our momentum is continuing to build as international operators are increasingly looking for a linear and broadband hybrid television solution for both their DVR and their non-DVR set-top boxes.

We announced the deal with Technicolor, formerly Thomson, a leading global set-top box manufacturer serving numerous cable and satellite television operators around the world, which builds on our alliance with Conax. This partnership will allow Technicolor to port TiVo's software and user interface directly onto Technicolor HD PVR set-top boxes, allowing international operators that choose to license TiVo's software with a cost-effective, rapidly deployable set-top box option with TiVo's middleware, user interface and backend services. We are in discussions with various operators regarding this solution and are hopeful that we will have additional details to share as the year progresses.

Also, our arrangement with Virgin Media continues to get considerable attention by other European operators who are very hopeful there will be additional distribution arrangements in place in the near term. Virgin continues to push aggressively towards rolling out the TiVo service later this year, which will be the exclusive interface for both Virgin's next-generation DVR and non-DVR set-top boxes.

With Comcast, Cox, RCN, DIRECTV and internationally with Virgin Media in the U.K., Seven Networks in Australia, Telecom New Zealand, Conax and now Technicolor, what we're seeing is a preference for an integrated linear, broadband and VOD solution, operators, networks and technology providers of all sizes as they embrace TiVo's highly differentiated and quality advanced television solution. Stand-alone broadband boxes simply don't do this.

Shifting gears on the TiVo-owned side of the business, TiVo Premiere, which launched in late March, features our next-generation user interface and is a more cost-efficient hardware platform than our previous HD product. On that note, for the first time in TiVo's history, when looking strictly at hardware revenues and costs, excluding retail-related costs, we generate a positive net hardware margin from the sale of our Premiere boxes. We're excited about the potential of Premiere and are working aggressively to further improve performance and augment its feature set through software upgrades over the coming months.

We also have some good news in terms of our strategic alliance with Best Buy. As we announced earlier today, we entered into an agreement, so that development is underway between TiVo and Best Buy's Insignia brand to integrate TiVo's software and advanced television services into broadband-connected Insignia television.

The new Insignia televisions will provide Best Buy customers with an exceptional, intuitive user experience for accessing online content by utilizing our latest non-DVR software, giving the viewer a one-stop shop for delivering and searching content right on the television. This offering adds to the arsenal of unique approaches that TiVo has to shape the advanced television experience. Whether through the retail box, an operator provisioned box, software built into a third party's box, a software upgrade to someone else's DVR or non-DVR set-top boxes and now software built directly into the television set. We are focused on taking numerous alternative means to affecting the television experience and providing a TiVo solution to each.

While we are expanding our global footprint, bringing the TiVo experience to new and old viewers like never before, we're also making notable progress with our Audience Research business, as TiVo data becomes an increasingly important part of how the media industry evaluate viewership behavior and the effectiveness of ad campaigns. To that end, we recently teamed with Millward Brown, a global leader in marketing research that works with a significant portion of the top 100 global brands, to use TiVo's audience research capabilities to test commercial effectiveness prior to and throughout its run to help these brands achieve more cost-effective media planning. We believe working with Millward Brown and some of the world's top brands in this regard opens up a whole new avenue of growth for our Audience Research business.

In closing, we continue to expand our strategic initiatives, demonstrating our potential for broad distributions throughout many incarnations. Our new broadband advanced television approach with its unique user interface has played a significant part in driving a range of new distribution partners. We remain a financially strong company with exciting growth prospects that will begin to play out in the year ahead, particularly with TiVo at the forefront of innovation and a driving force that defines how television viewers will access and consume content in an ever-changing media landscape. And with that, I'll turn it over to Anna.

Anna Brunelle

Thank you, Tom, and good afternoon, everyone. We're pleased with our first quarter results as we exceeded expectations on both the top and bottom line, and as we continue to maintain a strong balance sheet with our cash position increasing to $255 million, up $11 million from the prior quarter.

Getting into the detail of the first quarter. Service and technology revenues were $43.2 million. Of that, service revenues was $36.2 million and technology revenues were $7 million. Total stock-based compensation expenses for the quarter were $5.6 million. Excluding the related stock-based compensation expenses, cost of service and technology revenues were $14.8 million.

Our hardware loss was approximately $1.1 million, which was a significant improvement compared to $4.6 million last quarter and $4 million in the year-ago quarter and consisted of $800,000 of margin-related net hardware sales. This was driven by the better economics of our Premiere box and was slightly offset by reserve on obsolete parts and accessories, and $1.9 million of cost related to marketing development funds and revenue share paid to the retail channels.

Operating expenses, excluding stock-based compensation, as a percentage of service and technology revenues were as follows: non-stock sales and marketing, 16%; subscription acquisition costs, 7%; research and development, 39%, which increased as we accelerated our investment in developing advanced television offerings as previously announced; and G&A, 22%, up from the prior quarter, due to increased litigation costs. Additionally, we had interest income of $369,000 and a benefit of $34,000 for income taxes. This led to a net loss for the first quarter of $14.2 million, which compared to our guidance of a net loss of $19 million to $21 million and to a loss of $3.9 million in the year-ago quarter. Our net loss per share was $0.13 for the first quarter, using an average of 111 million shares outstanding.

Adjusted EBITDA loss for the first quarter was $6.7 million compared to guidance of an adjusted EBITDA loss of $9 million to $11 million. In addition to excluding stock-based compensation, interests and taxes, our adjusted EBITDA excluded $2.2 million in depreciation and amortization expense. The better-than-expected net income and adjusted EBITDA were driven by higher service and technology revenue and lower-than-anticipated operating expenses. Additionally, our net income benefited from lower-than-expected stock-based compensation charges.

Now turning to our first quarter key metrics. In line with our expectation, our growth subscription additions were 33,000 as compared to 37,000 in the year-ago quarter. Churn was 2%, down from the prior quarter, which was primarily driven by a lower number of product lifetime subscribers becoming inactive. On a net basis, our TiVo-owned subscription decreased by 51,000 in the first quarter and our TiVo-owned subscription base ended the quarter at approximately 1.4 million subscriptions.

Our MSO/Broadcasters' subscription base declined by 45,000, 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 and Virgin are live and after Comcast move beyond New England.

Our overall subscription base stands at approximately 2.5 million subscriptions, and we had approximately 282,000 TiVo-owned product lifetime subscription as it reach the end of the revenue amortization period, representing 46% of our current total product lifetime subscription base. Our TiVo-owned average revenue per subscription was $7.54, and TiVo-owned total acquisition cost was $5.5 million, while SAC was $167,000. SAC benefited by positive margins on our hardware, but those gains were offset by increased marketing spend related to the Premiere launch.

Before I get into the specific guidance for the second quarter, let me walk you through some factors that are impacting our guidance. First, as we've discussed in our prior calls, we're investing more in R&D this year, given the many opportunities we see in front of us, and we believe this investment will lead to additional distribution opportunities for TiVo. Second, we're budgeting higher legal expenses in both Q2 and for the rest of the year, due to our litigation with EchoStar, AT&T and Verizon. With that, for the second quarter, we expect service and technology revenues of $40 million to $42 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 $17 million to negative $19 million.

To wrap up, I'm pleased with the progress we're making on the distribution and product front and believe our additional investments in the coming year will help to provide sustainable long-term growth. 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 question comes from the line of Bridget Weishaar of JPMorgan.

Bridget Weishaar - JP Morgan Chase & Co

Looking at the MSO partnerships you have, can you give us an indication of how many of the markets are primary offering versus an upgrade offering? And do you have any data in your existing Comcast as to what the penetration is of those that have DVR that are selecting to upgrade to a TiVo box?

Tom Rogers

On the operator front, we've announced two deals of note where we are the primary or exclusive offering going forward, the Virgin deal in the U.K., which have a sub-base of about $4 million or so; and RCN in the United States, which has operations in many of the major markets, including Washington and New York, where they've began to roll out. In terms of Comcast, Comcast has announced that we will be the primary DVR offering in a couple of markets. They have not begun to roll out in those markets that will have that designation. I can't give you any Comcast-specific sub-numbers. I can say the general matter with our cable progress, very important that the RCN opportunity rolled out as quickly as it did. What we're finding now is that we have a real solution that's operational where the cable industry can see that our hardware with our software integrated into their backbone, including their VOD can provide a really quick way for operators to provide an integrated, traditional linear channel and broadband TV experience. And that it can get the kind of positive feedback, very positive feedback that RCN subscribers that have already taken this are giving it. So this gives us yet one more path to talk to the cable industry about, not just on a hypothetical basis, where TiVo had conversations with the industry, about how our hardware might be able to serve them. But now it's a reality, now it's out there, now people can see how quickly it can further their own needs, own designs. And we're finding that, that is providing quite an impetus for the potential for other cable operator activity.

Bridget Weishaar - JP Morgan Chase & Co

With Comcast and DTV, any update on the rollout of them?

Tom Rogers

Well, on the cable front, this new initiative that I've announced, I really do think gives us a way to think about talking to both operators that we've announced deals with and operators we haven't announced deals with to potentially have an alternative path that might give us some faster rollout prospects. As you know, with the larger cable operators, which are focused on tru2way and Comcast is paying a substantial amount of money to provide tru2way solution for TiVo to be rolled out. The tru2way development has still got some question marks around it in terms of how quickly large operators will be able to get advanced television-based tru2way in the field. And as a result of that, we are focused on what are the alternative ways that we can provide a faster solution for operators who are feeling the pressure that a broadband-linear combined solution be something that they make available. On the DIRECTV front, we are still very much aiming for the end of this year in terms of deployment. Mike White, the new CEO of DIRECTV, who I've been able to establish a good dialogue with, I think has done a very nice job of being able to make sure our respective teams are communicating well and overcoming any development challenges that may appear in our path and keeping us on track in terms of getting that out. So we are continuing to make progress there.

Operator

Next question comes from Edward Williams of BMO Capital Markets.

Edward Williams - BMO Capital Markets U.S.

Can you comment a little bit about the Premiere box? I'm curious as to what the uptick has been like, especially for the existing TiVo lifetime subscribers was sort of how many of them have been kind of adding the Premiere box or upgrading to the Premiere box? And also as far as modeling the Premiere box is concerned, I think, going-forward basis, should we look at what we saw in the first quarter and kind of assume that, that relative relationship that margin extends on a going-forward basis? And then, Tom, if you can talk a little bit about Google TV and your thoughts around Google TV and potential, how that affects sort of top consumption?

Tom Rogers

On the Premiere front, the first quarter is not much of an indication there,, because 2/3 of the first quarter Premiere wasn't available in the marketplace. We were running pretty dry in terms of our previous offering, HD TiVo offering, in terms of available inventory and we only had Premiere in the market for a month. I think that we are very focused on the fall as a period in which we can step up our marketing in tune with the new television season which tends to be a heavier period for us. And we are putting together a bunch of marketing efforts for purposes of taking advantage of that, which will be timed nicely with certain upgrades, particularly in the feature side of Premiere. I'd say that it continues to be something that existing TiVo subscribers are upgrading to. I'd say we're finding some nice reception on that front in terms of how we are able to particularly deal with potential churn effects from single tuner, older TiVo customers that need to get to a new solution, particularly as they get an HD television set and have come up with some new ways, which we think will be increasingly effective to get Premiere in front of them as a great solution before they go to an operator-based DVR solution for their new HD sets. On the Google front, it really is a real contrast with what Premiere represents. Premiere represents a one-box solution. You get your linear television service, you get your broadband service and you get that all in a single interface, single search, single remote, all the benefits of having everything available on a single box, single approach. Google TV really represents a two-box approach. You have your operator box and in addition to that, you have your Google box. And your Google box presumably provides broadband content. Well, the best of broadband content is something we put a considerable amount of effort into making sure is available through Premiere. We have some 6 million broadband content options that are available through that solution. Google takes a different approach to it. They're providing a browser that will allow that to be displayed from the Internet through the television set. I think that the questions that will revolve around that are -- we've seen two-box solutions don't particularly work. I think Apple TV demonstrated the limitations that consumers have with wanting a separate box different from their primary television box from what they bring to the set. Obviously, WebTV showed a lot of the issues around simply providing a computer, making your television screen a computer screen. I think what people are most going to want from Google TV-type solutions others are the best of content available from broadband. And the thing that we hear most about in that regard is Hulu. That's the one piece of the broadband content equation that we don't currently provide. I think that consumers are seeking very much in terms of getting to their television sets,, where they'd most like to consume it. I think there is obviously a real question mark as to whether Google TV will have the rights because Hulu hasn't made available those rights to take Hulu and make it available on the television set. So in my mind, that's really the essential ingredient of what will determine success on, in terms of any broadband solution, what is the quality of a content available, as opposed to the process by which things are taken from broadband and displayed on the TV.

Operator

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

David Miller - Caris & Company

Tom, you said in your prepared remarks that you thought that the en banc review was really about an opportunity for the court to clarify a number of key policy issues, with respect to patent law. Why is it, in your opinion, that they chose your case? Are there just not that many cases heard en banc that are patent cases, and it's become much more of a higher profile case within the court than you had anticipated?

Tom Rogers

Well, I don't have a great insight as to why they chose our case. It's a very rare thing. This is a patent court. The Federal Circuit Court of Appeals only hears intellectual property issues. It is very rare for that court to take a case en banc, only about 3% of them. Obviously, it did become a very high-profile case within the court. The questions they put out weren't specific to the facts of our case or the facts of our patent. It was very much a set of questions related to macro patent policy issues. The way we look at it is this: Obviously, we would have preferred that they not take the case to review because of this further delay in getting to the ultimate resolution. But there's no doubt that every court, whether the district court or appeals court, that's looked at our case has felt that our facts are very compelling. The patent is very compelling. The claim construction arguments we have put forward are very compelling, which is where facts meet the patent. And the en banc court did not ask any specific additional questions related to those elements. They clearly are looking at these broader policy questions. And if you believe that our case is strong, when it comes to the facts and the patent, we think it only becomes a more compelling case when it comes to these policy issues. Because what the court is really trying to get at here is the question of, how much time should it take for a party like us that's been granted an injunction? How much additional time should it take to get that injunction enforced when somebody comes forward with a work-around? As is the case here with the district court judge, he decided to look at these issues in a summary proceeding where he weighed the evidence and made a decision. And the case, the questions that are being posed is, when should a court have a whole new trial? And all the time and appeals process that it takes when somebody comes forward with a very minor or trivial change, how much more time should there be before you get to a final resolution? Well, everybody knows, in our case, it's been about six years so far. A whole new trial and a whole new appeals process from that trial would add another several years. You could be looking at 10 years, half the whole time period of patent term, before you get to enforcement. And in the fast-moving world of technology, that's tantamount to having rights that really aren't enforceable. So given that backdrop of the policy questions being examined now, we think our facts are very compelling for why judges need a summary proceeding like this to be able to look at a work-around; determine that it's not meaningful; determine that it may be trivial and allow something to move forward with some dispatch, so enforceability of patent rights can be maintained, because otherwise, you're in a situation where they simply become unenforced. Now the fact is that it's going to take us a little more time before we get to an ultimate decision here. But the confidence that we had on the facts and the patent and the claim construction, when it comes to the policy question, that confidence is even greater.

David Miller - Caris & Company

And then separate topic. On the cost of goods sold line, as it applies to hardware sales, can you just refresh my memory in terms of what you guys are subsidizing, in terms of middleware and software, and what is being outsourced to third parties?

Anna Brunelle

Well, with regard to cost of hardware sales, we really aren't so much subsidizing any middleware software. But with our new Premiere box, what we're noting is that our box cost have been reduced substantially, such that when we sell the box into the channel, we're primarily selling it very close to cost. So there really isn't a large margin there to consider, or a large deficit. In the past, we used to subsidize the boxes and then make that up on the service revenue. And I think why this is important is that it allows us to be more strategic about upgrade offers to our existing base. It allows us to have a more -- potentially, a product with greater appeal to offer to cable companies, et cetera. So I think this is a change that'll benefit us in the long term.

Operator

Your next question comes from Barton Crockett of Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets LLC

I wanted to have a follow-up on Google. And the question is really this: Do you have any sense of how shelf space will look for Google TV and Best Buy, relative to the TiVo solutions and Best Buy? Does Google kind of a much bigger presence, or you? Or is it too early to tell?

Tom Rogers

I don't have any insight into the Google TV shelf space issue. Obviously, Best Buy carries a wide array of product offerings. But by virtue of the fact that we are announcing what we've announced today, in terms of TiVo being built into Insignia television sets, I think it gives you a clear sense of the nature and level of the strategic partnership there, and something that we believe will continue to be significantly supported. If you want the best of broadband content to your television today, TiVo at Best Buy is available and it's the way to get it.

Barton Crockett - Lazard Capital Markets LLC

And then I was wondering if you could comment a little bit on the ARPU line for the third-party MSO deals that dipped to $1.12 from $1.20 in the fourth quarter. Could you talk a little bit about what drove that and how we should think about that over the balance of the year?

Tom Rogers

Yes, Anna, you want to mention that?

Anna Brunelle

Sure. In terms of our ARPU, you were saying -- I'm not quite sure I understand, you were saying going to $1.20?

Barton Crockett - Lazard Capital Markets LLC

Yes, it went to $1.12 from $1.20 in the fourth quarter.

Anna Brunelle

Oh yes, I understand.

Barton Crockett - Lazard Capital Markets LLC

Yes, and then how do we think about it for the balance of the year?

Anna Brunelle

Sure. Well, as you know, our new DIRECTV deal kicked in on February 15. And as a result, there is an increase in the cash that we're receiving from DIRECTV for monthly subscribers. However, until our new product with DIRECTV is accepted a little later this year, we'll continue to be recognizing revenue at the old rate. And that's just a pure accounting guidance rule that we have to follow.

Tom Rogers

Just to supplement that, meaning, we are taking an increased cash. The cash isn't all being reflected, in terms of how the accounting and treatment reflects the revenues on the MSO line, so that there is increased payments, but not necessarily accounting that is paralleling that.

Barton Crockett - Lazard Capital Markets LLC

And then a follow-up question on RCN getting into Boston and Philadelphia. Is there any competitive situation there that could affect the pacing of the rollout from Comcast?

Tom Rogers

Well, those carriers do compete to some extent. I think they're, as I said, now that the RCN solution has begun to be deployed and operators can see that, that solution exist, coupled with the marketplace pressure that Google TV and other things are adding that made clear that the cable industry is behind on the whole issue of broadband content to the TV, coupled with the SEC proceeding on third-party boxes where there's clearly an emphasis to make sure there's a greater embrace by the cable industry of third-party boxes, I think all that helps to combine to provide a reason beyond the competitive dynamics you might be suggesting as to why other operators look at our solution as a smart, near-term way to take advantage of being able to have a combined linear broadband consumer offering. And we plan to continue to work that path, while we're continuing to drive the others we've already established with some of these operators.

Operator

The next question comes from Daniel Ernst of Hudson Square Research.

Daniel Ernst - Soleil-Hudson Square Research

If you look at the distribution subs or what I call partners subs, maybe like DIRECTV and Comcast, you've had 16 consecutive quarters of subscriber loss from that channel. But with this quarter, the negative 45 is actually the best number you've had since October 2006. So it looks like it's a story of less bad, but it looks like you're turning the corner and we could potentially see that turn positive sometime in the foreseeable future. Is that in your thinking over the next 12 months? That's my first question. And then the second question, Tom, you said in some of your remarks earlier that there are some customers or distribution partners that have been yet to be announced. Can you clarify that, if that's what I heard correctly? And then a follow-up on the Google TV question. I mean, one of the features that they seem to really push for or seem to be telling as the advantage of how their approach to this concept is that they tend to be using more browser technology. So their Google-based TV products will be able to browse to a Hulu, and so they're not restricted in what they're able to access. And from a technical perspective, can you install browser into TiVo that will allow you to browse to that Web address in the same way that Google TV is saying that they're going to be able to do?

Tom Rogers

On your first question, in terms of trends of MSO subs, yes, you're right. This is a better-looking quarter than previously. As you know, most of the downdraft there has been a function of DIRECTV subs that have the old version of TiVo through which they can't get the latest HD package from DIRECTV, and that has caused a certain amount of churn and also caused to get a fairly broad level of anticipation among DIRECTV subscribers who are looking for new rendition of TiVos that is in sync with the HD offering of DIRECTV today. We do have other mass distribution deals that are kicking in. We don't project subs and time period, so I'm not going to specifically answer that. But everything we are doing here, in terms of showing the types of deals we're putting together, whether it's with a box manufacturer like Thomson or a rollout with RCN, is about building the many different ways we can have distributors be in a position to offer TiVo. And so we are very much looking to provide a path for that to be positive as soon as we can. I didn't say there were necessarily deals that we hadn't announced yet, but we are in deep discussions with various people that I hope we will be able to announce these deals very shortly. And I think that we've made substantial progress in getting operators to view the importance of our solution as a way that they can, near term, deploy linear and broadband content. On the Google TV front, I think the idea of the technical capabilities of a browser on the TV is certainly one where you can fashion scenarios, where what that browser can do to display various things that a consumer may want to grab includes any content that may be on the Web. They're obviously ways also that content providers might look to defeat how certain browsers operate in what they're able to grab and not grab for purposes of display. I think it's really a question, as I've said, whether the Hulu content providers would allow the display of their content on a television set, without there being a deal being entered into with them to enable that. And to the extent that was done without a deal, well, my guess is we're probably seeing some kind of very substantial controversy. I can't opine as to the specifics of where Google may be with certain content providers or how they view that particular issue. I'm not aware of that. But I do think it's much more complicated than simply saying, there's a browser on the television, and therefore, somebody can get whatever they want. I think there will be more complicated set of variables that will become clear over time that relate to that.

Operator

Your next question comes from Tony Wible of Janney Montgomery Scott.

Tony Wible - Janney Montgomery Scott LLC

Tom, I was hoping you could go into the Comcast deal. And we've heard about the technical issues with this deal in the past. Have any of those technical issues changed over time? And also, as Comcast rolls out XFINITY, how does TiVo play a role in that migration?

Tom Rogers

As to the first issue, yes, the original issues with the Comcast infrastructure that were making installation of our first software upgrade to the Comcast boxes in Boston was solved, and those were able to be installed without the kinds of technical issues that we were encountering. The next level of challenge has much more to do, not with those kind of operational issues, but with the broad technology strategy that Comcast isn't undertaking, as you well know, to drive tru2way as the primary means by which advanced television has brought to other markets. And it is, one, something we are developing, which is not developed yet. But two, tru2way, for advanced television purposes, has not been deployed by Comcast yet either. And it is our development work dog tailing with the implementation of their tru2way strategy, which is the essence of availability in other markets, in terms when that would happen. The issue of our approach that RCN is taking and our desire to bring that out is something other cable operators view as a near-term path to all the things we've been talking about on the advanced television front, as we said, is something we think is an important alternative to operators to consider and hope to try to drive as much consideration of that as we can.

Tony Wible - Janney Montgomery Scott LLC

Do you see TiVo playing a role in the conversion to XFINITY in the various Comcast markets?

Tom Rogers

Well, XFINITY, as kind of the brand name offering for Comcast television going to Comcast video services broadly, going forward, yes, we very much hope to be a part of their overall television offerings, and are working with them to make sure that what we offer is considered an essential part of how they offer advanced television, going forward.

Tony Wible - Janney Montgomery Scott LLC

And the last question is on Dish, with their latest work-around, do you know if that will be heard before or after we have a decision on the en banc? And what kind of information has been shared with you, with regards to their latest work-around?

Tom Rogers

Well, I don't have any comments specifically on their work-around, in terms of the consideration of it. I think the Federal Circuit has put the District Judge in a bit of an awkward position to be able to do anything by way of examining any further work-arounds, because they haven't decided what the standards are for the review or consideration of further work-arounds. That's exactly the macro policy issue that they said they were going to address. So it's a bit awkward for the judge to be in a position of considering that without the rule for the road being set. Matt Zinn, our General Counsel is on the phone. Matt, any other color you'd put on that?

Matthew Zinn

No, I think that's right. We don't know what the judge is going to do, one way or the other. But as Tom said, the Federal Circuit is kind of put in, in an awkward position, and we really can't comment on EchoStar's work-arounds on this call.

Operator

Today's final question comes from Tuna Amobi of Standard & Poor's.

Tuna Amobi - S&P Equity Research

So I wanted to get a better sense of the range of possible outcomes with regard to the en banc hearing, and more specifically, with regard to the very small number of cases that the en banc hearing was granted. Can you perhaps -- do you have an idea of how many of those actually resulted in a new trial that would be helpful?

Tom Rogers

There are so few cases that are taken en banc, and a number of them involve very strange procedures that don't necessarily even involve a review by an appeals court like we've already had. There are no statistics that really frame what the likelihood is of one result versus another. These are broad policy questions. It's a very narrow range of cases that actually involve broad policy questions, as opposed to some other reason that the court may take something en banc. And all I can offer is we very, very, very well understand what those broad policy questions come down to; how quickly can a case be decided; and what kind of ability will a district court judge have, so that years of litigation don't continue to ensue. And I think the framing of the issue is really what the essence here. You're not going to find any past precedence that give you any real insight into what lies ahead for the Court of Appeals.

Tuna Amobi - S&P Equity Research

I guess what I'm trying to understand is -- I understand what the best-case scenario is, but what, in your mind, could be the worst-case scenario here? Given that there has been so many levels of decisions already involved, what could be the worst-case outcome for TiVo?

Tom Rogers

Well, we haven't commented, at any point, on all the possible outcomes. We've basically been very clear that we're not going to comment on the intricacies of our litigation along the way. And we've been pretty devoted to a strict policy, no matter what gets thrown on the other direction, that we'll state what our case is and very much stick to the legal proceedings as a way to vindicate our rights. We've been successful every time, in front of a district court, and every time, in front of the appellate court. We got to build a new twist here on policy issues. We'll make very clear on our briefs what our policy positions are. And I think it will show very clearly how the facts of our case are very strong, with respect to any consideration of these policy issues. But we don't comment on various permutations.

Tuna Amobi - S&P Equity Research

I'm presuming that this latest development kind of freezes the collection of the latest award from the court, is that correct?

Tom Rogers

Yes, the damages aren't collected until appeals are exhausted.

Tuna Amobi - S&P Equity Research

And what about the patent process? That kind of seems to be perceived on parallel path. And so are there any developments with the patent review?

Tom Rogers

Nothing new to report on that front. Patent office consideration continues. In other situation where, for two various levels in the past, we have prevailed, and with the administrative review there continues.

Tuna Amobi - S&P Equity Research

And the AT&T, Verizon case also presumably proceeding independently? Or is there some kind of linkage between those two? I know you had some April hearings on that.

Tom Rogers

No, those aren't specifically linked. And they're procedural hearings in front of the judge coming up in the not too distant future.

Tuna Amobi - S&P Equity Research

And on Google TV, lastly, if I can just follow up on some comments there. One of the presumed advantages of Google TV is that the platform is open, right? So I know you commented on the two-box solution, which obviously, I think, favors TiVo. But how does that kind of factor into your assessment? Also, specifically with Google, I know you had the ARM deal with them last -- was it last fall? Last fall. So I'm just wondering if this kind of Google TV arrangement was contemplated, and were they kind of affecting, any way, your deal with Google on ARM, including the continuity of that deal? So is there any linkage between those two?

Tom Rogers

Any linkage? I mean, Google has been a customer of ours on the ARM front. And their use of our data, both for us and for them relates to a whole separate area of ad solutions and pricing and effectiveness of ad solutions, which is a whole different category from browsers on the television set. The question of openness is one that I think is increasingly important over time. One, consumers are going to want applications that are able to be available to them. And one of the key reasons that Premiere was built on Adobe Flash standards was to make sure that a world of third-party applications and the openness that flows from that was something that was available to the television set-top box. And our building of Premiere was the first Flash implementation of a set-top box. So we're very dedicated to the notion of creating all kinds of application opportunity and openness to the television world. Also, I think you have to look at it from an operator point of view. And I think, increasingly, from the dialogues we've had, is that operators want a sense of more robustness to the television set, but also in a way that they are not deprived of ultimately being able to fashion and control how that openness is defined. And that's a different approach, I think, possibly than one that involves the availability of openness as the way Google TV envisions it. So interesting pass, in terms of how further robustness can be provided, but we've taken a different one.

Just some concluding remarks here, as we come to the end of questions. A way we look at this quarter is that it was, financially, one, we were able to grow cash; do some things which we think were interesting developments from a financial point of view; having our net revenue be the best it's been in three years, which is a function of three years in terms of Q1 results, which is a function of hardware revenue, and that hardware revenue, including some substantial operator hardware contribution.

And all that kind of relates back to what we've been talking about is, how our set-top box solution is one that, not only is available at retail, but may increasingly be able to provide a path for operators as well to think about how they can accelerate their own plans. And as we think about accelerating our distribution; the kind of thing that we're doing with Thomson and largest, historically, set-top box operator in Europe; what we're doing with Best Buy to create a path directly to the television set; what we're doing with a domestic cable operator like RCN; how we're continuing to make progress with the international cable operator like Virgin, all is about building out the many different pass to advanced television, regardless of how the operator would like to implement it or how the consumer would like to come to it.

Bottom line is that we believe that being the only one-box solution for linear and broadband available for the operator or the consumer today is the right path to be on, and that one-box solution is one we're going to continue to push aggressively. More to come. And thanks, everybody, for tuning in.

Operator

Thank you. This concludes your conference. You may now disconnect.

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Source: TiVo F1Q11 (Qtr End 04/30/2010) Earnings Call Transcript

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